-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UFdDIOlwCknv3/93n2SsvhEw9cwlSzL5PiVCCeEALFvPg76eS4wFHt/Lq2CedJOx aSYZKQJ+Sh0C7+mR+5udgQ== 0000950131-02-001798.txt : 20020503 0000950131-02-001798.hdr.sgml : 20020503 ACCESSION NUMBER: 0000950131-02-001798 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020503 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BAXTER INTERNATIONAL INC CENTRAL INDEX KEY: 0000010456 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 360781620 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04448 FILM NUMBER: 02632898 BUSINESS ADDRESS: STREET 1: ONE BAXTER PKWY STREET 2: DF2-2W CITY: DEERFIELD STATE: IL ZIP: 60015 BUSINESS PHONE: 8479482000 MAIL ADDRESS: STREET 1: ONE BAXTER PARKWAY STREET 2: DF2-2W CITY: DEERFIELD STATE: IL ZIP: 60015 FORMER COMPANY: FORMER CONFORMED NAME: BAXTER LABORATORIES INC DATE OF NAME CHANGE: 19760608 FORMER COMPANY: FORMER CONFORMED NAME: BAXTER TRAVENOL LABORATORIES INC DATE OF NAME CHANGE: 19880522 10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF --- THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 ________ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to ____ Commission file number 1-4448 BAXTER INTERNATIONAL INC. ------------------------ (Exact name of registrant as specified in its charter) Delaware 36-0781620 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Baxter Parkway, Deerfield, Illinois 60015-4633 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (847) 948-2000 ------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares of the registrant's Common Stock, par value $1.00 per share, outstanding as of April 25, 2002 was 601,093,841 shares. BAXTER INTERNATIONAL INC. FORM 10-Q For the quarterly period ended March 31, 2002 TABLE OF CONTENTS
Page Number ----------- Part I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Income ............. 2 Condensed Consolidated Balance Sheets ................... 3 Condensed Consolidated Statements of Cash Flows ......... 4 Notes to Condensed Consolidated Financial Statements .... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................ 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 Review by Independent Accountants .................................. 17 Report of Independent Accountants .................................. 18 Part II. OTHER INFORMATION Item 1. Legal Proceedings ......................................... 19 Item 6. Exhibits and Reports on Form 8-K .......................... 22 Signature .......................................................... 23 Exhibits ........................................................... 24
PART I. FINANCIAL INFORMATION Item 1. Financial Statements Baxter International Inc. and Subsidiaries Condensed Consolidated Statements of Income (unaudited) (in millions, except per share data)
Three months ended March 31, 2002 2001 ------------------ Net sales $1,950 $1,757 Costs and expenses Cost of goods sold 1,064 986 Marketing and administrative expenses 400 343 Research and development expenses 115 103 Goodwill amortization -- 12 Interest, net 16 19 Other expense 13 7 - -------------------------------------------------------------------------------- Total costs and expenses 1,608 1,470 - -------------------------------------------------------------------------------- Income before income taxes and cumulative effect of accounting change 342 287 Income tax expense 89 73 - -------------------------------------------------------------------------------- Income before cumulative effect of accounting change 253 214 Cumulative effect of accounting change, net of income tax benefit of $32 -- (52) - -------------------------------------------------------------------------------- Net income $253 $162 ================================================================================ Earnings per basic common share Before cumulative effect of accounting change $.42 $.36 Cumulative effect of accounting change -- (.09) - -------------------------------------------------------------------------------- Net income $.42 $.27 ================================================================================ Earnings per diluted common share Before cumulative effect of accounting change $.41 $.35 Cumulative effect of accounting change -- (.08) - -------------------------------------------------------------------------------- Net income $.41 $.27 ================================================================================ Weighted average number of common shares outstanding Basic 600 590 ================================================================================ Diluted 622 606 ================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements. 2 Baxter International Inc. and Subsidiaries Condensed Consolidated Balance Sheets (in millions, except shares)
- --------------------------------------------------------------------------------------------------------------------- March 31, December 31, 2002 2001 (unaudited) ------------------------------------- Current assets Cash and equivalents $522 $582 Accounts receivable 1,619 1,493 Notes and other current receivables 122 129 Inventories 1,462 1,341 Short-term deferred income taxes 40 82 Prepaid expenses 396 350 --------------------------------------------------------------------------------------------------- Total current assets 4,161 3,977 - --------------------------------------------------------------------------------------------------------------------- Property, At cost 5,788 5,732 plant and Accumulated depreciation and amortization (2,462) (2,426) equipment --------------------------------------------------------------------------------------------------- Net property, plant and equipment 3,326 3,306 - --------------------------------------------------------------------------------------------------------------------- Other assets Goodwill and other intangibles 1,695 1,698 Insurance receivables 82 93 Other 1,353 1,269 --------------------------------------------------------------------------------------------------- Total other assets 3,130 3,060 - --------------------------------------------------------------------------------------------------------------------- Total assets $10,617 $10,343 ===================================================================================================================== Current Short-term debt $490 $149 liabilities Current maturities of long-term debt and lease obligations 52 52 Accounts payable and accrued liabilities 2,004 2,432 Income taxes payable 626 661 --------------------------------------------------------------------------------------------------- Total current liabilities 3,172 3,294 - --------------------------------------------------------------------------------------------------------------------- Long-term debt and lease obligations 2,677 2,486 - --------------------------------------------------------------------------------------------------------------------- Long-term deferred income taxes 201 218 - --------------------------------------------------------------------------------------------------------------------- Long-term litigation liabilities 131 140 - --------------------------------------------------------------------------------------------------------------------- Other long-term liabilities 496 448 - --------------------------------------------------------------------------------------------------------------------- Commitments and contingencies - --------------------------------------------------------------------------------------------------------------------- Stockholders' Common stock, $1 par value, authorized 1,000,000,000 equity shares, issued 608,817,449 shares in 2002 and 608,817,449 shares in 2001 609 609 Common stock in treasury, at cost, 7,943,249 shares in 2002 and 9,924,459 shares in 2001 (271) (328) Additional contributed capital 2,813 2,815 Retained earnings 1,346 1,093 Accumulated other comprehensive loss (557) (432) --------------------------------------------------------------------------------------------------- Total stockholders' equity 3,940 3,757 - --------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $10,617 $10,343 =====================================================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Baxter International Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (unaudited) (in millions)
- --------------------------------------------------------------------------------------------------------------------- Three months ended March 31, (brackets denote cash outflows) 2002 2001 ---------------------------- Cash flows Income before cumulative effect of non-cash from accounting change $253 $214 operations Adjustments Depreciation and amortization 105 108 Deferred income taxes 34 80 Other (16) 15 Changes in balance sheet items Accounts receivable (181) (11) Inventories (128) (100) Accounts payable and other accrued liabilities (124) (256) Net litigation payable and other (43) (83) --------------------------------------------------------------------------------------------------- Cash flows from operations (100) (33) - --------------------------------------------------------------------------------------------------------------------- Cash flows Capital expenditures (139) (131) from investing Acquisitions (net of cash received) activities and investments in affiliates (49) (49) Divestitures and other asset dispositions -- 19 --------------------------------------------------------------------------------------------------- Cash flows from investing activities (188) (161) - --------------------------------------------------------------------------------------------------------------------- Cash flows Issuances of debt and lease obligations 53 767 from financing Redemptions of debt and lease obligations (285) (168) activities Increase in debt with maturities of three months or less, net 749 32 Common stock cash dividends (348) (340) Stock issued under employee benefit plans 91 64 Purchases of treasury stock (35) -- --------------------------------------------------------------------------------------------------- Cash flows from financing activities 225 355 - --------------------------------------------------------------------------------------------------------------------- Effect of currency exchange rate changes on cash and equivalents 3 (17) - --------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and equivalents (60) 144 Cash and equivalents at beginning of period 582 579 - --------------------------------------------------------------------------------------------------------------------- Cash and equivalents at end of period $522 $723 =====================================================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Baxter International Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) 1. FINANCIAL INFORMATION The unaudited interim condensed consolidated financial statements of Baxter International Inc. and its subsidiaries (the company or Baxter) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (GAAP) have been condensed or omitted. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the company's 2001 Annual Report to Stockholders. In the opinion of management, the interim condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the interim periods. All such adjustments, unless otherwise noted herein, are of a normal, recurring nature. The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for the full year. Comprehensive income Total comprehensive income was $128 million and $340 million for the three months ended March 31, 2002 and 2001, respectively. The decline in comprehensive income in the quarter was principally related to unfavorable foreign currency fluctuations, partially offset by increased net income. Allowance for doubtful accounts In the normal course of business, the company provides credit to customers in the health-care industry, performs credit evaluations of these customers and maintains reserves for potential credit losses. 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 management determines they are uncollectible. Credit losses, when realized, have been within the range of management's allowance for doubtful accounts. 2. CHANGE IN ACCOUNTING PRINCIPLE IN 2001 Effective at the beginning of 2001, the company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," and its amendments. In accordance with the transition provisions of SFAS No. 133, upon adoption the company recorded a cumulative effect after-tax reduction to earnings of $52 million and a cumulative effect after-tax increase to other comprehensive income of $8 million. 5 3. INVENTORIES Inventories consisted of the following.
- ------------------------------------------------------------------------------- March 31, December 31, (in millions) 2002 2001 - ------------------------------------------------------------------------------- Raw materials $387 $353 Work in process 287 244 Finished products 788 744 - ------------------------------------------------------------------------------- Total inventories $1,462 $1,341 ===============================================================================
4. INTEREST, NET Net interest expense consisted of the following.
- ------------------------------------------------------------------------------- Three months ended March 31, (in millions) 2002 2001 - ------------------------------------------------------------------------------- Interest expense $18 $28 Interest income (2) (9) - ------------------------------------------------------------------------------- Interest expense, net $16 $19 ===============================================================================
5. STOCK SPLIT On February 27, 2001, Baxter's board of directors approved a two-for-one stock split of the company's common shares. On May 1, 2001, the split was approved by the company's shareholders. 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 the condensed consolidated financial statements and notes have been adjusted and restated to reflect the stock split. 6. EARNINGS PER SHARE The numerator for both basic and diluted earnings per share (EPS) is net earnings available to common shareholders. The denominator for basic EPS is the weighted-average number of common shares outstanding during the period. The following is a reconciliation of the shares (denominator) of the basic and diluted per-share computations.
- ------------------------------------------------------------------------------- Three months ended March 31, (in millions) 2002 2001 - ------------------------------------------------------------------------------- Basic EPS shares 600 590 - ------------------------------------------------------------------------------- Effect of dilutive securities Employee stock options 21 15 Employee stock purchase plans and equity forward agreements 1 1 - ------------------------------------------------------------------------------- Diluted EPS shares 622 606 ===============================================================================
6 7. ACQUISITIONS AND INTANGIBLE ASSETS Adoption of new accounting standards SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets," were issued in July 2001. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method of accounting. The amortization provisions of SFAS No. 142, including nonamortization of goodwill, apply to goodwill and intangible assets acquired after June 30, 2001. With the adoption of SFAS No. 142 in its entirety on January 1, 2002, all of the company's goodwill is no longer being amortized, but is subject to periodic impairment reviews, beginning on January 1, 2002. In performing the reviews, potential impairment is to be identified by comparing the fair value of a reporting unit with its carrying amount, and if the fair value is less than the carrying amount, an impairment loss is recorded as the excess of the carrying amount of the goodwill over its implied fair 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, and are referred to as Medication Delivery, BioScience and Renal. While the company is still in the process of performing the initial goodwill impairment review by reporting unit as of January 1, 2002, it is management's preliminary assessment that a goodwill impairment charge will not be recorded as of the date of adoption. Goodwill The carrying amount of goodwill as of March 31, 2002 was $646 million, $488 million and $210 million for Medication Delivery, BioScience and Renal, respectively. The change in goodwill during the three months ended March 31, 2002 was not significant. There was no impairment of goodwill during the quarter. Other intangible assets Intangible assets other than goodwill are separated into two categories. Intangible assets with finite useful lives are recorded on the condensed consolidated balance sheet and amortized over the estimated useful life of the asset. Intangible assets with indefinite useful lives are recorded on the condensed consolidated balance sheet, are not amortized, and are subject to periodic impairment tests. The amount of intangible assets with indefinite lives is immaterial. The following is a summary of the company's intangible assets subject to amortization at March 31, 2002.
- ---------------------------------------------------------------------------------------------- As of March 31, 2002 --------------------------------------------- Weighted- Average Accumulated Amortization ($ in millions) Gross Amortization Net Period - ---------------------------------------------------------------------------------------------- Amortized intangible assets Developed technology, including patents $492 $212 $280 14 Manufacturing, distribution and other contracts 33 7 26 12 Other 43 6 37 18 - ---------------------------------------------------------------------------------------------- Total amortized intangible assets $568 $225 $343 14 ==============================================================================================
The amortization expense for these intangible assets was $8 million for the three months ended March 31, 2002. The anticipated annual amortization expense for these intangible assets is 7 $32 million, $33 million, $31 million, $28 million, $27 million and $24 million in 2002, 2003, 2004, 2005, 2006 and 2007, respectively. Earnings and per share earnings in 2001 excluding amortization Net-of-tax amortization expense relating to goodwill and indefinite-lived assets was $10 million, or $.02 per basic and diluted common share for the three months ended March 31, 2001. Adjusted for this amortization expense, income before cumulative effect of accounting change, net income, net income per basic common share and net income per diluted common share were $224 million, $172 million, $.29 and $.29, respectively, for the three months ended March 31, 2001. Acquisitions Acquisitions during the three months ended March 31, 2002 and 2001 were accounted for under the purchase method. Results of operations of acquired companies are included in the company's results of operations as of the respective acquisition dates. The purchase price of each acquisition is allocated to the net assets acquired based on estimates of their fair values at the date of the acquisition. The excess of the purchase price over the fair values of the tangible assets and identifiable intangible assets acquired and liabilities assumed is allocated to goodwill. The allocation of purchase price in certain cases may be subject to revision based on the final determination of fair values. Fusion Medical Technologies, Inc. In February 2002, the company entered into an agreement to acquire Fusion Medical Technologies, Inc. (Fusion), subject to shareholder and regulatory approvals. The acquisition of Fusion, a business that develops and commercializes proprietary products used to control bleeding during surgery, supports the company's strategic initiative to expand and enhance the portfolio of innovative therapeutic solutions for biosurgery and tissue regeneration. The acquisition of Fusion, which will be included in the BioScience segment, is expected to close during the second quarter of 2002. Pro forma information The following pro forma information presents a summary of the company's consolidated results of operations as if acquisitions during the first quarter of 2002 and the first quarter of 2001 had taken place as of the beginning of the current and preceding fiscal year, giving effect to purchase accounting adjustments. No adjustments were made for charges for in-process research and development and acquisition-related costs.
- ------------------------------------------------------------------------------- Three months ended March 31, (in millions, except per share data) 2002 2001 - ------------------------------------------------------------------------------- Net sales $1,950 $1,836 Income before cumulative effect of accounting change $253 $211 Net income $253 $159 Net income per diluted common share $0.41 $0.26 - -------------------------------------------------------------------------------
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. 8. LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES Refer to "Part II - Item 1. Legal Proceedings" below. 8 9. SEGMENT INFORMATION The company operates in three segments, each of which are strategic businesses that are managed separately because each business develops, manufactures and sells distinct products and services. The segments and a description of their businesses 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: biopharmaceuticals and blood-collection, separation and storage products and technologies; and Renal: products and services to treat end-stage kidney disease. Certain items are maintained at corporate headquarters (Corporate) and are not allocated to the segments. They primarily include most of the company's debt and cash and equivalents and related net interest expense, corporate headquarters costs, certain non-strategic investments and related income and expense, deferred income taxes, the majority of hedging activities, and certain litigation liabilities and related insurance receivables. Financial information for the company's segments for the quarter ended March 31 is as follows.
Medication (in millions) Delivery BioScience Renal Other Total - ------------------------------------------------------------------------------------------------------------------- For the three months ended March 31, 2002 Net sales $739 $746 $465 -- $1,950 Pretax income 120 171 56 ($5) 342 2001 Net sales $669 $631 $457 -- $1,757 Pretax income 102 113 66 $6 287 - -------------------------------------------------------------------------------------------------------------------
The following are reconciliations of total segment amounts to amounts per the condensed consolidated income statements.
Three months ended March 31, ------------------ (in millions) 2002 2001 - ------------------------------------------------------------------------------------------------------------------- Pretax income Total pretax income from segments $347 $281 Unallocated amounts Interest expense, net (16) (19) Other Corporate items 11 25 - ------------------------------------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of accounting change $342 $287 - -------------------------------------------------------------------------------------------------------------------
9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Baxter International Inc.'s (the company or Baxter) 2001 Annual Report to Stockholders (Annual Report) contains management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2001. In the Annual Report, management outlined its key financial objectives for 2002. The table below reflects these objectives and the company's results through March 31, 2002.
- -------------------------------------------------------------------------------------- RESULTS THROUGH FULL YEAR 2002 OBJECTIVES MARCH 31, 2002 - -------------------------------------------------------------------------------------- ... Accelerate sales growth to the low- . Net sales for the quarter ended March 31, teens. 2002 increased 11 percent. Excluding the effects of changes in currency exchange rates, net sales increased 14 percent. - -------------------------------------------------------------------------------------- ... Grow earnings per share in the . Diluted earnings per share increased 17 mid-teens. percent for the first quarter of the year, excluding the first quarter 2001 cumulative effect of a change in accounting principle. - -------------------------------------------------------------------------------------- ... Generate at least $500 million in . The company had operational cash outflow operational cash flow, after of $217 million during the quarter ended investing more than $1.3 billion in March 31, 2002. The company typically capital expenditures and research generates the majority of its annual cash and development. flow during the second half of the year. The total of capital expenditures and research and development expenses for the quarter ended March 31, 2002 was $254 million. - --------------------------------------------------------------------------------------
10 RESULTS OF OPERATIONS NET SALES
- ------------------------------------------------------------------------ Three months ended March 31, Percent (in millions) 2002 2001 increase - ------------------------------------------------------------------------ International $991 $902 10% United States 959 855 12% - ------------------------------------------------------------------------ Total net sales $1,950 $1,757 11% ========================================================================
Excluding the effect of fluctuations in currency exchange rates, which impacted sales growth unfavorably for all three segments, total net sales growth was 14 percent for the quarter ended March 31, 2002. The United States dollar strengthened principally relative to the Euro and the Japanese Yen. Refer to Note 9 to the condensed consolidated financial statements for a summary of net sales by segment. Medication Delivery The Medication Delivery segment generated 10 percent sales growth during the three months ended March 31, 2002. Excluding the impact of fluctuations in currency exchange rates, sales growth was 12 percent for the quarter, with the strongest sales growth in the international market. Of the constant-currency sales growth, seven points of growth were generated by the October 2001 acquisition of a subsidiary of Degussa AG, ASTA Medica Onkologie GmbH & CoKG (ASTA), which develops, produces and markets oncology products worldwide, and the August 2001 acquisition of Cook Pharmaceutical Solutions, formerly a unit of Cook Group Incorporated (Cook), which provides contract filling of syringes and vials. The drug delivery business, excluding the impact of the acquisition of Cook, contributed two points of sales growth, primarily driven by increased sales of frozen premixed products. The remaining sales growth for the quarter was principally driven by increased sales of specialty products, particularly outside the United States. BioScience Sales in the BioScience segment increased 18 percent for the three months ended March 31, 2002. Excluding the impact of fluctuations in currency exchange rates, sales growth was 21 percent for the quarter, with sales in both the domestic and international markets contributing strongly to the growth rate. The constant-currency sales growth was driven by increased sales of recombinant products, particularly Recombinate Antihemophilic Factor (rAHF) (Recombinate), with such growth principally a result of increased capacity, improved pricing, and continued strong demand for this product, as well as strong sales of vaccines. Sales of plasma-derived products for hemophilia and other conditions and sales of products that provide for leukoreduction, which is the removal of white blood cells from blood products used for transfusion, also contributed strongly to the segment's growth rate for the quarter. Renal The Renal segment generated sales growth of two percent during the three months ended March 31, 2002. Excluding the impact of fluctuations in currency exchange rates, sales growth was seven percent for the quarter. Of the constant-currency sales growth, approximately five points of growth were due to increased 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. The remaining growth in the Renal segment was driven principally by the segment's Renal Therapy Services business, which operates dialysis clinics in partnership with local physicians in international markets, and the Renal Management Strategies business, which is a renal-disease 11 management organization, with revenues from these businesses increasing approximately $6 million in the first quarter of 2002 as compared to the prior year quarter. The following tables show key ratios of certain income statement items as a percent of sales. GROSS MARGIN AND EXPENSE RATIOS
- -------------------------------------------------------------------------- Three months ended March 31, 2002 2001 Increase - -------------------------------------------------------------------------- Gross profit margin 45.4% 43.9% 1.5 pts Marketing and administrative expenses 20.5% 19.5% 1.0 pt - ----------------------------------------------------------------------------
The improvement in the gross profit margin during the quarter was primarily due to a change in the products and services mix in all three segments, and particularly as a result of increased sales of higher-margin products in the BioScience segment. Marketing and administrative expenses increased as a percent of sales in the current quarter as compared to the prior year quarter. 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, including enhancing the technological infrastructure of the company and attracting and retaining a highly talented workforce. To offset these investments, management is aggressively managing expenses and leveraging recent acquisitions. Management expects the expense ratio to decline during the remainder of the year. RESEARCH AND DEVELOPMENT
- -------------------------------------------------------------------------- Three months ended March 31, Percent (in millions) 2002 2001 increase - -------------------------------------------------------------------------- Research and development expenses $115 $103 12% As a percent of sales 5.9% 5.9% - --------------------------------------------------------------------------
The increase in research and development (R&D) expenses for the quarter was due to increased spending in all three segments. Contributing to the growth rate was the Medication Delivery segment's October 2001 acquisition of ASTA, as well as increased spending relating to the development of a next-generation recombinant clotting factor for hemophilia, a next-generation oxygen-therapeutics program, initiatives in the wound management and plasma-based products area, as well as other R&D projects across the three segments. Management expects to significantly increase its growth rate in R&D spending during the remainder of the year. GOODWILL AMORTIZATION In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002, goodwill is no longer amortized, but is subject to periodic impairment reviews. Management expects to significantly increase R&D spending, offsetting the reduced expense due to the elimination of goodwill amortization. 12 INTEREST, NET AND OTHER EXPENSE Net interest expense decreased for the three months ended March 31, 2002 as compared to the prior year period principally due to the May 2001 issuance of convertible debt, which bears a lower interest rate than the debt balances repaid with the proceeds from the issuance. Other expense in both the current and prior year quarter primarily consisted of amounts relating to minority interests and fluctuations in currency exchange rates. PRETAX INCOME Refer to Note 9 to the condensed consolidated financial statements for a summary of financial results by segment. Certain items are maintained at the company's corporate headquarters and are not allocated to the segments. They primarily include the majority of the hedging activities, certain foreign currency fluctuations, net interest expense, income and expense related to certain non-strategic investments, corporate headquarters costs, and certain nonrecurring gains and losses. The following is a summary of the significant factors impacting the segments' financial results. Medication Delivery Pretax income increased 18 percent for the three months ended March 31, 2002. The growth in pretax income was primarily the result of solid sales growth, the close management of costs, the leveraging of expenses in conjunction with recent acquisitions, and decreased pump service costs, partially offset by the unfavorable impact of fluctuations in currency exchange rates and increased R&D spending, which was primarily related to the acquisition of ASTA. BioScience Pretax income increased 51 percent for the three months ended March 31, 2002. The growth in pretax income was primarily a result of strong sales growth, an improved gross margin due to a change in product mix, and the leveraging of expenses. Partially offsetting these increases was the unfavorable impact of fluctuations in currency exchange rates, as well as increased R&D investments in the business. Renal Pretax income decreased 15 percent for the three months ended March 31, 2002. The decrease in pretax income during the quarter was principally due to the unfavorable impact of fluctuations in currency exchange rates and increased R&D spending, partially offset by an improved sales mix and the close management of expenses. INCOME TAXES The effective income tax rate for the three months ended March 31, 2002 was substantially unchanged as compared to the prior year quarter. Management does not expect a significant change in the effective tax rate during the remainder of the year. CHANGES IN ACCOUNTING PRINCIPLES Refer to Note 7 to the condensed consolidated financial statements regarding the company's adoption in 2002 of Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." The company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and its amendments at the beginning of 2001. In accordance with the transition provisions of SFAS No. 133, upon adoption the company recorded a cumulative effect reduction to earnings of approximately $52 million (net of tax benefit of approximately $32 million), and a cumulative effect increase to other comprehensive income of approximately $8 million (net of tax of approximately $5 million). 13 LIQUIDITY AND CAPITAL RESOURCES Cash flows from operations per the company's condensed consolidated statements of cash flows decreased for the three months ended March 31, 2002. The effect of increased earnings in 2002, improved cash flows relating to accounts payable and accrued liabilities, and decreased net cash payments relating to the company's litigation was more than offset by the effect of increases in accounts receivable and inventories, as the company continues to grow its businesses. Cash flows from investing activities decreased for the three months ended March 31, 2002. Capital expenditures increased modestly during the three months ended March 31, 2002 as compared to the prior year quarter 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. The company plans to increase its level of capital expenditures during the remainder of the year. Net cash outflows relating to acquisitions remained constant during the first three months of 2002 as compared to the prior year period. Approximately $24 million of the 2002 total related to the Medication Delivery segment's January 2002 acquisition of Autros Healthcare Solutions Inc., a developer of automated patient information and medication management systems designed to reduce medication errors, with the remainder pertaining to individually insignificant acquisitions. Approximately $11 million of the 2001 total related to acquisitions of dialysis centers in international markets, with the remainder pertaining to individually insignificant acquisitions. In February 2001, the company acquired Sera-Tec Biologicals, L.P., which owned and operated 80 plasma centers in 28 states, and a central testing laboratory. The purchase price of this acquisition, which is included in the BioScience segment, was paid with Baxter International Inc. common stock. The cash flows relating to divestitures and other asset dispositions in 2001 principally related to the sale and leaseback of certain assets. Cash flows from financing activities decreased for the three months ended March 31, 2002. Debt issuances, net of redemptions and other payments of debt, decreased in the current quarter as compared to the prior year quarter. Cash outflows relating to common stock dividends increased for the three-month period due to an increase in the number of shares outstanding. Cash received for stock issued under employee benefit plans increased due to a higher level of stock option exercises coupled with a higher average exercise price. In conjunction with the early termination of an equity forward agreement, the company purchased one million shares of common stock for $35 million during the first quarter of 2002. The company's net-debt-to-capital ratio was 40.6 percent and 35.9 percent at March 31, 2002 and December 31, 2001, respectively. Management assesses the company's liquidity in terms of its overall ability to mobilize cash to support ongoing business levels and to fund its growth. Management uses an internal performance measure called operational cash flow that evaluates each operating business and geographic region on all aspects of cash flow under its direct control. Operational cash flow, as defined, reflects all litigation payments and related insurance recoveries except for those payments and recoveries relating to mammary implants, which the company never manufactured or sold. The following table reconciles cash flow provided by operations, as determined by generally accepted accounting principles (GAAP), to operational cash flow, which is not a measure defined by GAAP. 14
- --------------------------------------------------------------------------------------- Three months ended March 31, (in millions) 2002 2001 - --------------------------------------------------------------------------------------- Cash flows from operations per the company's condensed consolidated statements of cash flows ($100) ($33) Capital expenditures (139) (131) Net interest after tax 12 11 Other, including mammary implant litigation 10 42 - --------------------------------------------------------------------------------------- Operational cash flow ($217) ($111) =======================================================================================
As authorized by the board of directors, the company repurchases its stock to optimize its capital structure depending upon its operational cash flows, net debt level and current market conditions. In July 2001, the board of directors authorized the repurchase of $500 million of common stock. The company began repurchasing under this program in the third quarter of 2001, and, as discussed above, repurchased one million shares of common stock during the first quarter of 2002. Stock repurchases totaled $111 million under this program at March 31, 2002. On February 27, 2001, Baxter's board of directors approved a two-for-one stock split of the company's common shares. On May 1, 2001, the split was approved by the company's shareholders. 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 the condensed consolidated financial statements and notes have been adjusted and restated to reflect the stock split. The company intends to fund its short-term and long-term obligations as they mature through cash flow from operations, by issuing additional debt, by entering into other financing arrangements or by issuing common stock. 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 will be used for working capital, to repay certain existing debt, for capital expenditures and for general corporate purposes. 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 could be adversely affected in the event there is a material decline in the demand for the company's products, deterioration in the company's key financial ratios or credit ratings, or other significantly unfavorable change in conditions. With respect to the company's credit arrangements and debt outstanding at March 31, 2002, while a deterioration in the company's credit rating could unfavorably impact the financing costs associated with the credit arrangements, such a downgrade would not affect the company's ability to draw on the credit arrangements, and would not result in an acceleration of the scheduled maturities of the outstanding debt. See "Part II - Item 1. Legal Proceedings" for a discussion of the company's legal contingencies and related insurance coverage with respect to cases and claims relating to the company's plasma-based therapies and mammary implants manufactured by the Heyer-Schulte division of American Hospital Supply Corporation, as well as other matters. Upon resolution of any of these matters, the company may incur charges in excess of presently established reserves. While such future charges could have a material adverse impact on the company's net income or cash flows in the period in which they are recorded or paid, management believes that the outcomes of these actions, individually or in the aggregate, will not have a material adverse effect on the company's consolidated financial position. FORWARD-LOOKING INFORMATION The matters discussed above that are not historical facts include forward-looking statements. These statements are based on the company's current expectations and involve numerous 15 risks and uncertainties. Some of these risks and uncertainties are factors that affect all international businesses, while some are specific to the company and the health-care arenas in which it operates. Many factors could affect the company's actual results, causing results to differ, and possibly differ materially, from those expressed in any such forward-looking statements. These factors include, but are not limited to, interest rates; technological advances in the medical field; economic conditions; demand and market acceptance risks for new and existing products, technologies and health-care services; the impact of competitive products and pricing; manufacturing capacity; new plant start-ups; global regulatory, trade and tax policies; regulatory, legal or other developments relating to the company's Series A, AF and AX dialyzers; continued price competition; product development risks, including technological difficulties; ability to enforce patents; actions of regulatory bodies and other government authorities; reimbursement policies of government agencies; commercialization factors; results of product testing; and other factors described in this report or in the company's other filings with the Securities and Exchange Commission. Additionally, as discussed in "Legal Proceedings" below, upon the resolution of certain legal matters, the company may incur charges in excess of presently established reserves. Any such charge could have a material adverse effect on the company's results of operations or cash flows in the period in which it is recorded. Currency fluctuations are also a significant variable for global companies, especially fluctuations in local currencies where hedging opportunities are unreasonably expensive or unavailable. If the United States dollar strengthens against most foreign currencies, the company's growth rates in its sales and net earnings could be negatively impacted. Management believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge of the company's business and operations, but there can be no assurance that the actual results or performance of the company will conform to any future results or performance expressed or implied by such forward-looking statements. 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk For a complete discussion, refer to the caption "Financial Instrument Market Risk" in the company's 2001 Annual Report to Stockholders on Form 10-K. As part of its risk-management program, the company performs sensitivity analyses to assess potential changes in fair value relating to hypothetical movements in currency exchange rates. A sensitivity analysis of changes in the fair value of foreign exchange option and forward contracts outstanding at March 31, 2002, the total of which did not change significantly from that at December 31, 2001, indicated that, if the U.S. Dollar uniformly fluctuated unfavorably by 10 percent against all currencies, the fair value of those contracts would decrease by approximately $139 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 percent, the fair value of the contracts would decrease by approximately $249 million as of March 31, 2002. These sensitivity analyses disregard the possibility that currency exchange rates can move in opposite directions and that gains from one currency may or may not be offset by losses from another currency. The analyses also disregard the offsetting change in value of the underlying hedged transactions and balances. Review by Independent Accountants Reviews of the interim condensed consolidated financial information included in this Quarterly Report on Form 10-Q for the three months ended March 31, 2002 and 2001 have been performed by PricewaterhouseCoopers LLP, the company's independent accountants. Their report on the interim condensed consolidated financial information follows. This report is not considered a report within the meaning of Sections 7 and 11 of the Securities Act of 1933 and therefore, the independent accountants' liability under Section 11 does not extend to it. 17 Report of Independent Accountants To the Board of Directors and Stockholders of Baxter International Inc.: We have reviewed the accompanying condensed consolidated balance sheet of Baxter International Inc. and its subsidiaries as of March 31, 2002, and the related condensed consolidated statements of income for the three-month periods ended March 31, 2002 and 2001 and the condensed consolidated statements of cash flows for the three-month periods ended March 31, 2002 and 2001. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2001 and the related consolidated statements of income, cash flows and stockholders' equity for the year then ended (not presented herein), and in our report dated February 14, 2002 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2001, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. PricewaterhouseCoopers LLP Chicago, Illinois April 30, 2002 18 PART II. OTHER INFORMATION Baxter International Inc. and Subsidiaries Item 1. Legal Proceedings Baxter International Inc. (Baxter or the company) and certain of its subsidiaries are named as defendants in a number of lawsuits, claims and proceedings, including product liability claims involving products now or formerly manufactured or sold by the company or by companies that were acquired by the company. The most significant of these are reported in the company's Annual Report on Form 10-K for the year ended December 31, 2001, and material developments in such matters for the quarter ended March 31, 2002 are described below. Upon resolution of any such matters, Baxter may incur charges in excess of presently established reserves. While such a future charge could have a material adverse impact on the company's net income and net cash flows in the period in which it is recorded or paid, management believes that no such charge would have a material adverse effect on Baxter's consolidated financial position. Mammary implant litigation As previously reported in the company's Annual Report on Form 10-K, the company, together with certain of its subsidiaries, is currently a defendant in various courts in a number of lawsuits brought by individuals, all seeking damages for injuries of various types allegedly caused by silicone mammary implants formerly manufactured by the Heyer-Schulte division of American Hospital Supply Corporation (AHSC). AHSC, which was acquired by the company in 1985, divested its Heyer-Schulte division in 1984. It is not known how many of these claims and lawsuits involve products manufactured and sold by Heyer-Schulte, as opposed to other manufacturers. In December 1998, a panel of independent medical experts appointed by a federal judge announced its findings that reported medical studies contained no clear evidence of a connection between silicone mammary implants and traditional or atypical systemic diseases. In June 1999, a similar conclusion was announced by a committee of independent medical experts from the Institute of Medicine, an arm of the National Academy of Sciences. As of March 31, 2002, Baxter, together with certain of its subsidiaries, was named as a defendant or co-defendant in 231 lawsuits and one claim relating to mammary implants, brought by approximately 480 plaintiffs, of which 385 are implant plaintiffs and the remainder are consortium or second generation plaintiffs. Of those plaintiffs, 12 currently are included in the Lindsey class action Revised Settlement described below, which accounts for approximately 11 of the pending lawsuits against the company. Additionally, 283 plaintiffs have opted out of the Revised Settlement (representing approximately 176 pending lawsuits), and the status of the remaining plaintiffs with pending lawsuits is unknown. Some of the opt-out plaintiffs filed their cases naming multiple defendants and without product identification; thus, not all of the opt-out plaintiffs will have viable claims against the company. As of March 31, 2002, 147 of the opt-out plaintiffs had confirmed Heyer-Schulte mammary implant product identification. Furthermore, during the first quarter of 2002, Baxter obtained dismissals, or agreements for dismissals, with respect to 112 plaintiffs. In addition to the individual suits against the company, a class action on behalf of all women with silicone mammary implants is pending in the United States District Court (U.S.D.C.) for the Northern District of Alabama involving most manufacturers of such implants, including Baxter, as successor to AHSC (Lindsey, et al., v. Dow Corning, et al., U.S.D.C., N. Dist. Ala., CV 94-P-11558-S). The class action was certified for settlement purposes only by the court on September 1, 1994, and the settlement terms were subsequently revised and approved on December 22, 1995 (the Revised Settlement). All appeals directly challenging the Revised Settlement have been dismissed. 19 In addition to the Lindsey class action, the company also has been named in three other purported class actions in various state and provincial courts, only one of which is certified. On March 31, 2000, the United States Department of Justice filed an action in the federal district court in Birmingham, Alabama against Baxter and other manufacturers of breast implants, as well as the escrow agent for the revised settlement fund, seeking reimbursement under various federal statutes for medical care provided to various women with mammary implants. On September 26, 2001 the district court granted the motion of all defendants, including Baxter, to dismiss the action. The federal government has appealed the dismissal. Plasma-based therapies litigation As previously reported in the company's Annual Report on Form 10-K, Baxter currently is a defendant in a number of claims and lawsuits brought by individuals who have hemophilia, all seeking damages for injuries allegedly caused by anti-hemophilic factor concentrates VIII or IX derived from human blood plasma (factor concentrates) processed by the company from the late 1970s to the mid-1980s. The typical case or claim alleges that the individual was infected with the HIV virus by factor concentrates, which contained the HIV virus. None of these cases involves factor concentrates currently processed by the company. As of March 31, 2002, Baxter was named in 37 lawsuits and 91 claims in the United States, France, Ireland, Italy, Japan and Taiwan. The U.S.D.C. for the Northern District of Illinois has approved a settlement of all U.S. federal court factor concentrates cases. As of March 31, 2002, approximately 6,500 claimant groups had been found eligible to participate in the settlement, and approximately 350 claimants had opted out of the settlement. Approximately 6,236 of the claimant groups had received payments as of March 31, 2002. In Japan, Baxter is a defendant, along with the Japanese government and four other co-defendants, in factor concentrates cases in Osaka, Tokyo, Nagoya, Tohoku, Fukuoka, Sapporo and Kumamoto. As of March 31, 2002, the cases involved 1,351 plaintiffs, of whom 1,340 have settled their claims. In addition, Immuno International AG (Immuno), a company acquired by Baxter in fiscal year 1997, has unsettled claims for damages for injuries allegedly caused by its plasma-based therapies. The typical claim alleges that the individual with hemophilia was infected with HIV by factor concentrates containing the HIV virus. Additionally, Immuno faces multiple claims stemming from its vaccines and other biologically derived therapies. A portion of the liability and defense costs related to these claims will be covered by insurance, subject to exclusions, conditions, policy limits and other factors. Pursuant to the stock purchase agreement between the company and Immuno, as revised in April 1999 in consideration for payment by the company of 29 million Swiss Francs to Immuno as additional purchase price, approximately 26 million Swiss Francs of the purchase price is being withheld to cover these contingent liabilities. As previously reported in the company's Annual Report on Form 10-K, Baxter is currently a defendant in a number of claims and lawsuits brought by individuals who infused the company's Gammagard(R) IVIG (intravenous immuno-globulin), all of whom are seeking damages for Hepatitis C infections allegedly caused by infusing Gammagard(R) IVIG. As of March 31, 2002, Baxter was a defendant in 17 lawsuits and 26 claims in the United States, Denmark, France, Germany, Italy, Spain and the United Kingdom. One class action in the United States has been certified. In September 2000, the U.S.D.C. for the Central District of California approved a settlement of the class action that would provide financial compensation for U.S. individuals who used Gammagard(R) IVIG between January 1993 and February 1994. 20 Other As of March 31, 2002, Baxter International Inc. and certain of its subsidiaries were named as defendants in three civil lawsuits, one of which is a purported class action, seeking damages on behalf of persons who allegedly died or were injured as a result of exposure to Baxter's A, AF and AX series dialyzers. One of these cases, which is pending in the Superior Court of San Bernardino County, California, was filed during the first quarter of 2002. The company has reached settlements with a number of the families of patients who died in Spain and Croatia after undergoing hemodialysis on Baxter Althane series dialyzers. Government criminal investigations concerning the patient deaths are pending in Spain and Croatia. Other lawsuits and claims may be filed in the United States and elsewhere. Baxter International Inc. and certain of its subsidiaries have been named as defendants, along with others, in six lawsuits brought in U.S. federal courts on behalf of various classes of purchasers of Medicare and Medicaid eligible drugs alleged to have been injured by Baxter and other defendants as a result of pricing practices for such drugs, which are alleged to be artificially inflated. One of these cases was filed during the first quarter of 2002 in the U.S.D.C. for the Western District of Louisiana and another was filed in April 2002 in the U.S.D.C. for the Eastern District of Pennsylvania. All six of these U.S. federal court cases have been transferred to the U.S.D.C. for the District of Massachusetts for consolidated pretrial case management under Multi District Litigation rules. Claimants seek damages and declaratory and injunctive relief under various state and/or federal statutes. In addition, in January 2002, the Attorney General of Nevada filed a civil suit in the Second Judicial District Court of Washoe County, Nevada. In February 2002, the Attorney General of Montana filed a civil suit in the First Judicial District Court of Lewis and Clark County, Montana. These lawsuits in Nevada and Montana, which each name a subsidiary of Baxter International as a defendant and seek damages, injunctive relief, civil penalties, disgorgement, forfeiture and restitution, allege that prices for Medicare and Medicaid eligible drugs were artificially inflated in violation of various state laws. Various state and federal agencies are conducting civil investigations into the marketing and pricing practices of Baxter and others with respect to Medicare and Medicaid reimbursement. As of September 30, 1996, the date of the spin-off of Allegiance Corporation (Allegiance) from Baxter, Allegiance assumed the defense of litigation involving claims related to Allegiance's businesses, including certain claims of alleged personal injuries as a result of exposure to natural rubber latex gloves. Allegiance has not been named in most of this litigation but will be defending and indemnifying Baxter pursuant to certain contractual obligations for all expenses and potential liabilities associated with claims pertaining to latex gloves. As of March 31, 2002, the company was named as a defendant in 494 lawsuits, including the following purported class action: Swartz v. Baxter Healthcare Corporation, et al. Court of Common Pleas, Jefferson County, PA, 656-1997 C.D. 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 this position was successfully challenged by one or more countries' taxing authorities, Baxter would be liable for any resulting liability. Baxter believes that it has established adequate reserves to cover the expected tax liabilities. There can be no assurance, however, that Baxter will not incur losses in excess of such reserves. 21 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index hereto. (b) Reports on Form 8-K None. 22 Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BAXTER INTERNATIONAL INC. ----------------------------------- (Registrant) Date: May 3, 2002 By: /s/ Brian P. Anderson ------------------------------- Brian P. Anderson Senior Vice President and Chief Financial Officer (Chief Accounting Officer) 23 EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION - -------------------------------------------------------------------------------- Number Description of Exhibit - ------ ---------------------- 10.3 Baxter International Inc. and Subsidiaries Supplemental Pension Plan, as amended and restated effective January 1, 2002 10.9 Baxter International Inc. and Subsidiaries Deferred Compensation Plan, as amended and restated effective January 1, 2002 12 Computation of Ratio of Earnings to Fixed Charges 15 Letter Re Unaudited Interim Financial Information 24 EX-10.3 3 dex103.txt SUPPLEMENTAL PENSION PLAN Exhibit 10.3 BAXTER INTERNATIONAL INC. AND SUBSIDIARIES SUPPLEMENTAL PENSION PLAN (Amended and Restated Effective January 1, 2002) BAXTER INTERNATIONAL INC. AND SUBSIDIARIES SUPPLEMENTAL PENSION PLAN (Amended and Restated Effective January 1, 2002) ARTICLE I GENERAL 1.1. Purpose and Effective Date. Baxter International Inc. (the "Corporation") established the Baxter International Inc. and Subsidiaries Supplemental Pension Plan (the "Plan"), effective as of January 1, 1989, to assist in providing retirement and other benefits to certain employees of the Corporation and its affiliates which are in addition to those provided under the Baxter International Inc. and Subsidiaries Pension Plan (the "Pension Plan"). The following provisions constitute an amendment and restatement of the Plan effective as of January 1, 2002, the "Effective Date" of the Plan set forth herein. The Plan is intended to constitute an "excess benefit plan" within the meaning of Section 3(36) of ERISA with respect to the benefits provided under Section 4.2 that are in excess of those that may be provided under the Pension Plan because of the application of Code Section 415, and an unfunded plan maintained primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees with respect to the other benefits provided under the Plan. 1.2. Plan Administration; Source of Benefit Payments. The authority to control and manage the operation and administration of the Plan shall be vested in the Administrative Committee. In controlling and managing the operation and administration of the Plan, the Administrative Committee shall have the same rights, powers and duties as those delegated to such Committee under the Pension Plan. A Participating Employer's obligation under the Plan shall be reduced to the extent that any amounts due under the Plan are paid from one or more trusts, the assets of which are subject to the claims of general creditors of the Participating Employer or any affiliate thereof; provided, however, that nothing in the Plan shall require the Corporation or any Participating Employer to establish any trust to provide benefits under the Plan. 1.3. Applicable Laws. The Plan shall be construed and administered in accordance with the laws of the State of Illinois to the extent that such laws are not preempted by the laws of the United States of America. 1.4. Notices. Any notice or document required to be filed with the Administrative Committee under the Plan will be properly filed if delivered or mailed by registered mail, postage prepaid, to the Administrative Committee, in care of the Corporation, at its principal executive offices. Any notice required under the Plan may be wholly or partially waived by the person entitled thereto. 1.5. Action by Participating Employers. Any action required or permitted to be taken under the Plan by a Participating Employer shall be by resolution of its Board of Directors, or by a person or persons authorized by its Board of Directors. 1.6. Limitation on Provisions. Any benefit payable under the Pension Plan shall be paid solely in accordance with the terms and conditions of the Pension Plan and nothing in the Plan shall operate or be construed in any way to modify, amend or affect the terms and provisions of the Pension Plan. 1.7. Claims and Review Procedures. The claims procedures applicable to claims and appeals of denied claims under the Pension Plan shall apply to any claims for benefits under the Plan and appeals of any such denied claims. 1.8. Inactive Participation. Except as otherwise specifically provided herein, the benefits, if any, payable to or on behalf of Participants who terminated employment with the Corporation and its affiliates prior to the Effective Date shall be determined in accordance with the terms of the Plan as in effect on such termination of employment. 1.9. Plan Supplements. The provisions of the Plan as applied to any Participating Employer or Participant may be modified and/or supplemented from time to time by the adoption of one or more Supplements. In the event of any inconsistency between a Supplement and the Plan document, the terms of the Supplement shall govern. 1.10. Severability of Plan Provisions. In the event any provisions of the Plan shall be held invalid or illegal for any reason, any invalidity or illegality shall not affect the remaining parts of the Plan, but the Plan shall be construed and enforced as if the invalid or illegal provision had never been included, and the Corporation shall have the right to correct and remedy such questions of invalidity or illegality by amendment as provided in Article 5. ARTICLE II DEFINITIONS 2.1. "Accrued Benefit" shall have the meaning ascribed to such term under the Pension Plan. 2.2. "Administrative Committee" shall have the meaning ascribed to such term under the Pension Plan. 2.3. "Code" means the Internal Revenue Code of 1986, as amended. 2.4. "Corporation" has the meaning ascribed to such term in Section 1.1. 2 2.5. "Deferred Compensation Plan" means Baxter International Inc. and Subsidiaries Deferred Compensation Plan. 2.6. "Effective Date" means January 1, 2002. 2.7. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 2.8. "Excess Benefit" means the benefit determined under Section 4.2. 2.9. "Participant" means an employee of a Participating Employer who is eligible for an Excess Benefit, Pension Make-Whole Benefit or Special Supplemental Benefit, as set forth in Section 3.1. 2.10. "Participating Employer" means the Corporation and any affiliate of the Corporation, which is a Participating Employer under the Pension Plan. 2.11. "Pension Make-Whole Benefit" means the benefit determined under Section 4.3. 2.12. "Pension Plan" has the meaning ascribed to such term in Section 1.1. 2.13. "Plan" has the meaning ascribed to such term in Section 1.1. 2.14. "Special Supplemental Benefit" means the benefit determined under Section 4.4. ARTICLE III PARTICIPATION IN THE PLAN 3.1. Eligibility. An employee of a Participating Employer shall become a Participant in the Plan on the first date such employee is eligible for an Excess Benefit, Pension Make-Whole Benefit or Special Supplemental Benefit, in accordance with the following: (a) Each participant in the Pension Plan who has a fully vested interest in his or her Accrued Benefit under the Pension Plan and whose benefit under the Pension Plan is limited by reason of the application Section 415 or Section 401(a)(17) of the Code shall be eligible for an Excess Benefit, determined in accordance with Section 4.2. (b) Each participant in the Pension Plan who has a fully vested interest in his or her Accrued Benefit under the Pension Plan and who also is a participant in the Deferred Compensation Plan shall be eligible for a Pension Make-Whole Benefit, determined in accordance with Section 4.3. 3 (c) The Administrative Committee (or the person or persons delegated such authority by the Administrative Committee), in its sole discretion, shall designate the individuals, if any, who shall be eligible for Special Supplemental Benefits. 3.2. Restricted Participation. Notwithstanding any other provision of the Plan to the contrary, if the Administrative Committee determines that participation by one or more Participants shall cause the Plan as applied to any Participating Employer to be subject to Part 2, 3 or 4 of Subtitle B of Title I of ERISA, the entire interest of such Participants under the Plan shall be immediately paid to them by each applicable Participating Employer, or shall otherwise be segregated from the Plan in the discretion of the Administrative Committee, and such Participants shall cease to have any interest under the Plan. In the event the Participant has died, the foregoing provisions of this Section 3.2 shall apply to the Participant's interest, if any, which is payable to the Participant's surviving spouse or other beneficiary. 3.3. No Contract of Employment. The Plan does not constitute a contract of employment, and participation in the Plan will not give any employee the right to be retained in the employ of the Corporation or any Participating Employer nor any right or claim to any benefit under the Plan, unless such right or claim has specifically accrued under the terms of the Plan. ARTICLE IV AMOUNT AND PAYMENT OF PLAN BENEFITS 4.1. Plan Benefits. Eligible Participants under the Plan shall receive an Excess Benefit, Pension Make-Whole Benefit or Special Supplemental Benefit, in the amount and payable at the times set forth in the following provisions of this Article 4. 4.2. Excess Benefit. As of any date, an eligible Participant's "Excess Benefit" under the Plan shall be an amount equal to the Accrued Benefit the Participant would be eligible for under the Pension Plan as of such date if such Accrued Benefit were determined without regard to limitations of Section 415 and Section 401(a)(17) of the Code, reduced by the Participant's actual Accrued Benefit under the Pension Plan as of such date. A Participant's Excess Benefit, if any, shall be paid at the same time and in the same form as the Participant's benefits under the Pension Plan; provided, however, the Administrative Committee, in its sole discretion, may defer commencement of payments under the Plan for a period of up to twelve months after the time payments under the Pension Plan commence. 4.3. Pension Make-Whole Benefit. As of any date, an eligible Participant's "Pension Make-Whole Benefit" under the Plan shall be an amount equal to: (a) the Accrued Benefit the Participant would be eligible for under the Pension Plan as of such date if such Accrued Benefit were determined (i) without exclusion of compensation deferred under the Deferred Compensation Plan, and (ii) without regard to the limitations of Code Sections 415 and 401(a)(17), 4 reduced by (b) the sum of (i) the Participant's actual Accrued Benefit under the Pension Plan as of such date, and (ii) the amount of any Excess Benefit determined under Section 4.2 without regard to such deferred compensation. A Participant's Pension Make-Whole Benefit, if any, shall be paid at the same time and in the same form as the Participant's benefits under the Pension Plan; provided, however, the Administrative Committee, in its sole discretion, may defer commencement of payments under the Plan for a period of up to twelve months after the time payments under the Pension Plan commence. 4.4. Special Supplemental Benefits. The amount, if any, of a Participant's "Special Supplemental Benefit" shall be determined by the Administrative Committee, shall be subject to such terms and conditions as the Administrative Committee may establish, and shall be payable at the times and in the form determined by the Administrative Committee. The Administrative Committee, in its sole discretion, may delegate its authority under this Section 4.4 to any person or persons in connection with the award of Special Supplemental Benefits to a particular Participant, a class of Participants, or all Participants. A copy of all actions taken by the Administrative Committee or its delegate with respect to Special Supplemental Benefits under the Plan shall be sent to the Corporate Counsel in charge of the Company's employee benefit plans. 4.5. Actuarial Equivalence. To the extent applicable, the benefits payable to any person under the Plan shall be determined by applying the appropriate interest rate and other actuarial assumptions set forth in the Pension Plan. 4.6. Benefits May Not Be Assigned or Alienated. Benefits payable under the Plan are expressly declared to be unassignable and nontransferable. Neither the Participant nor any other person shall have any voluntary or involuntary right to commute, sell, assign, pledge, anticipate, mortgage or otherwise encumber or transfer or convey in advance of actual receipt any benefits payable under the Plan. 4.7. Withholding Taxes. Benefits and payments under the Plan are subject to the withholding of all applicable taxes. Notwithstanding any provision of the Plan to the contrary, a Participant's initial benefit payment under the Plan shall be in an amount sufficient pay any remaining employment tax required to be withheld with respect to Plan benefits. To the extent such amount is in excess of the first distribution that would otherwise have been made based on the form of benefit elected by the Participant, subsequent payments will not begin until the aggregated payments that would have been made under the form of benefit elected by the Participant exceed the amount of such initial distribution. 4.8. Beneficiaries. A Participant's beneficiary under the Plan with respect to benefits payable under the Plan following the Participant's death, if any, shall be the Participant's beneficiary under the Pension Plan. 5 ARTICLE V AMENDMENT AND TERMINATION 5.1. Amendment and Termination. The Administrative Committee may, at any time, amend or supplement the Plan. The Board of Directors of the Corporation may, at any time, terminate the Plan. Notwithstanding the foregoing provisions of this Section 5.1, neither an amendment or termination of the Plan shall materially reduce or impair the interests of Participants or other persons entitled to benefits under the Plan; provided, however, the Administrative Committee or Corporation, as applicable, may amend or terminate the Plan at any time to take effect retroactively or otherwise, as deemed necessary or advisable for purposes of conforming the Plan to any present or future law, regulations or rulings relating to plans of this or a similar nature. 5.2. Successors and Assigns. The obligations of the Corporation and the Participating Employers under the Plan shall be binding upon any assignee or successor in interest thereto. * * * IN WITNESS WHEREOF, the undersigned duly authorized officer has caused this Plan to be executed this 12th of March, 2002. BAXTER INTERNATIONAL INC. By /s/ Karen J. May --------------------------------- Its Corporate Vice President of Human Resources 6 EX-10.9 4 dex109.txt DEFERRED COMPENSATION PLAN EXHIBIT 10.9 BAXTER INTERNATIONAL INC. AND SUBSIDIARIES DEFERRED COMPENSATION PLAN (Amended and restated effective January 1, 2002) BAXTER INTERNATIONAL INC. AND SUBSIDIARIES DEFERRED COMPENSATION PLAN (Amended and Restated Effective January 1, 2002) ARTICLE I PURPOSE, EFFECTIVE DATE, EMPLOYER 1.1 Purpose. The Baxter International Inc. and Subsidiaries Deferred Compensation Plan (the "Plan") has been adopted by Baxter International Inc. ("Baxter"). The Plan is intended to be an unfunded arrangement to provide deferred compensation for the benefit of a select group of management and highly compensated employees. The Plan is designed to enable eligible participants to defer compensation and receive matching contributions under the provisions of the Baxter International Inc. and Subsidiaries Incentive Investment Plan ("IIP"), a tax-qualified defined contribution plan, in excess of the limitations imposed by the Internal Revenue Code("Code").Effective January 1, 1998, Baxter amended and restateed the Plan in part to combine the Plan and the Baxter International Inc. and Subsidiaries Incentive Investment Excess Plan. Effective January 1, 2002, the Plan is hereby further amended and restated. Capitalized terms not defined in this Plan are deemed to have the meaning given them in the IIP. 1.2 Effective Date. The effective date of this restatement is January 1, 2002. 1.3 Employer. The Plan is adopted for the benefit of a select group of management or highly compensated employees of Baxter or of any subsidiaries or affiliates of Baxter, as set forth below. The Plan may be adopted by any subsidiaries or affiliates of Baxter with the consent of the Administrative Committee. Adopting Employers are listed on Appendix A as attached and updated from time to time. ARTICLE II DEFINITIONS 2.1 Accounts. Accounts means the sum of the Participant's Excess Matching Contribution Account balance, the Participant's Bonus Deferral Account balance and the Participant's Pay Deferral Account balance. 2.2 Administrative Committee. For purposes of the Plan, Administrative Committee has the same meaning as the Administrative Committee in the IIP. 2.3 Beneficiary. A Participant's Beneficiary, as defined in Article VI, is the Beneficiary designated to receive the Participant's Accounts, if any, from the Plan, upon the death of the Participant. 2.4 Bonus. The term Bonus means those bonuses that are included in the definition of Compensation in the IIP and also includes any other bonus which is approved by the Administrative Committee and listed on Attachment A to this Plan. Attachment A may be 1 updated from time to time to accurately reflect the approved bonuses for purpose of this definition. 2.5 Bonus Deferral. The Bonus Deferral is the amount of the Participant's Bonus which the Participant elected to defer and contribute to the Plan which, but for such election, would have otherwise been paid to him/her. 2.6 Compensation. For purposes of the Plan, Compensation has the same meaning as Compensation in the IIP without regard to Section 401(a)(17) of the Code, except that the Bonuses deferred under the Plan are included in Compensation in the Plan Year in which such amounts would be paid if they were not deferred and not in the Plan Year in which such amounts are actually paid. 2.7 Compensation Committee. The Compensation Committee of the Board of Directors of Baxter. 2.8 Deferral Election Form. The form which a Participant must complete and return to the Administrative Committee, in accordance with the rules and procedures as may be established by the Administrative Committee, in order to elect to defer aportion of his or her Bonus into the Plan and to designate his Pay Deferral Election. 2.9 Distribution Election Form. The form which a Participant must complete and return to the Administrative Committee, in accordance with the rules and procedures as may be established by the Administrative Committee. This form is to be used by both (a) Participants who are not eligible to defer a portion of their Bonus or make a Pay Deferral Contribution to the Plan; and (b)Participants who are electing distributions with respect to a Deferred Compensation Account. Only one election form shall be filed with respect to distribution of a Participant's Deferred Compensation Account following termination of employment. A Participant may also file a Distribution Election Form to request a scheduled in-service distribution of his or her Deferred Compensation Account, provided that such form is filed at least 24 months prior to the date distribution is to commence. If the Participant has a Termination of Employment prior to the date the in-service distribution is scheduled to commence, the Distribution Election Form requesting such in-service distribution shall be ignored. To be effective, a Distribution Election Form must be filed within the time prescribed by the Administrative Committee. 2.10 Eligible Employee. An Eligible Employee is anyone who: (a) is a participant in the Baxter International Inc. Long Term Incentive Plan for the Plan Year to which deferrals relate (or was a participant in the Baxter International Inc. Long Term Incentive Plan in a prior Plan Year and who is a participant in a different Long Term Incentive Plan, sponsored by Baxter or one of its affiliates, for the current Plan Year) who has contributed the maximum annual contribution limit under Sections 401(k) and 402(g) of the Code to the IIP; 2 (b) is a participant in the IIP whose Matching Contributions to the IIP for the Plan Year are limited because of the application of the Code, provided he or she has met the eligibility rules set forth in Section 3.1 below; or (c) is designated by the Administrative Committee to be a Participant in the Plan and eligible to receive discretionary benefits under Section 3.5 of the Plan for the Plan Year, subject to the terms and conditions imposed by the Administrative Committee in accordance with Section 3.5. 2.11 Excess Matching Contribution. The Excess Matching Contribution is the difference between the Matching Contributions allocated to a Participant's IIP Account during the Plan Year and the amount that would have been allocated if the limitations of Sections 415, 401(k), 402(g) and 401(m) of the Code, as well as the limitations of Section 401(a)(17) of the Code, were disregarded. 2.12 Matching Contribution. The term Matching Contribution has the same meaning in the Plan as it does in the IIP. 2.13 Participant. A Participant is any Eligible Employee who has an Account balance in the Plan. 2.14 Pay Deferral Contribution. The term Pay Deferral Contribution has the same meaning as Pay Deferral Contribution in the IIP. The Pay Deferral Contribution is the amount of the Participant's Compensation which the Participant elected to defer into the Plan which, but for such election, would have otherwise been paid to him/her. 2.15 Plan Year. The Plan Year is the calendar year. 2.16 Termination of Employment. For purposes of the Plan, Termination of Employment has the same meaning as Termination of Employment in the IIP. 2.17 Unforeseeable Emergency. A severe financial hardship resulting from a sudden or unexpected illness or accident of the Participant or one of his or her dependents, loss of the Participant's property due to casualty or similar extraordinary and unforeseeable circumstances arising as a result of one or more recent events beyond the control of the Participant, as determined by the Administrative Committee. 2.18 Vesting. For purposes of the Plan, Vesting has the same meaning as Vesting in the IIP. 3 ARTICLE III ELIGIBILITY FOR EXCESS MATCHING CONTRIBUTIONS, BONUS DEFERRALS AND PAY DEFERRALS 3.1 Eligibility for Excess Matching Contribution. An Eligible Employee is a Participant in the Plan and eligible to receive a contribution to his or her Excess Matching Contribution Account in the Plan for a Plan Year if such Participant's allocation of Matching Contributions in the IIP during the Plan Year is less than three percent (3%) of Compensation because of the application of the Code. 3.2 Bonus Deferral Elections. An Eligible Employee is a Participant in the Plan if he or she defers the maximum amount of Compensation allowed under the Code to the IIP for the Plan Year and he or she elects to defer all or a portion of his or her Bonus through the Plan until his or her Termination of Employment, or such other time as specified on his or her Deferral Election Form, by completing a Deferral Election Form in accordance with applicable rules and procedures established by the Administrative Committee. A Participant may elect to defer up to 100% of his or her Bonus, in whole percentages. Beginning January 1 of the year to which the Deferral Election Form applies, the Deferral Election Form is irrevocable, except as provided in Section 5.6. The Deferral Election Form must be filed with the Administrative Committee in accordance with the rules established by the Administrative Committee before January 1 of the Plan Year to which the Deferral Election Form applies. For purposes of Bonus Deferral Elections, eligible employees are those employees who are participants in the Long Term Incentive Plan for the Plan Year to which deferrals relate. 3.3 Pay Deferral Elections. An Eligible Employee is a Participant in the Plan if he or she elects to defer a portion of his or her Compensation in excess of the annual contribution limit under Sections 401(k) and 402(g) of the Code (as contributed to the IIP) as set forth on his or her Deferral Election Form, in accordance with applicable rules and procedures established by the Administrative Committee. A Participant may elect to defer up to a total of 12% of his or her Compensation (effective for deferrals on or after January 1, 2003, a total of 20% of his or her Compensation); to the IIP and the Plan however, such election must be the same election as the Participant made for the IIP for such Plan Year, and the Participant may not change his/her IIP election for the Plan Year.Notwithstanding the prior sentence, effective April 1, 2002, a Participant may elect to make an additional annual "catch-up contribution" to the IIP in accordance with the terms of the IIP, which shall be disregarded for purposes of the Plan. For purposes of Pay Deferral Elections, eligible employees are those employees who are participants in the Long Term Incentive Plan for the Plan Year to which deferrals relate. Notwithstanding the foregoing provisions of this Section 3.3, the Administrative Committee, in its sole discretion, may permit a Participant to defer in excess of 12% of his or her Compensation (and, effective for deferrals on or after January 1, 2003, in excess of 20% of his or her Compensation) to the Plan for any Plan Year (a "Supplemental Pay Deferral"). To the extent that the Administrative Committee exercises its discretionary authority under the prior sentence, such exercise shall be reflected in Appendix B to the Plan which shall identify each Participant designated as eligible to 4 make Supplemental Pay Deferrals, specify the Plan Year(s) for which Supplemental Pay Deferrals may be made, and reflect any other conditions and limitations applicable with respect to such Supplemental Pay Deferrals. In no event shall Supplemental Pay Deferrals be eligible for Excess Matching Contributions 3.4 Somatogen Acquisition Deferral Election. Any former employee of Somatogen, Inc. who is acquired by Baxter International Inc. as of the closing date of the merger agreement between Baxter and Somatogen and who completed a Special Deferral Enrollment Form shall have such form recognized as a valid election under the Plan. Deferrals authorized under this section shall be treated as deferrals authorized under Section 3.2 for purposes of accounting and distribution. 3.5 Discretionary Contributions. The Administrative Committee may, in its sole discretion, specify such additional amounts in the form of employer contributions to be credited to the Account of a Participant or another employee who is a member of a select group of management and highly compensated employees, subject to such terms and conditions as the Administrative Committee may establish. To the extent that the Administrative Committee exercises its discretionary authority under this Section 3.5, such exercise shall be reflected in Appendix C to the Plan, which shall identify each Participant credited with such discretionary employer contributions, specify the Plan Year(s) for which contributions relate, and reflect any other limitations applicable with respect to such discretionary contributions. Discretionary employer contributions authorized under this section shall be treated as deferrals authorized under Section 3.2 for purposes of accounting and distribution. ARTICLE IV CREDITING OF ACCOUNTS 4.1 Crediting of Accounts. A. Excess Matching Contribution Account. An account equal to the Excess Matching Contributions, if any, of each Participant made for Plan Years prior to 2002, as adjusted for investment return under Section 4.2 and distributions under Article V. B. Bonus Deferral Account. An account equal to the Bonus Deferrals, if any, of each Participant made for Plan Years prior to 2002, as adjusted for investment return under Section 4.2 and distributions under Article V. C. Pay Deferral Account. An account equal to the Pay Deferral Contributions and Supplemental Pay Deferrals, if any, of each Participant made for Plan Years prior to 2002, as adjusted for investment return under Section 4.2 and distributions under Article V. 5 D. Deferred Compensation Account. An account equal to the Excess Matching Contributions, Pay Deferral Contributions, Bonus Deferrals and Supplemental Pay Deferrals made for the 2002 Plan Year and thereafter, as adjusted for investment return under Section 4.2 and distributions under Article V. Notwithstanding the foregoing provisions of this Section 4.1, if elected by the Participant in accordance with rules established by the Administrative Committee, the Participant may elect to have his or her Excess Matching Contributions, Pay Deferral Contributions, Bonus Deferrals and Supplemental Pay Deferrals made for the 2001 Plan Year, if any, credited to his or her Deferred Compensation Account under paragraph D, instead of to the Excess Matching Contribution Account, Bonus Deferral Account and Pay Deferral Account described in paragraphs A, B and C. Further, effective January 1, 2002, notwithstanding the forgoing provisions of this Section 4.1, if elected by the Participant in accordance with rules established by the Administrative Committee, the Participant may make a one-time election to have amounts credited to his or her Excess Matching Contribution Account, Bonus Deferral Account and Pay Deferral Account (including Supplemental Pay Deferrals) credited to his or her Deferred Compensation Account under paragraph D, provided however, that such election is made prior to 2002 and such amounts are not scheduled to be distributed in 2001. 4.2 Earnings. Each Participant's Accounts will be adjusted for investment return, on a weekly basis, in accordance with the following provisions of this Section 4.2: A. Amounts in a Participant's Excess Matching Account, Bonus Deferral Account and Pay Deferral Account will be credited with earnings at a rate determined by the Administrative Committee from time to time. Until the Administrative Committee determines otherwise, such earnings will be credited at the same rate as the Stable Income Fund in the IIP. B. Amounts in a Participant's Deferred Compensation Account shall be adjusted upward or downward to reflect the investment return that would have been realized had such amounts been invested in one or more investments selected by the Participant from among the assumed investment alternatives designated by the Administrative Committee for use under the Plan. Prior to the first day of each Plan Year, Participants may change the assumed investment alternatives in which their Deferred Compensation Account will be deemed invested for such Plan Year. Participant elections of assumed investment alternatives shall be made at the time and in the form determined by the Administrative Committee, and shall be subject to such other restrictions and limitations as the Administrative Committee shall determine. 4.3 Account Statements. Account Statements will be generated effective as of the last day of each calendar quarter and mailed to each Participant as soon as administratively feasible. Account Statements will reflect all Account activity during the reporting quarter, including Account contributions, distributions and earnings credits. 4.4 Vesting. Subject to Sections 9.1 and 9.2, a Participant is always 100% Vested in his or her Accounts in the Plan at all times. 6 ARTICLE V DISTRIBUTION OF BENEFITS 5.1 Distribution of Benefits. Subject to Section 5.2, distribution of a Participant's Accounts, if any, will commence in accordance with the Participant's Distribution Election Form or Deferral Election Form as soon as administratively feasible after the Participant's Termination of Employment. Any spousal consent requirements under the IIP will not apply to distributions under the Plan. 5.2 Distribution. A. Deferral Election Form. A Participant's Excess Matching Contribution Account, Bonus Deferral Account and Pay Deferral Account will be paid in accordance with the form of payment designated in the Participant's Deferral Election Form. The Deferral Election Form shall not be used to elect forms of distribution with respect to deferrals for Plan Years after 2001 (or 2000, with respect to a Participant electing to have his or her deferrals credited to the Deferred Compensation Account for Plan Year 2000 under Section 4.1). B. Distribution Election Form - Termination of Employment. A Participant's Deferred Compensation Account and, if the Participant is not eligible for Pay Deferrals or Bonus Deferrals, his or her Excess Matching Contribution Account, will be paid after the Participant's Termination of Employment, in accordance with the form of payment designated in such Participant's Distribution Election Form. Only one Distribution Election Form may be submitted with respect to distribution of a Participant's Deferred Compensation Account following Termination of Employment, and such election shall apply to the Participant's entire Deferred Compensation Account balance at his or her Termination of Employment. C. In-Service Distribution of Deferred Compensation Account. A Participant may also elect to receive a distribution of all or a portion of his or her Deferred Compensation Account at a specified future date, by filing a Distribution Election Form with the Administrative Committee, specifying the dollar amount of the distribution, at least 24 months prior to the distribution date. If the balance in the Participant's Deferred Compensation Account on the specified distribution date is less than the dollar amount requested, the entire balance of the Deferred Compensation Account shall be distributed. If the Participant has a Termination of Employment prior to the specific date requested on such Distribution Election Form, such form shall be ignored and the Participant's distribution election with respect to Termination of Employment shall be followed. D. Forms of Distribution. The forms of distribution are: (a) a lump sum payment, or (b) annual installments of at least 2 years, but not to exceed 15 years. 7 Annual installments will commence in the first quarter of the Plan Year as specified in the Participant's Deferral Election Form or Distribution Election Form. Subsequent installments will be paid annually in the first quarter of subsequent Plan Years. Lump sum payments will be made in the first quarter of the Plan Year as specified in the Participant's Deferral Election Form. Lump sum payments pursuant to a Distribution Election Form relating to payments following Termination of Employment will be made in the first quarter following the Plan Year in which the Participant incurs a Termination of Employment or any subsequent Plan Year as indicated on the Distribution Election Form. All distributions of a Participant's Deferred Compensation Account prior to Termination of Employment will be paid in a lump sum as soon as administratively feasible after the date elected by the Participant in the Distribution Election Form. If a Participant does not elect a form of distribution by the time the Deferral Election Form or the Distribution Election Form is required to be completed, the Participant's election will default to a lump sum payment in the first quarter of the Plan Year following the Plan Year in which the Participant incurs a Termination of Employment. Notwithstanding the above, a Participant whose Accounts under the Plan total less than $50,000 as of the last day of the Plan Year in which he or she incurs a Termination of Employment will receive lump sum payment of his or her Accounts in the first quarter of the Plan Year following the Plan Year in which the Participant incurs a Termination of Employment. The Administrative Committee has the right to postpone the payment of any Account for up to one year from the date on which the credits would otherwise be paid. 5.3 Effect of Payment. Payment to the person or trust reasonably and in good faith determined by the Administrative Committee to be the Participant's Beneficiary will completely discharge any obligations Baxter or any other Employer may have under the Plan. If a Plan benefit is payable to a minor or a person declared to be incompetent or to a person the Administrative Committee in good faith believes to be incompetent or incapable of handling the disposition of property, the Administrative Committee may direct payment of such Plan benefit to the guardian, legal representative or person having the care and custody of such minor and such decision by the Administrative Committee is binding on all parties. The Administrative Committee may initiate whatever action it deems appropriate to ensure that benefits are properly paid to an appropriate guardian. The Administrative Committee may require proof of incompetence, minority, incapacity or guardianship as it may deem appropriate prior to distribution of the Plan benefit. Such distribution will completely discharge the Administrative Committee and the Employer from all liability with respect to such benefit. 5.4 Taxation of Plan Benefits. It is intended that each Participant will be taxed on amounts credited to him or her under the Plan at the time such amounts are received, and the provisions of the Plan will be interpreted consistent with that intention. 8 5.5 Withholding and Payroll Taxes. Baxter will withhold from payments made hereunder any taxes required to be withheld for the payment of taxes to the Federal, or any state or local government. 5.6 Distribution Due to Unforeseeable Emergency. Upon written request of a Participant and the showing of Unforeseeable Emergency, the Administrative Committee may authorize distribution of all or a portion of the Participant's Accounts, and or the acceleration of any installment payments being made from the Plan, but only to the extent reasonably necessary to relieve the Unforeseeable Emergency. In any event, payment may not be made to the extent such Unforeseeable Emergency is or may be satisfied through reimbursement by insurance or otherwise, including, but not limited to, liquidation of the Participant's assets, to the extent that such liquidation would not in and of itself cause severe financial hardship. In addition, such Participant is precluded from enrolling in the Plan for the entire Plan Year beginning January 1 after the request is approved. ARTICLE VI BENEFICIARY DESIGNATION 6.1 Beneficiary Designation. Each Participant has the right to designate one or more persons or trusts as the Participant's Beneficiary, primary as well as secondary, to whom benefits under this Plan will be paid in the event of the Participant's death prior to complete distribution to the Participant of the benefits due under the Plan. Each Beneficiary designation will be in a written form prescribed by the Administrative Committee and will be effective only when filed with the Administrative Committee during the Participant's lifetime. 6.2 Amendments to Beneficiary Designation. Any Beneficiary designation may be changed by a Participant without the consent of any Beneficiary by the filing of a new Beneficiary designation with the Administrative Committee. Filing a Beneficiary designation as to any benefits available under the Plan revokes all prior Beneficiary designations effective as of the date such Beneficiary designation is received by the Administrative Committee. If a Participant's Accounts are community property, any Beneficiary designation will be valid or effective only as permitted under applicable law. 6.3 No Beneficiary Designation. In the absence of an effective Beneficiary designation, or if all Beneficiaries predecease the Participant, the Participant's estate will be the Beneficiary. If a Beneficiary dies after the Participant and before payment of benefits under this Plan has been completed, and no secondary Beneficiary has been designated to receive such Beneficiary's share, the remaining benefits will be payable to the Beneficiary's estate. ARTICLE VII ADMINISTRATION 7.1 Administrative Committee. The Plan is administered by the Administrative Committee, which is the Plan Administrative purposes of Section 3(16)(A) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Baxter has appointed the 9 members of the Administrative Committee to administer the Plan. Members of the Administrative Committee may be Participants in the Plan. 7.2 Administrative Committee Powers. The Administrative Committee has such powers as may be necessary to discharge its duties hereunder, including, but not by way of limitation, the following powers, rights and duties: (a) Interpretation of Plan. The Administrative Committee has the power, right and duty to construe, interpret and enforce the Plan provisions and to determine all questions arising under the Plan including, but not by way of limitation, questions of Plan participation, eligibility for Plan benefits and the rights of employees, Participants, Beneficiaries and other persons to benefits under the Plan and to determine the amount, manner and time of payment of any benefits hereunder; (b) Plan Procedures. The Administrative Committee has the power, right and duty to adopt procedures, rules, regulations and forms to be followed by employees, Participants, Beneficiaries and other persons or to be otherwise utilized in the efficient administration of the Plan which may alter any procedural provision of the Plan without the necessity of an amendment; (c) Benefit Determinations. The Administrative Committee has the power, right and duty to make determinations as to the rights of employees, Participants, Beneficiaries and other persons to benefits under the Plan and to afford any Participant or Beneficiary dissatisfied with such determination with rights pursuant to a claims procedure adopted by the Committee; and (d) Allocation of Duties. The Administrative Committee is empowered to employ agents (who may also be employees of Baxter) and to delegate to them any of the administrative duties imposed upon the Administrative Committee or Baxter. 7.3 Uniform Application of Rules. The Administrative Committee will apply all rules, regulations, procedures and decisions uniformly and consistently to all Participants similarly situated. Any ruling, regulation, procedure or decision of the Administrative Committee will be conclusive and binding upon all persons affected by it. There will be no appeal from any ruling by the Administrative Committee which is within its authority, except as provided in Section 7.4 below. When making a determination or a calculation, the Administrative Committee will be entitled to rely on information supplied by any Employer, accountants and other professionals including, but not by way of limitation, legal counsel for Baxter or any Employer. 7.4 Claims Procedure. If a claim for benefits by a Participant or his or her beneficiary or beneficiaries (the "applicant") is denied, the applicant within 90 days after receipt of such claim (or within 180 days after receipt if the 10 Administrative Committee will furnish the applicant within 90 days after receipt of such claim (or within 180 days after receipt if the Administrative Committee notifies the applicant prior to the end of the 90 day period that special circumstances require an extension of time), a written notice which specifies the reason for the denial, refers to the pertinent provisions of the Plan on which the denial is based, describes any additional material or information necessary for properly completing the claim and explains why such material or information is necessary, and explains the claim review procedures of this Section 7.4. If, within 60 days after receipt of such notice, the applicant so requests in writing, the Administrative Committee will review its earlier decision. The Administrative Committee's decision on review will be in writing, and will include specific reasons for the decision, written in a manner calculated to be understood by the claimant, and will include specific references to the pertinent provisions of the Plan on which the decision is based. It will be delivered to the claimant within 60 days after the request for review is received, unless extraordinary circumstances require a longer period, but in no event more than 120 days after the request for review is received. 7.5 Action by Administrative Committee. Action by the Administrative Committee will be subject to the following special rules: (a) Meetings and Documents. The Administrative Committee may act by meeting or by document signed without meeting and documents may be signed through the use of a single document or concurrent documents. (b) Action by Majority. The Administrative Committee will act by a majority decision which action will be as effective as if such action had been taken by all Administrative Committee members, provided that by majority action one or more Administrative Committee members or other persons may be authorized to act with respect to particular matters on behalf of all Administrative Committee members. (c) Resolving Deadlocks. If there is an equal division among the Administrative Committee members with respect to any question a disinterested party may be selected by a majority vote to decide the matter. Any decision by such disinterested party will be binding. 7.6 Indemnity. To the extent permitted by applicable law and to the extent that they are not indemnified or saved harmless under any liability insurance contracts, any present or former Administrative Committee members, officers, or directors of Baxter, the Employers or their subsidiaries or affiliates, if any, will be indemnified and saved harmless by the Employers from and against any and all liabilities or allegations of liability to which they may be subjected by reason of any act done or omitted to be done in good faith in the administration of the Plan, including all expenses reasonably incurred in their defense in the event that Baxter fails to provide such defense after having been requested in writing to do so. ARTICLE VIII AMENDMENT AND TERMINATION OF PLAN 11 8.1 Amendment. The Compensation Committee may amend the Plan at any time, except that no amendment will decrease or restrict the Accounts of Participants and Beneficiaries at the time of the amendment. Notwithstanding the foregoing, the Compensation Committee may delegate certain authority to amend the Plan to the Administrative Committee. 8.2 Right to Terminate. The Compensation Committee may at any time terminate the Plan. Any Employer may terminate its participation in the Plan by notice to Baxter. 8.3 Payment at Termination. If the Plan is terminated payment of each affected Participant's Accounts to the Participant or Beneficiary for whom they are held will commence within 60 days of such termination in the form determined under Article 5. ARTICLE IX MISCELLANEOUS 9.1 Unfunded Plan. This Plan is intended to be an unfunded retirement plan maintained primarily to provide retirement benefits for a select group of management or highly compensated employees. All credited amounts are unfunded, general obligations of the appropriate Employer. This Plan is not intended to create an investment contract, but to provide retirement benefits to eligible employees who participate in the Plan. Eligible employees are members of a select group of management or are highly compensated employees, who, by virtue of their position with an Employer, are uniquely informed as to such Employer's operations and have the ability to affect materially Employer's profitability and operations. 9.2 Unsecured General Creditor. In the event of an Employer's insolvency, Participants and their Beneficiaries, heirs, successors and assigns will have no legal or equitable rights, interest or claims in any property or assets of such Employer, nor will they be Beneficiaries of, or have any rights, claims or interests in any life insurance policies, annuity contracts or the proceeds therefrom owned or which may be acquired by such Employer (the "Policies") greater than those of any other unsecured general creditors. In that event, any and all of the Employer's assets and Policies will be, and remain, the general, unpledged, unrestricted assets of Employer. Employer's obligation under the Plan will be merely that of an unfunded and unsecured promise of Employer to pay money in the future. 9.3 Nonassignability. Neither a Participant nor any other person will have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are, expressly declared to be nonassignable and nontransferable. No part of the amounts payable will, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency. Nothing contained herein will preclude an Employer from offsetting any amount owed to it by a Participant against payments to such Participant or his or her Beneficiary. 12 9.4 Not a Contract of Employment. The terms and conditions of this Plan will not be deemed to constitute a contract of employment between a Participant and such Participant's Employer, and neither the Participant nor the Participant's Beneficiary will have any rights against such Participant's Employer except as may otherwise be specifically provided herein. Moreover, nothing in this Plan is deemed to give a Participant the right to be retained in the service of his or her Employer or to interfere with the right of such Employer to discipline or discharge him or her at any time. 9.5 Protective Provisions. A Participant will cooperate with Baxter by furnishing any and all information requested by Baxter, in order to facilitate the payment of benefits hereunder. 9.6 Governing Law. The provisions of this Plan will be construed and interpreted according to the laws of the State of Illinois, to the extent not preempted by ERISA. 9.7 Severability. In the event any provision of the Plan is held invalid or illegal for any reason, any illegality or invalidity will not affect the remaining parts of the Plan, but the Plan will be construed and enforced as if the illegal or invalid provision had never been inserted, and Baxter will have the privilege and opportunity to correct and remedy such questions of illegality or invalidity by amendment as provided in the Plan, including, but not by way of limitation, the opportunity to construe and enforce the Plan as if such illegal and invalid provision had never been inserted herein. 9.8 Notice. Any notice or filing required or permitted to be given to Baxter or the Administrative Committee under the Plan will be sufficient if in writing and hand delivered, or sent by registered or certified mail to any member of the Administrative Committee, or to Baxter's Chief Financial Officer and, if mailed, will be addressed to the principal executive offices of Baxter. Notice to a Participant or Beneficiary may be hand delivered or mailed to the Participant or Beneficiary at his or her most recent address as listed in the employment records of Baxter. Notices will be deemed given as of the date of delivery or mailing or, if delivery is made by certified or registered mail, as of the date shown on the receipt for registration or certification. Any person entitled to notice hereunder may waive such notice. 9.9 Successors. The provisions of this Plan will bind and inure to the benefit of Baxter, each Employer, the Participants and Beneficiaries, and their respective successors, heirs and assigns. The term successors as used herein will include any corporate or other business entity, which, whether by merger, consolidation, purchase or otherwise acquires all or substantially all of the business and assets of Baxter, and successors of any such corporation or other business entity. 9.10 Action by Baxter. Except as otherwise provided herein, any action required of or permitted by Baxter under the Plan will be by resolution of the Compensation Committee or any person or persons authorized by resolution of the Compensation Committee. 9.11 Effect on Benefit Plans. Amounts paid under this Plan, will not by operation of this Plan be considered to be compensation for the purposes of any benefit plan maintained by 13 any Employer. The treatment of such amounts under other employee benefit plans will be determined pursuant to the provisions of such plans. 9.12 Participant Litigation. In any action or proceeding regarding the Plan, employees or former employees of Baxter or an Employer, Participants, Beneficiaries or any other persons having or claiming to have an interest in this Plan will not be necessary parties and will not be entitled to any notice or process. Any final judgment which is not appealed or appealable and may be entered in any such action or proceeding will be binding and conclusive on the parties hereto and all persons having or claiming to have any interest in this Plan. To the extent permitted by law, if a legal action is begun against Baxter, an Employer, the Administrative Committee, or any member of the Administrative Committee by or on behalf of any person and such action results adversely to such person or if a legal action arises because of conflicting claims to a Participant's or other person's benefits, the costs to such person of defending the action will be charged to the amounts, if any, which were involved in the action or were payable to the Participant or other person concerned. To the extent permitted by applicable law, acceptance of participation in this Plan will constitute a release of Baxter, each Employer, the Administrative Committee and each member thereof, and their respective agents from any and all liability and obligation not involving willful misconduct or gross neglect. * * * IN WITNESS WHEREOF, the undersigned duly authorized officer has caused this Plan to be executed this 12th day of March, 2002. BAXTER INTERNATIONAL INC. By /s/ Karen J. May ------------------------------------ Its Corporate Vice President of Human Resources 14 APPENDIX A PARTICIPATING EMPLOYERS Participating Employers in the Plan include all participating Employers in the Baxter International Inc. and Subsidiaries Incentive Investment Plan. 15 APPENDIX B PARTICIPANTS ELIGIBLE FOR SUPPLEMENTAL PAY DEFERRALS Name Plan Year(s) Terms and Conditions Alan Heller 2001 Up to 80% of Compensation 16 EX-12 5 dex12.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 Baxter International Inc. and Subsidiaries Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges (unaudited - in millions, except ratios) - ------------------------------------------------------------------------------------------------------------ Years ended December 31, 2001 2000 1999 1998 1997 (B) (B) (B) (B) - ------------------------------------------------------------------------------------------------------------ Income from continuing operations before income taxes and cumulative effect of accounting change $964 $946 $1,052 $493 $570 - ------------------------------------------------------------------------------------------------------------ Fixed charges Interest costs 130 135 123 152 166 Estimated interest in rentals (A) 36 33 30 26 26 - ------------------------------------------------------------------------------------------------------------ Fixed charges as defined 166 168 153 178 192 - ------------------------------------------------------------------------------------------------------------ Adjustments to income Interest costs capitalized (22) (14) (10) (4) (6) Losses of less than majority owned affiliates, net of dividends (1) (2) (2) -- -- - ------------------------------------------------------------------------------------------------------------ Income as adjusted $1,107 $1,098 $1,193 $667 $756 ============================================================================================================ Ratio of earnings to fixed charges 6.67 6.54 7.80 3.75 3.94 ============================================================================================================ - ------------------------------------------------------------------------------------------------------------ Three months ended March 31, 2002 - ------------------------------------------------------------------------------------------------------------ Income from operations before income taxes and cumulative effect of accounting change $342 - ------------------------------------------------------------------------------------------------------------ Fixed charges Interest costs 22 Estimated interest in rentals (A) 9 - ------------------------------------------------------------------------------------------------------------ Fixed charges as defined 31 - ------------------------------------------------------------------------------------------------------------ Adjustments to income Interest costs capitalized (4) Losses of less than majority-owned affiliates, net of dividends -- - ------------------------------------------------------------------------------------------------------------ Income as adjusted $369 ============================================================================================================ Ratio of earnings to fixed charges 11.90 ============================================================================================================
(A) Represents the estimated interest portion of rents. (B) Excluding the following significant unusual charges, the ratio of earnings to fixed charges was 9.49, 8.24, 6.08 and 5.08 in 2001, 2000, 1998 and 1997, respectively. 2001: $280 million charge for in-process research and development and acquisition-related costs, $189 million charge relating to discontinuing the A, AF and AX series dialyzers. 2000: $286 million charge for in-process research and development and acquisition-related costs. 1998: $116 million in-process research and development charge, $178 million net litigation charge, $122 million exit and reorganization costs charge. 1997: $220 million in-process research and development charge. EX-15 6 dex15.txt LETTER RE UNAUDITED INTERIM FINANCIAL INFO. EXHIBIT 15 May 2, 2002 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Commissioners: We are aware that our report dated April 30, 2002 on our review of interim financial information of Baxter International Inc. (the "Company") as of and for the period ended March 31, 2002 included in the Company's quarterly report on Form 10-Q for the quarter then ended is incorporated by reference in its Registration Statements on Form S-8 (Nos. 2-82667, 2-86993, 2-97607, 33-8812, 33-8813, 33-15523, 33-15787, 33-28428, 33-33750, 33-54069, 333-43563, 333-47019, 333-71553, 333-80403, 333-88257, 333-48906 and 333-62820), on Form S-3 (Nos. 33-5044, 33-23450, 33-27505, 33-31388, 33-49820, 333-19025, 333-94889, 333-38564, 333-54014, 333-67772 and 333-82988) and on Form S-4 (Nos. 33-808, 33-15357, 33-53937, 333-21327, 333-47927, 333-36670 and 333-84454). Very truly yours, PricewaterhouseCoopers LLP Chicago, Illinois -----END PRIVACY-ENHANCED MESSAGE-----