Form 10-Q

-----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, F81yd8yUH1D744m2jB7eQm9xtqWby+uFtd7Wn9x3VnZFUbLsJK4/Qv1m2dWJOsle JsCdx1zYyMTz//WJi4cU4g== 0001193125-05-161084.txt : 20050809 0001193125-05-161084.hdr.sgml : 20050809 20050808190831 ACCESSION NUMBER: 0001193125-05-161084 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050809 DATE AS OF CHANGE: 20050808 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: 051007121 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 TRAVENOL LABORATORIES INC DATE OF NAME CHANGE: 19880522 FORMER COMPANY: FORMER CONFORMED NAME: BAXTER LABORATORIES INC DATE OF NAME CHANGE: 19760608 10-Q 1 d10q.htm FORM 10-Q 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 June 30, 2005

¨	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

incorporation or organization)

(I.R.S. Employer

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 ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

The number of shares of the registrant’s Common Stock, par value $1.00 per share, outstanding as of July 29, 2005 was 622,507,876 shares.

BAXTER INTERNATIONAL INC.

FORM 10-Q

For the quarterly period ended June 30, 2005

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	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	32

Review by Independent Registered Public Accounting Firm		33

Report of Independent Registered Public Accounting Firm		34

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	35

Item 4.	Submission of Matters to a Vote of Security Holders	41

Item 5	Other Information	42

Item 6.	Exhibits	42

Signature		43

Exhibits		44

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 June 30,						Six months ended June 30,
	2005			2004			2005			2004
Net sales	$	2,577		$	2,379		$	4,960		$	4,588
Cost and expenses
Cost of goods sold		1,464			1,440			2,878			2,756
Marketing and administrative expenses		537			532			1,020			998
Research and development expenses		133			129			266			265
Restructuring		(104	)		543			(104	)		543
Infusion pump charge		77			—			77			—
Net interest expense		33			25			64			46
Other expense, net		25			42			49			63

Total costs and expenses		2,165			2,711			4,250			4,671

Income (loss) from continuing operations before income taxes		412			(332	)		710			(83	)
Income tax expense (benefit)		88			(163	)		162			(101	)

Income (loss) from continuing operations		324			(169	)		548			18
Discontinued operations		(2	)		(1	)		—			(12	)

Net income (loss)	$	322		$	(170	)	$	548		$	6

Earnings (loss) per basic common share	$	0.52		$	(0.28	)	$	0.88		$	0.03
Continuing operations
Discontinued operations		—			—			—			(0.02	)

Net income (loss)	$	0.52		$	(0.28	)	$	0.88		$	0.01

Earnings (loss) per diluted common share	$	0.51		$	(0.28	)	$	0.88		$	0.03
Continuing operations
Discontinued operations		—			—			—			(0.02	)

Net income (loss)	$	0.51		$	(0.28	)	$	0.88		$	0.01

Weighted average number of common shares outstanding
Basic		621			613			620			613

Diluted		626			613			624			617

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

Baxter International Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (unaudited)

(in millions, except shares)


	June 30, 2005			December 31, 2004
Current assets
Cash and equivalents	$	1,428		$ 1,109
Accounts and other current receivables		1,959		2,091
Inventories		1,944		2,135
Short-term deferred income taxes		235		297
Prepaid expenses and other		273		387

Total current assets		5,839		6,019

Property, plant and equipment
At cost		7,831		7,991
Accumulated depreciation and amortization		(3,674	)	(3,622	)

Net property, plant and equipment		4,157		4,369

Other assets
Goodwill		1,560		1,648
Other intangible assets		502		547
Other		1,568		1,564

Total other assets		3,630		3,759

Total assets	$	13,626		$14,147

Current liabilities
Short-term debt	$	500		$ 207
Current maturities of long-term debt and lease obligations		950		154
Accounts payable and accrued liabilities		2,501		3,531
Income taxes payable		410		394

Total current liabilities		4,361		4,286

Long-term debt and lease obligations		3,039		3,933

Other long-term liabilities		2,016		2,223

Commitments and contingencies

Stockholders’ equity
Common stock, $1 par value, authorized 2,000,000,000 shares, issued 648,414,492 shares in 2005 and 2004		648		648
Common stock in treasury, at cost, 26,856,182 shares in 2005 and 30,489,183 shares in 2004		(1,323	)	(1,511	)
Additional contributed capital		3,514		3,597
Retained earnings		2,807		2,259
Accumulated other comprehensive loss		(1,436	)	(1,288	)

Total stockholders’ equity		4,210		3,705

Total liabilities and stockholders’ equity	$	13,626		$14,147

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

Baxter International Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (unaudited)

(in millions)


	Six months ended June 30,
	2005			2004
Cash flows from operations
Income from continuing operations	$	548		$	18
Adjustments
Depreciation and amortization		292			295
Deferred income taxes		119			(203	)
Restructuring		(104	)		543
Infusion pump charge		77			—
Other		33			147
Changes in balance sheet items
Accounts receivable		20			(162	)
Inventories		90			(75	)
Accounts payable and accrued liabilities		(325	)		(229	)
Restructuring payments		(73	)		(62	)
Other		102			(20	)

Cash flows from continuing operations		779			252
Cash flows from discontinued operations		(1	)		15

Cash flows from operations		778			267

Cash flows from investing activities
Capital expenditures		(163	)		(229	)
Acquisitions (net of cash received) and investments in and advances to affiliates		—			(20	)
Divestitures and other		49			31

Cash flows from investing activities		(114	)		(218	)

Cash flows from financing activities
Issuances of debt		41			333
Payments of obligations		(443	)		(337	)
Increase in debt with maturities of three months or less, net		312			81
Common stock cash dividends		(359	)		(361	)
Proceeds from stock issued under employee benefit plans		90			75
Purchases of treasury stock		—			(18	)

Cash flows from financing activities		(359	)		(227	)

Effect of currency exchange rate changes on cash and equivalents		14			13

Increase (decrease) in cash and equivalents		319			(165	)
Cash and equivalents at beginning of period		1,109			925

Cash and equivalents at end of period	$	1,428		$	760

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

Baxter International Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 (SEC). 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 2004 Annual Report to Stockholders (2004 Annual Report).

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.

Certain reclassifications have been made to conform the 2004 financial statements and notes to the 2005 presentation.

Stock compensation plans

The company has a number of stock-based employee compensation plans, including stock option, stock purchase, restricted stock and restricted stock unit plans. The company measures stock-based compensation expense using the intrinsic value method of accounting. Generally, no expense is recognized for the company’s employee stock option and purchase plans. Expense is recognized relating to restricted stock and restricted stock unit grants and certain modifications to stock options.

Under the fair value method, additional expense would be recognized for the company’s employee stock option and purchase plans. The following table shows net income and earnings per share (EPS) had the company applied the fair value method of accounting for stock-based compensation.


	Three months ended June 30,						Six months ended June 30,
(in millions, except per share data)	2005			2004			2005			2004
Net income (loss), as reported	$	322		$	(170	)	$	548		$	6
Add:
Stock-based employee compensation expense included in reported net income, net of tax		2			12			2			12
Deduct:
Total stock-based employee compensation expense determined under the fair value method, net of tax		(18	)		(32	)		(30	)		(60	)

Pro forma net income (loss)	$	306		$	(190	)	$	520		$	(42	)

Earnings (loss) per basic share
As reported	$	0.52		$	(0.28	)	$	0.88		$	0.01
Pro forma	$	0.49		$	(0.31	)	$	0.84		$	(0.07	)

Earnings (loss) per diluted share
As reported	$	0.51		$	(0.28	)	$	0.88		$	0.01
Pro forma	$	0.49		$	(0.31	)	$	0.83		$	(0.07	)

New accounting standards

In December 2004, the Financial Accounting Standards Board (FASB) revised and reissued Statement of Financial Accounting Standards (SFAS) No. 123, “Share-Based Payment” (SFAS No. 123-R), which requires companies to expense the value of employee stock options and similar awards. Due to an SEC amendment to Regulation S-X in April 2005, SFAS No. 123-R will become effective for the company on January 1, 2006. The new rules provide for one of two transition elections, either prospective application or restatement (back to January 1, 1995). The company plans to adopt SFAS No. 123-R on January 1, 2006 and has not yet decided which transition option the company will use. Management is in the process of analyzing the provisions of SFAS No. 123-R and assessing the impact on the company’s future consolidated financial statements.

In December 2004, the FASB issued SFAS No. 151, “Inventory Costs” (SFAS No. 151), which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and spoilage. SFAS No. 151 requires that those items be recognized as current period charges. In addition, the new standard requires that the allocation of fixed production overhead costs be based on the normal capacity of the production facilities. The company plans to adopt SFAS No. 151 on its effective date of January 1, 2006. Management is in the process of analyzing the new standard and has not yet determined the impact on the company’s consolidated financial statements.

2. SUPPLEMENTAL FINANCIAL INFORMATION

Net pension and other postemployment benefits expense

The following is a summary of net expense relating to the company’s pension and other postemployment benefit (OPEB) plans.


	Three months ended June 30,						Six months ended June 30,
(in millions)	2005			2004			2005			2004
Pension benefits
Service cost	$	20		$	20		$	41		$	40
Interest cost		40			37			81			76
Expected return on plan assets		(42	)		(46	)		(85	)		(94	)
Amortization of net loss, prior service cost and transition obligation		21			15			42			31

Net pension plan expense	$	39		$	26		$	79		$	53

OPEB
Service cost	$	1		$	2		$	3		$	4
Interest cost		7			7			15			15
Amortization of net loss and prior service cost		1			3			4			5

Net OPEB plan expense	$	9		$	12		$	22		$	24

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act (the Medicare Act) was signed into law. The Medicare Act introduces a prescription drug benefit under Medicare (Part D) as well as a federal subsidy to sponsors of retiree health-care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare (Part D). The final regulations for determining whether plans are actuarially equivalent to Medicare (Part D) were issued in January 2005. Based on these final regulations, management expects the company’s OPEB plan to be actuarially equivalent to Medicare (Part D), and that the company will be eligible for the federal subsidy. In accordance with GAAP, the estimated reduction in the accumulated OPEB obligation due to the federal subsidy is reflected as an actuarial gain, and the gain is being amortized. The effect on the company’s consolidated financial statements is not expected to be material.

Second quarter 2004 charges

Financial results for the second quarter of 2004 included several charges. These charges, as summarized below, reduced pre-tax income from continuing operations by $115 million, and reduced net income by $20 million or $0.04 per diluted share.

Cost of goods sold included $45 million relating to inventory reserve and foreign currency hedge adjustments (principally due to certain changes within the BioScience segment), marketing and administrative expenses included $55 million relating to adjustments to the allowance for doubtful accounts (principally related to the company’s loan to Cerus Corporation), other expense included a $15 million impairment charge (related to the company’s Pathogen Inactivation program), and income tax expense reflected a $95 million benefit relating to these charges, as well as a reversal of reserves based on the completion of tax audits. Refer to the 2004 Annual Report for a more complete discussion of each of these adjustments.

Net interest expense

Net interest expense consisted of the following.


	Three months ended June 30,				Six months ended June 30,
(in millions)	2005		2004		2005		2004
Interest expense, net of capitalized interest	$ 43		$ 30		$ 84		$ 58
Interest income	(10	)	(5	)	(20	)	(12	)

Net interest expense	$ 33		$ 25		$ 64		$ 46

Other expense, net

Other income and expense includes amounts relating to foreign exchange, minority interests and equity method investments. Other income and expense may also include other items, such as legal settlement gains and losses, asset impairment charges and divestitures gains and losses.

Charges relating to legal matters totaled $9 million in both the three- and six-month periods ended June 30, 2005. Asset impairment charges totaled $18 million in the three- and six-month periods ended June 30, 2004, including the $15 million Pathogen Inactivation program charge discussed above. Expense for the quarter and year-to-date period ended June 30, 2004 also included $6 million relating to the application of FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45), to the company’s guarantee of the Shared Investment Plan loans (which were extended during the second quarter of 2004). Refer to the 2004 Annual Report for further information regarding the Shared Investment Plan.

Comprehensive income

Total comprehensive income was $153 million and $400 million for the three and six months ended June 30, 2005, respectively, and total comprehensive loss was $237 million and $46 million for the three and six months ended June 30, 2004, respectively. The increase in comprehensive income during the quarter and year-to-date period was principally related to increased net income and favorable movements in the company’s net investment hedges, partially offset by unfavorable currency translation adjustments.

Earnings per share

The numerator for both basic and diluted EPS is net income. The denominator for basic EPS is the weighted-average number of common shares outstanding during the period. The dilutive effect of outstanding employee stock options, employee stock purchase subscriptions and other common stock equivalents is reflected in the denominator for diluted EPS using the treasury stock method. The following is a reconciliation of basic shares to diluted shares.


	Three months ended June 30,		Six months ended June 30,
(in millions)	2005	2004	2005	2004
Basic shares	621	613	620	613
Effect of dilutive securities
Employee stock options	4	—	4	3
Other	1	—	—	1

Diluted shares	626	613	624	617

Inventories

Inventories consisted of the following.


(in millions)	June 30, 2005		December 31, 2004
Raw Materials	$	419	$ 456
Work in process		624	754
Finished products		901	925

Total inventories	$	1,944	$2,135

Goodwill

Goodwill at June 30, 2005 totaled $859 million for the Medication Delivery segment, $567 million for the BioScience segment and $134 million for the Renal segment. Goodwill at December 31, 2004 totaled $895 million for the Medication Delivery segment, $583 million for the BioScience segment and $170 million for the Renal segments. The reduction in the goodwill balance for each segment related to foreign currency fluctuations and for the Renal segment, a first quarter 2005 divestiture (which resulted in a $28 million reduction in the Renal segment’s goodwill balance).

Other intangible assets

The following is a summary of the company’s intangible assets subject to amortization at June 30, 2005 and December 31, 2004. Intangible assets with indefinite useful lives are not material.


(in millions, except amortization period data)	Developed technology, including patents	Manufacturing, distribution and other contracts	Other		Total
June 30, 2005
Gross intangible assets	$778	$29	$	75	$	882
Accumulated amortization	346	14		27		387

Net intangible assets	$432	$15	$	48	$	495

Weighted-average amortization period (in years)	14	8		20		15

December 31, 2004
Gross intangible assets	$804	$28	$	80	$	912
Accumulated amortization	333	14		25		372

Net intangible assets	$471	$14	$	55	$	540

Weighted-average amortization period (in years)	14	8		20		15

The amortization expense for these intangible assets was $15 million and $16 million for the three months ended June 30, 2005 and 2004, respectively, and $29 million and $32 million for the six months ended June 30, 2005 and 2004, respectively. At June 30, 2005, the anticipated annual amortization expense for these intangible assets is $56 million in 2005, $53 million in 2006, $45 million in 2007, $41 million in 2008, $38 million in 2009 and $38 million in 2010.

Product warranties

The following is a summary of activity in the product warranty liability.


	As of and for the three months ended June 30,				As of and for the six months ended June 30,
(in millions)	2005		2004		2005		2004
Beginning of period	$ 57		$ 50		$ 57		$ 53
New warranties and adjustments to existing warranties	5		7		12		10
Payments in cash or in kind	(5	)	(5	)	(12	)	(11	)

End of period	$ 57		$ 52		$ 57		$ 52

Securitization arrangements

The company’s securitization arrangements resulted in net cash outflows of $34 million and $86 million for the three and six months ended June 30, 2005, respectively, and $147 million and $190 million for the three and six months ended June 30, 2004, respectively. A summary of the activity is as follows.


	Three months ended June 30,						Six months ended June 30,
(in millions)	2005			2004			2005			2004
Sold receivables at beginning of period	$	539		$	704		$	594		$	742
Proceeds from sales of receivables		382			318			738			693
Cash collections (remitted to the owners of the receivables)		(416	)		(465	)		(824	)		(883	)
Effect of currency exchange rate changes		(20	)		(10	)		(23	)		(5	)

Sold receivables at end of period	$	485		$	547		$	485		$	547

Income taxes

The American Jobs Creation Act of 2004

No provision has been made for U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries, as these earnings are currently deemed to be permanently invested.

In October 2004, the American Jobs Creation Act of 2004 (the Act) was enacted. The Act allows U.S. companies a one-time opportunity to repatriate non-U.S. earnings through 2005 at a 5.25% tax rate rather than the normal U.S. tax rate of 35%, provided that certain criteria, including qualified reinvestment, are met. Management is analyzing the provisions of the Act. Detailed final guidance necessary to implement the Act has not yet been issued by the Internal Revenue Service. Management has not yet determined the effects on the company’s plans or its consolidated financial statements. Management expects to complete its evaluation by the end of the third quarter of 2005.

Effective income tax rate

As discussed in Notes 1, 3 and 4, included in results of operations in both 2005 and 2004 were certain unusual or nonrecurring charges and income items. The company’s effective tax rate was impacted by these items, which were tax-effected at

varying rates, depending on the particular tax jurisdictions. In addition, during the second quarter of 2005, principally due to ongoing improvements to the company’s geographic product sourcing, the company revised its estimate and recorded a year-to-date income tax adjustment totaling approximately $20 million, to reflect a lower full-year 2005 projected effective income tax rate (reducing the expected full-year 2005 effective income tax rate from 25%, as disclosed in the 2004 Annual Report, to approximately 22%).

3. RESTRUCTURING

Second quarter 2004 restructuring charge

During the second quarter of 2004, the company recorded a $543 million restructuring charge principally associated with management’s decision to implement actions to reduce the company’s overall cost structure and to drive sustainable improvements in financial performance. The charge was primarily for severance and costs associated with the closing of facilities (including the closure of additional plasma collection centers) and the exiting of contracts.

These actions include the elimination of over 4,000 positions, or 8% of the global workforce, as management reorganizes and streamlines the company. Approximately 50% of the positions being eliminated are in the United States. Approximately three-quarters of the estimated savings impact general and administrative expenses, with the remainder primarily impacting cost of sales. The eliminations impact all three of the company’s segments, along with the corporate headquarters and functions.

Included in the 2004 charge was $196 million relating to asset impairments, almost all of which was to write down property, plant and equipment (PP&E), based on market data for the assets. Also included in the 2004 charge was $347 million for cash costs, principally pertaining to severance and other employee-related costs. Approximately 80% of the targeted positions have been eliminated as of June 30, 2005. As discussed below, management adjusted the restructuring charge during the second quarter of 2005 based on changes in estimates.

Second quarter 2003 restructuring charge

During the second quarter of 2003, the company recorded a $337 million restructuring charge principally associated with management’s decision to close certain facilities and reduce headcount on a global basis. Management undertook these actions in order to position the company more competitively and to enhance profitability. The company closed plasma collection centers and a plasma fractionation facility. In addition, the company consolidated and integrated several facilities. Management discontinued Baxter’s recombinant hemoglobin protein program because it did not meet expected clinical milestones. Also included in the charge were costs related to other reductions in the company’s workforce.

Included in the 2003 charge was $128 million relating to asset impairments, principally to write down PP&E, goodwill and other intangible assets. The impairment loss relating to the PP&E was based on market data for the assets. The impairment loss relating to goodwill and other intangible assets was based on management’s assessment of the value of the related businesses. Also included in the 2003 charge was $209 million for cash costs, principally pertaining to severance and other employee-related costs associated with the elimination of approximately 3,200 positions worldwide. Substantially all of the targeted positions have been eliminated as of June 30, 2005, and the program is substantially complete. As discussed below, management adjusted the restructuring charge during the second quarter of 2005 based on changes in estimates.

Restructuring reserves

The following summarizes activity in the company’s restructuring reserves through June 30, 2005.


(in millions)	Employee- related costs		Contractual and other costs		Total
2003 Restructuring Charge
Charge	$160		$ 49		$209
Utilization	(63	)	(6	)	(69	)

Reserve at December 31, 2003	97		43		140
Utilization	(74	)	(17	)	(91	)

Reserve at December 31, 2004	23		26		49
Utilization	(5	)	(1	)	(6	)

Reserve at March 31, 2005	18		25		43
Utilization	(5	)	—		(5	)
Adjustments	(8	)	(20	)	(28	)

Reserve at June 30, 2005	$ 5		$ 5		$10

2004 Restructuring Charge
Charge	$212		$135		$347
Utilization	(60	)	(32	)	(92	)

Reserve at December 31, 2004	152		103		255
Utilization	(26	)	(11	)	(37	)

Reserve at March 31, 2005	126		92		218
Utilization	(19	)	(6	)	(25	)
Adjustments	(40	)	(16	)	(56	)

Reserve at June 30, 2005	$ 67		$ 70		$137

With respect to the 2003 restructuring charge, the remaining reserve is expected to be utilized during 2005. With respect to the 2004 restructuring charge, approximately $50 million of the reserve is expected to be utilized during the second half of 2005, with the remainder to be utilized in 2006.

Second quarter 2005 adjustments to restructuring charges

During the second quarter of 2005, the company recorded a $104 million pre-tax benefit relating to the adjustment of restructuring charges recorded in 2004 and 2003. As detailed in the table above, $84 million of the adjustment related to improved estimates of restructuring reserves. The remaining $20 million represented asset disposal proceeds in excess of original estimates and finalization of certain employment termination arrangements.

The restructuring reserve adjustments principally related to severance and other employee-related costs. The company’s targeted headcount reductions are being achieved with a higher level of attrition than originally anticipated. Accordingly, the company’s severance payments are now projected to be lower than originally estimated. The remaining reserve adjustment principally related to changes in estimates regarding certain contract termination costs.

4. INFUSION PUMP CHARGE

On July 21, 2005, the company announced that the United States Food and Drug Adminstration (FDA) had classified a March 15, 2005 company voluntary notice to customers regarding certain user interface and failure code issues relating to the company’s COLLEAGUE® Volumetric Infusion Pump as a Class I recall (FDA’s highest priority level) and that there had been reports of three deaths and six serious injuries that may have been associated with the issues identified in the March 15, 2005 voluntary notice. The same announcement also described a field corrective action letter sent to customers on July 20, 2005 (also designated a Class I recall), notifying customers that the company is in the process of developing an action plan to address design issues relating to COLLEAGUE pump failure codes (with which one of the three previously described deaths may have been associated). While these actions do not require customers to return their COLLEAGUE pumps, the company will voluntarily hold shipments of new COLLEAGUE pumps until design issues are resolved.

During the second quarter of 2005 the company recorded a $77 million charge for costs associated with correcting the COLLEAGUE infusion pump design issues. The charge recorded during the quarter represents management’s current estimate of the costs to be incurred to remediate these issues. The charge principally consists of materials, labor and freight costs. The actual costs relating to this matter may differ from management’s estimate. It is possible that additional charges may be required in future periods. It is also possible that actual costs relating to this matter may be less than estimated costs.

5. LEGAL PROCEEDINGS

“Part II - Item 1. Legal Proceedings” is incorporated herein by reference.

6. SEGMENT INFORMATION

The company operates in three segments, each of which is a strategic business that is managed separately because each business develops, manufactures and sells distinct products and services. The segments and a description of their products and services are as follows: Medication Delivery, which provides a range of intravenous solutions and specialty products that are used in combination for fluid replenishment, general anesthesia, nutrition therapy, pain management, antibiotic therapy and chemotherapy; BioScience, which develops biopharmaceuticals, biosurgery products, vaccines and blood collection, processing and storage products and technologies for transfusion therapies; and Renal, which develops products and provides services to treat end-stage kidney disease.

Certain items are maintained at the corporate level and are not allocated to the segments. They primarily include most of the company’s debt and cash and equivalents and related net interest expense, corporate headquarters costs, certain non-strategic investments and related income and expense, certain nonrecurring gains and losses, certain special charges (such as in-process research and development, restructuring and certain asset impairments), deferred income taxes, certain foreign currency fluctuations, certain employee benefit costs, the majority of the foreign currency and interest rate hedging activities, and certain litigation liabilities and related insurance receivables.

The $77 million second quarter 2005 charge associated with the COLLEAGUE infusion pump is reflected in the Medication Delivery segment’s pre-tax income for the three- and six-month periods ended June 30, 2005 in the table below. Refer to Note 4 for further information.

Financial information for the company’s segments for the quarters and year-to-date periods ended June 30 is as follows.


	Three months ended June 30,						Six months ended June 30,
(in millions)	2005			2004			2005			2004
Net sales
Medication Delivery	$	1,083		$	1,006		$	2,061		$	1,932
BioScience		990			893			1,892			1,703
Renal		504			480			1,007			953

Total	$	2,577		$	2,379		$	4,960		$	4,588

Pre-tax income from continuing operations
Medication Delivery	$	120		$	182		$	277		$	333
BioScience		265			137			469			259
Renal		94			93			191			172
Other		(67	)		(744	)		(227	)		(847	)

Total	$	412		$	(332	)	$	710		$	(83	)

The following is a reconciliation of segment pre-tax income to income from continuing operations before income taxes per the consolidated income statements.


	Three months ended June 30,						Six months ended June 30,
(in millions)	2005			2004			2005			2004
Total pre-tax income from segments	$	479		$	412		$	937		$	764
Unallocated amounts
Interest expense, net		(33	)		(25	)		(64	)		(46	)
Restructuring		104			(543	)		104			(543	)
Certain currency exchange rate fluctuations and hedging activities		(19	)		(39	)		(43	)		(73	)
Asset dispositions and impairments, net		—			(56	)		—			(56	)
Other corporate items		(119	)		(81	)		(224	)		(129	)

Income (loss) from continuing operations before income taxes	$	412		$	(332	)	$	710		$	(83	)

7. SUBSEQUENT EVENT—DECISION TO CEASE MANUFACTURING HEMODIALYSIS INSTRUMENTS

In July 2005, the company decided to discontinue the manufacture of HD instruments. Separately, the company entered into an agreement with Gambro to distribute Gambro’s HD instruments and related ancillary products. The company will have exclusive distribution rights throughout most of Latin America, and a non-exclusive arrangement in the United States and the rest of the world, excluding Japan where the company does not participate in the HD market. The decision to stop manufacturing HD instruments and the execution of the agreement with Gambro is consistent with the company’s strategy to optimize and improve the financial performance of the Renal business, focusing resources on peritoneal dialysis therapies while maintaining a broad portfolio of HD products. The company will continue to distribute its existing line of HD dialyzers, and provide HD solutions and concentrates that are manufactured by Baxter.

As a result of the decision to stop manufacturing HD instruments, management anticipates that charges for severance, contract termination and other costs will be incurred in future periods. While management has not finalized its exit plans, it currently estimates that the pre-tax cost will total between $40 million and $50 million.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF CONTINUING OPERATIONS

NET SALES


	Three months ended June 30,				Percent change	Six months ended June 30,				Percent change
(in millions)	2005		2004		Percent change	2005		2004		Percent change
Medication Delivery	$	1,083	$	1,006	8%	$	2,061	$	1,932	7%
BioScience		990		893	11%		1,892		1,703	11%
Renal		504		480	5%		1,007		953	6%

Total net sales	$	2,577	$	2,379	8%	$	4,960	$	4,588	8%


	Three months ended June 30,				Percent change	Six months ended June 30,				Percent change
(in millions)	2005		2004		Percent change	2005		2004		Percent change
International	$	1,421	$	1,285	11%	$	2,760	$	2,475	12%
United States		1,156		1,094	6%		2,200		2,113	4%

Total net sales	$	2,577	$	2,379	8%	$	4,960	$	4,588	8%

Foreign exchange benefited sales growth by 3 points during both the three- and six-month periods ended June 30, 2005, principally because the United States Dollar weakened relative to the Euro and the Japanese Yen. Foreign currency fluctuations favorably impacted sales growth for all three segments.

Medication Delivery

The Medication Delivery segment generated 8% and 7% sales growth for the three- and six-month periods ended June 30, 2005, respectively (including 3 percentage points due to the favorable impact of foreign currency fluctuations for both the quarter and year-to-date period).

The following is a summary of sales by significant product line.


	Three months ended June 30,				Percent change		Six months ended June 30,				Percent change
(in millions)	2005		2004		Percent change		2005		2004		Percent change
IV Therapies	$	312	$	288	8%		$	608	$	570	7%
Drug Delivery		226		202	12%			430		390	10%
Infusion Systems		245		233	5%			475		421	13%
Anesthesia		282		259	9%			513		501	2%
Other		18		24	(25%	)		35		50	(30%	)

Total net sales	$	1,083	$	1,006	8%		$	2,061	$	1,932	7%

IV Therapies

This product line principally consists of intravenous solutions and nutritional products. Because approximately two-thirds of IV Therapies’ sales are generated outside the United States, sales growth in this product line particularly benefited from the weakened United States Dollar. Sales growth, which was primarily due to increased volume, was strong in international markets, partially offset by lower sales of nutritional products used with automated compounding equipment in the United States.

Drug Delivery

This product line primarily consists of pre-mixed drugs and contract services, principally for pharmaceutical and biotechnology customers. Contributing to sales growth for the second quarter of 2005 were increased contract services revenues as well as increased sales of small volume parenterals. Sales growth for the year-to-date period benefited from $9 million of sales during the first quarter of 2005 under an existing order from the United States Government related to its biodefense program. In addition, increased sales of certain generic and branded pre-mixed drugs contributed to sales growth in both the second quarter and first half of 2005, with the growth driven by increases in volume, partially offset by lower pricing.

Infusion Systems

Sales growth of electronic infusion pumps and related tubing sets during the second quarter and first six months of 2005 was primarily driven by higher sales volume of devices, and was particularly strong in the year-to-date period due to the timing of customers’ purchases. Refer to Note 4 and the discussion below regarding a charge recorded during the second quarter of 2005 relating to the COLLEAGUE infusion pump. As a result of the company’s decision to voluntarily stop shipping new COLLEAGUE infusion pumps, there will be no sales of these pumps until the issues are remediated. The company’s sales of COLLEAGUE pumps for the second half of 2004 totaled approximately $120 million.

Anesthesia

Sales of anesthesia products increased during the second quarter and first half of 2005, with sales growth in both periods reflecting increased volume and improved pricing, particularly with respect to one of the company’s proprietary products, SUPRANE (Desflurane, USP), an inhaled anesthetic agent. As discussed in prior filings, management continues to believe its sales volume and pricing of generic propofol could be negatively impacted by the entry of additional competitors into the marketplace in 2005. Late in the second quarter of 2005, a competitor launched a generic propofol product. The company’s sales of generic propofol in the second half of 2004 totaled approximately $120 million.

Other

This category primarily includes other hospital-distributed products. The decline in sales during the second quarter and first six months of 2005 was primarily due to the continued exit of certain lower-margin distribution businesses outside the United States.

BioScience

Sales in the BioScience segment increased 11% for both the three- and six-month periods ended June 30, 2005 (including 4 and 3 percentage points due to the favorable impact of foreign currency fluctuations for the quarter and year-to-date period, respectively).

The following is a summary of sales by significant product line.


	Three months ended June 30,				Percent change	Six months ended June 30,				Percent change
(in millions)	2005		2004		Percent change	2005		2004		Percent change
Recombinants	$	397	$	320	24%	$	741	$	612	21%
Plasma Proteins		266		267	—		525		505	4%
Antibody Therapy		93		90	3%		182		170	7%
Transfusion Therapies		140		136	3%		273		276	(1%	)
Other		94		80	18%		171		140	22%

Total net sales	$	990	$	893	11%	$	1,892	$	1,703	11%

Recombinants

The primary driver of sales growth in the BioScience segment during the second quarter and first half of 2005 was increased sales volume of recombinant Factor VIII products. Factor VIII products are used in the treatment of hemophilia A, which is a bleeding disorder caused by a deficiency in blood clotting Factor VIII. Sales growth for both the second quarter and first six months of 2005 was primarily fueled by the continued adoption by customers of the advanced recombinant therapy, ADVATE (Antihemophilic Factor (Recombinant), Plasma/Albumin-Free Method) rAHF-PFM, which received regulatory approval in the United States in July 2003 and in Europe in March 2004. Pricing also improved with the continued launch of ADVATE. Management expects sales volumes of ADVATE will continue to grow during the remainder of 2005 as the launch of this new product continues.

Plasma Proteins

Sales of plasma-based products (excluding antibody therapies) were flat in the second quarter and grew in the first half of 2005 primarily due to increased sales volume of FEIBA, an anti-inhibitor coagulant complex, and the company’s plasma-based sealant, TISSEEL. This growth was partially offset by lower sales of plasma to third parties as a result of management’s decision to exit certain lower-margin contracts and, in the second quarter, to the impact of the timing of certain tenders outside the United States. During the first quarter of 2005, and effective in the third quarter of 2005, the company and the American Red Cross terminated their contract manufacturing agreement and replaced it with a plasma procurement agreement. For the second half of 2005, this new arrangement is expected to result in lower revenues for the Plasma Proteins product line as compared to the prior arrangement (this impact is expected to be offset by increased sales in the Antibody Therapy product line, as further discussed below).

Antibody Therapy

Higher sales of IVIG (intravenous immunoglobulin), which is used in the treatment of immune deficiencies, fueled sales growth during the second quarter and first half of 2005, primarily due to continued pricing recovery in the United States. Sales volume is expected to grow in the second half of the year as a result of the agreement with the American Red Cross which, as discussed above, is effective in the third quarter of 2005. Also contributing to sales growth during the second quarter of 2005 were sales of WinRho ® SDF [Rho(D) Immune Globulin Intravenous (Human)], which is a product used to treat a critical bleeding disorder. The company acquired the United States marketing and distribution rights relating to this product late in the first quarter of 2005. In addition, a liquid formulation of IVIG, which received regulatory approval in the United States in April 2005, is expected to be launched in the fourth quarter of 2005.

Transfusion Therapies

Sales of transfusion therapies products, which are products and systems for use in the collection and preparation of blood and blood components, continued to be unfavorably impacted by consolidation in the plasma industry during the second quarter and first half of 2005.

Other

Other BioScience products primarily consist of vaccines and non-plasma-based sealant products. Sales of vaccines, which are impacted by the timing of government tenders, increased during both the second quarter and first six months of 2005, and primarily related to increased sales volume of NeisVac-C (for the prevention of meningitis C) and FSME Immun (for the prevention of tick-borne encephalitis). The company’s non-plasma-based sealants are relatively new products, and sales increased significantly in both the three-month and six-month periods ended June 30, 2005, as the company continues to launch these products.

Renal

Sales from continuing operations in the Renal segment increased 5% and 6% for the three- and six-month periods ended June 30, 2005, respectively (including 5 percentage points due to the favorable impact of foreign currency fluctuations in both the quarter and year-to-date periods), with sales growth principally generated in international markets.

The following is a summary of sales by significant product line.


	Three months ended June 30,				Percent change		Six months ended June 30,				Percent change
(in millions)	2005		2004		Percent change		2005		2004		Percent change
PD Therapy	$	385	$	357	8%		$	759	$	702	8%
HD Therapy		114		118	(3%	)		240		242	(1%	)
Other		5		5	— %			8		9	(11%	)

Total net sales	$	504	$	480	5%		$	1,007	$	953	6%

PD Therapy

Peritoneal dialysis, or PD Therapy, is a dialysis treatment method for end-stage renal disease. PD Therapy, which is used primarily at home, uses the peritoneal membrane, or abdominal lining, as a natural filter to remove waste from the bloodstream. In addition to the favorable impact of foreign exchange, the sales growth in both periods was primarily driven by an increased number of patients in the majority of markets, principally in Asia, Latin America and Europe. Changes in the pricing of the segment’s PD Therapy products were not a significant factor. Increased penetration of PD Therapy products continues to be strong in emerging markets, where many people with end-stage renal disease are currently under-treated.

HD Therapy

Hemodialysis, or HD Therapy, is another form of end-stage renal disease dialysis therapy, which is generally performed in a hospital or outpatient center. HD Therapy works by removing wastes and fluid from the blood by using a machine and a filter, also known as a dialyzer. This product line includes sales of products as well as revenues from the Renal Therapy Services (RTS) businesses outside the United States. The sales decline during the second quarter of 2005 was principally due to the divestiture of the RTS business in Taiwan at the end of the first quarter of 2005 (the company’s revenues relating to the

RTS business in Taiwan totaled approximately $20 million per quarter in 2004). The remainder of the decline in the quarter and year-to-date period was due to lower sales of dialyzers and related hardware. In July 2005, the company decided to discontinue the manufacture of HD instruments. Separately, the company entered into an agreement with Gambro to distribute Gambro’s HD instruments and related ancillary products. Refer to further discussion below. The decision and new agreement are not expected to have a significant impact on sales.

GROSS MARGIN AND EXPENSE RATIOS

Three months
ended

June 30,

Change

Six months
ended

June 30,

Change

2005

2004

2005

2004

Gross margin

43.2%

39.5%

3.7 pts

42.0%

39.9%

2.1 pts

Marketing and administrative expenses

20.8%

22.4%

(1.6 pts

)

20.6%

21.8%

(1.2 pts

)

Gross Margin

The improvement in gross margin in both the second quarter and first half of 2005 was principally driven by increased sales of higher-margin recombinant products, cost savings related to the company’s restructuring initiatives (as further discussed below), and improvements in the plasma proteins business. These increases were partially offset by increased costs associated with the company’s pension plans in both the quarter and six-month period (as further discussed below). Refer to the discussion below regarding a $77 million charge recorded in the second quarter of 2005 relating to the Medication Delivery segment’s COLLEAGUE infusion pumps. This charge is included as a separate line item in the consolidated statements of income. In addition, refer to Note 2 regarding certain charges recorded during the second quarter of 2004 which reduced the company’s gross margin in the prior year quarter and year-to-date period.

Marketing and Administrative Expenses

The marketing and administrative expenses ratio improved as a result of cost savings relating to the company’s restructuring initiatives and other actions designed to reduce the company’s expense base. In addition, as discussed in Note 2, certain charges were recorded during the second quarter of 2004 which increased the company’s expense ratio in the prior year quarter and year-to-date period. These reductions in expenses from 2004 to 2005 were partially offset by the impact of increased pension plan costs, reserves for bad debts and legal costs in 2005.

Pension Plan Expenses

Pension plan expenses increased $13 million in the second quarter of 2005 and $26 million in the first half of 2005, partially reducing the above-mentioned improvements to the company’s gross margin and expense ratios. The increased pension plan expenses were due to changes in the discount rate and expected return on assets assumptions, as well as increased amortization of unrecognized losses.

RESEARCH AND DEVELOPMENT


	Three months ended June 30,				Percent change	Six months ended June 30,				Percent change
(in millions)	2005		2004		Percent change	2005		2004		Percent change
Research and development (R&D) expenses	$	133	$	129	3%	$	266	$	265	—	%
As a percent of sales		5.2%		5.4%			5.4%		5.8%

R&D expenses increased in the second quarter of 2005 and were flat for the first half of 2005, with increased spending on certain projects, principally in the BioScience segment, offset by restructuring-related cost savings. Management expects that full-year 2005 R&D expenses will increase over the prior year as the company invests in various R&D projects.

RESTRUCTURING

Second quarter 2004 restructuring charge

During the three- and six-month periods ended June 30, 2005, $25 million and $62 million, respectively, of the reserve for cash costs was utilized. Approximately $50 million of the remaining reserve is expected to be utilized during the second half of 2005, with the remainder to be utilized in 2006. The cash expenditures are being funded with cash generated from operations. Approximately 80% of the targeted positions have been eliminated as of June 30, 2005. See discussion below and Note 3 for additional information, including a discussion of restructuring charge adjustments recorded in the second quarter of 2005 based on changes in estimates.

Management’s original estimates of the benefits of the program are unchanged. Management continues to project that these initiatives will yield savings of approximately $0.20 to $0.25 per diluted share for full-year 2005 (assuming a constant diluted share count), or incremental savings of $0.15 to $0.20 as compared to full-year 2004. Savings for the second quarter and first half of 2005 were consistent with management’s original estimates. Once fully implemented in 2006, management anticipates total annual savings will be approximately $0.30 to $0.35 per diluted share (assuming a constant diluted share count), or incremental savings of $0.10 as compared to full-year 2005.

Second quarter 2003 restructuring charge

This program is substantially complete, and management does not expect incremental cost savings in 2005. The remaining reserve principally relates to severance and other cash payments to be made in the future, and these payments are being funded with cash generated from operations. See discussion below as well as Note 3 for additional information, including a discussion of restructuring charge adjustments recorded in the second quarter of 2005 based on changes in estimates.

Second quarter 2005 adjustments to restructuring charges

During the second quarter of 2005, the company recorded a $104 million pre-tax benefit relating to the adjustment of restructuring charges recorded in 2004 and 2003. The restructuring reserve adjustments principally related to severance and other employee-related costs. The company’s targeted headcount reductions are being achieved with a higher level of attrition than originally anticipated. Accordingly, the company’s severance payments are now projected to be lower than originally estimated. The remaining reserve adjustment principally related to changes in estimates regarding certain contract termination costs, certain adjustments related to asset disposal proceeds being in excess of original estimates, and the finalization of certain employment termination arrangements. Refer to Note 3 for additional information.

INFUSION PUMP CHARGE

SUBSEQUENT EVENT – DECISION TO CEASE MANUFACTURING HEMODIALYSIS INSTRUMENTS

NET INTEREST EXPENSE

Net interest expense increased $8 million and $18 million for the quarter and six-month period, respectively, principally due to higher interest rates and the execution of the net investment hedge mirror strategy, as further discussed below.

OTHER EXPENSE, NET

Other expense, net decreased for both the quarter and six-month period ended June 30, 2005. Other expense, net in both periods principally consisted of amounts relating to foreign exchange, minority interests, and equity method investments. Refer to Note 2 for additional information.

PRE-TAX INCOME

Refer to Note 6 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 certain foreign currency fluctuations, the majority of the foreign currency and interest rate hedging activities, net interest expense, income and expense related to certain non-strategic investments, corporate headquarters costs, certain employee benefit plan costs, certain nonrecurring gains and losses and certain special charges (such as in-process research and development, restructuring and certain asset impairments). Included in Note 6 is a table that reconciles financial results for the segments to the consolidated company’s results. The following is a summary of significant factors impacting the segments’ financial results.

Medication Delivery

Pre-tax income decreased 34% and 17% for the three and six months ended June 30, 2005, respectively. Pre-tax income for both the three-and six-month periods ended June 30, 2005 includes the $77 million charge associated with the COLLEAGUE infusion pump. Refer to discussion above as well as Note 4 for additional information. Aside from the charge, growth in pre-tax income in both the quarter and year-to-date periods was primarily the result of sales growth, the close management of costs, restructuring-related benefits, and foreign currency fluctuations.

BioScience

Pre-tax income increased 93% and 81% for the three and six months ended June 30, 2005, respectively. The increase in pre-tax income was primarily due to strong sales growth, a higher gross margin, the close management of costs, restructuring-related benefits and foreign currency fluctuations, partially offset by increased R&D spending. As discussed above, the improved gross margin was due to a favorable sales mix, with strong sales of higher-margin recombinant products, as well as improved pricing in certain product lines.

Renal

Pre-tax income increased 1% and 11% for the three and six months ended June 30, 2005, respectively. The increase in pre-tax income was primarily due to sales growth, the close management of costs, restructuring-related benefits and foreign currency fluctuations.

INCOME TAXES

As discussed in the notes to the consolidated financial statements, included in results of operations in both 2005 and 2004 were certain unusual or nonrecurring charges and income items. The company’s effective tax rate was impacted by these items, which were tax-effected at varying rates, depending on the particular tax jurisdictions. In addition, during the second quarter of 2005, principally due to ongoing improvements to the company’s geographic product sourcing, the company revised its estimate and recorded a year-to-date income tax adjustment totaling approximately $20 million, to reflect a lower full-year 2005 projected effective income tax rate (reducing the expected full-year 2005 effective income tax rate from 25%, as disclosed in the 2004 Annual Report, to approximately 22%).

The American Jobs Creation Act of 2004

No provision has been made for U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries, as these earnings are currently deemed to be permanently invested.

INCOME AND EARNINGS PER DILUTED SHARE FROM CONTINUING OPERATIONS

Income (loss) from continuing operations was $324 million and ($169) million for the three months ended June 30, 2005 and 2004, respectively, and $548 million and $18 million for the six months ended June 30, 2005 and 2004, respectively. Income (loss) from continuing operations per diluted share was $0.51 and ($0.28) for the three months ended June 30, 2005 and 2004, respectively, and $0.88 and $0.03 for the three and six months ended June 30, 2005 and 2004, respectively. The significant factors contributing to the growth are discussed above.

DISCONTINUED OPERATIONS

Refer to the 2004 Annual Report regarding the 2002 decision to divest the majority of the Renal segment’s services businesses. Discontinued operations generated a net loss of $2 million for the second quarter of 2005 and a net loss of $1 million for the second quarter of 2004. No earnings were generated for the first six months of 2005, and a net loss of $12 million was generated for the first half of 2004. The divestiture plan is substantially complete, and is expected to be fully completed during 2005.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with generally accepted accounting principles (GAAP) requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. A summary of the company’s significant accounting policies is included in Note 1 to the company’s consolidated financial statements for the year ended December 31, 2004, included in the 2004 Annual Report. Certain of the company’s accounting policies are considered critical, as these policies are the most important to the depiction of the company’s financial statements and require significant, difficult or complex judgments by management, often employing the use of estimates about the effects of matters that are inherently uncertain. Such policies are summarized in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in the 2004 Annual Report. There have been no significant changes in the application of the critical accounting policies since December 31, 2004.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS

Cash flows from operations

Continuing operations Cash flows from continuing operations increased during the first six months of 2005 as compared to the prior year. The increase in cash flows was primarily due to increased earnings (before non-cash items), improved working capital management, and the settlement of certain mirror cross-currency swaps (as further discussed below), partially offset by increased payments related to restructuring programs and higher contributions to the company’s pension trust relating to the United States and Puerto Rico pension plans.

Accounts Receivable

Cash flows relating to accounts receivable increased as management continues to increase its focus on working capital efficiency. With this increased focus, the company improved its accounts receivable collections. Days sales outstanding improved from 60.5 days at June 30, 2004 to 58.4 days at June 30, 2005. In addition, proceeds from the factoring of receivables increased and cash outflows relating to the company’s securitization arrangements decreased (as detailed in Note 2) during the first half of 2005.

Inventories

The following is a summary of inventories at June 30, 2005 and December 31, 2004, as well as inventory turns for the second quarter of 2005 and 2004, by segment.


	Inventories			Inventory turns for the six months ended June 30,
(in millions, except inventory turn data)	June 30, 2005		December 31, 2004	2005	2004
BioScience	$	1,136	$1,332	1.78	1.66
Medication Delivery		581	587	4.30	3.83
Renal		227	216	4.00	3.71

Total	$	1,944	$2,135	2.90	2.61

Inventories decreased $191 million from December 31, 2004 to June 30, 2005. The decline was primarily related to plasma inventories. Due to the recently executed agreement with the American Red Cross (discussed above), plasma inventories are expected to increase somewhat during the second half of 2005. Inventory turns are impacted by seasonality in certain of the company’s businesses, and are generally highest in the fourth quarter of the year, and lower earlier in the year, for these businesses.

Other

Contributing to the increase in cash flows from operations during the first half of 2005 was a $55 million cash inflow related to the settlement of certain mirror cross-currency swaps during the first half of 2005. Refer to the net investment hedges section below for further information regarding these swaps. Partially offsetting these cash inflows were increased payments associated with restructuring programs, with cash payments increasing $11 million, from $62 million in the first half of 2004 to $73 million in the first half of 2005. The company also made $46 million of increased contributions to its pension trust relating to its United States and Puerto Rico pension plans, from $54 million in the first half of 2004 to $100 million in the first half of 2005.

Discontinued operations Discontinued operations generated net cash outflows of $1 million and cash inflows of $15 million in the first six months of 2005 and 2004, respectively. The cash inflow in the prior year period primarily consisted of divestiture proceeds. As discussed above, the company has divested the majority of the discontinued operations and plans to complete the divestiture plan in 2005.

Cash flows from investing activities

Capital Expenditures

Capital expenditures decreased $66 million for the six months ended June 30, 2005, from $229 million in 2004 to $163 million in 2005, partially due to the timing of expenditures. Management expects to spend approximately $550 million in capital expenditures for full-year 2005.

Acquisitions and Investments In and Advances to Affiliates

There were no net cash flows relating to acquisitions or investments in and advances to affiliates during the first six months of 2005. There were $20 million of payments in the first six months of 2004, which primarily related to the 2003 acquisition of certain assets of Alpha Therapeutic Corporation, which are included in the BioScience segment.

Divestitures and Other

Net cash flows relating to divestitures and other totaled $49 million during the first half of 2005 and $31 million in the first half of 2004. The 2005 total principally related to the collection of a loan from Cerus Corporation, a company in which Baxter owns approximately 1% of the common stock, and the cash proceeds relating to the divestiture of the Renal segment’s RTS business in Taiwan. The 2004 total principally related to the sale of a building and the return of collateral.

Cash flows from financing activities

Debt Issuances, Net of Payments of Obligations

Net cash flows relating to debt issuances, net of payments of obligations, decreased $167 million in the first half of 2005, from $77 million of net cash inflows in 2004 to $90 million of net cash outflows in 2005. Included in the net total for 2005 and 2004 were $363 million and $40 million, respectively, in cash outflows associated with the settlement of certain of the company’s cross-currency swap agreements. Refer to further discussion below.

Other Financing Activities

Common stock cash dividends were substantially unchanged as compared to the prior year quarter. Cash received for stock issued under employee benefit plans increased by $15 million, from $75 million in the first half of 2004 to $90 million in the first half of 2005, primarily due to a higher level of employee stock option exercises coupled with a higher average option exercise price, partially offset by reduced cash proceeds from the employee stock purchase plans. Stock repurchases decreased from 2004 to 2005. In the first half of 2004 the company paid $18 million to repurchase stock from Shared Investment Plan (SIP) participants. Refer to the 2004 Annual Report for further information regarding the SIP and these repurchases. There were no repurchases during the first half of 2005.

CREDIT FACILITIES, ACCESS TO CAPITAL, AND COMMITMENTS

Refer to the 2004 Annual Report for further discussion of the company’s credit facilities, access to capital, and commitments and contingencies.

Credit facilities

The company had $1.4 billion of cash and equivalents at June 30, 2005. The company maintains three revolving credit facilities, which totaled approximately $2.0 billion at June 30, 2005. One of the facilities totals $640 million and matures in October 2007, another facility totals $800 million and matures in September 2009, and the third facility, which is denominated in Euros and was entered into in January 2005, totals approximately $600 million and matures in January 2008. The facilities enable the company to borrow funds on an unsecured basis at variable interest rates. The company has never drawn on these facilities. Management believes these credit facilities are adequate to support ongoing operational requirements. The credit facilities contain certain covenants, including a maximum net-debt-to-capital ratio and a minimum interest coverage ratio. At June 30, 2005, the company was in compliance with all financial covenants. The company’s net-debt-to-capital ratio, as defined below, of 30.1% at June 30, 2005 was well below the credit facilities’ net-debt-to-capital covenant. Similarly, the company’s actual interest coverage ratio of 9.0 to 1 in the second quarter of 2005 was well in excess of the minimum interest coverage ratio covenant. The net-debt-to-capital ratio, which is calculated in accordance with the company’s primary credit agreements, and is not a measure defined by GAAP, is calculated as net debt (short-term and long-term debt and lease obligations, less cash and equivalents) divided by capital (the total of net debt and stockholders’ equity). The net-debt-to-capital ratio at June 30, 2005 and the corresponding covenant in the company’s credit agreements give 70% equity credit to the company’s equity units. Refer to the 2004 Annual Report for a description of the equity units. The minimum interest coverage ratio is a four-quarter rolling calculation of the total of income from continuing operations before income taxes plus interest expense (before interest income), divided by interest expense (before interest income). Baxter also maintains certain other short-term credit arrangements.

Access to capital

Management intends to fund short-term and long-term obligations as they mature through cash on hand, future cash flows from operations, by issuing additional debt, or by issuing common stock. As of June 30, 2005, the company has approximately $399 million of shelf registration statement capacity available for the issuance of debt, common stock or other securities, and for general corporate purposes.

The company’s ability to generate cash flows from operations, issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms could be adversely affected in the event there is a material decline in the demand for the company’s products, deterioration in the company’s key financial ratios or credit ratings, or other significantly unfavorable changes in conditions. Management believes it has sufficient financial flexibility in the future to issue debt, enter into other financing arrangements, and attract long-term capital on acceptable terms as may be needed to support the company’s growth objectives.

Short-term debt and current maturities of long-term debt and lease obligations

The increase in short-term debt from December 31, 2004 to June 30, 2005 principally related to increased commercial paper ($0 at December 31, 2004 to approximately $300 million at June 30, 2005). The increase in current maturities of long-term debt and lease obligations from December 31, 2004 to June 30, 2005 principally related to the reclassification of approximately $800 million of notes due in the first quarter of 2006 from long-term to short-term.

Credit ratings

The company’s credit ratings at June 30, 2005 were as follows.


	Standard & Poor’s	Fitch	Moody’s
Ratings
Senior debt	A-	BBB+	Baa1
Short-term debt	A2	F2	P2
Outlook	Negative	Stable	Negative

Any future downgrades of Baxter’s credit ratings may unfavorably impact the financing costs related to the company’s credit arrangements and future debt issuances.

Any future credit rating downgrades or changes in outlook would not affect the company’s ability to draw on its credit facilities, and would not result in an acceleration of the scheduled maturities of any of the company’s outstanding debt.

Certain specified rating agency downgrades, if they occur in the future, could require the company to post collateral for, or immediately settle certain of its arrangements. No collateral was required to be posted at June 30, 2005. In addition, in the event of certain specified downgrades (Baa3 or BBB-, depending on the rating agency), the company would no longer be able to securitize new receivables under certain of its securitization arrangements. However, any downgrade of credit ratings would not impact previously securitized receivables. Refer to the 2004 Annual Report for further information.

Net investment hedges

As further discussed in the 2004 Annual Report, the company has historically hedged the net assets of certain of its foreign operations using a combination of foreign currency denominated debt and cross-currency swaps. The cross-currency swaps have served as effective hedges for accounting purposes and have reduced volatility in the company’s stockholders’ equity balance and net-debt-to-capital ratio (as any increase or decrease in the fair value of the swaps relating to changes in spot currency exchange rates is offset by the change in value of the hedged net assets of the foreign operations relating to changes in spot currency exchange rates).

Because the United States Dollar has weakened relative to the hedged currency, the hedged net assets have increased in value over time, while the cross-currency swaps have decreased in value over time. At June 30, 2005, as presented in the following table, the company had a pre-tax net liability of $733 million relating to these cross-currency swap agreements. Of this total, $71 million was short-term, and $662 million was long-term.

The company reevaluated its net investment hedge strategy in the fourth quarter of 2004 and decided to reduce the use of these instruments as a risk-management tool. Management intends to settle the swaps that mature in 2005 using cash flows from operations.

In addition, in order to reduce financial risk and uncertainty through the maturity (or cash settlement) dates of the cross-currency swaps, the company has executed offsetting or mirror cross-currency swaps. As of the date of execution, these mirror swaps effectively fixed the net amount that the company will ultimately pay to settle the cross-currency swap agreements subject to this strategy. After execution, as

the market value of the fixed portion of the original portfolio decreases, the market value of the mirror swaps increases by an approximately offsetting amount, and vice versa. The mirror swaps will be settled when the offsetting existing swaps are settled. The following is a summary, by maturity date, of the mark-to-market position of the original cross-currency swaps portfolio, as well as the mirror swap portfolio, and the total mark-to-market position as of June 30, 2005 (in millions).


Maturity date	Original swaps	Mirror swaps	Total
2005	$ 67	$ 4	$	71
2007	28	9		37
2008	222	76		298
2009	327	—		327

Total	$644	$89	$	733

Approximately $406 million, or 55%, of the total swaps net liability of $733 million as of June 30, 2005 has been fixed by the mirror swaps.

As discussed in the 2004 Annual Report and above, for the mirrored swaps, the company no longer realizes the favorable interest rate differential between the two currencies, and this results in increased net interest expense. The amount of increased net interest expense will vary based on floating interest rates and foreign exchange rates, and the timing of the company’s settlements.

As discussed above, during the first half of 2005, the company settled certain cross-currency swaps agreements (and related mirror swaps, as applicable), and made net payments totaling $308 million. In accordance with Statement of Financial Accounting Standards (SFAS) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” when the original cross-currency swaps are settled, the cash flows are reported within the financing section of the consolidated statement of cash flows. When the mirror swaps are settled, the cash flows are reported in the operating section of the consolidated statement of cash flows. Of the $308 million in net settlement payments, $363 million of cash outflows were included in the financing section and $55 million of cash inflows were included in the operating section.

The total swaps net liability decreased from $1.172 billion at December 31, 2004 to $733 million at June 30, 2005 due to the $308 million settlement payments and a $131 million favorable movement in the foreign currency rate.

LEGAL CONTINGENCIES

Refer to Note 5 and “Part II - Item 1. Legal Proceedings” for a discussion of the company’s legal contingencies. Upon resolution of any of these uncertainties, the company may incur charges in excess of presently established reserves. While such a future charge could have a material adverse impact on the company’s net income or cash flows in the period in which it is recorded or paid, based on the advice of counsel, management believes that any outcome of these actions, individually or in the aggregate, will not have a material adverse effect on the company’s consolidated financial position.

NEW ACCOUNTING STANDARDS

January 1, 2006. The new rules provide for one of two transition elections, either prospective application or restatement (back to January 1, 1995). The company plans to adopt SFAS No. 123-R on January 1, 2006 and has not yet decided which transition option the company will use. Management is in the process of analyzing the provisions of SFAS No. 123-R and assessing the impact on the company’s future consolidated financial statements.

FORWARD-LOOKING INFORMATION

The matters discussed in this report that are not historical facts include forward-looking statements and include statements with respect to COLLEAGUE infusion pumps and other regulatory matters, restructuring programs progress and related reserves, sales and pricing forecasts, litigation outcomes, future costs relating to HD instruments, and developments with respect to credit and credit ratings. These statements are based on the company’s current expectations and involve numerous risks and uncertainties. Many factors may cause actual results to differ, possibly materially, from those expressed in the forward-looking statements. These factors include, but are not limited to:

•

the company’s ability to realize in a timely manner the anticipated benefits of restructuring initiatives;

•

the impact of geographic and/or product mix on the company’s sales;

•

actions of regulatory bodies and other government authorities, including the Food and Drug Administration and foreign counterparts that could delay, limit or suspend product sales and distribution, including with respect to the COLLEAGUE infusion pump;

•

product quality and/or patient safety concerns, leading to product recalls, withdrawals, launch delays or declining sales;

•

product development risks;

•

interest rates;

•

technological advances in the medical field;

•

demand for and market acceptance risks for new and existing products, such as ADVATE (Antihemophilic Factor (Recombinant), Plasma/Albumin-Free Method) rAHF-PFM, and other technologies;

•

the impact of competitive products and pricing, including generic competition, drug reimportation and disruptive technologies;

•

inventory reductions or fluctuations in buying patterns by wholesalers or distributors;

•

foreign currency exchange rates;

•

the availability of acceptable raw materials and component supply;

•

global regulatory, trade and tax policies;

•

regulatory, legal or other developments relating to the company’s A, AF and AX series dialyzers;

•

the ability to obtain adequate insurance coverage at reasonable cost;

•

the ability to enforce patents;

•

patents of third parties preventing or restricting the company’s manufacture, sale or use of affected products or technology;

•

reimbursement policies of government agencies and private payers;

•

internal and external factors that could impact commercialization;

•

results of product testing; and

•

other factors described elsewhere in this report or in the company’s other filings with the Securities and Exchange Commission.

Currency fluctuations are also a significant variable for global companies, especially fluctuations in local currencies where hedging opportunities are not economic or not available. If the United States Dollar strengthens significantly against foreign currencies, the company’s ability to realize projected growth rates in its sales and net earnings outside the United States, as reported in United States Dollars, could be negatively impacted.

Please refer to the company’s Annual Report on Form 10-K and other documents filed by the company with the Securities and Exchange Commission, which are available on the company’s website, for more details concerning important factors that could cause actual results to differ materially. The company does not undertake to update its forward-looking statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Currency risk

For a complete discussion, refer to the caption “Financial Instrument Market Risk” in the company’s 2004 Annual Report. As part of its risk-management program, the company performs sensitivity analyses to assess potential changes in the fair value of its foreign exchange instruments relating to hypothetical and reasonably possible near-term movements in foreign exchange rates.

A sensitivity analysis of changes in the fair value of foreign exchange forward and option contracts outstanding at June 30, 2005, while not predictive in nature, indicated that if the United States Dollar uniformly fluctuated unfavorably by 10% against all currencies, on a net-of-tax basis, the net liability balance of $44 million with respect to those contracts would increase by $65 million.

With respect to the company’s cross-currency swap agreements (including the outstanding mirror swaps) discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations, if the United States Dollar uniformly weakened by 10%, on a net-of-tax basis, the net liability balance of $462 million with respect to those contracts outstanding at June 30, 2005 would increase by $66 million. Any increase or decrease in the fair value of cross-currency swap agreements designated as hedges of the net assets of foreign operations relating to changes in spot currency exchange rates is offset by the change in the value of the hedged net assets relating to changes in spot currency exchange rates. With respect to the portion of the cross-currency swap portfolio that is no longer designated as a net investment hedge, but is fixed via the mirror swaps, as the fair value of this fixed portion of the portfolio decreases, the fair value of the mirror swaps increases by an approximately offsetting amount, and vice versa.

The sensitivity analysis model recalculates the fair value of the foreign currency forward, option and cross-currency swap contracts outstanding at June 30, 2005 by replacing the actual exchange rates at June 30, 2005 with exchange rates that are 10% unfavorable to the actual exchange rates for each applicable currency. All other factors are held constant. These sensitivity analyses disregard the possibility that currency exchange rates can move in opposite directions and that gains from one currency may or may not be offset by losses from another currency. The analyses also disregard the offsetting change in value of the underlying hedged transactions and balances.

Interest rate and other risks

For a complete discussion, refer to the caption “Financial Instrument Market Risk” in the company’s 2004 Annual Report. There have been no significant changes from the information discussed therein.

Item 4. Controls and Procedures

The company carried out an evaluation, under the supervision and with the participation of the company’s Disclosure Committee and the company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the quarterly period covered by this report. The company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported on a timely basis and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the company’s disclosure controls and procedures are effective as of June 30, 2005.

Changes in Internal Control over Financial Reporting

During the first quarter of 2005, the company began to outsource the transaction processing activities of the company’s business in one European country and certain previously centralized activities (expense report processing, accounts payable, accounts receivable, fixed asset and intercompany accounting). After an analysis of the limited outsourcing that began during the first quarter, the company decided to discontinue this outsourcing initiative and to continue to perform these activities internally. Other than the item mentioned above, there has been no change in Baxter’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, Baxter’s internal control over financial reporting.

Review by Independent Registered Public Accounting Firm

Reviews of the interim condensed consolidated financial information included in this Quarterly Report on Form 10-Q for the three and six months ended June 30, 2005 and 2004 have been performed by PricewaterhouseCoopers LLP, the company’s independent registered public accounting firm. 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.

Report of Independent Registered Public Accounting Firm

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 June 30, 2005, and the related condensed consolidated statements of income for each of the three-month and six-month periods ended June 30, 2005 and 2004 and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2005 and 2004. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), 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 have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2004, and the related consolidated statements of income, cash flows and stockholders’ equity and comprehensive income for the year then ended, management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004 and the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004; and in our report dated March 14, 2005, we expressed (i) an unqualified opinion on those consolidated financial statements, (ii) an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting, and (iii) an adverse opinion on the effectiveness of the Company’s internal control over financial reporting. The consolidated financial statements and management’s assessment of the effectiveness of internal control over financial reporting referred to above are not presented herein. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2004, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Chicago, Illinois

August 1, 2005

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Product Liability

Mammary Implant Litigation

Baxter, together with certain of its subsidiaries, is currently a defendant in various courts in a number of lawsuits seeking damages for injuries of various types allegedly caused by silicone mammary implants previously manufactured by the Heyer-Schulte division of American Hospital Supply Corporation (AHSC). AHSC, which was acquired by Baxter 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. The majority of the claims and lawsuits against the company have been resolved. Certain of the proceedings are ongoing, as described below.

As of June 30, 2005, Baxter International, together with certain of its subsidiaries, was named as a defendant or co-defendant in 35 lawsuits relating to mammary implants, brought by approximately 91 plaintiffs, of which 80 are implant plaintiffs and the remainder are consortium or second generation plaintiffs. Of those plaintiffs, two currently are included in the Lindsey class action Revised Settlement described below, which accounts for one of the pending lawsuits against the company. Additionally, 34 plaintiffs have opted out of the Revised Settlement (representing approximately 21 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, the company believes that not all of the opt-out plaintiffs will have viable claims against the company. As of June 30, 2005, 25 of the opt-out plaintiffs had confirmed Heyer-Schulte mammary implant product identification. Furthermore, during the second quarter of 2005, Baxter obtained dismissals, or agreements for dismissals, with respect to 9 plaintiffs.

In addition to the individual suits against the company, a class action on behalf of all women with silicone mammary implants was filed on March 23, 1994 and is pending in the United States District Court (U.S.D.C.) for 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. 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.

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

Plasma-Based Therapies Litigation

Baxter currently is a defendant in a number of claims and lawsuits brought by individuals who have hemophilia, and their families, 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 June 30, 2005, Baxter was named as a defendant in 82 lawsuits most of which have been or are expected to be consolidated in the U.S.D.C. for the Northern District of Illinois and has received 161 claims in the United States, France, Ireland, Italy, Japan, Spain and Argentina. Among the lawsuits, the company and other manufacturers have been named as defendants in 70 lawsuits pending or expected to be transferred to the U.S.D.C. for the Northern District of Illinois on behalf of claimants, who are primarily non-U.S. residents, seeking unspecified damages for HIV and/or Hepatitis C infections from their use of plasma-based factor concentrates. In March 2005, the District Court denied plaintiff’s motion to certify the purported classes. Thereafter, plaintiffs have filed additional lawsuits on behalf of individual claimants outside of the United States. The defendants, including Baxter, have filed motions to dismiss these lawsuits based on forum non conveniens grounds. The U.S.D.C. for the Northern District of Illinois has approved a settlement of U.S. federal court HIV factor concentrate cases. As of December 31, 2004, all 6,246 claimant groups eligible to participate in the settlement have been paid.

In addition, Immuno International AG (Immuno), acquired by Baxter in 1996, has unsettled claims and lawsuits for damages for injuries allegedly caused by its plasma-based therapies. The typical claim alleges that the individual with hemophilia was infected with HIV and/or Hepatitis C by factor concentrates. Immuno’s successor is a participant in a foundation that would make payments to Italian applicants who are HIV positive. At least 370 applications are pending before that foundation. 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, approximately 26 million Swiss Francs, which is the equivalent of approximately $20 million based on the exchange rate as of June 30, 2005, of the purchase price is being withheld to cover these contingent liabilities.

Baxter is currently named in a number of claims and lawsuits brought by individuals who infused the company’s GAMMAGARD IVIG (intravenous immunoglobulin), all of whom are seeking damages for Hepatitis C infections allegedly caused by infusing GAMMAGARD IVIG. As of June 30, 2005, Baxter was a defendant in nine lawsuits and has received notice of four claims in the United States, France, Denmark, Italy, Germany and Spain. 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 IVIG between January 1993 and February 1994.

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

Althane Dialyzers Litigation

Baxter was named as a defendant in a number of civil cases seeking unspecified damages for alleged injury from exposure to Baxter’s Althane series of dialyzers, which were withdrawn from the market in 2001. All of these suits have been resolved, although the possibility of additional suits being filed cannot be excluded. Currently, there are a number of claims from Croatian citizens and one from the Spanish Ministry of Health, although suits have not been filed. The company previously reached settlements with a number of families of patients who died or were injured in Spain, Croatia and the United States allegedly after undergoing hemodialysis on an Althane dialyzer. The U.S. government is investigating the matter and Baxter received a subpoena in December 2002 to provide documents. Baxter is fully cooperating with the Department of Justice.

Vaccines Litigation

As of June 30, 2005, Baxter and certain of its subsidiaries have been named as defendants, along with others, in 142 lawsuits filed in various state and U.S. federal courts, four of which are purported class actions, seeking damages, injunctive relief and medical monitoring for claimants alleged to have contracted autism or other attention deficit disorders as a result of exposure to vaccines for childhood diseases containing the preservative, Thimerosal. These vaccines were formerly manufactured and sold by North American Vaccine, Inc., which was acquired by Baxter in June 2000, as well as other companies. As of December 31, 2004, ten suits have been dismissed based on the application of the National Vaccine Injury Compensation Act. Additional Thimerosal cases may be filed in the future against Baxter and companies that marketed Thimerosal-containing products.

Other

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, which merged with Cardinal Health in 1999, has not been named in most of this litigation but has defended and indemnified Baxter pursuant to certain contractual obligations for all expenses and potential liabilities associated with claims pertaining to latex gloves. As of June 30, 2005, the company has been named as a defendant in 10 lawsuits.

Pricing

As of June 30, 2005, Baxter International and certain of its subsidiaries were named as defendants, along with others, in approximately 40 lawsuits brought in various state and U.S. federal courts which allege that Baxter and other defendants reported artificially inflated average wholesale prices for Medicare and Medicaid eligible drugs. These cases have been brought by private parties on behalf of various purported classes of purchasers of Medicare and Medicaid eligible drugs, as well as by state attorneys general. As further explained below, all but nine of these cases were consolidated in the U.S.D.C. for the District of Massachusetts for pretrial case management under Multi District Litigation rules. In July 2005, the defendants, including Baxter, removed an additional five lawsuits from state courts to the U.S.D.C. for

the District of Massachusetts. Claimants seek unspecified damages and declaratory and injunctive relief under various state and/or federal statutes. After the partial dismissal of the consolidated amended complaint, Plaintiffs filed an amended master consolidated class action complaint that the defendants, including Baxter, moved to dismiss. In February 2004, the court granted in part and denied in part defendants’ motion to dismiss. The lawsuits against Baxter include eight lawsuits brought by state attorneys general, which allege that prices for Medicare and Medicaid eligible drugs were artificially inflated and seek unspecified damages, injunctive relief, civil penalties, disgorgement, forfeiture and restitution. Specifically, 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. In June 2003, the U.S.D.C. for the District of Massachusetts remanded the Nevada case to Washoe County, Nevada and denied plaintiffs’ motion to remand the Montana case. In January 2004, the District Court remanded another case filed in state court to the Superior Court of Maricopa County, Arizona. In March 2004, the Attorney General of Pennsylvania filed a civil suit in the Commonwealth Court of Pennsylvania. That action was dismissed in February 2005. In March 2005, the Attorney General of Pennsylvania filed an amended complaint. In May 2004, the Attorney General of Texas filed a civil suit in the District Court of Travis County, Texas. In June 2004, the Attorney General of Wisconsin filed a civil suit in the Circuit Court of Dane County, Wisconsin. In November 2004, the Attorney General of Kentucky filed a civil suit in the Circuit Court of Franklin County, Kentucky. During the first quarter of 2005, Baxter was named as a defendant in 14 additional cases, 13 of which have been served upon the company. Additionally, during April 2005 Baxter was named as a defendant in eight cases, five of which have been served. In January 2005, the Attorney General of Alabama filed a civil suit in the Circuit Court of Montgomery County, Alabama. In February 2005, the Attorney General of Illinois filed a civil suit in the Circuit Court of Cook County, Illinois. In July 2005, the lawsuits filed by the attorneys general of Pennsylvania, Wisconsin, Kentucky, Alabama and Illinois were removed by the defendants to the U.S.D.C. for the District of Massachusetts. Each of the state attorneys general has moved to remand these cases. 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. These investigations may result in additional cases being filed by various state attorneys general.

Securities Laws and Other

In July 2003, the Midwest Regional Office of the Securities and Exchange Commission (SEC) requested that the company voluntarily provide information concerning certain revisions to the company’s growth and earnings forecasts during 2003. In connection with this inquiry, in July 2004 the SEC sought information regarding the establishment of certain reserves as well as events in connection with the company’s restatement of its consolidated financial statements, previously announced in July 2004. The company is cooperating fully with the SEC.

In August 2002, six purported class action lawsuits were filed in the U.S.D.C. for the Northern District of Illinois naming Baxter and its then Chief Executive Officer and then Chief Financial Officer as defendants. These lawsuits, which were consolidated and sought recovery of unspecified damages, alleged that the defendants violated the federal securities laws by making misleading statements that allegedly caused Baxter common stock to trade at inflated levels. In December 2002, plaintiffs filed their consolidated amended class action complaint which named nine additional Baxter officers as defendants. In July 2003, the U.S.D.C. for the Northern District of Illinois dismissed in its entirety the consolidated amended class action complaint. In July 2004, the Seventh Circuit Court of Appeals reversed the order of dismissal and remanded the case to the District Court. In September 2004, the Seventh Circuit Court of Appeals denied motions by Baxter for rehearing, rehearing en banc and to stay the order to remand the case pending a petition for a writ of certiorari to the U.S. Supreme Court. In December 2004, Baxter filed its petition for a writ of certiorari in the U.S. Supreme Court. Plaintiffs filed a revised consolidated

amended complaint in the District Court in November 2004. Baxter filed its motion to dismiss the complaint in December 2004. The District Court denied Baxter’s motion to dismiss in February 2005. In March 2005, the U.S. Supreme Court denied Baxter’s petition for certiorari.

In July 2004, a purported class action lawsuit was filed in the U.S.D.C. for the Northern District of Illinois, in connection with the previously disclosed restatement, naming Baxter and its current Chief Executive Officer and Chief Financial Officer and their predecessors as defendants. The lawsuit, which seeks recovery of unspecified damages, alleges that the defendants violated the federal securities laws by making false and misleading statements regarding the company’s financial results, which allegedly caused Baxter common stock to trade at inflated levels during the period between April 2001 and July 2004. Three similar purported class action lawsuits were filed in the third quarter of 2004 in the U.S.D.C. for the Northern District of Illinois against the same defendants. These cases have been consolidated before a single judge. In January 2005, plaintiffs filed a consolidated amended complaint in the District Court. In February 2005, Baxter filed its motion to dismiss. In May 2005, the District Court granted Baxter’s motion to dismiss this action in its entirety. One of the consolidated plaintiffs has moved to alter the judgment terminating its case and to file an amended complaint. That motion is pending before the District Court.

In October 2004, a solitary plaintiff filed a purported class action against Baxter in the Circuit Court of Cook County, Illinois alleging a breach of federal securities law through Baxter International’s secondary offering of common stock in September 2003. The plaintiff alleges that the offering price of these shares was artificially inflated by virtue of the financial statements that the company filed prior to and concurrent with the offering, which the company later amended in connection with the restatement, and seeks unspecified damages. In November 2004, Baxter removed this case to the U.S.D.C. for the Northern District of Illinois. In December 2004, plaintiff moved to remand the proceeding to state court. In May 2005, the District Court remanded the case back to state court.

The company believes that it may be subject to additional class action litigation and regulatory proceedings in connection with the events preceding the restatement announced in the third quarter of 2004.

In October 2004, a sole plaintiff filed a purported class action in the U.S.D.C. for the Northern District of Illinois against Baxter and its current Chief Executive Officer and Chief Financial Officer and their predecessors for alleged violations of the Employee Retirement Income Security Act of 1974, as amended. Plaintiff alleges that these defendants, along with the Administrative and Investment Committees of the company’s Incentive Investment Plan and Puerto Rico Savings and Investment Plan (the Plans), which are the company’s 401(k) plans, breached their fiduciary duties to the Plans’ participants by offering Baxter common stock as an investment option in each of the Plans during the period of January 2001 to October 2004. Plaintiff alleges that Baxter common stock traded at artificially inflated prices during this period and seeks unspecified damages and declaratory and equitable relief. The plaintiff seeks to represent a class of the Plans’ participants who elected to acquire Baxter common stock through the Plans between January 2001 and the present. The defendants have moved to dismiss this action and the motion currently is pending before the District Court.

In August and September 2004, three plaintiffs filed separate derivative complaints in the Circuit Court of Cook County, Illinois against the company’s Chief Executive Officer and Chief Financial Officer and certain other current and former officers and directors of the company. These actions, which plaintiffs purport to bring on the company’s behalf, seek unspecified damages for alleged breaches of fiduciary duty in connection with the company’s disclosures of its financial results between April 2001 and July 2004. These three cases have been consolidated before one judge in the state court.

During the first quarter of 2005, Baxter and Haemonetics Corporation (Haemonetics) have been engaged in a binding arbitration proceeding brought by Haemonetics. Haemonetics alleged that Baxter breached supply contracts assigned to it in connection with Baxter’s acquisition of assets from Alpha Corporation in 2003. Baxter denied the allegations. In May 2005, the arbitration panel awarded Haemonetics $27.7 million, plus attorneys’ fees.

In April 2003, A. Nattermann & Cie GmbH and Aventis Behring L.L.C. filed a patent infringement lawsuit in the U.S.D.C. for the District of Delaware naming Baxter Healthcare Corporation as the defendant. In November 2003, plaintiffs dismissed the lawsuit without prejudice. The complaint, which sought injunctive relief, alleged that Baxter’s planned manufacture and sale of ADVATE would infringe United States Patent No. 5,565,427. A reexamination of the patent is pending before the United States Patent and Trademark Office.

Baxter has been named a potentially responsible party (PRP) for environmental clean-up at a number of sites. Under the United States Superfund statute and many state laws, generators of hazardous waste that is sent to a disposal or recycling site are liable for clean-up of the site if contaminants from that property later leak into the environment. The laws generally provide that a PRP may be held jointly and severally liable for the costs of investigating and remediating the site.

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

Item 4. Submission of Matters to a Vote of Security Holders

The company’s annual meeting of stockholders was held on May 3, 2005, for the purpose of electing directors, ratifying the appointment of PricewaterhouseCoopers LLP as the company’s independent registered public accounting firm and voting on the stockholder proposals listed below. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was no solicitation in opposition to management’s solicitation. Each of management’s nominees for directors, as listed in the proxy statement, was elected with the number of votes set forth below.


NAME	FOR	ABSTAINED/WITHHELD
To hold office for two years:
Blake E. Devitt	533,080,996	5,669,605
To hold office for three years:
Joseph B. Martin, M.D., Ph.D.	533,121,028	5,629,573
Robert L. Parkinson, Jr.	530,476,516	8,274,085
Thomas T. Stallkamp	519,885,857	18,864,744
Albert P.L. Stroucken	533,077,273	5,673,328

In addition to the directors listed above, directors whose term of office as a director continued after the meeting are: Walter E. Boomer, John D. Forsyth, Gail D. Fosler, James R. Gavin III, M.D., Ph.D., Peter S. Hellman, Carole Shapazian and K.J. Storm.

The results of the other matters voted upon at the annual meeting are as follows:


PROPOSAL	FOR	AGAINST	ABSTAINED	BROKER NON-VOTES
The appointment of PricewaterhouseCoopers LLP as the company’s independent registered public accounting firm in 2005 was approved.	508,806,791	26,293,567	3,650,243	—

The stockholder proposal relating to cumulative voting in the election of directors was not approved.	194,496,478	223,116,699	56,747,620	64,389,804

The stockholder proposal relating to restrictions on services performed by the independent registered public accounting firm was not approved.	55,680,412	412,250,755	6,429,630	64,389,804

The stockholder proposal relating to the annual election of directors was approved.	368,378,655	47,954,339	58,027,803	64,389,804

Item 5. Other Information

On July 21, 2005, the company announced that the FDA had classified a March 15, 2005 company voluntary notice to customers regarding certain user interface and failure code issues relating to the company’s COLLEAGUE® Volumetric Infusion Pump as a Class I recall (FDA’s highest priority level) and that there had been reports of three deaths and six serious injuries that may have been associated with the issues identified in the March 15, 2005 voluntary notice. The same announcement also described a field corrective action letter sent to customers on July 20, 2005 (also designated a Class I recall), notifying customers that the company is in the process of developing an action plan to address design issues relating to COLLEAGUE pump failure codes (with which one of the three previously described deaths may have been associated). While these actions do not require customers to return their COLLEAGUE pumps, the company will voluntarily hold shipments of new COLLEAGUE pumps until design issues are resolved. Refer to Part I, Item 2 for additional information.

The company is working to correct the issues with the COLLEAGUE pump. Nevertheless, as more fully described in the company’s filing on Form 10-K, Part I, Item 1, “Government Regulation,” the operations of the company and many of its products are subject to extensive regulation and review. Thus, the company is subject to possible administrative and legal actions by FDA and other agencies. Such actions may include product recalls, product seizures, injunctions to halt manufacture and distribution, and other civil sanctions, as well as in certain circumstances criminal sanctions. From time to time, the company has instituted voluntary compliance actions, such as removing products from the market and efforts to improve the effectiveness of quality systems. The company continues to work with the FDA with respect to its observations and investigation of these issues and remains committed to enhancing quality systems and processes across the company.

Item 6. Exhibits

Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index hereto.

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: August 8, 2005
	By:	/s/ John J. Greisch
		John J. Greisch
		Corporate Vice President and Chief Financial Officer

EXHIBITS FILED WITH OR FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION


Number		Description of Exhibit
10.1		Baxter International Inc. Non-Employee Director Compensation Plan adopted as of May 6, 2004 and amended through May 4, 2005

10.2		Guaranty Agreement entered as of January 7, 2005 and amended through June 1, 2005 by Baxter International Inc. in favor of J.P. Morgan Europe Limited as Agent in respect of obligations of Baxter Healthcare S.A. under the Credit Agreement of the same date.

15		Letter Re Unaudited Interim Financial Information

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350

EX-10.1 2 dex101.htm NON-EMPLOYEE DIRECTOR COMPENSATION PLAN Non-Employee Director Compensation Plan

EXHIBIT 10.1

[Amended]

BAXTER INTERNATIONAL INC.

Non-Employee Director Compensation Plan

adopted May 6, 2003

Terms and Conditions

1.	Purpose

This Non-Employee Director Compensation Plan (the “Plan”) is adopted by the Board of Directors (the “Board”) of Baxter International Inc. (“Baxter”). This Plan is adopted pursuant to the Baxter International Inc. 2003 Incentive Compensation Program (the “Program”), for the purposes stated in the Program. Capitalized terms defined in the Program that are used without being defined in the Plan will have the same meaning as in the Program.

2.	Participants

Each member of the Board who is not an employee of Baxter or any of its subsidiaries shall participate in the Plan (a “Participant”).

3.	Restricted Stock

3.1

On the date of Baxter’s annual meeting of stockholders (the “Annual Meeting”) in each year beginning with the Annual Meeting on May 6, 2003, and subject to availability of shares of Common Stock under the Program, each Participant upon completion of the Annual Meeting shall, automatically and without necessity of any action by the Board or any committee thereof, receive the number of shares of Restricted Stock equal to the quotient of (A) $60,000 divided by (B) the Fair Market Value of a share of Common Stock on the date of grant (rounded to the nearest whole number which is a multiple of ten) (the “Annual Restricted Stock Grant Amount”).

3.2

Each Participant elected or appointed on a date other than the date of an Annual Meeting shall, on the date of such election or appointment and automatically and without necessity of any action by the Board or any committee thereof, receive the number of shares of Restricted Stock equal to the product of (A) the Annual Restricted Stock Grant Amount (as defined in Section 3.1, subject to adjustment in accordance with the Program) for the Restricted Stock awarded on the date of the immediately preceding Annual Meeting, multiplied by (B) the quotient of (i) the number of full calendar months before the next Annual Meeting divided by (ii) 12 (rounded to the nearest whole number which is a multiple of ten). The number of shares of Restricted Stock granted under this Section 3.2 shall not exceed the number available under the Program on the date of grant.

3.3

Restricted Stock may not be sold, transferred, assigned, pledged, hypothecated or otherwise encumbered or disposed of, whether voluntarily, involuntarily or by operation of law, until vested pursuant to the terms hereof.

3.4

Subject to Section 11.10 of the Program and except as expressly provided in Sections 3.6 and 3.7, all shares of Restricted Stock shall vest on the date of and immediately prior to the next Annual Meeting following the date of grant.

3.5

Except as provided in Sections 3.6 and 3.7, if a Participant ceases service as a member of the Board before his or her Restricted Stock vests, the Participant will forfeit his or her unvested Restricted Stock immediately upon ceasing service as a member of the Board.

3.6

If a Participant dies while serving as a member of the Board, his or her unvested Restricted Stock will not be forfeited and will be fully vested immediately.

3.7

If a Participant becomes disabled and unable to continue service as a member of the Board, his or her Restricted Stock will not be forfeited and will, when the Participant ceases to serve as member of the Board, be fully vested.

3.8

Each Participant receiving Restricted Stock shall have all of the rights of a stockholder with respect to the shares of Restricted Stock during any period in which the shares of Restricted Stock are subject to forfeiture or restrictions on transfer, including the right to vote the shares of Restricted Stock and to receive dividends and other distributions thereon, unless and until such shares are forfeited pursuant to Section 3.5; provided, however, that a dividend or other distribution with respect to Restricted Stock (including, without limitation, a stock dividend or stock split), other than a cash dividend, shall be delivered to Baxter (and the Participant shall, if requested by Baxter, execute and return one or more irrevocable stock powers related thereto) and shall be subject to the same restrictions as the Restricted Stock with respect to which such dividend or other distribution was made. Cash dividends paid on the Restricted Stock will be reinvested in shares of Common Stock, unless the Participant elects otherwise. Common Stock purchased with reinvested cash dividends shall not be restricted.

3.9

If requested by Baxter, each Participant receiving Restricted Stock shall enter into an agreement with Baxter incorporating the terms and conditions of this Plan. A stock certificate for the shares of Restricted Stock awarded will be issued in the name of each Participant and deposited, together with a stock power endorsed in blank by Participant, with Baxter. Each such certificate shall bear a legend in substantially the following form:

The transferability of this certificate and the shares of Common Stock represented by it are subject to the terms and conditions (including conditions of forfeiture) contained in the Baxter International Inc. Non-Employee Director Compensation Plan adopted May 6, 2003. A copy of this Plan is available from the Corporate Secretary of Baxter International Inc.

Subject to the terms of the Program, after the Restricted Stock vests, shares of Common Stock free and clear of all restrictions will be delivered to the Participant (or to the Participant’s legal representative, beneficiary or heir).

4.	Stock Options

4.1

On the date of Baxter’s Annual Meeting in each year beginning with the Annual Meeting on May 6, 2003, and subject to availability of shares of Common Stock under the Program, upon completion of the Annual Meeting each Participant shall be granted Stock Options having a value equal to $60,000, to be determined by the Board or the Compensation Committee of the Board (the “Committee”) based on a Black-Scholes or other option valuation model in the discretion of the Board or the Committee (rounded to the nearest whole number which is a multiple of ten) (the “Annual Stock Option Grant Amount”).

4.2

Each Participant elected or appointed on a date other than the date of an Annual Meeting shall, on the date of such election or appointment and automatically and without necessity of any action by the Board or any committee thereof, be granted a Stock Option to purchase that number of shares of Common Stock equal to the product of (A) the Annual Stock Option Grant Amount (as defined in Section 4.1, subject to adjustment in accordance with the Program) for each Stock Option granted on the date of the immediately preceding Annual Meeting, multiplied by (B) the quotient of (i) the number of full calendar months before the next Annual Meeting divided by (ii) 12 (rounded to the nearest whole number which is a multiple of ten). The number of shares of Common Stock subject to any Stock Option granted under this Section 4.2 shall not exceed the number available under the Program on the date of grant.

4.3

The purchase price for each share of Common Stock subject to a Stock Option shall be the Fair Market Value of a share of Common Stock on the date of grant. The terms of each Stock Option will be as set forth in this Plan and the Program. To the extent that any provision of the Plan is inconsistent with the Program, the Program shall control. The Stock Options are not intended to qualify as Incentive Stock Options within the meaning of Section 422 of the United States Internal Revenue Code.

4.4

Subject to Section 11.10 of the Program and except as expressly provided in Sections 4.8, 4.9 and 4.10, Stock Options shall first become exercisable on the date of and immediately prior to the next Annual Meeting following the date of grant.

4.5

After a Stock Option becomes exercisable and until it expires, it may be exercised in whole or in part, in the manner specified by the Company. Under no circumstances may a Stock Option be exercised after it has expired. Shares of Common Stock may be used to pay the purchase price for shares of Common Stock to be acquired upon exercise of a Stock Option or fulfill any tax withholding obligation, subject to any requirements or restrictions specified by the Company.

4.6

Except as provided in Sections 4.8, 4.9 and 4.10, if a Participant ceases service as a member of the Board before his or her Stock Option becomes exercisable, the Stock Option will expire when the Participant ceases service as a member of the Board.

4.7

If a Participant ceases service as a member of the Board after his or her Stock Option becomes exercisable, the Stock Option will not expire but will remain exercisable. Subject to Sections 4.8, 4.9, 4.10 and 4.11, the Stock Option will expire three months after the Participant ceases service as a member of the Board, unless the Participant dies or becomes disabled during such three month period in which case the Stock Option will expire on the first anniversary of the date the Participant ceased serving as a member of the Board.

4.8

If a Participant dies while serving as a member of the Board, his or her Stock Option will not expire and will remain, or immediately become, fully exercisable, as the case may be. Subject to Sections 4.10 and 4.11, the Stock Option will expire on the first anniversary of the Participant’s death.

4.9

If a Participant becomes disabled and unable to continue service as a member of the Board, his or her Stock Option will not expire and will remain, or when the Participant ceases to serve as member of the Board become, fully exercisable, as the case may be. Subject to Sections 4.10 and 4.11, the Stock Option will expire on the first anniversary of the date the Participant ceases service as a member of the Board.

4.10

If a Participant who has served as a member of the Board for a continuous period of at least ten years or who is at least 72 years of age ceases to serve as a member of the Board (including without limitation by reason of death or disability), his or her Stock Option will not expire and will remain, or when the Participant ceases to serve as member of the Board become, fully exercisable, as the case may be. Subject to Section 4.11, the Stock Option will expire on the fifth anniversary of the date the Participant ceases service as a member of the Board.

4.11

Stock Options that have not previously expired will expire at the close of business on the tenth anniversary of the date of grant. If a Stock Option would expire on a date that is not a Business Day, it will expire at the close of business on the last Business Day preceding that date. A “Business Day” is any day on which the Common Stock is traded on the New York Stock Exchange.

4.12

An exercisable Stock Option may only be exercised by the Participant, his or her legal representative, or a person to whom the Participant’s rights in the Stock Option are transferred by will or the laws of descent and distribution or in accordance with rules and procedures established by the Committee.

5.	Cash Compensation

5.1

Baxter shall pay each Participant a meeting fee of $1,000 for each meeting of the Board or any committee thereof attended, and a Participant acting as the chairperson of any meeting of a committee of the Board shall receive an additional $1,000 for each meeting chaired by him or her. Fees shall be paid quarterly in arrears and are payable if the Participant attends in person, by conference telephone, or by any other means permitted by the Delaware General Corporation Law and Baxter’s Bylaws.

5.2

Baxter shall pay each Participant a total annual cash retainer of $45,000 per calendar year (“Annual Cash Retainer”). The Annual Cash Retainer shall be paid quarterly in arrears. For purposes of determining the amount of such quarterly payment, a Participant must be a member of the Board on or prior to the 15^th day of a month in order to be entitled to receive payment of the Annual Cash Retainer with respect to that month.

5.3

Participants shall be eligible to defer payment of cash compensation otherwise payable under this Section 5 pursuant to the terms and conditions of the Baxter Non-Employee Director Deferred Compensation Plan.

6.	Availability of Shares

If on any grant date, the number of shares of Common Stock which would otherwise be granted in the form of Restricted Stock or subject to Stock Options granted under the Plan shall exceed the number of shares of Common Stock then remaining available under the Program, the available shares shall be allocated among the Stock Options and Restricted Stock to be granted Participants in proportion to the number of shares subject to Stock Options and shares of Restricted Stock that Participants would otherwise be entitled to receive, and allocated evenly between Restricted Stock and Stock Options.

7.	General Provisions

7.1

Subject to the limitations contained in Section 11.9 of the Program, the Board or the Committee may, at any time and in any manner, amend, suspend, or terminate the Plan or any Stock Option outstanding under the Plan.

7.2

Participation in the Plan does not give any Participant any right to continue as a member of the Board for any period of time or any right or claim to any benefit unless such right or claim has specifically accrued hereunder.

Amendment No. 1

Baxter International Inc.

Non-Employee Director Compensation Plan

Effective as of May 4, 2004, the Baxter International Inc. Non-Employee Director Compensation Plan is amended to add the following subsection 4.13 to read in its entirety as follows:

4.13

The Board or the Committee may, in its sole discretion and without receiving permission from any Participant, substitute stock appreciation rights (“SARs”) for any or all outstanding Stock Options granted on or after May 4, 2004. Upon the grant of substitute SARs, the related Stock Options replaced by the substitute SARs shall be cancelled. The grant price of the substitute SAR shall be equal to the Option Price of the related Stock Option, the term of the substitute SAR shall not exceed the term of the related Stock Option, and the terms and conditions applicable to the substitute SAR shall otherwise be substantially the same as those applicable to the related Stock Option replaced by the substitute SAR.

Amendment No. 2

Baxter International Inc.

Non-Employee Director Compensation Plan

Effective as of July 26, 2005, subsection 5.2 of the Baxter International Inc. Non-Employee Director Compensation Plan is amended to read in its entirety as follows:

5.2

Baxter shall pay each Participant a total annual cash retainer of $45,000 per calendar year (“Annual Cash Retainer”). Baxter shall pay an additional annual cash retainer of $25,000 per calendar year to the Lead Director (“Lead Director Retainer”). Both the Annual Cash Retainer and Lead Director Retainer shall be paid quarterly in arrears. For purposes of determining the amount of such quarterly payment(s), a Participant and/or the Lead Director must be a member of the Board on or prior to the 15^th day of a month in order to be entitled to receive such payment(s) with respect to that month.

EX-10.2 3 dex102.htm GUARANTY AGREEMENT Guaranty Agreement

Exhibit 10.2

[Amended]

GUARANTY

This Guaranty (as it may be amended, restated or modified and in effect from time to time, this “Guaranty”) is made as of the 7^th day of January, 2005 by Baxter International Inc., a Delaware corporation (the “Guarantor”), in favor of J.P. Morgan Europe Limited, in its capacity as agent on behalf of the Banks (as hereinafter defined).

R E C I T A L S:

A. Baxter Healthcare SA (the “Borrower”), the financial institutions named therein (the “Banks”), and J.P. Morgan Europe Limited, as agent (together with its successors and assigns, the “Agent”), have entered into a certain Credit Agreement dated as of the date hereof (as from time to time modified, supplemented, restated or amended, the “Credit Agreement”). Each capitalized term used but not otherwise defined herein shall have the meaning ascribed to such term by the Credit Agreement.

B. The Guarantor is the parent of the Borrower and will receive substantial and direct benefits from the extensions of credit contemplated by the Credit Agreement and is entering into this Guaranty to induce the Agent and the Banks to enter into the Credit Agreement and extend credit to the Borrower thereunder.

C. The execution and delivery of this Guaranty is a condition precedent to the obligations of the Banks to extend credit to the Borrower pursuant to the Credit Agreement.

NOW THEREFORE, in consideration of the foregoing and other good and valuable consideration and as an inducement to the Banks to enter into the Credit Agreement and extend credit to the Guarantor thereunder, the Guarantor hereby agrees as follows:

1. As used in this Guaranty:

“Adjusted Debt” means, at any time, (a) all Debt, minus (b) an amount equal to all cash and cash equivalent investments of the Guarantor and its Consolidated Subsidiaries at such time.

“Consolidated” refers to the full consolidation of the accounts of the Guarantor and its Subsidiaries in accordance with generally accepted accounting principles, including principles of consolidation, consistent with those applied in the preparation of the financial statements referred to in Section 11(f).

“Consolidated Capitalization” means, at any time, the sum at such time of: (i) the Consolidated stockholders’ equity of the Guarantor and its Consolidated Subsidiaries, and (ii) Adjusted Debt of the Guarantor and its Consolidated Subsidiaries.

“Consolidated Net Tangible Assets” means the total amount of assets which would be included on a Consolidated balance sheet of the Guarantor and its Consolidated Subsidiaries (and which shall reflect the deduction of applicable reserves) after deducting therefrom all current liabilities of the Guarantor and its Consolidated Subsidiaries and all Intangible Assets.

“Debt” means the sum of: (i) indebtedness for borrowed money or for the deferred purchase price of property or services carried as indebtedness on the Consolidated balance sheet of the Guarantor and its Consolidated Subsidiaries (excluding accounts payable arising in the ordinary course of such Person’s business payable on terms customary in the trade), (ii) obligations of the Guarantor and its Consolidated Subsidiaries as lessee under leases that, in accordance with generally accepted accounting principles, are recorded as capital leases, and (iii) obligations of the Guarantor and its Consolidated Subsidiaries under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (i) and (ii) above (other than Debt of any Subsidiary, to the extent such Debt is included in the calculation of Debt as a result of clause (i) or (ii) above) in excess of $100,000,000 in the aggregate and (iv) indebtedness or obligations of the kinds referred to in clause (i), (ii), or (iii) above of the Guarantor’s unconsolidated Subsidiaries in excess of $200,000,000 in the aggregate. The term “Debt” shall not include (A) any obligations of the Guarantor under or in connection with that certain Facility and Guaranty Agreement dated as of April 14, 2004 among the Guarantor, certain financial institutions parties thereto and Bank One, NA, as agent, (B) that certain Facility and Guaranty Agreement dated as of July 8, 2003 among the Guarantor, certain financial institutions parties thereto and Bank One, NA, as agent, or (C) any similar arrangement under which the Guarantor has agreed to guarantee the payment obligations of a current or former employee of the Guarantor arising in connection with financing provided to such employee and relating to the Guarantor’s “Baxter International Inc. 1999 Shared Investment Plan”, to the extent the aggregate obligations of the Guarantor under the foregoing clauses (A), (B) and (C) do not exceed an amount equal to $200,000,000 and such obligations (whenever incurred) shall have arisen solely in connection with purchases by such employees of the Guarantor common stock in 1999, or (y) the undrawn face amount of any letter of credit issued for the account of the Guarantor or any of its Consolidated Subsidiaries in the ordinary course of the Guarantor’s or such Subsidiary’s business, but shall include the reimbursement obligation owing from time to time by the Guarantor or any of its Consolidated Subsidiaries in respect of drawings made under any letter of credit in the event reimbursement is not made immediately following the applicable drawing.

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Guaranteed Obligations” is defined in Section 2.

“Intangible Assets” means all assets of the Guarantor and its Consolidated Subsidiaries which are treated as intangibles in conformity with generally accepted

accounting principles on the Consolidated balance sheet of the Guarantor and its Consolidated Subsidiaries.

“Interest Expense” means, with respect to any period, the Consolidated interest expense of the Guarantor and its Consolidated Subsidiaries for such period before the effect of interest income, as reflected on the Consolidated statements of income for the Guarantor and its Consolidated Subsidiaries for such period.

“Material Adverse Effect” means a material adverse effect on (i) the business, property, condition (financial or otherwise), results of operations, or prospects of the Guarantor and its Subsidiaries taken as a whole, (ii) the ability of the Guarantor to perform its obligations under this Guaranty, or (iii) the validity or enforceability of this Guaranty or the rights or remedies of the Banks hereunder.

“Material Default Amount” means an amount equal to $50,000,000.

“Material Subsidiary” means, with respect to the Guarantor, any of (i) the Borrower, (ii) Baxter Healthcare Corporation, a Delaware corporation, (iii) Baxter World Trade Corporation, a Delaware corporation, or (iv) in the case of any specified condition or event, any other Subsidiary or group of other Subsidiaries (A) each of which has suffered such condition or event to occur and (B) that in the aggregate represents five percent (5%) or more of the net revenues or the Consolidated Net Tangible Assets of the Guarantor and its Consolidated Subsidiaries, as reflected in the then most recent financial statements of the Guarantor and its Consolidated Subsidiaries delivered pursuant to Section 12(a)(i) or (ii).

“Secured Debt” means the amount of Debt or other obligation or liability of the Guarantor or any of its Material Subsidiaries the payment of which is secured by a Security Interest.

“SEC” means the United States Securities and Exchange Commission or any successor thereto.

“Security Interest” means any lien, security interest, mortgage or other charge or encumbrance of any kind, title retention device, pledge or any other type of preferential arrangement, upon or with respect to any property of the Guarantor or of any Material Subsidiary, whether now owned or hereafter acquired.

“Subsidiary” means any entity with respect to which the Guarantor alone owns, the Guarantor and one or more Subsidiaries together own, or any Person controlling the Guarantor owns, in each such case directly or indirectly, capital stock (or the equivalent equity interest) having ordinary voting power to elect a majority of the members of the Board of Directors of such corporation (or, in the case of a partnership or joint venture, having the majority interest in the capital or profits of such entity).

The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms.

In the event that any changes in generally accepted accounting principles occur after the date hereof and such changes result in a material variation in the method of calculation of financial covenants or other terms of this Guaranty, then the Guarantor and the Banks agree to amend such provisions of this Guaranty so as to equitably reflect such changes in order that the criteria for evaluating the Guarantor’s financial condition will be the same after such changes as if such changes had not occurred.

2. The Guarantor hereby absolutely, irrevocably and unconditionally guarantees prompt, full and complete payment when due, whether at stated maturity, upon acceleration or otherwise, and at all times thereafter, of (a) the principal of and interest on the Advances made by the Banks to, and any Notes held by the Banks of, the Borrower and (b) all other amounts from time to time owing to the Banks by the Borrower under the Credit Agreement, any Notes and the other Loan Documents (collectively, the “Guaranteed Obligations”). This is a guaranty of payment, not a guaranty of collection.

3. The Guarantor waives notice of the acceptance of this Guaranty and of the extension, incurrence or continuance of the Guaranteed Obligations or any part thereof. The Guarantor further waives all setoffs and counterclaims and presentment, protest, notice, filing of claims with a court in the event of receivership, bankruptcy or reorganization of the Borrower, demand or action on delinquency in respect of the Guaranteed Obligations or any part thereof, including any right to require the Banks to sue the Guarantor, the Borrower, any other guarantor or any other Person obligated with respect to the Guaranteed Obligations or any part thereof, or otherwise to enforce payment thereof against any collateral securing the Guaranteed Obligations or any part thereof.

4. The Guarantor hereby agrees that, to the fullest extent permitted by law, its obligations hereunder shall be continuing, absolute and unconditional under any and all circumstances and not subject to any reduction, limitation, impairment, termination, defense (other than indefeasible payment in full), setoff, counterclaim or recoupment whatsoever (all of which are hereby expressly waived by it to the fullest extent permitted by law), whether by reason of any claim of any character whatsoever, including, without limitation, any claim of waiver, release, surrender, alteration or compromise. The validity and enforceability of this Guaranty shall not be impaired or affected by any of the following: (a) any extension, modification or renewal of, or indulgence with respect to, or substitution for, the Guaranteed Obligations or any part thereof or any agreement relating thereto at any time; (b) any failure or omission to perfect or maintain any lien on, or preserve rights to, any security or collateral or to enforce any right, power or remedy with respect to the Guaranteed Obligations or any part thereof or any agreement relating thereto, or any collateral securing the Guaranteed Obligations or any part thereof; (c) any waiver of any right, power or remedy or of any default with respect to the Guaranteed Obligations or any part thereof or any agreement relating thereto or with respect to any collateral securing the Guaranteed Obligations or any part thereof; (d) any release, surrender, compromise, settlement, waiver, subordination or modification, with or without consideration, of any collateral securing the Guaranteed Obligations or any part thereof, any other guaranties with respect to the

Guaranteed Obligations or any part thereof, or any other obligations of any person or entity with respect to the Guaranteed Obligations or any part thereof; (e) the non-enforceability or invalidity of the Guaranteed Obligations or any part thereof or the spuriousness, non-enforceability or invalidity of any agreement relating thereto or with respect to any collateral securing the Guaranteed Obligations or any part thereof; (f) the application of payments received from any source to the payment of indebtedness other than the Guaranteed Obligations, any part thereof or amounts which are not covered by this Guaranty even though the Banks might lawfully have elected to apply such payments to any part or all of the Guaranteed Obligations or to amounts which are not covered by this Guaranty; (g) any change of ownership of the Borrower or the insolvency, bankruptcy or any other change in the legal status of the Borrower; (h) any change in, or the imposition of, any law, decree, regulation or other governmental act which does or might impair, delay or in any way affect the validity, enforceability or the payment when due of the Guaranteed Obligations; (i) the failure of the Borrower to maintain in full force, validity or effect or to obtain or renew when required all governmental and other approvals, licenses or consents required in connection with the Guaranteed Obligations or this Guaranty, or to take any other action required in connection with the performance of all obligations pursuant to the Guaranteed Obligations or this Guaranty; (j) the existence of any claim, setoff or other rights which the Guarantor may have at any time against the Borrower or any other guarantor or any other Person in connection herewith or with any unrelated transaction; (k) the Banks’ election, in any case or proceeding instituted under chapter 11 of the United States Bankruptcy Code, of the application of Section 1111(b)(2) of the United States Bankruptcy Code; (l) any borrowing, use of cash collateral, or grant of a security interest by the Borrower, as debtor in possession, under Section 363 or 364 of the United States Bankruptcy Code; (m) the disallowance of all or any portion of the Bank’s claims for repayment of the Guaranteed Obligations under Section 502 or 506 of the United States Bankruptcy Code; or (n) any other fact or circumstance which might otherwise constitute grounds at law or equity for the discharge or release of the Guarantor from its obligations hereunder, all whether or not the Guarantor shall have had notice or knowledge of any act or omission referred to in the foregoing clauses (a) through (n) of this Section. It is agreed that the Guarantor’s liability hereunder is independent of any other guaranties or other obligations at any time in effect with respect to the Guaranteed Obligations or any part thereof and that the Guarantor’s liability hereunder may be enforced regardless of the existence, validity, enforcement or non-enforcement of any such other guaranties or other obligations or any provision of any applicable law or regulation purporting to prohibit payment by the Borrower of the Guaranteed Obligations in the manner agreed upon among the Agent, the Borrower and the Banks.

5. Credit may be granted or continued from time to time by the Banks to the Borrower without notice to or authorization from the Guarantor regardless of the Borrower’s financial or other condition at the time of any such grant or continuation. The Banks shall not have an obligation to disclose or discuss with the Guarantor their assessment of the financial condition of the Borrower.

6. Until the irrevocable payment in full of the Guaranteed Obligations and termination of all commitments which could give rise to any of the Guaranteed

Obligations, (a) the Guarantor shall have no right of subrogation with respect to the Guaranteed Obligations, (b) the Guarantor hereby waives any right to enforce any remedy which the Agent or the Banks now have or may hereafter have against the Borrower, any endorser or any other guarantor of all or any part of the Guaranteed Obligations, and (c) the Guarantor hereby waives any benefit of, and any right to participate in, any security or collateral given to the Agent or the Banks to secure payment of the Guaranteed Obligations or any part thereof or any other liability of the Borrower to the Banks.

7. The Guarantor authorizes the Banks to take any action or exercise any remedy with respect to any collateral securing the Guaranteed Obligations, which the Banks in their sole discretion shall determine, without notice to the Guarantor.

8. In the event the Banks in their sole discretion elect to give notice of any action with respect to any collateral securing the Guaranteed Obligations or any part thereof, ten (10) days’ written notice mailed to the Guarantor by ordinary mail at its address referred to in Section 20 shall be deemed reasonable notice of any matters contained in such notice. The Guarantor consents and agrees that neither the Agent nor the Banks shall be under any obligation to marshall any assets in favor of the Guarantor or against or in payment of any or all of the Guaranteed Obligations.

9. In the event that acceleration of the time for payment of any of the Guaranteed Obligations is stayed upon the insolvency, bankruptcy or reorganization of the Borrower, or otherwise, all such amounts shall nonetheless be payable by the Guarantor forthwith upon demand by the Agent or the Banks. The Guarantor further agrees that, to the extent that the Borrower makes a payment or payments to any of the Banks on the Guaranteed Obligations, or the Agent or the Banks receive any proceeds of collateral securing the Guaranteed Obligation, which payment or receipt of proceeds or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be returned or repaid to the Borrower, its estate, trustee, receiver, debtor in possession or any other party, including, without limitation, the Guarantor, under any insolvency or bankruptcy law, state or federal law, common law or equitable cause, then to the extent of such payment, return or repayment, the obligation or part thereof which has been paid, reduced or satisfied by such amount shall be reinstated and continued in full force and effect as of the date when such initial payment, reduction or satisfaction occurred.

10. No delay on the part of the Agent or the Banks in the exercise of any right, power or remedy shall operate as a waiver thereof, and no single or partial exercise by the Agent or the Banks of any right, power or remedy shall preclude any further exercise thereof; nor shall any amendment, supplement, modification or waiver of any of the terms or provisions of this Guaranty be binding upon the Agent or the Banks, except as expressly set forth in a writing duly signed and delivered on the Banks’ behalf of the Agent. The failure by the Agent or the Banks at any time or times hereafter to require strict performance by the Borrower or the Guarantor of any of the provisions, warranties, terms and conditions contained in any promissory note, pledge agreement, security agreement, agreement, guaranty, instrument or document now or at any time or

times hereafter executed pursuant to the terms of, or in connection with, the Credit Agreement by the Borrower or the Guarantor and delivered to the Agent or the Banks shall not waive, affect or diminish any right of the Agent or the Banks at any time or times hereafter to demand strict performance thereof, and such right shall not be deemed to have been waived by any act or knowledge of the Agent or the Banks, their agents, officers or employees, unless such waiver is contained in an instrument in writing duly signed and delivered on the Banks’ behalf by the Agent. No waiver by the Agent or the Banks of any default shall operate as a waiver of any other default or the same default on a future occasion, and no action by the Banks permitted hereunder shall in any way affect or impair the Agent’s or the Banks’ rights or powers, or the obligations of the Guarantor under this Guaranty. Any determination by a court of competent jurisdiction of the amount of any Guaranteed Obligations owing by the Guarantor to the Banks shall be conclusive and binding on each Guarantor irrespective of whether the Guarantor was a party to the suit or action in which such determination was made.

11. The Guarantor represents and warrants to the Agent and the Banks that:

(a) The Guarantor and each Material Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite authority to conduct its business in each jurisdiction in which the failure so to qualify would have a material adverse effect on the business, properties, assets, operations or condition (financial or otherwise) of the Guarantor;

(b) The execution, delivery and performance by the Guarantor of this Guaranty are within the Guarantor’s corporate powers, have been duly authorized by all necessary corporate action, and do not contravene (i) the Guarantor’s charter or by-laws or (ii) any law or any contractual restriction binding on or affecting the Guarantor;

(c) No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority or regulatory body is required for the due execution, delivery and performance by the Guarantor of this Guaranty;

(d) This Guaranty is the legal, valid and binding obligations of the Guarantor enforceable against the Guarantor in accordance with its terms, subject to the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar law affecting creditors’ rights generally and to the effect of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law);

(e) There is no pending or, to the best of the knowledge of the Guarantor, threatened action or proceeding affecting the Guarantor or any of its Subsidiaries before any court, governmental agency or arbitrator, which could reasonably be expected to have a material adverse effect on the financial condition or operations of the Guarantor or which purports to affect the legality, validity or enforceability of this Guaranty;

(f) The Consolidated balance sheet at December 31, 2003 and the related Consolidated statements of income and stockholder’s equity for the period then ended of the Guarantor and its Consolidated Subsidiaries, copies of which have been furnished to each Bank, present fairly the financial position of the Guarantor and its Consolidated Subsidiaries at December 31, 2003 and the results of the operations and changes in financial position of the Guarantor and its Consolidated Subsidiaries for the year then ended, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year. The Consolidated balance sheet at June 30, 2004 and the related Consolidated statements of income and stockholder’s equity for the two quarters then ended of the Guarantor and its Consolidated Subsidiaries, copies of which have been furnished to each Bank, present fairly the financial position of the Guarantor and its Consolidated Subsidiaries at June 30, 2004 and the results of the operations and changes in financial position of the Guarantor and its Consolidated Subsidiaries for the two quarters then ended, in conformity with generally accepted accounting principles consistently applied. Since December 31, 2003 there has been no material adverse change in such financial position or operations; and

(g) The operations of the Guarantor and each Material Subsidiary comply in all material respects with all Environmental Laws, the noncompliance with which would materially adversely affect the business of the Guarantor or the ability of the Guarantor to obtain credit on commercially reasonable terms; and

(h) The Guarantor is not (i) an “investment company,” (ii) a company “controlled” by an “investment company” which is registered under the Investment Company Act of 1940, as amended, or (iii) to the best knowledge of the Guarantor, a company “controlled” by any other “investment company” within the meaning of the Investment Company Act of 1940, as amended.

The Guarantor agrees that the foregoing representations and warranties shall be deemed to have been made by the Guarantor on the date of this Guaranty and on the date of each Borrowing Notice (except to the extent any such representation or warranty is stated to relate solely to an earlier date) with respect to each Advance under the Credit Agreement on and as of such Borrowing Date.

12. As long as this Guaranty shall continue in effect, the Guarantor shall:

(a) provide to the Agent in sufficient copies for distribution to each Bank:

(i) As soon as available and in any event within the earlier of (A) five (5) days after the time period specified by the SEC under the Exchange Act for quarterly reporting or (B) 55 days after the end of each of the first three quarters of each fiscal year of the Guarantor, a Consolidated balance sheet of the Guarantor and its Consolidated Subsidiaries as of the end of such quarter and a Consolidated statement of income and changes in financial position (or Consolidated statement of

cash flow, as the case may be) of the Guarantor and its Consolidated Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, certified by the chief financial officer of the Guarantor; provided, however, that at any time the Guarantor shall be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, delivery within the time period specified above of copies of the quarterly balance sheets and statements on Form 10-Q of the Guarantor and its Consolidated Subsidiaries for such quarterly period as filed with the SEC shall be deemed to satisfy the requirements of this clause (i);

(ii) As soon as available and in any event within the earlier of (A) five (5) days after the time period specified by the SEC under the Exchange Act for annual reporting or (B) 100 days after the end of each fiscal year of the Guarantor, a Consolidated balance sheet of the Guarantor and its Consolidated Subsidiaries as of the end of such year and a Consolidated statement of income and stockholder’s equity and changes in financial position of the Guarantor and its Consolidated Subsidiaries for such fiscal year and accompanied by (A) a report of PriceWaterhouse Coopers LLP, independent public accountants of the Guarantor, or other independent public accountants of nationally recognized standing, on the results of their examination of the Consolidated annual financial statements of the Guarantor and its Consolidated Subsidiaries, which report shall be unqualified or shall be otherwise reasonably acceptable to the Majority Banks; provided that such report may set forth qualifications to the extent such qualifications pertain solely to changes in generally accepted accounting principles from such principles applied during earlier accounting periods, the implementation of which changes (with the concurrence of such accountants) is reflected in the financial statements accompanying such report, and (B) a certificate of such accountants substantially in the form of Exhibit 6.01(g)(ii) to the Credit Agreement; and provided further, that at any time the Guarantor shall be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, delivery within the time period specified above of copies of the annual balance sheets and statements on Form 10-K of the Guarantor and its Consolidated Subsidiaries for such annual period as filed with the SEC shall be deemed to satisfy the requirements of this clause (ii);

(iii) Promptly after the sending or filing thereof, copies of all reports which the Guarantor files with the SEC under the Exchange Act, including, without limitation, all such reports that disclose material litigation pending against the Guarantor or any Material Subsidiary or any material noncompliance with any Environmental Law on the part of the Guarantor or any Material Subsidiary;

(iv) Together with the financial statements required pursuant to clauses (i) and (ii) above, a certificate signed by the chief financial officer

of the Guarantor (A) stating that no event of default under this Guaranty or event which, with notice or the lapse of time or both, would constitute such an event of default exists or, if any does exist, stating the nature and status thereof and describing the action the Guarantor proposes to take with respect thereto and (B) demonstrating, in reasonable detail, the calculations used by such officer to determine compliance with the financial covenants contained in Sections 12(h), 12(i) and 12(j);

(v) With respect to each fiscal year for which the Guarantor shall have an aggregate Unfunded Liability of $100,000,000 or more for all of its single employer pension benefit plans covered by Title IV of ERISA and all multiemployer pension benefit plans covered by Title IV of ERISA to which the Guarantor has an obligation to contribute, as soon as available, and in any event within ten months after the end of such fiscal year, a statement of Unfunded Liabilities of each such plan, certified as correct by an actuary enrolled in accordance with regulations under ERISA and a statement of estimated withdrawal liability as of the most recent plan year end as customarily prepared by the trustees under the multiemployer plans to which the Guarantor has an obligation to contribute;

(vi) As soon as possible, and in any event within 30 days after the occurrence of each event the Guarantor knows is or may be a Reportable Event (as defined in Section 4043 of ERISA) with respect to any Plan with an Unfunded Liability in excess of $100,000,000, a statement signed by the chief financial officer of the Guarantor describing such reportable event and the action which the Guarantor proposes to take with respect thereto; and

(vii) As soon as possible, and in any event within five Business Days after the Guarantor shall become aware of the occurrence of each event of default under this Guaranty or each event which, with notice or lapse of time or both, would constitute such an event of default, which event of default or event is continuing on the date of such statement, a statement of the chief financial officer of the Guarantor setting forth details of such event of default or event and the action which the Guarantor proposes to take with respect thereto;

(b) Pay and discharge, and cause each Material Subsidiary to pay and discharge, before the same shall become delinquent, (i) all taxes, assessments and governmental charges or levies imposed upon it or upon its income, profit or property, and (ii) all lawful claims which, if unpaid, might by law become a lien upon its property; provided, however, that neither the Guarantor nor any Material Subsidiary shall be required to pay or discharge any such tax, assessment, charge or claim which is being contested in good faith and by proper proceedings and with respect to which the Guarantor shall have established appropriate reserves in accordance with generally accepted accounting principles;

(c) Maintain, and cause each Material Subsidiary to maintain, insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as is usually carried by (or, as applicable, self-insure in a manner and to an extent not inconsistent with conventions observed by) companies engaged in similar businesses and owning similar properties in the same general areas in which the Guarantor or such Material Subsidiary operates;

(d) Preserve and maintain, and cause each Material Subsidiary to preserve and maintain, its corporate existence, rights (charter and statutory), and franchises, except as otherwise permitted by Section 12(k);

(e) Comply, and cause each Material Subsidiary to comply, with the requirements of all applicable laws, rules, regulations and orders of any Governmental Authority (including, without limitation, all Environmental Laws), noncompliance with which would materially adversely affect the business of the Guarantor or the ability of the Guarantor to obtain credit on commercially reasonable terms;

(f) Keep, and cause each Material Subsidiary to keep, proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of the Guarantor and each Material Subsidiary in accordance with generally accepted accounting principles consistently applied;

(g) Permit, and cause each Material Subsidiary to permit, the Agent, and its representatives and agents (which may be a Bank), to inspect any of the properties, corporate books and financial records of the Guarantor and its Material Subsidiaries, to examine and make copies of the books of account and other financial records of the Guarantor and its Material Subsidiaries, and to discuss the affairs, finances and accounts of the Guarantor and its Material Subsidiaries with, and to be advised as to the same by, their respective officers or directors, at such reasonable times during normal business hours and intervals as the Agent may reasonably designate;

(h) Maintain a ratio of (i) the sum of Consolidated income before income tax expense (excluding extraordinary gains and losses) of the Guarantor and its Consolidated Subsidiaries plus Interest Expense of the Guarantor and its Consolidated Subsidiaries as at the end of each fiscal quarter of the Guarantor with respect to the four-quarter period then ended, to (ii) Interest Expense for such four-quarter period then ended of not less than 2.0 to 1.0;

(i) Not suffer to exist, create, assume or incur, or permit any of its Material Subsidiaries to suffer to exist, create, assume or incur, any Security Interest, or assign, or permit any of its Material Subsidiaries to assign, any right to receive income, in each case to secure Debt or any other obligation or liability, other than:

(i) Any Security Interest to secure Debt or any other obligation or liability of any Material Subsidiary to the Guarantor;

(ii) Mechanics’, materialmen’s, carriers’ or other like liens arising in the ordinary course of business (including construction of

facilities) in respect of obligations which are not due or which are being contested in good faith and for which reasonable reserves have been established;

(iii) Any Security Interest arising by reason of deposits with, or the giving of any form of security to, any governmental agency or any body created or approved by law or governmental regulation which is required by law or governmental regulation as a condition to the transaction of any business, or the exercise of any privilege, franchise or license;

(iv) Security Interests for taxes, assessments or governmental charges or levies not yet delinquent or Security Interests for taxes, assessments or governmental charges or levies already delinquent but the validity of which is being contested in good faith and for which reasonable reserves have been established;

(v) Security Interests (including judgment liens) arising in connection with legal proceedings so long as such proceedings are being contested in good faith and, in the case of judgment liens, execution thereon is stayed;

(vi) Landlords’ liens on fixtures located on premises leased by the Guarantor or one of its Material Subsidiaries in the ordinary course of business;

(vii) Security Interests arising in connection with contracts and subcontracts with or made at the request of the United States of America, any state thereof, or any department, agency or instrumentality of the United States or any state thereof for obligations not yet delinquent;

(viii) Any Security Interest arising by reason of deposits to qualify the Guarantor or a Subsidiary to conduct business, to maintain self-insurance, or to obtain the benefit of, or comply with, laws;

(ix) Any purchase money Security Interest claimed by sellers of goods on ordinary trade terms provided that no financing statement has been filed to perfect such Security Interest;

(x) The extension of any Security Interest existing as of the date hereof to additions, extensions, or improvements to the property subject to the Security Interest which does not arise as a result of borrowing money or the securing of Debt or other obligation or liability created, assumed or incurred after such date;

(xi) Security Interests on (A) property of a corporation or firm existing at the time such corporation is merged or consolidated with the Guarantor or any Subsidiary or at the time of a sale, lease or other

disposition of the properties of a corporation or a firm as an entirety (or the properties of a corporation or firm comprising a product line or line of business, as an entirety) or substantially as an entirety to the Guarantor or a Subsidiary; or (B) property comprising machinery, equipment or real property acquired by the Guarantor or any of its Subsidiaries, which Security Interests shall have existed at the time of such acquisition and secure obligations assumed by the Guarantor or such Subsidiary in connection with such acquisition; provided that the Debt or other obligations or liabilities secured by Security Interests of the type described in this paragraph (xi) shall not either (x) have been created in anticipation of such merger, consolidation, sale, lease or other disposition or in contemplation of such acquisition or (y) at any time exceed an aggregate amount equal to $300,000,000;

(xii) Security Interests arising in connection with the sale, assignment or other transfer by the Guarantor or any Material Subsidiary of accounts receivable, lease receivables or other payment obligations (any of the foregoing being a “Receivable”) owing to the Guarantor or any Subsidiary or any interest in any of the foregoing (together in each case with any collections and other proceeds thereof and any collateral, guaranties or other property or claims in favor of the Guarantor or such Subsidiary supporting or securing payment by the obligor thereon of any such Receivables), in each case whether such sale, assignment or other transfer constitutes a “true sale” or a secured financing for accounting, tax or any other purpose; provided that either (i) such sale, assignment or other transfer shall have been made as part of a sale of the business out of which the applicable Receivables arose, (ii) such sale, assignment or other transfer is made in the ordinary course of business and is for the purpose of collection only, (iii) such sale, assignment or other transfer is made in connection with an agreement on the part of the assignee thereof to render performance under the contract that has given rise to such Receivable, or (iv) in all other cases, the aggregate outstanding investment or claim held at any time by purchasers, assignees or other transferees of (or of interests in) such Receivables (as determined by the Guarantor using any reasonable methods) shall not exceed an amount equal to 10% of the Consolidated total assets of the Guarantor and its Consolidated Subsidiaries at such time;

(xiii) Security Interests securing non-recourse obligations in connection with leveraged or single-investor lease transactions;

(xiv) Security Interests securing the performance of any contract or undertaking made in the ordinary course of business (as such business is currently conducted) other than for the borrowing of money;

(xv) Any Security Interest granted by any Material Subsidiary of the Guarantor; provided, that (i) the principal business and assets of such

Material Subsidiary are located in Puerto Rico or are located outside of the United States, its other territories and possessions, (ii) the property of such Material Subsidiary which is subject to such Security Interest is a parcel of real property, a manufacturing plant, manufacturing equipment, a warehouse, or an office building hereafter acquired, constructed, developed or improved by such Material Subsidiary, and (iii) such Security Interest is created prior to or contemporaneously with, or within 120 days after (x) in the case of acquisition of such property, the completion of such acquisition and (y) in the case of the construction, development or improvement of such property, the later to occur of the completion of such construction, development or improvement or the commencement of operations, use or commercial production (exclusive of test and start-up periods) of such property, and such Security Interest secures or provides for the payment of all or any part of the acquisition cost of such property or the cost of construction, development or improvement thereof, as the case may be;

(xvi) Any Security Interest in deposits or cash equivalent investments pledged with a financial institution for the sole purpose of implementing a hedging or financing arrangement commonly known as a “back-to-back” loan arrangement, provided in each case that neither the assets subject to such Security Interest nor the Debt incurred in connection therewith are reflected on the Consolidated balance sheet of the Guarantor; and

(xvii) Any extension, renewal or refunding (or successive extensions, renewals or refundings) in whole or in part of any Debt or any other obligation or liability secured by any Security Interest referred to in the foregoing paragraphs (i) through (xvii), provided that the principal amount of Debt or any other obligation or liability secured by such Security Interest shall not exceed the principal amount outstanding immediately prior to such extension, renewal or refunding, and that the Security Interest securing such Debt or other obligation or liability shall be limited to the property which, immediately prior to such extension, renewal or refunding secured such Debt or other obligation or liability and additions to such property.

Notwithstanding the foregoing provisions of this Section 12(i), the Guarantor and its Material Subsidiaries may, at any time, suffer to exist, issue, incur, assume and guarantee Secured Debt (in addition to Secured Debt permitted to be secured under the foregoing paragraphs (i) through (xvii)), provided that the aggregate amount of such Secured Debt, together with the aggregate amount of all other Secured Debt (not including Secured Debt permitted to be secured under the foregoing paragraphs (i) through (xvii)) of the Guarantor and its Material Subsidiaries which is suffered to exist, issued, incurred, assumed or guaranteed after the date hereof, does not at such time exceed 5% of Consolidated Net Tangible Assets; and

(j) Not permit (i) Consolidated Adjusted Debt (which for purposes of this clause (i) only shall exclude, up to and until February 16, 2006, an amount equal to seventy percent (70%) of the aggregate amount of senior notes due February 16, 2008 issued by the Guarantor on December 17, 2002, but only to the extent such amount shall be treated as “debt” for purposes of generally accepted accounting principles) of the Guarantor and its Consolidated Subsidiaries at any time to exceed (ii) an amount equal to 55% of Consolidated Capitalization at such time;

(k) (i) Not merge or consolidate with or into, or Transfer Assets to, any Person, except that the Guarantor may (A) merge or consolidate with any corporation, including any Subsidiary, which is a U.S. Corporation and (B) Transfer Assets to any Subsidiary which is a U.S. Corporation; provided, in each case described in clause (A) and (B) above, that (x) immediately after giving effect to such transaction, no event shall have occurred and be continuing which constitutes an event of default by the Guarantor under this Guaranty or which with the giving of notice or lapse of time or both would constitute such an event of default and (y) in the case of any merger or consolidation to which the Guarantor shall be a party, the survivor of such merger or consolidation shall be the Guarantor; and

(ii) Not permit any Material Subsidiary to merge or consolidate with or into, or Transfer Assets to, any Person unless, immediately after giving effect to such transaction, no event shall have occurred and be continuing which constitutes an event of default by the Guarantor under this Guaranty or which with the giving of notice or lapse of time or both would constitute such an event of default.

For purposes of this Section 12(k): “Transfer Assets” means, when referring to the Guarantor, the conveyance, transfer, lease or other disposition (whether in one transaction or in a series of transactions) of all or substantially all of the assets of the Guarantor or of the Guarantor and its Subsidiaries considered as a whole and means, when referring to a Subsidiary, the conveyance, transfer, lease or other disposition (whether in one transaction or in a series of transactions) of all or substantially all of the assets of such Subsidiary; and “U.S. Corporation” means a corporation organized and existing under the laws of the United States, any state thereof or the District of Columbia.

13. Subject to the provisions of Section 9 hereof, this Guaranty shall continue in effect until the Credit Agreement has terminated, the Guaranteed Obligations have been paid in full and the other conditions of this Guaranty have been satisfied.

14. In addition to and without limitation of any rights, powers or remedies of the Agent or the Banks under applicable law, any time after maturity of the Guaranteed Obligations, whether by acceleration or otherwise, the Agent or any of the Banks may, in its sole discretion, with notice after the fact to the Guarantor (provided that any failure to give such notice shall not affect the validity of any such appropriation or application referred to herein) and regardless of the acceptance of any security or collateral for the payment hereof, appropriate and apply toward the payment of any Guaranteed Obligations (a) any indebtedness due or to become due from the Banks to the

Guarantor, and (b) any moneys, credits or other property belonging to the Guarantor (including all account balances, whether provisional or final and whether or not collected or available) at any time held by or coming into the possession of any of the Agent or any Bank whether for deposit or otherwise.

15. The Guarantor agrees to pay all costs, fees and expenses (including reasonable attorneys’ fees and time charges, which attorneys may be employees of the Agent or a Bank) incurred by the Banks in collecting or enforcing the obligations of the Guarantor under this Guaranty.

16. This Guaranty shall bind the Guarantor and its successors and assigns and shall inure to the benefit of the Agent, the Banks and their successors and assigns. All references herein to the Banks shall for all purposes also include all assignees of any Bank. All references herein to the Borrower shall be deemed to include its successors and assigns including, without limitation, a receiver, trustee or debtor in possession of or for the Borrower.

17. THIS GUARANTY SHALL BE DEEMED TO HAVE BEEN MADE AT NEW YORK, NEW YORK, AND SHALL BE CONSTRUED AND THE RIGHTS AND LIABILITIES OF THE AGENT, THE BANKS AND THE GUARANTOR DETERMINED, IN ACCORDANCE WITH THE INTERNAL LAWS (WITHOUT REGARD TO CONFLICT OF LAWS PROVISIONS) OF THE STATE OF NEW YORK.

18. Wherever possible, each provision of this Guaranty shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Guaranty shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Guaranty.

19. Except as otherwise expressly provided herein, any notice required or desired to be served, given or delivered to any party hereto under this Guaranty shall be in writing by facsimile, U.S. mail or overnight courier and addressed or delivered to such party (a) if to the Agent or the Banks, at their respective addresses set forth in the Credit Agreement, or (b) if to the Guarantor, at its address indicated on Exhibit A hereto, or to such other address as the Agent, any of the Banks or the Guarantor designates to the other in writing. All notices by United States mail shall be sent certified mail, return receipt requested. All notices hereunder shall be effective upon delivery or refusal of receipt; provided, that any notice transmitted by facsimile shall be deemed given when transmitted.

20. Upon (i) the occurrence and during the continuance of any Event of Default and (ii) the making of the request or the granting of the consent specified by Section 7.01 of the Credit Agreement to authorize the Administrative Agent to declare the Advances due and payable pursuant to the provisions of Section 7.01 of the Credit Agreement, each Bank (and each of its Affiliates) is hereby authorized at any time and

from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Bank (or any of its Affiliates) to or for the credit or the account of the Guarantor against any and all of the obligations of the Guarantor now or hereafter existing under the Loan Documents, irrespective of whether or not such Bank shall have made any demand under the Loan Documents and of whether or not such obligations may be matured. Each Bank agrees promptly to notify the Guarantor after any such set-off and application made by such Bank, but the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Bank under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which such Bank may have.

[Signature Page Follows]

IN WITNESS WHEREOF, the Guarantor has entered into this Guaranty as of the 7th day of January, 2005.


BAXTER INTERNATIONAL INC.

By:		/s/ John Greisch



Name:		John Greisch



Title:		CVP & CFO

EXHIBIT A

Baxter International Inc.

One Baxter Parkway

Deerfield, Illinois 60015

Attention: Treasurer

Telephone: (847) 948-4310

Telecopy: (847) 948-4509

A-1

AMENDMENT NO. 1 TO GUARANTY

This Amendment No. 1 to Guaranty (this “Amendment”) is entered into as of June 1, 2005 by and between Baxter International Inc., a Delaware corporation (the “Guarantor”) and J.P. Morgan Europe Limited, as administrative agent (the “Administrative Agent”).

RECITALS

A. Baxter Healthcare SA (the “Borrower”), the Administrative Agent, and the financial institutions named therein (the “Banks”) are party to that certain Credit Agreement dated as of January 7, 2005 (the “Credit Agreement”). Unless otherwise specified herein, capitalized terms used in this Amendment shall have the meanings ascribed to them by the Credit Agreement; and

B. In order to induce the Administrative Agent and the Banks to enter into the Credit Agreement and extend credit thereunder to the Borrower, the Guarantor executed and delivered to the Administrative Agent, on behalf of itself and the Banks, that certain Guaranty dated as of January 7, 2005 (the “Guaranty”); and

C. Subject to the terms and conditions set forth herein, the Guarantor has requested that the Administrative Agent, on behalf of the Banks, modify the Guaranty, and the Administrative Agent has consented to such modification, as set forth below.

NOW, THEREFORE, in consideration of the mutual execution hereof and other good and valuable consideration, the parties hereto agree as follows:

1. Amendment to Guaranty. Upon the “Effective Date” (as defined below), the last paragraph of Section 11 of the Guaranty shall be deleted in its entirety and the following is substituted in lieu thereof:

“The Guarantor agrees that the foregoing representations and warranties shall be deemed to have been made by the Guarantor on the date of this Guaranty and on the date of each Borrowing Notice (except to the extent any such representation or warranty is stated to relate solely to an earlier date and other than subsection (f) hereof) with respect to each Advance under the Credit Agreement on and as of such Borrowing Date.”

2. Representations and Warranties of the Guarantor. The Guarantor represents and warrants that:

(a) The execution, delivery and performance by the Guarantor of this Amendment have been duly authorized by all necessary corporate action and that this Amendment is a legal, valid and binding obligation of the Guarantor enforceable against the Guarantor in accordance with its terms, except as the enforcement thereof may be subject to the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar law affecting creditors’ rights generally;

(b) Each of the representations and warranties contained in the Guaranty is true and correct in all material respects on and as of the date hereof as if made on the date hereof except to the extent any such representation or warranty is stated to relate solely to an earlier date, in which case such representation or warranty was true and correct on and as of such earlier date and other than Section 11(f) thereof;

(c) After giving effect to this Amendment, no event of default or event which would constitute an event of default but for the requirement that notice be given or time elapse or both has occurred and is continuing under the Guaranty or the Credit Agreement.

3. Effective Date. Section 1 of this Amendment shall become effective (the “Effective Date”) upon the execution and delivery hereof by the Borrower, the Administrative Agent and the percentage of Banks required by the Credit Agreement.

4. Reference to and Effect Upon the Guaranty.

(a) Except as specifically amended above, the Guaranty shall remain in full force and effect and is hereby ratified and confirmed.

(b) The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Administrative Agent or any Bank under the Guaranty, nor constitute a waiver of any provision of the Guaranty, except as specifically set forth herein. Upon the effectiveness of this Amendment, each reference in the Guaranty to “this Agreement”, “hereunder”, “hereof”, “herein” or words of similar import shall mean and be a reference to the Guaranty as amended hereby and each reference in the Credit Agreement to “the Guaranty” or words of similar import shall mean and be a reference to the Guaranty as amended hereby.

5. Costs and Expenses. The Guarantor hereby affirms its obligation under Section 15 of the Guaranty to reimburse the Administrative Agent for all reasonable out-of-pocket costs and expenses paid or incurred by the Administrative Agent in connection with the preparation, negotiation, execution and delivery of this Amendment, including but not limited to the reasonable attorneys’ fees and out-of-pocket expenses of such attorneys for the Administrative Agent with respect thereto.

6. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS (AS DISTINGUISHED FROM THE CONFLICTS OF LAWS RULES) OF THE STATE OF NEW YORK.

7. Headings. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purposes.

- 2 -

8. Counterparts. This Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed an original but all such counterparts shall constitute one and the same instrument.

[Signature pages immediately follow]

- 3 -

IN WITNESS WHEREOF, the parties have executed this Amendment as of the date and year first above written.


BAXTER INTERNATIONAL INC., as Guarantor

By:		/s/ Robert M. Davis
Title: Corporate Vice President & Treasurer

Signature Page to Amendment No. 1

to Guaranty


THE ADMINISTRATIVE AGENT

J.P. MORGAN EUROPE LIMITED,
as Administrative Agent

By:		/s/ Barbara R. Marks
Title: Vice President

Signature Page to Amendment No. 1

to Guaranty

Consented to by the following Banks as of June 1, 2005:


Commitments:
	THE BANKS

33,000,000 Euro	J.P. MORGAN CHASE BANK

	By	/s/ Barbara R. Marks
	Title: Vice President

33,000,000 Euro	DEUTSCHE BANK AG NEW YORK BRANCH

	By	/s/ Frederick Laird
	Title: Managing Director

33,000,000 Euro	ABN AMRO BANK N.V.

	By
	Title:

29,250,000 Euro	BANCO BILBAO VIZCAYA ARGENTARIA S.A.

	By	/s/ John Martini
	Title: Vice President

	By	/s/
	Title:

Signature Page to Amendment No. 1

to Guaranty


29,250,000 Euro	BANK OF AMERICA, N.A.

	By	/s/ Peter D. Griffith
	Title: Senior Vice President

29,250,000 Euro	THE BANK OF TOKYO-MITSUBISHI, LTD.

	By	/s/ Andrew Trenouth
	Title: Deputy General Manager

29,250,000 Euro	BNP PARIBAS

	By	/s/ Ann M F Rix
	Title: Relationship Manager

	By	/s/ S. Duranti
	Title: Relationship Manager

29,250,000 Euro	CITIBANK N.A.

	By	/s/ Christopher L. Snider
	Title: Vice President

29,250,000 Euro	CREDIT SUISSE FIRST BOSTON BANK

	By	/s/
	Title:

29,250,000 Euro	DANSKE BANK

	By	/s/ Martin Anderson
	Title: Associate Director

Signature Page to Amendment No. 1

to Guaranty


29,250,000 Euro	LLOYDS BANK

	By
	Title:

29,250,000 Euro	SANPAOLO IMI BANK IRELAND PLC

	By	/s/ Pier Carlo Arena
	Title: Managing Director

	By	/s/ Franck Fleury
	Title: Deputy General Manager & Administrator

29,250,000 Euro	SUMITOMO MITSUI BANKING CORPORATION

	By
	Title:

29,250,000 Euro	UBS AG

	By	/s/ T. Elliott
	Title: Director

	By	/s/ J. Campbell
	Title: Director

29,250,000 Euro	WACHOVIA BANK, N.A.

	By	/s/ James Taylor
	Title: Vice President

25,000,000 Euro	ALLIED IRISH BANK

	By	/s/ Diarmuid O’Neill
	Title: Vice President

Signature Page to Amendment No. 1

to Guaranty


25,000,000 Euro	NATEXIS BANQUE POPULARIS

	By	/s/ Gilbert Criado
	Title: Relationship Manager

	By	/s/ Pierrick Tiret
	Title: Manager

Signature Page to Amendment No. 1

to Guaranty

EX-15 4 dex15.htm INTERIM FINANCIAL INFORMATION Interim Financial Information

EXHIBIT 15

August 8, 2005

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549

Commissioners:

We are aware that our report dated August 1, 2005 on our review of interim financial information of Baxter International Inc. (the “Company”) as of June 30, 2005 and for the three- and six-month periods ended June 30, 2005 and 2004 included in the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2005 is incorporated by reference in its Registration Statements on Form S-8 (Nos. 33-8813, 33-15523, 33-15787, 33-28428, 33-33750, 33-54069, 333-43563, 333-47019, 333-71553, 333-80403, 333-88257, 333-48906, 333-62820, 333-102140, 333-104420, 333-104421 and 333-105032), on Form S-3 (Nos. 33-5044, 33-23450, 333-54014, 333-101122, 333-101779, 333-106041 and 333-123811) and on Form S-4 (Nos. 33-808, 33-15357, 33-53937, and 333-36670).

Very truly yours,

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Chicago, Illinois

EX-31.1 5 dex311.htm SECTION 302 CEO CERTIFICATION Section 302 CEO Certification

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Robert L. Parkinson, Jr., certify that:

I have reviewed this quarterly report on Form 10-Q of Baxter International Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: August 8, 2005	By:	/s/ Robert L. Parkinson, Jr.
		Robert L. Parkinson, Jr.
		Chairman of the Board and Chief Executive Officer

EX-31.2 6 dex312.htm SECTION 302 CFO CERTIFICATION Section 302 CFO Certification

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, John J. Greisch, certify that:

I have reviewed this quarterly report on Form 10-Q of Baxter International Inc.;

(a)

(b)

(c)

(d)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: August 8, 2005	By:	/s/ John J. Greisch
		John J. Greisch
		Corporate Vice President and Chief Financial Officer

EX-32.1 7 dex321.htm SECTION 906 CEO CERTIFICATION Section 906 CEO Certification

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF

THE SARBANES-OXLEY ACT OF 2002

Robert L. Parkinson, Jr., as Chairman of the Board and Chief Executive Officer of Baxter International Inc. (the “Company”), certifies, pursuant to 18 U.S.C §1350, as adopted pursuant to §906 of the Sarbanes–Oxley Act of 2002, that:

(1)

the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005 as filed with Securities and Exchange Commission on the date hereof (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

(2)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Robert L. Parkinson, Jr.

Robert L. Parkinson, Jr.

Chairman of the Board and Chief Executive Officer

August 8, 2005

EX-32.2 8 dex322.htm SECTION 906 CFO CERTIFICATION Section 906 CFO Certification

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF

THE SARBANES-OXLEY ACT OF 2002

John J. Greisch, as Corporate Vice President and Chief Financial Officer of Baxter International Inc. (the “Company”), certifies, pursuant to 18 U.S.C §1350, as adopted pursuant to §906 of the Sarbanes–Oxley Act of 2002, that:

(1)

(2)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ John J. Greisch

John J. Greisch

Corporate Vice President and Chief Financial Officer

August 8, 2005

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