UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
FORM 10-K
x
--- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended June 30, 1998
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 1-483
--------------------------------
MALLINCKRODT INC.
(Exact name of Registrant as specified in its charter)
New York 36-1263901
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
675 McDonnell Boulevard
St. Louis, Missouri 63134
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: 314-654-2000
-----------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
4% Cumulative Preferred Stock,
par value $100 per share New York Stock Exchange
Common Stock, par value $1 per share New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
9.875% Debentures due March 15, 2011 New York Stock Exchange
7% Debentures due December 15, 2013 New York Stock Exchange
6.75% Notes due September 15, 2005 New York Stock Exchange
6.5% Notes due November 15, 2007 New York Stock Exchange
6% Notes due October 15, 2003 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
------------------------------
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. ---
------------------------------
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant: $1,673,807,983 as of August 31,
1998. Market value is based on the August 31, 1998 closing prices of
Registrant's Common Stock and 4% Cumulative Preferred Stock.
Applicable Only To Corporate Registrants: Indicate the number of
shares outstanding of each of the Registrant's classes of common
stock: 72,859,212 shares as of August 31, 1998.
Documents Incorporated By Reference: Information required by Items
10, 11, 12 and 13 of Part III is incorporated by reference from pages
2 through 5, and 11; pages 6 and 7, 10 and 11, and 14 through 23;
pages 8 and 9; and page 7, respectively, of the Registrant's
definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on October 21, 1998.
<PAGE>
1998 FORM 10-K CONTENTS
ITEM Page
- ---- ----
Part I:
1. Business............................................... 1
Introduction........................................... 1
General Factors Related to the Business................ 2
International and Economic Risk Factors................ 2
Operations............................................. 3
Other Actions.......................................... 10
Other Activities....................................... 10
2. Properties............................................. 12
3. Legal Proceedings...................................... 12
4. Submission of Matters to a Vote of Security Holders.... 16
Executive Officers of the Registrant................... 16
Part II:
5. Market for Registrant's Common Stock and Related
Stockholder Matters................................... 19
6. Selected Financial Data................................ 20
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 21
7A. Quantitative and Qualitative Disclosures About
Market Risk........................................... 30
8. Financial Statements and Supplementary Data............ 31
9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure................... 58
Part III:
10. Directors and Executive Officers of the Registrant..... 58
11. Executive Compensation................................. 58
12. Security Ownership of Certain Beneficial Owners
and Management........................................ 59
13. Certain Relationships and Related Transactions......... 59
Part IV:
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K........................................... 59
Signatures................................................... 66
<PAGE>
Part I.
ITEM 1. BUSINESS
INTRODUCTION
Company Profile
- ---------------
Mallinckrodt Inc. (Mallinckrodt, the Company, or the Corporation) is
a global company serving selected healthcare markets with products
used primarily for respiratory care, diagnostic imaging and pain
relief.
The Company was incorporated in New York in 1909 under the name
International Agricultural Corporation. The corporate headquarters is
located at 675 McDonnell Boulevard, St. Louis, Missouri 63134, and
the telephone number is (314) 654-2000.
Transition of the Company
- -------------------------
During the past several years, many significant steps have been taken
to transform the composition of the Company. During the past three
years the transition has involved the following:
- In December 1995, the Company announced a Strategic Change
Initiative which eliminated the management and administrative
structures of the three former operating companies:
Mallinckrodt Chemical, Inc., Mallinckrodt Medical, Inc. and
Mallinckrodt Veterinary, Inc.
- On October 16, 1996, the shareholders approved changing the
Company's name from Mallinckrodt Group Inc. to Mallinckrodt
Inc.
- On March 31, 1997, the Company disposed of Fries & Fries,
Inc., a wholly owned subsidiary which owned the Company's 50
percent interest in Tastemaker, which was the flavors joint
venture with Hercules Incorporated. The transaction
generated a net value to the Company of $550 million.
- On June 30, 1997, the Company sold the animal health segment
for $405 million cash. The Company retained certain
liabilities.
- On August 28, 1997, the Company acquired Nellcor Puritan
Bennett Incorporated (Nellcor) through an agreement to
purchase for cash all of the outstanding shares of common
stock of Nellcor for $28.50 per share. The aggregate
purchase price of the Nellcor acquisition was approximately
$1.9 billion. Nellcor is the worldwide market leader in
providing products that monitor, diagnose and treat
respiratory impaired patients.
- During 1998, the Company sold, or committed to sell, its
catalysts and chemical additives and Aero Systems divisions.
The completed actions resulted in net cash proceeds of $308
million.
- -------------------------------
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995: Our discussion and analysis in this annual report
contain some forward-looking statements. Forward-looking statements
do not relate strictly to historical or current facts, but rather
give our current expectations or forecasts of future events.
Forward-looking statements may be identified by their use of words
such as "plans," "expects," "will," "anticipates," "believes," and
other words of similar meaning. Such statements may address, among
other things, the Company's strategy for growth, product development,
regulatory approvals, the outcome of contingencies such as legal
proceedings, market position, expenditures, and financial results.
Forward-looking statements are based on current expectations of
future events. Such statements involve risks and uncertainties and
actual results could differ materially from those discussed. Among
the factors that could cause actual results to differ materially from
those projected in any such forward-looking statements are as
follows: the effect of business and economic conditions; the impact
of competitive products and continued pressure on prices realized by
the Company for its products; constraints on supplies of raw
materials used in manufacturing certain of the Company's products;
capacity constraints limiting the production of certain products;
difficulties or delays in the development, production, testing, and
marketing of products; difficulties or delays in receiving required
governmental or regulatory approvals; market acceptance issues,
including the failure of products to generate anticipated sales
levels; difficulties in rationalizing acquired businesses and in
realizing related cost savings and other benefits; the effects of and
changes in trade, monetary, and fiscal policies, laws, and
regulations; foreign exchange rates and fluctuations in those rates;
the costs and effects of legal and administrative proceedings,
including environmental proceedings and patent disputes involving the
Company; difficulties or delays in addressing "Year 2000" problems
(as discussed in Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations); and the risk factors
reported from time to time in the Company's SEC reports. The Company
undertakes no obligation to update any forward-looking statements as
a result of future events or developments.
<PAGE>
Other recent acquisitions, divestitures and continuing investments in
each of Mallinckrodt's businesses are described in the discussions of
the business groups in Management's Discussion and Analysis of
Financial Condition and Results of Operations in Item 7, and Note 2
of the Notes to Consolidated Financial Statements in Item 8.
General Points
- --------------
In this report:
Mallinckrodt Inc. and its subsidiaries, collectively, are called the
"Company," the "Corporation" or "Mallinckrodt," unless otherwise
indicated by the context. The Company now operates predominantly in
the healthcare industry and is comprised of three groups -
Respiratory, Imaging and Pharmaceuticals.
The term "operating earnings" of a business represents revenues less
all operating expenses. Operating expenses of a business do not
include interest expense, corporate income or expense, and taxes on
income.
All references to years are to fiscal years ended June 30 unless
otherwise stated.
Registered trademarks are indicated by an asterisk (*).
GENERAL FACTORS RELATED TO THE BUSINESS
In general, Mallinckrodt's businesses, including related working
capital requirements, are not materially affected by seasonal
factors.
Mallinckrodt's businesses do not routinely extend long-term credit to
customers. The Company believes this credit policy, as well as its
working capital requirements, are not materially different from the
credit policies and working capital requirements of its competitors.
Competition with manufacturers and suppliers in Mallinckrodt's
businesses involves price, service, quality and technological
innovation. Competition is strong in all markets served.
The Company's operations are subject to numerous U.S. and
international regulations which involve development, testing,
manufacturing, packaging, distribution and marketing of its products.
Financial information about the businesses is in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of
Operations, and in Item 8, Financial Statements and Supplementary
Data. Financial information about foreign and domestic operations
and export sales is included in Note 19 of the Notes to Consolidated
Financial Statements in Item 8.
INTERNATIONAL AND ECONOMIC RISK FACTORS
The Company operates globally, with manufacturing and distribution
facilities in various countries, and is subject to certain
opportunities and risks, including foreign currency fluctuations and
government actions. Various operational initiatives are employed to
help manage business risks. In the ordinary course of business,
Mallinckrodt purchases materials and sells finished products
denominated in approximately 25 different currencies. The Company is
primarily exposed to changes in exchange rates of the German deutsche
mark and other European currencies highly correlated with the German
deutsche mark and the Japanese yen. Overall, the Company is a net
beneficiary when the U.S. dollar weakens and is adversely affected by
a stronger U.S. dollar relative to the major currencies identified.
To minimize exposure to foreign currency exchange rates, which occur
in the ordinary course of business, the Company purchases currency
options.
The Company's interest income and expense are most sensitive to
changes in the general level of U.S. interest rates. In this regard,
changes in U.S. interest rates affect the interest earned on the
Company's cash equivalents and short-term investments as well as
interest paid on its short-term debt. To manage the interest rate
characteristics of its outstanding debt to a more desirable fixed or
variable rate basis or to limit the Company's exposure to rising
interest rates, the Company periodically enters into interest rate
swaps and option contracts.
For more information on the Company's risk management strategy, see
Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations, and Item 8, Financial Statements and
Supplementary Data.
The Company does not consider the present overall rate of inflation
to have a significant impact on the businesses in which it operates;
however, general price declines in hospital and alternate care
products on a global basis due to healthcare cost containment have
had a negative effect on operating results, and this trend is
expected to continue.
While future economic events cannot be predicted, the Company
believes its current operations and future expansion plans will not
result in a significantly different risk profile.
Mallinckrodt sales to customers outside the U.S. represented
approximately 33, 36 and 37 percent of consolidated net sales in
1998, 1997 and 1996, respectively. Products are manufactured and
marketed through a variety of subsidiaries and affiliates around the
world. For additional information, see discussions of individual
business groups included below; under Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operations; and in
Item 8, Note 19 of the Notes to Consolidated Financial Statements.
OPERATIONS
The Company provides advanced, innovative products for respiratory
care, anesthesiology, radiology, cardiology, nuclear medicine, and
pharmaceuticals. Principal products are oxygen monitoring, critical
care ventilation, airway management, contrast media for various
imaging modalities, radiopharmaceuticals for nuclear medicine, bulk
and dosage pharmaceuticals used primarily for pain relief, peptides,
and laboratory analysis and microelectronic chemicals.
The Company is comprised of three business groups - Respiratory,
Imaging and Pharmaceuticals.
Net Sales by Group were (in millions):
1998 1997 1996
------ ------ ------
Respiratory................ $ 991 $ 321 $ 338
Imaging.................... 760 802 716
Pharmaceuticals............ 616 575 543
------ ------ ------
$2,367 $1,698 $1,597
====== ====== ======
On August 28, 1997, the Company acquired Nellcor through an agreement
to purchase for cash all of the outstanding shares of common stock of
Nellcor for $28.50 per share. The aggregate purchase price of the
Nellcor acquisition was approximately $1.9 billion. Nellcor is the
worldwide market leader in providing products that monitor, diagnose
and treat respiratory impaired patients. Product lines include pulse
oximetry monitors and sensors, critical care and portable
ventilators, home oxygen therapy products, sleep apnea diagnostic and
therapy products, and medical gases.
The acquisition was accounted for under the purchase method of
accounting and, accordingly, the results of operations of Nellcor
have been included in the Company's consolidated financial statements
since September 1, 1997. The purchase price of the acquisition was
allocated to the assets acquired and liabilities assumed based on
their estimated fair values at the date of acquisition. The excess
of the purchase price over the fair value of the net identifiable
assets, totaling $724.2 million, was allocated to goodwill and is
being amortized on a straight-line basis over 30 years.
The Company's products are instrumental in the delivery of healthcare
services and are sold to hospital and alternate care sites, clinical
laboratories, pharmaceutical manufacturers and other customers on a
worldwide basis. Healthcare products are influenced by a high degree
of innovation and technology, by regulation from agencies such as the
U.S. Food and Drug Administration (FDA), industry standards and by
markets served. They are significantly affected by conditions within
the healthcare industry, including continuing legislative initiatives
and public and private healthcare insurance and reimbursement
programs. An aging population and demand for technologically
superior products to extend and improve the quality of life are two
major factors fueling growth within the industry.
The healthcare industry is experiencing extensive change. All
markets served by the Company are highly competitive in the United
States and overseas. Legislative bodies, in all likelihood, will
continue to review and assess alternative healthcare delivery systems
and payment methodologies, and ongoing public debate of these issues
can be expected. Cost containment initiatives, market pressures and
proposed changes in applicable laws and regulations may significantly
affect pricing or demand for medical products, the relative costs
associated with doing business and the amount of reimbursement by
both government and third-party payors. In particular, the industry
is experiencing market-driven reforms from forces within the industry
that are exerting pressure on healthcare providers and product
manufacturers to reduce healthcare costs. These market-driven
reforms are resulting in industry-wide consolidation that is expected
to increase the downward pressure on healthcare product margins, as
larger buyer and supplier groups exert pricing pressure on providers
of medical devices and other healthcare products. Managed care and
other healthcare provider organizations have grown substantially in
terms of the percentage of the population in the United States that
receives medical benefits through such organizations and in terms of
the influence and control that they are able to exert over an
increasingly large portion of the healthcare industry. These
organizations are continuing to consolidate and grow, which may
increase the ability of the organizations to influence the practices
and pricing involved in the purchase of medical products, including
those products sold by the Company. Both cost containment and
regulatory reform may have an adverse impact on the Company's results
of operations.
The demand for price reductions from healthcare customer buying
groups continued throughout 1998. This trend, which is expected to
continue, had its most significant impact on the Company's Imaging
business, where the potential for generic competitive products and
available manufacturing capacity continue to lower prices. In
response to this market trend, in 1996, the Company entered into a
multi-year agreement, with prices subject to periodic renegotiation,
with Premier, Inc. (Premier), the largest healthcare purchasing group
in the United States. Effective July 1, 1997, Premier named
Mallinckrodt a corporate partner and, accordingly, Premier's 1,650
member hospitals are provided incentives to use Mallinckrodt
products. For 1998 and 1997, net sales to hospitals under the
Premier agreement represented approximately 13 percent and 9 percent
of net sales, respectively. No individual customer, either through
Premier or otherwise, represented more than 10 percent of net sales
for any of the three years in the period ended June 30, 1998.
With the acquisition of Nellcor in August 1997, Mallinckrodt is a
more significant supplier to healthcare providers. Customers will
benefit from the combined companies' expanded product lines and
strengthened position as a full service, single source for hospitals
and national and regional purchasing organizations.
After the acquisition of Nellcor was consummated, management of the
combined Company formulated an integration plan to combine
Mallinckrodt and Nellcor into one company. Since both companies
(Mallinckrodt and Nellcor) had global healthcare operations, senior
management, through transition teams, assessed which activities
should be consolidated. Management finalized and approved a Nellcor
integration plan during the year. Accordingly, the Company recorded
additional purchase liabilities of $50.1 million, $30.8 million net
of related tax benefit, which were included in the acquisition cost
allocation and related goodwill. The principal actions of the plan
include the involuntary severance of approximately 450 Nellcor
employees as a result of work force reduction primarily in U.S.
administrative areas ($37.2 million), relocation of Nellcor employees
($3.8 million), and the elimination of contractual obligations of
Nellcor which have no future economic benefit ($9.1 million). These
actions are to be completed in 1999 and, although none are expected,
reductions in the estimated liability for these integration
activities will be offset against the related goodwill.
During 1998, the Company recorded a pretax charge to selling,
administrative and general expenses of $19.1 million associated with
exiting certain activities related to Mallinckrodt operations. The
charge included severance costs of $17.1 million related to the
involuntary severance of approximately 130 Mallinckrodt employees as
a result of work force reduction primarily in the Europe
administration function and U.S. sales force, and facility exit costs
of $2 million. In addition, the Company recorded a pretax charge to
selling, administrative and general expenses of $49.5 million in 1998
related to employee transition bonuses of $16.6 million, increased
asset valuation reserves of $12.8 million, and other integration
costs of $20.1 million.
Substantial cost savings are expected to be realized by the combined
operations through procurement and economies of scale in dealing with
healthcare purchasing organizations, and the elimination of redundant
activities. No assurance can be made as to the amount of cost
savings that will actually be realized; however, the Company
will apply substantial management resources in order to achieve
operating efficiencies from integrating the companies.
See Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations; and Item 8, Note 2 of Notes to
Consolidated Financial Statements for additional information about
business activities.
Respiratory
- -----------
The Respiratory Group, which includes Nellcor and Critical Care,
develops and markets products that help diagnose, monitor and treat
respiratory disorders, wherever patients receive care. Nellcor, which
was acquired by Mallinckrodt in August 1997, had established the
strategic objectives of focusing on the diagnosis, monitoring and
treatment of the respiratory-impaired patient across the global
continuum of care and of growing through product line extensions, new
product development, acquisitions, and strategic combinations which
would broaden its product line and enhance its competitive position.
The most significant event occurred in 1995 when Nellcor
Incorporated, with its core competency in pulse oximetry, joined with
Puritan-Bennett Corporation, the leader in acute care ventilation.
Today, the Company's product line is the broadest in the industry and
is composed of 7 businesses - anesthesia and respiratory devices;
oximetry, including monitors and sensors; critical care and portable
ventilators; medical gas, oxygen therapy and spirometry; sleep
diagnostic and therapy; blood analysis products; and maintenance
services.
Anesthesia and respiratory devices include continuous core
temperature monitoring systems, fluid warming and convective warm air
temperature management systems, and airway management products.
Continuous core temperature monitoring and temperature management
systems are utilized both in surgical procedures and post-
operatively. The airway management product line consists of basic and
specialty tracheal tubes, and a full range of disposables used in
hospitals to connect the airway management products to anesthesia and
ventilation machines, and tracheostomy tubes which are used in
hospitals and alternate site facilities for maintaining airways
during respiratory care. The Company's endotracheal and tracheostomy
tubes are by far the world market leaders.
Pulse oximetry products, including monitors and sensors, allow
clinicians to monitor both oxygen saturation levels in the
bloodstream and pulse rates of patients in a variety of clinical
settings and the home. The Company is the world leader in pulse
oximetry.
The Company's fetal pulse oximeter is already approved in Europe and
is undergoing clinical trials in the United States. It is believed
this product will help lower the risks involved in childbirth by
reducing unnecessary Caesarean section deliveries. The Company
believes that fetal pulse oximetry can help clinicians make better-
informed decisions regarding the status of a fetus during labor and
delivery by providing information that helps them determine if the
fetus is adequately oxygenated when the heart-rate pattern is non-
reassuring.
The Company's OEM oximetry modules are sold to manufacturers of
multi-parameter monitoring systems which incorporate the Company's
oximetry technology into their own systems. Mallinckrodt currently
has agreements with 76 OEMs and licensees. These customers include
medical equipment manufacturers in the United States, Europe, Asia,
Japan and Latin America.
During 1998, Mallinckrodt received 510(k) premarket notification
clearance for its new stand-alone bedside pulse oximetry product
line, including the NPB 190, NPB 195, NPB 290, and NPB 295.
The critical care and portable ventilators business currently offers
the world's most popular ventilator, the Puritan-Bennett 7200*
ventilator system. The 7200* Series ventilator system is a critical
care ventilator purchased primarily by hospitals to assist or manage
patient respiration in a variety of acute care settings. The 7200*
Series ventilator is designed to ease the work of patient breathing
and lessen patient discomfort.
During the fourth quarter of 1998, the Company received marketing
clearance from the FDA to sell its new 840* ventilator, which is
designed to become the world's leading infant-pediatric-adult
critical care ventilator. During the second quarter of 1998, the
Company received marketing clearance from the FDA to sell its new,
state-of-the-art 740* ventilator. The low operating and maintenance
costs of the 740* ventilator make it ideal for use in developing
countries and in subacute care facilities.
The medical gas, oxygen therapy and spirometry product family covers
the entire range of oxygen therapy functions, from oxygen
concentrators to portable liquid oxygen, to high-pressure oxygen
cylinder systems and conservation devices. The Company is the
largest producer of nitrous oxide in North America, and distributes
this along with other medical and specialty gases through a
nationwide system of 32 branches. The Company's spirometry system
measures lung capacity and performance through a complete line of
devices targeted at hospital pulmonologists and primary care
physicians. The Company also received 510(k) premarket clearance for
its new spirometry system, the Simplicity. This small, lightweight,
handheld system is designed for primary care physicians. The Company
also markets peak flow meters and other devices to help patients with
asthma or other forms of chronic obstructive pulmonary disease (COPD)
better manage their disease.
Diagnostic and therapeutic sleep products are used in hospital sleep
laboratories to diagnose sleep problems and in a variety of other
settings to monitor and treat sleep disorders.
HemoCue products include blood hemoglobin and glucose analysis
systems for use in hospitals and alternate site facilities.
The Company's service programs support customers during all stages of
product ownership and assist healthcare providers in merging the most
appropriate technology with the most cost-effective methods,
including CliniVision, the market-leading handheld computing tool
used in respiratory therapy.
Mallinckrodt's customers have traditionally been physicians and
healthcare professionals in clinical settings such as critical care
units of hospitals. However, with the increasing pressure to lower
health care costs, more patients are being treated in lower-cost
areas in and outside the hospital. The Company's products are now
purchased for use throughout the hospital, including intermediate
care and step-down units, labor and delivery rooms, emergency rooms
and general care floors, and are marketed and sold into the alternate
site care market, including surgicenters, subacute care and skilled
nursing facilities, physicians' offices, clinics, ambulatory care
settings, and the growing alternate care setting in the home.
The Company's products are sold in the major markets of the world,
principally through a direct sales force, assisted by clinical
consultants and specialists, corporate account managers, and
distributors in the United States and internationally.
During 1996, the Company entered into an agreement with Hewlett-
Packard Company (HP) whereby it licensed to HP for the European
market its proprietary fetal oximetry technology. Under the
agreement, HP will use the Company's software algorithms,
calibrations and fetal sensors for measuring fetal oxygen saturation
in future integrated HP fetal/maternal monitors.
In June 1995, the Company acquired Alton Dean, Inc. of Salt Lake
City, Utah to complement its temperature management business. Alton
Dean's products include in-line sterile fluid warmers, pressure
infusers, and irrigation pumps used in operating rooms and intensive
care units. These products are marketed through distributors in the
U.S. and Europe. This acquisition has since been integrated into the
Juarez, Mexico operation under the Warm Flo brand name.
In 1994, Mallinckrodt acquired DAR S.p.A. of Mirandola, Italy to
complement its tracheal and tracheostomy tube business and expand the
airway management business into related anesthesia and respiratory
disposables. DAR products include disposable filters, heat/moisture
exchangers, masks and breathing circuits used in operating rooms and
intensive care units to provide respiratory support to critically ill
patients.
In 1994, Juarez, Mexico became the new production base for the
temperature monitoring systems products used in emergency and
critical care settings. The Company capitalized on the rapid
conversion to disposable tracheal tubes in Europe by expanding its
anesthesiology products plant in Athlone, Ireland. In 1996, a new
facility to manufacture tracheal tubes in Juarez, Mexico was fully
operational and the Argyle, New York manufacturing facility was
closed.
On September 30, 1996, the Company sold Mallinckrodt Sensor Systems,
Inc. to Instrumentation Laboratory Company. The financial statements
include the results of this business prior to sale; however, the
associated earnings and assets were not material to the healthcare
segment or to Mallinckrodt Inc.
Respiratory manufacturing facilities are located in Angelholm,
Sweden; Argyle, New York; Athlone, Ireland; Carlsbad, California;
Irvine, California; Galway, Ireland; Johannesburg, South Africa;
Juarez, Mexico; Tijuana, Mexico; Indianapolis, Indiana; Mirandola,
Italy; Nancy, France; Plymouth, Minnesota; and St. Charles, Missouri.
The company also operates 32 branches which transfill and distribute
medical gases. Mallinckrodt owns the Argyle, Athlone, Carlsbad,
Galway, Mirandola and Nancy facilities. The remainder are leased.
The Argyle, New York facility is no longer in production and efforts
are underway to divest this facility.
For information about legal activities involving the Respiratory
Group, see the Other Litigation section of Legal Proceedings in Item
3.
Imaging
- -------
The Imaging Group includes the manufacture, sale and distribution of
products used in radiology, cardiology and nuclear medicine.
Radiology and cardiology products include iodinated contrast media
(ionic and nonionic), ultrasound contrast agents, magnetic resonance
imaging agents (MRI), and catheters for use in studies of the
cardiovascular system, brain, abdominal organs, renal system,
peripheral vascular system, and other areas of the body to aid in
diagnosis and therapy. These products are marketed in the U.S.
principally by a geographically organized sales force, and
internationally through direct sales forces and distributors.
Since its introduction in the U.S. in 1989, Optiray*, a low osmolar,
nonionic x-ray medium, has been widely accepted in both radiology and
cardiology procedures. Optiray* began to be introduced outside the
U.S. in 1991. To provide capacity for growing Optiray* volumes in
the international market, the Company opened a new production
facility in Dublin, Ireland during 1994 for the manufacture of
Optiray* in its bulk drug form. Capacity expansion projects at
Mallinckrodt's existing plant in St. Louis, Missouri were completed
in 1994 and again in June 1997. In addition, the Company developed a
new process for the synthesis of Ioversol, the key compound in the
production of Optiray*, which will result in lower cost and
additional capacity. The process change was completed at the Dublin
facility in February 1998 and is expected to be completed at the St.
Louis manufacturing site in January 2000.
In June 1990, Mallinckrodt introduced Ultraject*, a patented
innovation in contrast media agent administration. This prefilled
syringe provides a more efficient, convenient and safer method of
delivering contrast agents. Ultraject* allows Mallinckrodt to
differentiate its contrast media offering by providing advantages
over traditional glass bottles and vials because it reduces handling
hazards and the potential for dosage error. In January 1996,
Mallinckrodt acquired Liebel-Flarsheim Company of Cincinnati, Ohio to
enhance its position in the contrast imaging arena. Liebel-
Flarsheim's products include contrast media power injectors for
angiography and CT, x-ray components, and specialized equipment for
diagnostic urology procedures.
In September 1996, Mallinckrodt signed a collaboration agreement with
Epix Medical Inc., formerly known as METASYN, Inc., to co-develop a
blood pool MRI agent. Mallinckrodt has worldwide manufacturing
rights for the products developed and has selling and marketing
rights to them for all countries, except Japan. In April 1997,
Mallinckrodt introduced GastroMARK*, an oral GI bowel marker used in
magnetic resonance imaging procedures. This product was licensed
from Advanced Magnetics, Inc. of Cambridge, Massachusetts and is
distributed exclusively by Mallinckrodt in the U.S., Canada, Mexico,
Japan, Australia and New Zealand.
The cardiology business is directed toward meeting the needs of both
invasive and non-invasive cardiology in diagnosing and treating
diseases of the heart and the cardiovascular system. The business
currently offers both ionic and nonionic contrast agents, ultrasound
contrast agents, and interventional catheters and related supplies.
These products are sold directly to hospitals, primarily by a
dedicated sales organization within Mallinckrodt's geographically
organized sales force.
In addition to selling Imaging products to individual hospitals and
integrated healthcare networks, a significant amount of sales occurs
through various group purchasing organizations. In 1996,
Mallinckrodt won a five-year agreement (since extended to seven
years) with Premier. Premier is the largest healthcare purchasing
group in the U.S., representing approximately 30 percent of all x-ray
contrast media purchased. In April 1997, Nuclear Medicine products
were added to the Premier contract.
During 1989, Mallinckrodt acquired an equity position of less than
two percent of the then outstanding common shares of Molecular
Biosystems, Inc. (MBI) of San Diego, California, and obtained
exclusive marketing rights in the Western Hemisphere for Albunex*, a
new ultrasound contrast agent. Albunex* was unanimously recommended
for approval by a Devices and Radiology Advisory Panel of the FDA in
July 1992. MBI received an approvable letter for Albunex* from the
FDA in April 1994. Final approval was received early in August 1994,
with Mallinckrodt's launch of the product occurring in the second
quarter of 1995. On September 7, 1995, Mallinckrodt entered into a
new distribution and investment agreement for Albunex* and
OPTISON*(FS069), a major new ultrasound contrast agent in
development. Under the September 7, 1995 agreement, Mallinckrodt
made an additional equity investment of $13 million in MBI. In
addition, the agreement also provides for Mallinckrodt to partially
fund OPTISON* clinical development and make various milestone
payments. Mallinckrodt's total equity position in MBI pursuant to
this agreement is under ten percent of that Company's outstanding and
publicly traded common stock. In December 1996, Mallinckrodt
extended the agreement with MBI to exclusively distribute in Europe,
Africa, most of Asia, Australia and New Zealand. Albunex* received
FDA approval in June 1997 for the diagnosis of fallopian tube patency
as part of infertility workup.
On October 17, 1996, MBI submitted a premarket approval application
to the FDA's Center for Devices and Radiologic Health (CDRH) for
OPTISON*. In February 1997, OPTISON* received unconditional
recommendation for approval from the CDRH advisory panel of the FDA.
Then as a result of a citizens petition and subsequent court request,
the FDA reconsidered whether OPTISON* should continue to be reviewed
as a device while other ultrasound contrast agents were regulated as
drugs. On July 29, 1997, the FDA decided that all ultrasound
contrast agents are drugs, not medical devices. Therefore, the
OPTISON* premarket approval application to the CDRH was transferred
to the Center for Drug Evaluation and Research (CDER). The FDA's
decision did not affect the marketing of Albunex*. In a related
matter, MBI and Mallinckrodt have taken legal action to preempt any
competitor allegation regarding patent infringement by requesting the
United States Patent Office to reexamine patents granted. For
additional information about the legal action, see the Other
Litigation section of Legal Proceedings in Item 3.
On December 31, 1997, OPTISON* received final FDA approval. The
product was launched in the United States on January 2, 1998.
OPTISON*, the first of the perflourocarbon-containing ultrasound
agents to reach the market, enables physicians to enhance resolution
of anatomical structure where ultrasound alone is inadequate. The
product is specifically indicated for use in patients with suboptimal
echocardiograms to opacify the left ventricle and to improve the
delineation of the left ventricular endocardial borders. Ultrasound
cardiac imaging has several advantages over other imaging methods.
It is minimally invasive, relatively inexpensive and can provide a
real-time image. OPTISON* helps increase the effectiveness of
echocardiography in diagnosing heart disease by introducing gas-
filled microspheres into the blood. The microspheres travel in the
bloodstream to the left ventricle of the heart, where the
microspheres reflect the soundwaves generated from ultrasound
equipment, enabling the development of a clearer, more diagnostic
ultrasound image.
On May 19, 1998, Mallinckrodt announced that OPTISON*, the world's
first and only commercially available next-generation cardiac
ultrasound contrast imaging agent, had received final marketing
authorization by the European Commission for use in patients with
suspected or known cardiovascular disease. The authorization covers
all 15 member states of the European Union.
Nuclear medicine products consist of radiopharmaceuticals used to
provide images of numerous body organs, anatomy and function, and to
diagnose and treat diseases. Nuclear medicine products are sold to
hospitals and clinics in the U.S. by both a direct geographically
organized sales force and through a nationwide network of nuclear
pharmacies. Internationally, nuclear medicine products are marketed
through direct sales forces and distributors.
In 1995, Mallinckrodt signed an agreement with Medi+Physics to
distribute healthcare proprietary radiopharmaceutical products
through Medi+Physics' radiopharmacies in the U.S. and Canada.
Additionally, in 1997, the Company signed a five-year co-marketing
agreement with Medi+Physics to market Myoview* in the U.S.
In June 1994, the FDA authorized U.S. marketing of OctreoScan*. This
unique radiopharmaceutical assists physicians in diagnosing and
determining the extent of spread of certain types of cancers, using a
non-invasive procedure instead of surgical biopsy. OctreoScan* is
manufactured at facilities in St. Louis, Missouri and Petten, the
Netherlands. Introduction of the product began in June 1994 through
key hospitals specializing in cancer treatment. Marketing of the
product was expanded in 1995 upon FDA approval of promotional
material.
In 1992, Mallinckrodt signed an agreement with the Netherlands Energy
Research Foundation to construct a plant in Petten, the Netherlands
dedicated to the manufacture of molybdenum-99 (Mo99), a key raw
material used in the production of the nuclear medicine imaging
product technetium-99m. The Mo99 production facility, which began
operation in June 1996, is a new facility adjacent to the existing
manufacturing site.
To meet growing worldwide demand for cyclotron-produced products,
Mallinckrodt brought a new cyclotron on-line at Petten, the
Netherlands in 1993 and expanded cyclotron capacity at its
radiopharmaceutical production facility in Maryland Heights, Missouri
in 1995. The Company expanded the Maryland Heights, Missouri
manufacturing facility to introduce an improved technetium-99m
generator product in early 1997.
Imaging manufacturing facilities are located in Angleton, Texas;
Cincinnati, Ohio; Maryland Heights, Missouri; Mexico City, Mexico;
Mulhuddart, Ireland; Petten, the Netherlands; Pointe Claire, Canada;
Raleigh, North Carolina; and St. Louis, Missouri. Mallinckrodt owns
these facilities. The Company also operates 37 nuclear pharmacies
located in leased facilities throughout the U.S.
Pharmaceuticals
- ---------------
Pharmaceuticals Group products include analgesics such as
acetaminophen (APAP) used to control pain and fever; codeine salts,
morphine and other opium-based narcotics and synthetic narcotics used
to treat pain and coughs; and peptides which are used in many new
pharmaceuticals. Other Pharmaceuticals Group products include
laboratory chemicals used in analysis and microelectronic chemicals
used in the semiconductor industry; Toleron brand of ferrous fumarate
which stimulates the formation of red blood cells; magnesium stearate
for use as a tableting aid in pharmaceuticals; potassium chloride for
use as a potassium supplement in pharmaceuticals and nutritionals;
and other salts, chemicals and reagents used in the production of
pharmaceutical and food products.
Most pharmaceutical products are sold through distributors and by a
direct sales force to the pharmaceutical industry for use in the
manufacture of dosage form drugs. Narcotic prescription chemicals
are sold directly to pharmaceutical manufacturers and pharmaceutical
dosage products are sold directly to drug wholesalers and chain
pharmacies, while opiate addiction products are sold primarily to
clinics. Laboratory chemical products, which include thousands of
high-purity reagent chemicals used in research and development and
analytical laboratories, are sold primarily through distributors to
medical, industrial, educational and governmental laboratories. A
direct sales force is used to offer microelectronic chemicals and
photoresist strippers to worldwide semi-conductor chip producers.
Mallinckrodt expanded its product offering in healthcare by acquiring
an analgesic pharmaceutical product line from King Pharmaceuticals,
Inc. in 1996. In November 1996, Mallinckrodt acquired D.M. Graham
Laboratories, Inc. of Hobart, New York. Graham Laboratories is a
contract manufacturer of both tablet and capsule dosage
pharmaceuticals and a licensed producer of a variety of medicinal
narcotic substances. The Company expanded its capacity at its St.
Louis, Missouri site to manufacture pharmaceutical intermediates and
additives with the addition of an FDA registered facility in 1997.
The APAP manufacturing at the Raleigh, North Carolina facility has
been incrementally expanded over the past few years, while costs have
been reduced. Capacity of the Derbyshire, England para-aminophenol
(PAP, a precursor of APAP) manufacturing plant has also been
significantly increased. Mallinckrodt also upgraded its Compap*
production facility in Greenville, Illinois in 1997. In addition,
the Company continues to work on several projects to expand and
upgrade the narcotics facility in St. Louis, Missouri to meet growing
worldwide demand.
Pharmaceuticals are manufactured in Derbyshire, England; Deventer,
the Netherlands; Greenville, Illinois; Hayward, California; Hobart,
New York; Mexico City, Mexico; Paris, Kentucky; Phillipsburg, New
Jersey; Raleigh, North Carolina; St. Louis, Missouri; and Torrance,
California.
The Company has distribution locations in the U.S. in Carlsbad,
California; Mission Viejo, California; Plymouth, Minnesota; St.
Charles, Missouri; St. Louis, Missouri; Cincinnati, Ohio; and El
Paso, Texas.
The Company leases space for its international operations in
Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China,
Columbia, France, Germany, Ireland, Italy, Japan, Korea, Malaysia,
Mexico, the Netherlands, Philippines, Poland, Portugal, Puerto Rico,
Singapore, South Africa, and Switzerland.
OTHER ACTIONS
Discontinued Operations
- -----------------------
In 1998, the Company sold or committed to sell the catalysts and
chemical additives and Aero Systems divisions. Certain liabilities
for environmental, litigation and employee benefits remain with the
Company.
On June 30, 1997, the Company sold its animal health segment for cash
plus the assumption of certain liabilities. Environmental
liabilities, certain facility leases, and certain liabilities for
employee benefits, including postretirement benefits, were retained
by the Company.
On March 31, 1997, the Company disposed of Fries & Fries, Inc., a
wholly owned subsidiary which owned the Company's 50 percent interest
in Tastemaker, which was the flavors joint venture with Hercules
Incorporated.
In October 1995, the Company disposed of its feed ingredients
business. Discontinued operations for 1997 and 1996 also included
other charges, primarily for environmental and litigation costs
related to previously divested operations.
The results of these transactions and the results of operations from
these businesses have been reclassified to discontinued operations,
and prior year results have also been reclassified. For additional
information about discontinued operations, see Management's
Discussion and Analysis of Financial Condition and Results of
Operations in Item 7, and Note 2 of the Notes to Consolidated
Financial Statements in Item 8.
OTHER ACTIVITIES
Research and Development
- ------------------------
The Company performs applied research directed at development of new
products, development of new uses for existing products, and
improvement of existing products and processes. Research and
development programs include laboratory research as well as product
development and application. The Company's development activities
are focused on market-place needs. Internal research efforts in each
of its business groups are supplemented with third-party and
university technical agreements. Research and development expenses,
excluding purchased research and development as a result of the
Nellcor acquisition in 1998, were $149.0 million, $100.5 million and
$80.6 million in 1998, 1997 and 1996, respectively.
Research and development activities for the Imaging Group are
performed primarily in Angleton, Texas; Cincinnati, Ohio; Petten, the
Netherlands; and St. Louis, Missouri. Research and development
activities for the Pharmaceuticals Group are carried on in St. Louis.
Technical personnel for process support are located at each
manufacturing location.
The Respiratory Group's research and development functions are
individually aligned with each of the seven business units within the
organization: anesthesia and respiratory devices; oximetry, including
monitors and sensors; critical care and portable ventilators; medical
gas, oxygen therapy and spirometry; sleep diagnostic and therapy;
blood analysis products; and maintenance services. The research and
development functions are housed most frequently near a primary
manufacturing site, which are principally located in Carlsbad,
California; Pleasanton, California; Hazelwood, Missouri; Irvine,
California; Mirandola, Italy; Plymouth, Minnesota; St. Charles,
Missouri; and Angelholm, Sweden.
Patents, Trademarks and Licenses
- --------------------------------
Mallinckrodt owns a number of patents and trademarks, has a
substantial number of patent applications pending, and is licensed
under patents owned by others. No single patent is considered to be
essential to the Company as a whole, but in the aggregate, the
patents are of material importance to the Company.
Government Regulation
- ---------------------
Drug and Medical Device Regulation -- Most of the Company's
businesses are subject to varying degrees of governmental regulation
in the countries in which operations are conducted, and the general
trend is toward regulation of increasing stringency. In the United
States, the drug and device industries have long been subject to
regulation by various federal, state and local agencies, primarily as
to product safety, efficacy, advertising and labeling. The exercise
of broad regulatory powers by the FDA continues to result in
increases in the amounts of testing and documentation required for
FDA clearance of new drugs and devices and a corresponding increase
in the expense of product introduction. Similar trends toward product
and process regulation are also evident in a number of major
countries outside of the United States, especially in the European
Economic Community where efforts are continuing to harmonize the
internal regulatory systems. In 1997, the Food and Drug
Administration Modernization Act was passed in the United States and
was the culmination of a comprehensive legislative reform effort
designed to streamline regulatory procedures within the FDA and to
improve the regulation of drugs and medical devices. The legislation
was principally designed to ensure the timely availability of safe
and effective drugs and medical devices by expediting the premarket
review process for new products.
The regulatory agencies under whose purview the Company operates have
administrative powers that may subject the Company to such actions as
product recalls, seizure of products, and other civil and criminal
sanctions. In some cases, the Company may deem it advisable to
initiate product recalls voluntarily.
Puritan-Bennett Corporation (Puritan-Bennett), which became a wholly
owned subsidiary of Mallinckrodt as a result of the acquisition of
Nellcor in August 1997, had entered into a consent decree with the
FDA in January 1994, pursuant to which Puritan-Bennett agreed to
maintain systems and procedures complying with the FDA's good
manufacturing practices regulation and medical device reporting
regulation in all of its device manufacturing facilities. Burton A.
Dole, Jr., who currently serves as the sole director and the sole
officer of Puritan-Bennett, is a party to the consent decree.
Puritan-Bennett has experienced and will continue to experience
incremental operating costs due to ongoing regulatory compliance
requirements and quality assurance programs initiated in part as a
result of the FDA consent degree. The amount of these incremental
costs currently cannot be completely predicted and will depend upon a
variety of factors, including future changes in statutes and
regulations governing medical device manufacturers, and the manner in
which the FDA continues to enforce and interpret the requirements of
the consent decree.
There can be no assurance that the Company will not experience
problems associated with FDA regulatory compliance, including
increased general costs of ongoing regulatory compliance and specific
costs associated with the Puritan-Bennett consent decree. The
Company could experience a material adverse effect on business,
operations, profitability and outlook from, among other things: (i)
requirements associated with the Puritan-Bennett consent decree; (ii)
requirements arising from continuing company-wide adherence to
quality assurance and good manufacturing practices; (iii) the results
of future FDA inspections of the operations and facilities of the
Company; and (iv) any modification, extension or adverse
interpretation of the Puritan-Bennett consent decree or any product
recall, plant closure or other FDA enforcement activity with respect
to the Company.
Environmental Regulation -- The Company's operations are subject to a
variety of federal, state and local environmental laws and
regulations that govern, among other things, the generation,
handling, storage, transportation, treatment and disposal of
hazardous substances, discharges to water, and air emissions from
equipment and facilities.
Most of the Company's environmental-related capital expenditures are
in response to provisions of the Federal Clean Air Act; Water
Pollution Control Act; Resource Conservation and Recovery Act;
Comprehensive Environmental Response, Compensation, and Liability
Act; and land use, air and water protection regulations of the
various localities and states, and their foreign counterparts.
Capital expenditures worldwide relating to air emission control,
wastewater purification, land reclamation and solid waste disposal
totaled approximately $6 million in 1998 and $6 million in 1997. The
Company currently estimates that environmental capital expenditures
during 1999 and 2000 will be $21 million and $14 million,
respectively.
During 1996, the Company assumed certain liabilities to remediate
various sites in the future and was compensated by the previous owner
of the applicable properties for certain remediation costs to be
incurred. The Company established additional environmental reserves
for discontinued operations.
The Company had accruals, included in current accrued liabilities and
other noncurrent liabilities and deferred credits, of $126.2 million
at June 30, 1998 for costs associated with the study and remediation
of Superfund sites and for the Company's current and former operating
sites. Any claims for potential recovery from any sources have not
been valued against the accrued environmental liabilities. While
ongoing litigation may eventually result in recovery of costs
expended at certain of the environmental sites, any recovery is
contingent upon a successful outcome and has not been accrued.
The Company has established accruals only for those matters that are
in its view probable and estimable. Based upon information currently
available, management believes that existing accruals are sufficient
and that it is not reasonably possible at this time that any
additional liabilities will result from the resolution of these
matters that would have a material adverse effect on the Company's
consolidated results of operations or financial position.
Compliance -- Mallinckrodt endeavors to comply with all applicable
laws and regulations, but there can be no assurance that its
compliance efforts will always be acceptable. Instances of
non-compliance have occurred in the past and, although they have not
had a material adverse impact on the Company, such instances could
occur in the future and possibly have a material adverse impact. In
particular, the Company is unable to predict the extent to which it
may be adversely affected by future regulatory developments such as
new or changed laws or regulations.
See also the Environmental Matters section of Legal Proceedings in
Item 3, Management's Discussion and Analysis of Financial Condition
and Results of Operation in Item 7, and Note 21 of the Notes to
Consolidated Financial Statements in Item 8 for additional
information.
Employees
- ---------
Mallinckrodt had 12,823 employees at June 30, 1998, consisting of
7,706 U.S. based employees and 5,117 employees outside the U.S.
Labor Relations
- ---------------
In the U.S., the Company has ten collective bargaining agreements
with nine international unions or their affiliated locals covering
969 employees. Three agreements covering 348 employees were
negotiated during 1998, with no work stoppages. Five agreements
covering 527 employees will expire in 1999. Eight operating
locations outside the U.S. have collective bargaining agreements
and/or work counsel agreements covering approximately 1,210
employees. Recent wage and benefit increases were consistent with
competitive industry and community patterns.
ITEM 2. PROPERTIES
Information regarding the principal plant and properties of
Mallinckrodt is included in the Operations and Other Activities
sections of Business in Item 1. Additionally, Mallinckrodt leases
office space in St. Louis, Missouri.
The Company believes its manufacturing and distribution facilities
are adequate, suitable and of sufficient capacity to support its
current operations.
ITEM 3. LEGAL PROCEEDINGS
Environmental Matters
- ---------------------
The Company is actively involved in the investigation or remediation
of alleged contamination of 19 currently or previously owned or
operated sites and at 19 off-site locations where its waste was taken
for treatment or disposal. These actions are in various stages of
development and generally include demands for reimbursement of
previously incurred costs, or costs for future investigation and/or
for remedial actions. In many instances, the dollar amount of the
claim is not specified. For some sites, other potentially
responsible parties may be jointly and severally responsible, along
with the Company, to pay for any past remediation and other related
expenses. For other sites, the Company may be solely responsible for
remediation and related costs. The Company anticipates that a
portion of these costs will be covered by insurance or third party
indemnities. A number of the currently pending matters relate to
historic and formerly owned operations of the Company.
Once the Company becomes aware of its potential environmental
liability at a particular site, the measurement of the related
environmental liabilities to be recorded is based on an evaluation of
currently available facts such as the extent and types of hazardous
substances at a site, the range of technologies that can be used for
remediation, evolving standards of what constitutes acceptable
remediation, presently enacted laws and regulations, engineers and
environmental specialists' estimates of the range of expected clean-
up costs that may be incurred, prior experience in remediation of
contaminated sites, and the progress to date on remediation in
process. While the current law potentially imposes joint and several
liability upon each party at a Superfund site, the Company's
contribution to clean up these sites is expected to be limited, given
the number of other companies which have also been named as
potentially responsible parties and the volumes of waste involved. A
reasonable basis for apportionment of costs among responsible parties
is determined and the likelihood of contribution by other parties is
established. If it is considered probable that the Company will only
have to pay its expected share of the total clean-up, the recorded
liability reflects the Company's expected share. In determining the
probability of contribution, the Company considers the solvency of
the parties, whether responsibility is disputed, existence of an
allocation agreement, status of current action, and experience to
date regarding similar matters. Current information and developments
are regularly assessed by the Company, and accruals are adjusted on a
quarterly basis, as required, to provide for the expected impact of
these environmental matters.
The Company has established accruals only for those matters that are
in its view probable and estimable. Based upon information currently
available, management believes that existing accruals are sufficient
and that it is not reasonably possible at this time that any
additional liabilities will result from the resolution of these
matters that would have a material adverse effect on the Company's
consolidated results of operations or financial position.
The following is a brief discussion of certain pending environmental
proceedings which the Company believes, based on currently available
information, are most significant:
Orrington, ME - Hanlin Group, Inc. purchased a chemical manufacturing
facility located in Orrington, Maine from the Company in 1982. In
April 1989, Hanlin filed suit in the U.S. District Court for the
District of Maine alleging that the Company had operated the facility
in violation of federal and state environmental laws. More
specifically, Hanlin asserted that the Company had allowed the
discharge of unlawful amounts of mercury, contaminating the soil,
air, groundwater and adjoining waterways. The parties settled these
claims in 1991. The facility was subsequently sold to HoltraChem
Manufacturing Company, L.L.C. (HoltraChem); the settlement agreement
was assigned to HoltraChem as part of the sale. Under the settlement
agreement, the Company agreed to pay specified costs of a study
ordered by EPA. A draft Site Investigation has been completed.
Additional investigation is required to address questions from EPA
and Maine. The Company is completing additional work to supplement
the investigation prior to submitting the final Site Investigation
plan. Costs of implementing remedial action at the site will be
shared by the Company and HoltraChem on a yet-to-be agreed basis. If
the parties cannot reach agreement, the matter will be referred to
binding arbitration.
Auburn Hills, MI - The Company is a defendant in an action that was
filed on January 13, 1986 and is currently pending in the U.S.
District Court for the Eastern District of Michigan relating to a
drum reconditioning facility located in Auburn Hills, Michigan that
was leased and operated by the Company in the 1970s. The State of
Michigan (State) and the present owner of the facility, Columbus
Steel Drum Company, Inc., claim that the Company is jointly and
severally liable, along with approximately twenty other former owners
and operators of the facility, for alleged contamination of soil and
groundwater resulting from improper disposal practices. The State
seeks remedial measures at the site and reimbursement for costs
incurred to date. The current owner seeks reimbursement for
previously incurred clean-up costs and compensation for damages to
the site. The Company denies any violation of applicable law on its
part. The Company has filed a third-party complaint against
approximately 110 parties that sent drums to the facility, seeking
contribution for damages that might be assessed against the Company.
The Company and other parties have explored settlement alternatives,
but have not reached settlement to date. Discovery is proceeding.
The Company submitted a remedial action plan to the State of Michigan
for this site which was rejected. Although the Company completed
additional work as requested by the State and prepared a report
describing the results of the additional work and submitted it to the
Court, the State decided to complete additional investigation. The
Company is awaiting completion of the State investigations to
determine if it will submit a Revised Remedial Action Plan.
St. Louis, MO/CT Decommissioning - The Company processed certain
ores, columbium and tantalum, under license with the Nuclear
Regulatory Commission (NRC) in the 1960s through 1986. The Company
is required to complete decommissioning of the processing areas,
building and soil on the site where manufacturing occurred pursuant
to NRC regulations. The Company submitted a Phase I Decommissioning
Plan to NRC in November 1997 and is awaiting NRC comments. The
Company is developing the Phase II Decommissioning and
Decontamination Plan to submit to the NRC. This plan is due in
December 1998.
Raleigh, NC - The Company's bulk pharmaceutical facility has been
operating since the mid 1960s. It has a Resource Conservation
Recovery Act (RCRA) Part B permit which requires the facility to
undergo corrective action. There are several phases to the
corrective action process. The Company has worked with federal and
state agencies to complete the Remedial Feasibility Investigation and
identified certain Solid Waste Management Units (SWMUs). The Company
received its permit and submitted a RCRA Facility Investigation Work
Plan to the North Carolina Department of Environment, Health and
Natural Resources (Agency) proposing to investigate the SWMUs. The
Agency identified certain technical issues concerning the Work Plan
and the Company has been responding to these issues through revisions
to the Work Plan. The Company continues to work with the Agency to
complete the RCRA process. A Revised Work Plan was submitted to the
Agency in April 1997.
Springville, UT - In 1996, the Company entered into an interim
settlement agreement with Ensign-Bickford Industries, Inc. (EBI) to
share certain costs of remediating groundwater that allegedly has
been impacted by nitrates and explosive compounds emanating from
EBI's Springville, Utah explosives plant. The plant, under a series
of owners, has been manufacturing explosives at the mouth of the
Spanish Fork Canyon in Utah since the 1940s. The Company sold the
plant and related assets to the Trojan Corporation in 1982. EBI
acquired the Trojan Corporation in 1986 and has operated the plant
since that time. Pursuant to a 1991 stipulation and consent order
with the State of Utah (State), EBI has conducted a feasibility study
of alternatives for remediating impacted off-site groundwater. EBI
also is conducting a corrective action study under a 1995 consent
order with the State. The Company and EBI have entered into an
interim allocation agreement with two additional parties to address
funding remedial activities at this site.
In October 1996, a resident with property bordering the Springville
site filed suit against EBI in the U.S. District Court for the
District of Utah (Don Henrichsen, et al. v. The Ensign-Bickford
---------------------------------------------
Company, et al.) alleging nuisance and trespass for contamination
- ---------------
that allegedly migrated onto the resident's property. On January 31,
1997, the Company was added as a defendant. Some discovery has been
proceeding in this case, but no significant developments have
occurred.
On October 24, 1996, the Company was also sued in the U.S. District
Court for the District of Utah (Kent Gordon Stephens, et al. v.
-------------------------------
Trojan Corporation, et al.) by certain other residents near the
- --------------------------
plant alleging injuries and property damage which they claim to have
suffered as a result of contamination of their drinking water by
chemicals emanating from the plant. EBI had previously been sued by
these parties. The Company and EBI were presented with a settlement
demand by plaintiffs and have negotiated a final settlement in this
lawsuit.
The State also has advised EBI that it is investigating a natural
resource damages claim. However, the State has not indicated it
plans to pursue any claims. Nevertheless, all parties have entered
into a Tolling Agreement with the State in connection with the
potential natural resource damages claim.
For additional information relating to environmental matters, see the
Environmental Regulation section of Business in Item 1.
Other Litigation
- ----------------
The Company is a party to a number of other legal proceedings arising
in the ordinary course of business. The Company does not believe
that these pending legal matters will have a material adverse effect
on its financial condition or results of operations. The most
significant pending legal matters involve two products, OPTISON* and
convective warming blankets.
OPTISON* Patent Litigation - On July 31 1997, the Company and its
licensor, Molecular BioSystems, Inc. ("MBI") filed suit (the
"Mallinckrodt/MBI Action") in the United States District Court for
the District of Columbia against four potential competitors - Sonus
Pharmaceuticals, Inc. ("Sonus"), Nycomed Imaging AS ("Nycomed"),
ImaRx Pharmaceutical Corp. ("ImaRx") and its marketing partner DuPont
Merck, and Bracco International BV ("Bracco") - seeking declarations
that certain of their ultrasound contrast agent patents are invalid.
The complaint alleges that each of the defendant's patents are
invalid on a variety of independent grounds under United States
patent laws. In addition to requesting that all of the patents in
question be declared invalid, the complaint requests a declaration
that, contrary to the defendants' contentions, MBI and the Company do
not infringe the defendants' patents, and asks that the defendants be
enjoined from proceeding against MBI and the Company for infringement
until the status of the defendants' patents has been determined by
the court or the U.S. Patent and Trademark Office ("PTO"). The
complaint alleges that each defendant has claimed or is likely to
claim that its patent or patents cover OPTISON* and will attempt to
prevent its commercialization.
Each of the defendants, except Nycomed, filed a motion to dismiss the
complaint on jurisdictional grounds. In January 1998, the court
dismissed the complaint against (a) ImaRx (and its marketing partner,
DuPont Merck) and Bracco for lack of jurisdiction, and (b) Sonus for
improper venue. The court's ruling did not purport to rule on the
merits of the Company and MBI's claims. The Company and MBI elected
not to appeal the court's decision. Accordingly, only the action
against Nycomed will proceed in the District Court for the District
of Columbia.
Following the dismissal of Sonus as a defendant in the above-
described action, Sonus activated a patent infringement lawsuit (the
"Sonus Action") that it had filed on August 4, 1997 against the
Company and MBI in the United States District Court for the Western
District of Washington. Although the complaint was filed in August
1997, Sonus had agreed not to proceed with its action until the
jurisdictional motions were decided in the Mallinckrodt/MBI Action.
Sonus's complaint alleges that the manufacture and sale of OPTISON*
by the Company and MBI infringe two patents owned by Sonus. The
Company and MBI have filed a counterclaim seeking a declaration of
invalidity and noninfringement with respect to the Sonus patents.
On April 21, 1998, Nycomed filed an action in the District Court of
The Hague, the Netherlands against various Mallinckrodt European
entities and MBI, alleging that OPTISON* infringed or will infringe
its European patent EP0576521. Nycomed is seeking an injunction
against future sales and damages and a preliminary hearing is
scheduled for October 1998. The patent that is the subject of this
action is the counterpart of Nycomed's United States patent that is
the subject matter of the Mallinckrodt/MBI Action.
The Company is vigorously defending its position in each of the
above-described actions.
Augustine Medical, Inc. - On October 6, 1994, Augustine Medical, Inc.
("Augustine") commenced patent infringement litigation against
Mallinckrodt Group Inc. and Mallinckrodt Medical, Inc. (the
"Company") in the U.S. District Court for the District of Minnesota.
The original complaint was amended to include allegations of patent
infringement regarding U.S. Patent Nos. 4,572,188 (the '188 patent);
5,300,102 (the '102 patent); 5,324,320 (the '320 patent); and
4,405,371 (the '371 patent). Specifically, Augustine alleged that
the Company's sale of all five (5) models of its convective warming
blankets infringes certain claims of one or more of the
aforementioned patents. Augustine sought to have the Company
permanently enjoined from further acts of alleged infringement and an
award of damages adequate to compensate for the Company's alleged
infringement, together with attorneys' fees. Augustine included a
claim of willful infringement and requested enhanced damages based
thereon.
The Company filed a motion for summary judgment of non-infringement
of all of the asserted patents and the magistrate judge issued a
report and recommendations dated March 18, 1996 indicating that there
is no literal infringement of the '188 patent, but that factual
questions existed with respect to infringement of the '102 patent,
the '320 patent, and the '371 patent (the "Remaining Patents") and as
to whether the '188 patent is infringed under the doctrine of
equivalents. The Company also filed a motion for summary judgment of
invalidity of certain claims of the '371 patent. The Court granted
the Company's motion for summary judgment and found claims 1, 3, 4
and 8 of Augustine's '371 patent to be invalid.
In addition, on July 18, 1997, the magistrate judge issued a report
and recommendation indicating that in addition to there being no
literal infringement of the '188 patent, there is no infringement
under the doctrine of equivalents. This was confirmed by the Court
and the '188 patent was eliminated from the case.
The liability phase of the case was tried to a jury in August 1997
and the verdict was that the Company's blankets infringe the
Remaining Patents under the doctrine of equivalents, but do not
literally infringe the patents. There was also a finding of no
willful infringement. On September 22, 1997, the jury awarded
damages in the amount of $16.8 million. The Company has appealed the
jury verdicts of liability and damages to the Court of Appeals for
the Federal Circuit (a special court for patent appeals). With the
advice of outside counsel, the Company believes there was
insufficient evidence of equivalents presented and consequently for
this and other reasons the verdicts were in error. The Company is
working vigorously in the Court of Appeals to overturn the verdicts.
On September 26, 1997, the District Court judge ordered the Company
to stop manufacturing and selling its blankets in the United States,
except for sales to existing customers which were allowed to continue
until January 1, 1998. The Company subsequently obtained a stay of
the order from the Court of Appeals for the Federal Circuit, pending
the Company's appeal of the jury's finding of infringement. The
Court of Appeals indicated that the Company had raised a "substantial
question" meriting review by the Court. The Company believes this is
a positive development and supports its belief as to the ultimate
reversal of the jury's verdict. A decision by the Court of Appeals
is expected later in calendar year 1998.
On February 24, 1998, Augustine filed an action in the District Court
of The Hague, the Netherlands against Mallinckrodt Inc., various
Mallinckrodt European entities and Mallinckrodt distributors
(collectively "Mallinckrodt") alleging that Mallinckrodt Warm Touch*
blankets infringe its European patent EPO311336. Augustine is
seeking an injunction against future sales and damages. This
European patent is a counterpart of Augustine's United States patent,
which is the subject matter of above-described litigation between the
parties in the U.S. District Court in the District of Minnesota.
Trial of this action is currently set for December 1998.
Mallinckrodt will vigorously defend this action contending that the
Augustine patent is invalid or not infringed.
See Note 21 of the Notes to Consolidated Financial Statements in Item
8 for additional information about the ongoing patent infringement
litigation between Augustine and Mallinckrodt.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the three months ended June 30, 1998, there were no matters
submitted to a vote of the Company's shareholders.
EXECUTIVE OFFICERS OF THE REGISTRANT
The ages and five-year employment histories of Mallinckrodt's
executive officers at June 30, 1998 were as follows:
C. Ray Holman
Age 55. Chairman of the Company since October 1994; Chief Executive
Officer of the Company since December 1992; and President of the
Company from 1992-1995.
Mack G. Nichols
Age 60. President and Chief Operating Officer of the Company since
December 1995; Senior Vice President of the Company since October
1993; Vice President of the Company from October 1990 to October
1993; President and Chief Executive Officer of Mallinckrodt Chemical,
Inc. from January 1989 to December 1995.
Barbara A. Abbett
Age 58. Vice President, Communications of the Company since April
1994; Vice President and Senior Partner with Fleishman-Hillard, Inc.,
from 1979 to April 1994.
James C. Carlile
Age 46. Senior Vice President of the Company and President, Imaging
Group, since February 1998; Vice President of the Company from May
1996 to February 1998; President, Medical Imaging Division, from
December 1995 to February 1998; Senior Vice President, Mallinckrodt
Medical, Inc., 1994-1995; and Group Vice President, Imaging,
Mallinckrodt Medical, Inc., 1992-1994.
Ashok Chawla
Age 48. Senior Vice President of the Company and President, Global
Business Group, since February 1998; Senior Vice President, Strategic
Management, of the Company from October 1997 to February 1998; Vice
President, Strategic Management, of the Company from July 1991 to
October 1997.
Michael J. Collins
Age 44. Senior Vice President of the Company and President,
Pharmaceuticals Group, since February 1998; Vice President of the
Company from May 1996 to February 1998; President, Pharmaceutical
Specialties Division, from December 1995 to February 1998; and Group
Vice President, Pharmaceutical Specialties, Mallinckrodt Chemical,
Inc., 1992-1995.
Bruce K. Crockett, Ph.D.
Age 54. Vice President, Human Resources, of the Company since March
1995; and Vice President, Organization Development at Eastern
Enterprises from 1990 to February 1995.
John Q. Hesemann
Age 50. Senior Vice President of the Company and President,
Respiratory Group, since June 1998; Vice President, Mallinckrodt
Medical, Inc., Imaging-Contrast Media 1994-1998; and General Manager,
Mallinckrodt Medical, Inc., 1993-1994.
Roger A. Keller
Age 53. Vice President, Secretary and General Counsel of the Company
since July 1993.
Douglas A. McKinney
Age 45. Vice President and Controller of the Company since October
1997; Treasurer of the Company from November 1995 to October 1997;
and Assistant Treasurer July 1991 to November 1995.
Michael K. Milosovich
Age 52. Vice President of the Company since May 1996; President,
Pharmaceutical Chemicals Division, since December 1995; and Vice
President and General Manager, Bulk Analgesics, Mallinckrodt
Chemical, Inc., 1992-1995.
David Morra
Age 42. Vice President of the Company since May 1996; President,
Nuclear Medicine Division, since December 1995; Senior Vice
President, Europe, Mallinckrodt Veterinary, Inc., 1995; Group Vice
President, Europe/Australia, New Zealand, Mallinckrodt Veterinary,
Inc., 1994-1995; and Vice President and General Manager, Cardiology,
U.S., Mallinckrodt Medical, Inc., 1991-1994.
Daniel B. Mulholland
Age 46. Vice President of the Company and President, Mallinckrodt
Baker, Inc., (a wholly owned subsidiary of Mallinckrodt Inc.) since
August 1996. Vice President & General Manager, Mallinckrodt Baker,
February 1995-1996. President, J.T. Baker Inc., October 1992 to
1995.
Adeoye Y. Olukotun
Age 53. Vice President, Medical and Regulatory Affairs of the
Company since June 18, 1996; Vice President, Bristol-Meyers Squibb
Company 1991 to June 1996.
Michael A. Rocca
Age 53. Senior Vice President and Chief Financial Officer of the
Company since April 1994; Corporate Vice President and Treasurer of
Honeywell Inc., March 1992 to April 1994.
William B. Stone
Age 55. Vice President, Information Technology of the Company since
August 1996; and Vice President and Controller of the Company from
November 1990 to August 1996.
Frank A. Voltolina
Age 37. Staff Vice President and Treasurer of the Company since
October 1997; Vice President, Corporate Tax, 1995-1997; and Assistant
Controller, Director of Tax 1993-1995.
Daniel E. Woods, Jr.
Age 54. Vice President, Strategic Services of the Company since May
1998; Vice President of the Company since May 1996; President,
Catalysts and Chemical Additives Division from December 1995 to May
1998; and Group Vice President, Catalysts & Chemicals, Mallinckrodt
Chemical, Inc., 1993-1995.
Miscellaneous
All of the Company's officers are elected annually in October. No
"family relationships" exist among any of the listed officers.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Common Stock Prices and Dividends
Quarter
------------------------------------
First Second Third Fourth
------- -------- ------- --------
Fiscal 1998
Dividends per common share..... $ .165 $ .165 $ .165 $ .165
Common stock prices
High.......................... 41.375 39.438 40.063 39.750
Low........................... 34.750 36.000 34.688 29.000
Fiscal 1997
Dividends per common share..... $ .155 $ .165 $ .165 $ .165
Common stock prices
High.......................... 42.625 45.875 44.250 41.625
Low........................... 35.250 41.375 39.625 34.875
The principal market on which Mallinckrodt's common stock is traded
is the New York Stock Exchange. Common stock prices are from the
composite tape for New York Stock Exchange issues, as reported in The
Wall Street Journal. As of July 31, 1998, the number of registered
holders of common stock as reported by the Company's registrar was
7,550.
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in millions, except per share amounts)
<CAPTION>
Years Ended June 30,
------------------------------------------------------
1998 (1) 1997 1996 1995 1994 (2)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net sales.............. $2,367.0 $1,698.1 $1,596.9 $1,433.8 $1,244.0
Earnings (loss)
from continuing
operations............ (355.9) 175.2 143.6 127.0 73.9
Discontinued
operations (3)........ 72.4 14.9 68.3 53.3 29.9
Cumulative effect
of accounting
change (4)............ (8.4)
--------- -------- -------- -------- ---------
Net earnings (loss).... (291.9) 190.1 211.9 180.3 103.8
Preferred stock
dividends............. (.4) (.4) (.4) (.4) (.4)
--------- --------- --------- --------- ---------
Available for common
shareholders.......... $ (292.3) $ 189.7 $ 211.5 $ 179.9 $ 103.4
========= ========= ========= ========= =========
PER COMMON SHARE DATA
Diluted earnings
(loss) from continuing
operations............ $ (4.89) $ 2.33 $ 1.88 $ 1.63 $ .95
Diluted net
earnings (loss)....... (4.01) 2.53 2.77 2.32 1.33
Dividends declared..... .66 .65 .61 .55 .49
Book value............. 12.40 17.16 16.44 15.12 13.05
OTHER DATA
Total assets........... $3,785.6 $2,975.4 $3,017.6 $2,488.6 $2,258.2
Working capital........ $ (8.8) $ 963.1 $ 359.1 $ 271.9 $ 261.3
Current ratio.......... 1.0:1 2.5:1 1.4:1 1.5:1 1.5:1
Total debt (5)......... $1,255.9 $ 555.9 $ 666.1 $ 584.0 $ 616.8
Shareholders' equity... $ 918.4 $1,251.2 $1,232.2 $1,171.5 $1,015.9
Return on shareholders'
equity (5)............ (33)% 14% 12% 12% 8%
Capital
expenditures (5)...... $ 142.7 $ 104.4 $ 116.6 $ 124.3 $ 140.9
Total dividends paid... $ 48.5 $ 48.2 $ 45.7 $ 42.2 $ 37.7
Weighted average
common shares
(in millions)......... 73.5 75.1 76.4 77.5 77.7
Common shares
outstanding
(in millions)......... 73.2 72.3 74.3 76.8 77.0
Number of
employees (5)......... 12,800 8,000 8,000 7,800 7,400
</TABLE>
(1) On August 28, 1997, the Company acquired Nellcor Puritan Bennett
Incorporated (Nellcor) through an agreement to purchase for cash
all of the outstanding shares of common stock of Nellcor for
$28.50 per share. The aggregate purchase price of the Nellcor
acquisition was approximately $1.9 billion. Approximately
$398.3 million of the purchase price was allocated to purchased
research and development. This intangible asset, which had no
tax benefit, was charged to results of operations during 1998.
Of the total charge of $398.3 million, $2.0 million related to
the Aero Systems division which was sold and reclassified to
discontinued operations in 1998.
The sale of Nellcor inventories, which were stepped up to fair
value in connection with allocation of purchase price, decreased
earnings by $75.4 million, $46.7 million net of taxes for 1998.
After-tax charges to the Respiratory Group, which are included
in earnings (loss) from continuing operations, were $46.1
million. After-tax charges to discontinued operations related
to the Aero Systems division were $.6 million.
Costs of exiting certain activities related to Mallinckrodt
operations plus integration costs of the combined Mallinckrodt
and Nellcor operations were $68.6 million, $46.4 million net of
taxes. See the Acquisitions section of Note 2 of the Notes to
Consolidated Financial Statements for additional disclosure.
(2) Results for 1994 included restructuring charges of $93.9
million, $58.8 million after taxes, or 76 cents per share.
Pretax charges included in healthcare and discontinued
operations related to animal health were $73.9 million and $20.0
million, respectively.
Results for 1994 also included favorable tax adjustments of $3.0
million, or 4 cents per share, resulting from U.S. and foreign
tax law changes.
(3) See Note 2 of Notes to Consolidated Financial Statements for
information on discontinued operations in 1998, 1997 and 1996.
Results for 1995 and 1994 represent earnings from the catalysts
and chemical additives division, animal health segment, Fries &
Fries, Inc., and the feed ingredients business, partially offset
by environmental and related litigation charges.
(4) In April 1998, the American Institute of Certified Public
Accountants (AICPA) issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities" (SOP 98-5), which requires that costs
related to start-up activities be expensed as incurred. Prior
to 1998, the Company capitalized its preoperating costs incurred
in connection with opening a new facility. The Company elected
to early adopt the provisions of SOP 98-5 in its financial
statements for 1998. The effect of adoption of SOP 98-5 was to
record a charge of $8.4 million, net of taxes, for the
cumulative effect of an accounting change to expense costs that
had previously been capitalized prior to July 1, 1997.
(5) Excludes discontinued operations.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
All references to years are to fiscal years ended June 30 unless
otherwise stated. Certain amounts in prior years have been
reclassified to conform to the current year presentation. All
earnings per share amounts are calculated on a diluted basis unless
otherwise stated.
1998 vs. 1997
- -------------
During the past two years, Mallinckrodt completed the largest
acquisition in its history and divested certain businesses to improve
the strategic position and focus of the Company.
On August 28, 1997, the Company acquired Nellcor Puritan Bennett
Incorporated (Nellcor) through an agreement to purchase for cash all
of the outstanding shares of common stock of Nellcor for $28.50 per
share. The aggregate purchase price of the Nellcor acquisition was
approximately $1.9 billion. Nellcor is the worldwide market leader
in providing products that monitor, diagnose and treat respiratory
impaired patients. The product lines include pulse oximetry monitors
and sensors, critical care and portable ventilators, home oxygen
therapy products, sleep apnea diagnostic and therapy products, and
medical gas products and distribution systems.
The acquisition was accounted for under the purchase method of
accounting and, accordingly, the results of operations of Nellcor
have been included in the Company's consolidated financial statements
since September 1, 1997.
The purchase price of the acquisition was allocated to the assets
acquired and liabilities assumed based on their estimated fair values
at the date of acquisition. Identifiable intangible assets are
purchased research and development, technology, trademarks and trade
names, and the assembled work force. The purchased research and
development of $398.3 million was charged to expense in 1998.
Technology, also referred to as core or base technology and which
represents that portion of the existing technology that provides a
basis for future generation products as well as existing products,
was recorded at $374.2 million and is being amortized on a straight-
line basis over 15 years. The remaining identifiable intangible
assets of $152.9 million are being amortized on a straight-line basis
over 10 to 25 years (weighted average life of 24 years). Goodwill,
which represents the excess of the purchase price over the fair value
of the net assets acquired, was $724.2 million and is being amortized
on a straight-line basis over 30 years. The amortization of
identifiable intangible assets and goodwill directly associated with
the Nellcor acquisition was $46.4 million for 1998. Since the
results of Nellcor have only been included in the Company's
consolidated results since September, the amortization for 1998
represents ten months of activity. The Company also recorded a
deferred tax liability of $211.0 million, representing the tax effect
of timing differences recorded as part of the acquisition.
In connection with the Company's filing of a shelf registration
statement for debt securities, Mallinckrodt is engaged in discussions
with the staff of the Securities and Exchange Commission (SEC)
regarding the purchase price allocation related to its acquisition of
Nellcor. The Company and its auditors, Ernst & Young LLP, believe
that the allocation and related amortization charges are in
accordance with generally accepted accounting principles. Ernst &
Young LLP has expressed their opinion that the Company's 1998
consolidated financial statements are fairly presented, in all
material respects, in conformity with generally accepted accounting
principles. Nevertheless, if there are any significant changes as a
result of these discussions with the SEC to the amounts allocated to
purchased research and development or other intangible assets or
changes in the lives over which such amounts are amortized, these
changes could have a material impact on the related noncash charges
reflected in the 1998 results of operations and could materially
affect future results of operations as a result of increased
amortization expense.
The Company's most significant divestitures were the animal health
business and flavors joint venture in 1997 and the sale of the
catalysts and chemical additives and Aero Systems divisions in 1998
and early in 1999. The Company now operates predominantly in the
healthcare industry and is comprised of three business groups -
Respiratory, Imaging and Pharmaceuticals.
The Company incurred a loss from continuing operations of $355.9
million, or $4.89 per share, for 1998 due to nonrecurring acquisition
and integration charges related to the acquisition of Nellcor which
totaled $539.3 million, $488.8 million net of taxes or $6.70 per
share. The nonrecurring noncash acquisition charges are purchased
research and development and inventory stepped up to fair value.
Purchased research and development, which was charged to results of
operations during the first quarter of 1998, was valued at $398.3
million. Of this amount, $396.3 million related to the Respiratory
Group and $2.0 million related to the Aero Systems division, which
was sold and reclassified to discontinued operations in the fourth
quarter of 1998. The purchased research and development represents
the value of numerous new medical devices and other
products/technologies in all major product lines (e.g., sensors,
monitors and ventilators) that were in various stages of development
and had significant technological hurdles remaining as of the
transaction date. Medical devices are subjected to significant
clinical analysis and screening to validate their safety and efficacy
as well as determine their commercial viability. Accordingly,
medical devices are considered technologically feasible upon United
States Food and Drug Administration and/or international regulatory
body (FDA) market approval. The steps required to introduce these
products include both research and development and clinical and
regulatory costs and efforts to be expended over the next one to four
years. Clinical and regulatory costs and efforts relate primarily to
the costs and efforts associated with receiving FDA approval,
specifically costs and efforts incurred for clinical trials and
preparation of FDA submission and interaction with the FDA. None of
these medical devices or products had received FDA market approval as
of the acquisition date, and therefore all were identified as in-
process research and development that had not reached technological
feasibility. No alternative future uses were identified prior to
reaching technological feasibility because of the uniqueness of the
projects. Additionally, no identifiable alternate markets were
established for projects that were in such early stages of
development. The methodology (income approach) used to evaluate
purchased research and development was used to evaluate the other
Nellcor identifiable intangible assets acquired, with the exception
of assembled work force, which was valued under the cost approach.
The income approach focuses on the income producing capability of the
assets over their useful lives. The steps followed in applying this
approach involve estimating the projected net cash flows related to
such products, incorporating the cost to complete development of the
technology, if applicable, and the future revenues to be earned upon
commercialization of the products. These cash flows are then
discounted to their present value. The resulting projected net cash
flows from such products were based upon management's estimate of
revenue growth and expected profitability related to the overall
product portfolio. The discounting process uses a rate of return
which accounts for the time value of money and investment risk
factors to appropriately reflect the risks of realization of the cash
flows. The assumptions underlying the valuation of these assets were
based upon management's assessment of the facts as known at the date
of acquisition; however, no assurances can be given that actual
results will not materially deviate from these assumptions.
Revenue assumptions were based upon the growth rates for markets
served and the estimated life of each product's technology.
Significant aggregate revenue growth as projected by the Company's
strategic marketing units for the developed and in-process products
assumed increasing demand for medical devices, and the Company's
ability to maintain a significant share of the market. The revenue
generated by in-process technology products increases to $937 million
in 2004 and then declines over subsequent years, while revenue
assumptions for the developed products remain relatively flat in 1999
as compared with 1998 and then begin to decline gradually in
subsequent periods. Cost of goods sold assumptions, expressed as a
percentage of revenue, were expected to decrease from the current
projection of 48 percent to 43 percent in 2006. Gross margins, as
they relate inversely to costs of goods sold as a percentage of
revenue, were assumed to increase, in the aggregate, over time due
mainly to improving efficiency in the manufacturing processes and
more profitable products having a greater impact on total sales.
Selling, administrative and general expenses, excluding depreciation
and amortization, expressed as a percentage of revenues were
estimated at 24 percent for all periods. Research and development
expenses for the cost to complete the in-process technologies were
$52 million to be expended in ten strategic marketing units during
the periods 1998 through 2001. Maintenance research and development
expense, which includes routine changes, additions and modifications
undertaken after a product is introduced to the market, were
established at 2 percent of revenue for both developed and in-process
technologies for all periods. An after-tax cash flow was then
calculated by deducting income tax expense and contributory asset
charges from operating income. The cash flows were discounted to
present value utilizing an appropriate discount rate (15 percent for
developed technology and 18 percent for in-process technology).
Results to date have been consistent with the underlying projections
and assumptions of revenues to be generated, estimated costs to
complete and completion dates for the in-process projects and
acquired technologies. Material negative variations from the
projected results would impact the Company's expected return on its
investment in Nellcor, its future results of operations and financial
position. In 1998, the Company received market approval and launched
the Model 740 and Model 840 ventilators. These products, although
delayed approximately three months from expected launch date, have
been well accepted in the market place.
The sale of Nellcor inventories, which as part of the purchase price
allocation were stepped up to fair value, decreased earnings by $75.4
million, $46.7 million net of taxes. The pretax charges to the
Respiratory Group and Aero Systems division, which was sold and
reclassified to discontinued operations in the fourth quarter, were
$74.4 million and $1.0 million, respectively.
With the acquisition complete, the Company began integrating the
operations of Nellcor with those of Mallinckrodt's other businesses.
Management finalized and approved a Nellcor integration plan during
the year. Accordingly, the Company recorded additional purchase
liabilities of $50.1 million, $30.8 million net of related tax
benefit, which were included in the acquisition cost allocation and
related goodwill. In addition, the Company recorded pretax charges
to operations during 1998 of $68.6 million, $46.4 million net of
taxes, associated with exiting certain activities related to the
operation of Mallinckrodt prior to the acquisition of Nellcor and
other integration costs of the combined Company. See Note 2 of the
Notes to Consolidated Financial Statements for additional
information.
Excluding the nonrecurring acquisition and integration charges in
1998, the Company had earnings from continuing operations of $132.9
million, or $1.80 per share. Included in these results are after-tax
charges of $8.5 million, or 12 cents per share, primarily to increase
reserves for Nellcor trade receivables and inventory. Earnings from
continuing operations for 1997 were $175.2 million, or $2.33 per
share.
The year to year decline in earnings from continuing operations,
after excluding nonrecurring acquisition and integration charges, is
primarily attributable to the dilutive effect of the Nellcor
acquisition-related intangible and goodwill amortization expense and
interest expense, and selling price reductions. The aggregate
purchase price of Nellcor of approximately $1.9 billion was paid
through use of available cash and cash equivalents and additional
borrowings. The resulting higher interest expense exceeded the
operating earnings of the Nellcor operations during 1998. The
competitive demand for selling price reductions from healthcare
customer buying groups continued throughout 1998. This trend, which
is expected to continue, had its most significant impact on the
Company's Imaging business where the potential for generic
competitive products and available manufacturing capacity continue to
lower prices.
The Company recorded a net loss for 1998 of $291.9 million, or $4.01
per share as compared to net earnings of $190.1 million, or $2.53 per
share during the prior year. During 1998, the Company sold, or
committed to sell, its catalysts and chemical additives and Aero
Systems divisions. The completed actions resulted in an after-tax
gain of $68.9 million. The sale of the remainder of the catalysts
and chemical additives division on July 31, 1998 will result in a
gain to be included in the 1999 results of discontinued operations.
The gains on the completed sales and the results of operations for
these divisions have been reclassified to discontinued operations in
the fourth quarter and, accordingly, prior year results have also
been reclassified. Earnings, net of taxes, of these discontinued
operations were $11.4 million and $10.5 million for 1998 and 1997,
respectively. During the third quarter of 1998, the Company recorded
an after-tax charge of $7.9 million related to settlement costs from
the sale of the animal health business in the prior year. The net
loss for 1998 also included an after-tax noncash charge of $8.4
million, or 11 cents per share, for the early adoption of a new
standard of accounting related to previously capitalized start-up
costs. The cumulative effect of the accounting change was recorded
in the fourth quarter, but was effective as of July 1, 1997.
Operating earnings would have been reduced by $2.3 million after
taxes or 3 cents per share had the Company not adopted the accounting
change.
Net earnings for 1997 included a $270.6 million after-tax gain from
discontinued operations resulting from the March 31, 1997 disposition
of Fries & Fries, Inc., a wholly owned subsidiary which owned the
Company's 50 percent interest in Tastemaker, the flavors joint
venture, and a $269.4 million after-tax loss from discontinued
operations resulting from the sale of the animal health segment on
June 30, 1997.
Net sales for the year increased 39 percent to $2.37 billion compared
with $1.70 billion in 1997. Sales to customers outside the U.S. were
$792 million or 33 percent of total 1998 sales. Excluding sales of
Nellcor, which was acquired at the end of August 1997, sales were
$1.69 billion which is equal to the prior year. Excluding the
acquisition and integration charges discussed above, operating
earnings were $288.8 million, a decrease of $8.7 million or 3 percent
from the prior year. Excluding the results of Nellcor and the
acquisition and integration charges discussed above, operating
earnings were $248.1 million or 17 percent below the 1997 results of
$297.5 million. The decline in operating earnings is driven by
competitive price pressure in the Imaging and Critical Care
businesses.
1997 vs. 1996
- -------------
The Company's earnings from continuing operations for 1997 were
$175.2 million, or $2.33 per share. This represented a 24 percent
increase in per share earnings from continuing operations compared
with $143.6 million, or $1.88 per share during the same period in
1996. The strong performance improvement was attributable to growth
in operating earnings, higher interest income, global tax strategies
and common stock share repurchase activities.
Net earnings for 1997 were $190.1 million, or $2.53 per share,
compared with $211.9 million, or $2.77 per share, in 1996. In the
fourth quarter of 1998, the Company reclassified the catalysts and
chemical additives division to discontinued operations. The after-
tax operating results from this division, which were $10.5 million
and $10.1 million for 1997 and 1996, respectively, were also
reclassified. On March 31, 1997, the Company disposed of Fries &
Fries, Inc., a wholly owned subsidiary which owned a 50 percent
interest in Tastemaker, the flavors joint venture. This action
resulted in an after-tax gain of $270.6 million. On June 30, 1997,
the Company disposed of the animal health segment, which resulted in
an after-tax loss of $269.4 million. The results of these
transactions and the results of operations from these businesses were
reclassified to discontinued operations and, accordingly, prior
years' results were also reclassified. Net earnings for 1997 and
1996 included after-tax earnings of $5.8 million and $41.9 million,
respectively, from the divested Fries & Fries, Inc., animal health
segment and, for 1996, feed ingredients business.
Net earnings for 1996 included a $35.4 million after-tax gain in
discontinued operations due to the disposition of the feed
ingredients business in the second quarter, partially offset by $19.1
million after-tax adjustment of provisions for environmental and
litigation costs related to discontinued operations.
Net sales for 1997 were up 6 percent to $1.70 billion, compared to
$1.60 billion in 1996. Operating earnings were $297.5 million, an
increase of 6 percent compared to $279.5 million in 1996. The
markets in which the Company conducts business are highly
competitive, and in many instances regulated. Global efforts toward
healthcare cost containment exerted pressure on product pricing and
the resultant demand for price discounts from customer buying groups
adversely affected earnings growth.
OPERATING RESULTS
(In millions)
1998 1997 1996
------- ------- -------
Net sales
Respiratory................. $ 991 $ 321 $ 338
Imaging..................... 760 802 716
Pharmaceuticals............. 616 575 543
------- ------- -------
$2,367 $1,698 $1,597
======= ======= =======
Operating earnings
Respiratory............... $ 105 $ 76 $ 74
Imaging................... 124 164 179
Pharmaceuticals........... 83 82 67
------- ------- -------
312 322 320
Corporate expense......... (23) (25) (41)
Acquisition and
integration expense...... (539)
------- ------- -------
$ (250) $ 297 $ 279
======= ======= =======
1998 vs. 1997
- -------------
Healthcare is comprised of three business groups - Respiratory,
Imaging and Pharmaceuticals.
Operating earnings excluding charges related to acquisition and
integration activities and corporate expenses were $312 million,
which represents a 3 percent decline when compared to the prior year.
Excluding the results of Nellcor, acquired in August 1997, the
acquisition and integration charges, and corporate expenses,
operating earnings would have been $271 million or 16 percent below
1997. This earnings decline is attributable to lower selling prices
which were only partially offset by higher volume. The competitive
pressures and the demand for price discounts from customer buying
groups adversely affected earnings, and this trend is expected to
continue. In response to this market trend, the Company entered into
a multi-year agreement in 1996 with Premier, Inc. (Premier), the
largest healthcare purchasing group in the United States. Effective
July 1, 1997, Premier named Mallinckrodt a corporate partner and,
accordingly, Premier's 1,650 member hospitals are provided incentives
to use Mallinckrodt products.
The Respiratory Group, which includes Nellcor and Critical Care,
reported operating earnings of $105 million, an increase of 38
percent over the results for 1997. Excluding Nellcor, operating
earnings were $64 million, a 16 percent decrease from prior year.
The year to year earnings decline was attributable to sales decline
of $16 million resulting from the negative impact of exchange rate
movements caused by the strengthening of the U.S. dollar versus major
European currencies and the Japanese yen, $8 million due to price
declines and another $6 million attributable to the divestiture of a
product line in September 1996. These sales shortfalls were only
partially offset by volume increases of $14 million and $11 million
in disposable respiratory and anesthesiology product lines,
respectively.
The Imaging Group had operating earnings of $124 million, which was a
decline of $40 million or 24 percent from the prior year. The
decline in profitability was directly attributable to a sales decline
of $42 million - from $802 million in 1997 to $760 million in 1998.
All product lines had volume increases which represented an increase
of $85 million over the prior year. In spite of these increases,
erosion of selling price accounted for a $102 million sales decline.
The remainder of the shortfall in 1998 when compared to 1997 was
attributable to the impact of exchange rate movements caused by the
strengthening of the U.S. dollar versus major European currencies and
the Japanese yen. Iodinated contrast media, the Group's most
significant product line, had sales volume increases of $44 million,
but price erosion reduced sales by $85 million. The pricing
pressures were most significant in the U.S. where the Company and its
contrast media competitors utilize price concessions to maintain or
grow their shares in a market dominated by large customer buying
groups. The agreement with Premier aligns the Company with the
largest healthcare purchasing group in the U.S., representing 30
percent of all contrast media purchased. The Premier agreement is
believed to be the largest contract ever written for these products.
In spite of cost reductions in contrast media manufacturing and lower
operating expenses, the price erosion reduced profitability, and is
expected to reduce profitability in future periods but at a lower
rate of decline than was experienced in 1998 and 1997.
The Pharmaceuticals Group, which now includes bulk and dosage
pharmaceuticals, peptides, and process, laboratory and
microelectronic chemicals, had operating earnings of $83 million,
which was $1 million or 1 percent above results for the prior year.
In spite of higher sales, product mix, lower than expected sales of
high margin dosage and other specialty products, and the related
impact on plant efficiencies negatively impacted operating earnings.
Sales were $616 million, which represented an increase of $41 million
or 7 percent above 1997 results. The sales increase was partially
generated by a $19 million increase in dosage analgesic volume, of
which approximately $7 million was attributable to the full year
impact from an acquisition in November 1996. The remainder of the
sales increase was attributable to volume growth in all other product
lines. The impact of buying groups is less evident in the
Pharmaceuticals Group businesses. Overall, this group was able to
maintain pricing at prior year levels.
1997 vs. 1996
- -------------
Operating earnings, excluding corporate expense, for 1997 were $322
million, as compared with $320 million in 1996. The flat operating
earnings in 1997 when compared to the prior year was attributable to
continued reduction of selling prices in several product lines offset
by increased sales volumes, and a $20 million or 25 percent increase
in research and development expenses. Net sales increased 6 percent
to $1.70 billion in 1997 as compared to $1.60 billion during the
prior year.
The Critical Care business, now a component of the Respiratory Group,
had operating earnings of $76 million, which was $2 million or 3
percent greater than in 1996. The improved profitability was the
result of product mix. The operation had sales of $321 million,
which is $17 million or 5 percent below prior year. The Critical
Care business experienced increased demand for respiratory therapy
products and HemoCue blood hemoglobin and glucose analysis systems.
These sales gains were more than offset by lower prices of existing
products and lost revenue associated with the blood gas and
electrolyte business which was sold on September 30, 1996.
The Imaging Group's operating earnings were $164 million, which was
$15 million or 8 percent below the prior year. The decline in
profitability was the result of selling price erosion, which was only
partially offset by volume increases, and higher research and
development expenditures. The Imaging Group was affected
significantly by the demand for price discounts. The business had
sales of $802 million, which was an increase of $86 million or 12
percent over the prior year level of $716 million. The sales
increase was driven primarily by increased market share in iodinated
contrast media ($41 million) and the acquisition of Liebel-Flarsheim
during 1996 ($29 million). The growth of iodinated contrast media
sales was most significant in the U.S. market where sales volume
increased 49 percent, but prices declined 39 percent when compared to
the prior year. Contrast media competitor strategies with regard to
pricing were driven by customer consolidation and patent expiration
of a competitor's second generation x-ray contrast product resulting
in the potential for competitive generic products. In response to
these market changes, the Company entered into a supply agreement
with Premier, Inc., the largest hospital healthcare alliance in the
U.S. The agreement is believed to be the largest contract ever
written for contrast media products.
The Pharmaceuticals Group, which includes bulk and dosage
pharmaceuticals, peptides, and process, laboratory and
microelectronic chemicals, had operating earnings of $82 million,
which is $15 million or 22 percent greater than in 1996. The
improvement in earnings was directly attributable to a sales increase
of $32 million, or 6 percent, to $575 million as compared to the
prior year. The sales increase was generated by a $24 million growth
in bulk and dosage analgesic sales, partially the result of the
acquisition of D.M. Graham Laboratories, Inc. in November 1996. The
business also benefited from net price increases of approximately $14
million, which were generated by bulk sales of acetaminophen and
narcotics in spite of somewhat lower prices of dosage products.
D.M. Graham Laboratories, Inc. is a contract manufacturer of dosage
pharmaceuticals and is also licensed to produce a variety of
medicinal narcotics. This acquisition was another key step in the
continuing growth of the Pharmaceuticals business.
In December 1996, the Company acquired expanded sales and marketing
rights for Molecular Biosystems, Inc.'s ultrasound imaging agents.
As a result of this and earlier agreements, Mallinckrodt now has
marketing rights for Albunex and OPTISON throughout the world except
Japan, South Korea and Taiwan.
In January 1996, the Company acquired Liebel-Flarsheim Company, a
leading manufacturer of contrast media power injector systems for
diagnostic imaging procedures and equipment for urology procedures.
The acquisition enhanced sales performance but modestly impaired
operating earnings.
CORPORATE MATTERS
Corporate expenses in 1998, excluding nonrecurring acquisition and
integration charges, were $23 million as compared to $25 million in
the prior year. Corporate expenses in 1997 were 40 percent below the
1996 level because the prior year included consulting and employee
related actions of a nonrecurring nature.
Excluding the one-time noncash write-off of purchased research and
development which had no tax benefit, the Company's effective tax
rate was 31.3 percent, compared to last year's 35.5 percent and the
1996 rate of 37.0 percent. See Note 10 of the Notes to Consolidated
Financial Statements for additional information about income taxes.
Net interest and nonoperating income/expense increased $61 million in
1998 as compared with the prior year because of lower interest income
and higher borrowing costs to acquire Nellcor in August 1997. Net
interest and nonoperating income/expense decreased $26 million in
1997 from 1996 because cash proceeds from 1997 divestitures were used
to repay debt and were invested in interest bearing securities.
FINANCIAL CONDITION
The Company's financial resources are expected to continue to be
adequate to support existing businesses. Since June 30, 1997, cash
and cash equivalents decreased $752.8 million, primarily as a result
of the acquisition of the outstanding common shares of Nellcor in
August 1997. Operations provided $208.4 million of cash, while
acquisition and capital spending totaled $1.93 billion. The Company
received $308.2 million in proceeds from asset disposals. The
catalyst business and Aero Systems division were sold in the fourth
quarter for cash proceeds of $210.0 million and $69.7 million,
respectively. Debt as a percentage of invested capital was 57.8
percent at June 30, 1998.
The current ratio had declined to 0.7:1 at the end of the second
quarter as a result of short-term borrowings during the first quarter
of fiscal 1998 to acquire the outstanding shares of Nellcor common
stock. During the third quarter, the Company issued $400 million in
long-term debt, with the proceeds used to reduce short-term
borrowing. See Note 13 of the Notes to Consolidated Financial
Statements for additional information. The current ratio improved to
1.0:1 at June 30, 1998.
On August 28, 1997, the Company acquired Nellcor through an agreement
to purchase for cash all the outstanding shares of common stock of
Nellcor for $28.50 per share. The aggregate purchase price of the
Nellcor acquisition was approximately $1.9 billion. The Company
completed the acquisition using cash and cash equivalents and
borrowed approximately $1.1 billion under a $2.0 billion credit
facility established in July 1997, and amended and restated in
September 1997. The credit facility consisted of a $400 million term
loan, which was repaid in March 1998, and a $1.6 billion five-year
revolving credit facility. Under this facility, interest rates on
borrowings are based upon the London Interbank Offered Rate, plus a
margin dependent on the Company's senior debt rating. There was no
borrowing outstanding under the revolving credit facility at June 30,
1998.
In December 1997, the Company filed a $500 million shelf debt
registration statement which has not, as yet, been declared
effective. The unused portions of shelf registrations filed in 1995
and 1992 have been canceled.
At June 30, 1998, the Company had a $1.0 billion private-placement
commercial paper program. The program is backed by the $1.6 billion
five-year U.S. revolving credit facility available until September
2002. At June 30, 1998, there were $285.8 million commercial paper
borrowings outstanding. Non-U.S. lines of credit totaling $141.9
million were also available and borrowings under these lines amounted
to $17.2 million at June 30, 1998. The non-U.S. lines are cancelable
at any time.
The Company's Board of Directors previously authorized repurchase of
47 million shares of common stock and additional repurchases not to
exceed cash outlays of $250 million. Share repurchases under these
authorizations have totaled 36.8 million shares, including 242
thousand shares during the current year prior to the acquisition of
Nellcor.
Estimated capital spending for the year ending June 30, 1999 is
approximately $185 million.
Impact of Year 2000
- -------------------
The Year 2000 issue is the result of date-sensitive devices, systems
and computer programs that were deployed using two digits rather than
four to define the applicable year. Any such technologies may
recognize a year containing "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations
causing disruptions of operations including, among other things, a
temporary inability to process transactions or engage in similar
normal business activities.
The Company has completed its assessment of its information systems
which support business applications and is in the process of
modifying or replacing those portions of the software that are
required. The assessment of products sold to customers has also been
completed and the necessary remediation plans are being developed.
The assessment of research and development, manufacturing processes
and facility management systems is underway and is expected to be
substantially complete by January 1999. The Company is also
assessing the readiness of its key suppliers and business partners to
be Year 2000 compliant. Information requests have been distributed
and replies are being evaluated. If the risk is deemed material, the
Company is prepared to perform on-site visits to those businesses to
verify the adequacy of the information received. All of these
efforts should be substantially complete during the first quarter of
calendar 1999, which is prior to any anticipated significant impact
on Mallinckrodt's operations.
Based upon the accomplishments to date, no contingency plans are
expected to be needed and therefore none have been developed.
However, because of substantial progress to date and plans that
contemplate being substantially complete in the early part of
calendar 1999, we believe adequate time will be available to insure
alternatives can be developed, assessed and implemented prior to a
Year 2000 issue having a material negative impact on the operations
of the Company. However, if such modifications and conversions are
not made or are not completed timely, the Year 2000 issue could have
a material impact on the operations of the Company.
Both internal and external resources are being used to reprogram or
replace non-compliant technologies, and to appropriately test Year
2000 modifications. Such modifications are being funded through
operating cash flows. The project to address Year 2000 has been
underway since February 1997. The pretax costs incurred to date for
this effort were approximately $7 million and $1 million in 1998 and
1997, respectively. The Company anticipates expenses of
approximately $13 million will be incurred in 1999 to substantially
complete the effort.
The cost of the project and the date on which the Company believes it
will substantially complete Year 2000 modifications are based on
management's best estimates. Such estimates were derived using
software surveys and programs to evaluate calendar date exposures and
numerous assumptions of future events, including the continued
availability of certain resources and other factors. Because none of
these estimates can be guaranteed, actual results could differ
materially from those anticipated. Specific factors that might cause
such differences include, but are not limited to, the availability
and cost of personnel trained in this area, the ability to locate and
correct all relevant computer codes, and similar uncertainties.
European Monetary Union (EMU)
- -----------------------------
The euro is scheduled to be introduced on January 1, 1999, at which
time the eleven participating EMU member countries will establish
fixed conversion rates between their existing currencies (legacy
currencies) and the euro. The legacy currencies will continue to be
used as legal tender through January 1, 2002; thereafter, the legacy
currencies will be canceled and euro bills and coins will be used for
cash transactions in the participating countries.
The Company's European sales offices and various manufacturing and
distribution facilities affected by the euro conversion have
established plans to address the systems issues raised by the euro
currency conversion and are cognizant of the potential business
implications of converting to a common currency. The Company is
unable to determine the ultimate financial impact of the conversion
on its operations, if any, given that the impact will be dependent
upon the competitive situations which exist in the various regional
markets in which the Company participates and the potential actions
which may or may not be taken by the Company's competitors and
suppliers.
ENVIRONMENTAL MATTERS
The Company is subject to various investigations, claims and legal
proceedings covering a wide range of matters that arise in the
ordinary course of its business activities. In addition, the Company
is in varying stages of active investigation or remediation of
alleged or acknowledged contamination at 19 currently or previously
owned or operated sites and at 16 off-site locations where its waste
was taken for treatment or disposal.
Once the Company becomes aware of its potential environmental
liability at a particular site, the measurement of the related
environmental liabilities to be recorded is based on an evaluation of
currently available facts such as the extent and types of hazardous
substances at a site, the range of technologies that can be used for
remediation, evolving standards of what constitutes acceptable
remediation, presently enacted laws and regulations, engineers and
environmental specialists' estimates of the range of expected clean-
up costs that may be incurred, prior experience in remediation of
contaminated sites, and the progress to date on remediation in
process. While the current law potentially imposes joint and several
liability upon each party at a Superfund site, the Company's
contribution to clean up these sites is expected to be limited, given
the number of other companies which have also been named as
potentially responsible parties and the volumes of waste involved. A
reasonable basis for apportionment of costs among responsible parties
is determined and the likelihood of contribution by other parties is
established. If it is considered probable that the Company will only
have to pay its expected share of the total clean-up, the recorded
liability reflects the Company's expected share. In determining the
probability of contribution, the Company considers the solvency of
the parties, whether responsibility is disputed, existence of an
allocation agreement, status of current action, and experience to
date regarding similar matters. Current information and developments
are regularly assessed by the Company, and accruals are adjusted on a
quarterly basis, as required, to provide for the expected impact of
these environmental matters.
Most of the Company's environmental-related capital expenditures are
in response to provisions of the Federal Clean Air Act; Water
Pollution Control Act; Resource Conservation and Recovery Act;
Comprehensive Environmental Response, Compensation, and Liability
Act; and land use, air and water protection regulations of the
various localities and states, and their foreign counterparts.
Capital expenditures worldwide relating to air emission control,
wastewater purification, land reclamation and solid waste disposal
totaled approximately $6 million in 1998 and $6 million in 1997. The
Company currently estimates that environmental capital expenditures
during 1999 and 2000 will be $21 million and $14 million,
respectively.
During 1996, the Company assumed certain liabilities to remediate
various sites in the future and was compensated by the previous owner
of the applicable properties for certain remediation costs to be
incurred. The Company established additional environmental reserves
for discontinued operations.
The Company had accruals, included in current accrued liabilities and
other noncurrent liabilities and deferred credits, of $126.2 million
at June 30, 1998 for costs associated with the study and remediation
of Superfund sites and for the Company's current and former operating
sites. Any claims for potential recovery from any sources have not
been valued against the accrued environmental liabilities. While
ongoing litigation may eventually result in recovery of costs
expended at certain of the environmental sites, any gain is
contingent upon a successful outcome and has not been accrued.
The Company has established accruals only for those matters that are
in its view probable and estimable. Based upon information currently
available, management believes that existing accruals are sufficient
and that it is not reasonably possible at this time that any
additional liabilities will result from the resolution of these
matters that would have a material adverse effect on the Company's
consolidated results of operations or financial position.
RISK MANAGEMENT STRATEGIES
The Company operates globally, with manufacturing and distribution
facilities in various countries throughout the world, and is subject
to certain opportunities and risks, including foreign currency
fluctuations and government actions. Various operational initiatives
are employed to help manage business risks. In the ordinary course
of business, Mallinckrodt purchases materials and sells finished
products denominated in approximately 25 different currencies. The
Company is primarily exposed to changes in exchange rates of the
German deutsche mark and other European currencies highly correlated
with the German deutsche mark and the Japanese yen. Overall, the
Company is a net beneficiary when the U.S. dollar weakens and is
adversely affected by a stronger U.S. dollar relative to the major
currencies identified.
Operations in each country are monitored so that the Company can
quickly respond to changing economic and political environments as
well as changes in foreign currency exchange rates and interest
rates. The Company enters into forward foreign exchange contracts
and currency swaps to minimize the exposure on intercompany loans.
To minimize the impact of anticipated foreign currency exposures
which arise from probable purchases of raw materials or other
inventory, collection of accounts receivable, settlement of accounts
payable, and periodic debt service by international subsidiaries
which occur in the ordinary course of business, the Company hedges a
portion of its non-U.S. dollar denominated exposures by purchasing
currency options which generally have terms of two years or less, and
which have little or no intrinsic value at time of purchase. The
Company uses the options with an objective of limiting negative
foreign exchange rate effects on overall performance for both budget
and prior year comparisons over a rolling 18- to 24-month horizon.
The Company seeks to have effective coverage levels over such 18- to
24-month horizon of 50 to 80 percent of currency exposures that
subject the Company to risk. The hedges are designed to satisfy the
requirements for deferral accounting treatment at inception. Gains
and losses in the hedges are expected to be systematically monetized
with concurrent reinvestment to replace monetized hedges and maintain
overall hedging coverage targets. The net impact of foreign exchange
activities on earnings was immaterial for 1998, 1997 and 1996,
including conversion of certain currencies into functional currencies
and the costs of hedging certain transactions and balance sheet
exposures. The foreign currency translation loss included in
shareholders' equity, and resulting from the translation of the
financial statements of most of the Company's international
affiliates into U.S. dollars, increased by $21.1 million in 1998 due
to the strengthening of the U.S. dollar against the functional
currency of many of the Company's international affiliates.
The Company's interest income and expense are most sensitive to
changes in the general level of U.S. interest rates. In this regard,
changes in U.S. interest rates affect the interest earned on the
Company's cash equivalents and short-term investments as well as
interest paid on its short-term debt. To manage the interest rate
characteristics of its outstanding debt to a more desirable fixed or
variable rate basis or to limit the Company's exposure to rising
interest rates, the Company periodically enters into interest rate
swaps and option contracts.
The Company does not consider the present rate of inflation to have a
significant impact on the businesses in which it operates.
While future economic events cannot be predicted, the Company
believes its current operations and future expansion plans will not
result in a significantly different risk profile.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has determined that its market risk exposures, which
arise primarily from exposures to fluctuations in interest rates and
foreign currency rates, are not material to its future earnings, fair
value and cash flows.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Auditors................................. 32
Responsibility for Financial Reporting......................... 33
Consolidated Statements of Operations.......................... 34
Consolidated Balance Sheets.................................... 35
Consolidated Statements of Cash Flows.......................... 36
Consolidated Statements of Changes in Shareholders' Equity..... 37
Notes to Consolidated Financial Statements..................... 38
Quarterly Results.............................................. 57
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of Mallinckrodt Inc.
We have audited the accompanying consolidated balance sheets of
Mallinckrodt Inc. as of June 30, 1998 and 1997, and the related
consolidated statements of operations, changes in shareholders'
equity, and cash flows for each of the three years in the period
ended June 30, 1998, appearing on pages 34 through 56. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Mallinckrodt Inc. at June 30, 1998 and 1997,
and the consolidated results of its operations and its cash flows for
each of the three years in the period ended June 30, 1998, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in
the year ended June 30, 1998, the Company adopted Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities."
Ernst & Young LLP
St. Louis, Missouri
August 12, 1998
<PAGE>
RESPONSIBILITY FOR FINANCIAL REPORTING
The consolidated financial statements included in this report are the
responsibility of management. The statements have been prepared in
conformity with generally accepted accounting principles and include
amounts based on our best estimates and judgments. Financial
information appearing elsewhere in this report is consistent with
that in the financial statements.
Management is also responsible for maintaining systems of internal
accounting control with the objectives of providing reasonable
assurance at reasonable cost that the Company's assets are
safeguarded against material loss from unauthorized use or
disposition and that transactions are properly authorized and
recorded to permit reliance on the Company's financial data and
records. In addition, the Company maintains a program for
communicating corporate policy throughout the organization and, as a
further safeguard, an internal audit staff monitors compliance with
policies and systems of internal accounting control.
Mallinckrodt's consolidated financial statements have been audited by
Ernst & Young LLP. To express their opinion as to the fairness of
the statements in conformity with generally accepted accounting
principles, the independent auditors review and evaluate
Mallinckrodt's accounting controls and conduct such tests and other
procedures as they deem necessary. The Audit Committee of the Board
of Directors regularly meets with the independent auditors, without
management present, to review financial reporting matters, and audit
and control functions.
Douglas A. McKinney
Vice President and Controller
August 12, 1998
Michael A. Rocca
Senior Vice President and Chief Financial Officer
August 12, 1998
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
<CAPTION>
Years Ended June 30,
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales............................... $2,367.0 $1,698.1 $1,596.9
Operating costs and expenses:
Cost of goods sold.................... 1,368.8 897.9 837.9
Selling, administrative and
general expenses..................... 712.5 409.7 403.4
Purchased research and development.... 396.3
Research and development expenses..... 149.0 100.5 80.6
Other operating income, net........... (9.1) (7.5) (4.5)
--------- --------- ---------
Total operating costs and expenses...... 2,617.5 1,400.6 1,317.4
--------- --------- ---------
Operating earnings (loss)............... (250.5) 297.5 279.5
Interest income and other nonoperating
income (expense), net.................. 14.8 22.0 (.3)
Interest expense........................ (101.8) (48.0) (51.3)
--------- --------- ---------
Earnings (loss) from continuing
operations before income taxes......... (337.5) 271.5 227.9
Income tax provision.................... 18.4 96.3 84.3
--------- --------- ---------
Earnings (loss) from continuing
operations............................. (355.9) 175.2 143.6
Discontinued operations................. 72.4 14.9 68.3
--------- --------- ---------
Earnings (loss) before cumulative
effect of accounting change............ (283.5) 190.1 211.9
Cumulative effect of accounting change.. (8.4)
--------- --------- ---------
Net earnings (loss)..................... (291.9) 190.1 211.9
Preferred stock dividends............... (.4) (.4) (.4)
--------- --------- ---------
Available for common shareholders....... $ (292.3) $ 189.7 $ 211.5
========= ========= =========
Basic earnings per common share:
Earnings (loss) from continuing
operations............................ $ (4.89) $ 2.37 $ 1.90
Discontinued operations................ .99 .20 .91
Cumulative effect of accounting
change................................ (.11)
--------- --------- ---------
Net earnings (loss).................... $ (4.01) $ 2.57 $ 2.81
========= ========= =========
Earnings per common share -
assuming dilution:
Earnings (loss) from continuing
operations............................ $ (4.89) $ 2.33 $ 1.88
Discontinued operations................ .99 .20 .89
Cumulative effect of accounting
change................................ (.11)
--------- --------- ---------
Net earnings (loss).................... $ (4.01) $ 2.53 $ 2.77
========= ========= =========
(The accompanying Notes are an integral part of the Consolidated Financial
Statements.)
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share amounts)
<CAPTION>
June 30,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 55.5 $ 808.3
Trade receivables, less allowances of
$16.7 in 1998 and $8.2 in 1997.................. 486.3 335.8
Inventories...................................... 470.0 291.8
Deferred income taxes............................ 95.2 36.8
Other current assets............................. 61.5 99.4
Net current assets of discontinued operations.... 4.8 33.3
--------- ---------
Total current assets............................... 1,173.3 1,605.4
Investments and other noncurrent assets,
less allowances of $5.8 in 1998 and $8.1 in 1997.. 154.5 145.1
Property, plant and equipment, net................. 894.9 741.3
Goodwill, net...................................... 899.5 222.5
Technology, net.................................... 364.3 24.4
Other intangible assets, net....................... 282.1 144.4
Net noncurrent assets of discontinued operations... 12.4 91.5
Deferred income taxes.............................. 4.6 .8
--------- ---------
Total assets $3,785.6 $2,975.4
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt.................................. $ 311.4 $ 11.6
Accounts payable................................. 215.0 162.9
Accrued liabilities.............................. 532.0 391.2
Income taxes payable............................. 122.3 76.4
Deferred income taxes............................ 1.4 .2
--------- ---------
Total current liabilities.......................... 1,182.1 642.3
Long-term debt, less current maturities............ 944.5 544.3
Deferred income taxes.............................. 396.2 248.7
Postretirement benefits............................ 169.2 161.9
Other noncurrent liabilities and
deferred credits.................................. 175.2 127.0
--------- ---------
Total liabilities.................................. 2,867.2 1,724.2
--------- ---------
Shareholders' equity:
4 Percent cumulative preferred stock............. 11.0 11.0
Common stock, par value $1, authorized
300,000,000 shares; issued 87,116,289 shares.... 87.1 87.1
Capital in excess of par value................... 315.2 305.9
Reinvested earnings.............................. 952.2 1,292.6
Foreign currency translation..................... (71.1) (50.0)
Unrealized gain (loss) on investments............ (1.5) .1
Treasury stock, at cost.......................... (374.5) (395.5)
--------- ---------
Total shareholders' equity......................... 918.4 1,251.2
--------- ---------
Total liabilities and shareholders' equity $3,785.6 $2,975.4
========= =========
(The accompanying Notes are an integral part of the Consolidated Financial
Statements.)
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<CAPTION>
Years Ended June 30,
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
Net earnings (loss)........................ $ (291.9) $ 190.1 $ 211.9
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation............................. 114.3 97.5 109.6
Amortization............................. 72.8 30.2 39.5
Postretirement benefits.................. 6.3 7.9 10.9
Undistributed equity in earnings of
joint venture........................... (17.0) (25.0)
Gains on asset disposals................. (114.3) (182.5) (55.1)
Deferred income taxes.................... (75.8) 144.1 30.5
Write-off of purchased research
and development......................... 398.3
Sale of inventory stepped up to fair
value at acquisition ................... 75.4
Write-off of pre-operating costs......... 12.5
--------- --------- ---------
197.6 270.3 322.3
Changes in operating assets and
liabilities:
Trade receivables...................... (15.6) (34.3) (62.5)
Inventories............................ (18.1) 17.8 (49.5)
Other current assets................... 63.8 (62.0) ( 2.7)
Accounts payable, accrued liabilities
and income taxes payable, net......... (35.6) 111.6 22.8
Net assets of discontinued
operations............................ (.4) 9.8 (68.6)
Other noncurrent liabilities and
deferred credits...................... 30.6 (4.3) 49.7
Other, net............................. (13.9) (5.1) (41.1)
--------- --------- ---------
Net cash provided by operating activities.. 208.4 303.8 170.4
--------- --------- ---------
CASH FLOWS - INVESTING ACTIVITIES
Capital expenditures....................... (142.7) (109.5) (169.2)
Acquisition spending....................... (1,790.9) (16.8) (153.9)
Proceeds from asset disposals.............. 308.2 412.8 120.5
Other, net................................. 7.0 (6.7) 5.1
--------- --------- ---------
Net cash provided (used) by
investing activities...................... (1,618.4) 279.8 (197.5)
--------- --------- ---------
CASH FLOWS - FINANCING ACTIVITIES
Increase (decrease) in short-term debt..... 279.5 (103.8) 511.7
Proceeds from long-term debt............... 399.8 1.1 199.5
Payments on long-term debt................. (3.9) (10.2) (103.7)
Issuance of Mallinckrodt common stock...... 40.0 39.6 31.0
Acquisition of treasury stock.............. (9.7) (149.9) (130.5)
Dividends paid............................. (48.5) (48.2) (45.7)
--------- --------- ---------
Net cash provided (used) by financing
activities................................ 657.2 (271.4) 462.3
--------- --------- ---------
Increase (decrease) in cash and
cash equivalents.......................... (752.8) 312.2 435.2
Cash and cash equivalents at
beginning of year......................... 808.3 496.1 60.9
--------- --------- --------
Cash and cash equivalents at end of year... $ 55.5 $808.3 $496.1
========= ========= ========
(The accompanying Notes are an integral part of the Consolidated Financial
Statements.)
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In millions, except per share amounts)
<CAPTION>
Capital in
Preferred Common Excess of Reinvested Treasury
Stock Stock Par Value Earnings Other Stock
----- ------ --------- -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1995.. $11.0 $87.1 $274.1 $984.5 $(9.3) $(175.9)
Net earnings............ 211.9
Dividends:
4 Percent cumulative
preferred stock
($4.00 per share).... (.4)
Common stock
($.605 per share).... (45.3)
Stock option exercises.. 8.1 21.6
Income tax benefit
from stock options
exercised ............. 1.3
Acquisition of
treasury stock......... (130.5)
Translation adjustment.. (7.5)
Unrealized gain on
investments............ 1.5
----- ------ ------ ------- ------ -------
BALANCE, JUNE 30, 1996.. 11.0 87.1 283.5 1,150.7 (15.3) (284.8)
Net earnings............ 190.1
Dividends:
4 Percent cumulative
preferred stock
($4.00 per share).... (.4)
Common stock
($.65 per share)..... (47.8)
Stock option exercises.. 6.7 27.2
Income tax benefit
from stock options
exercised.............. 5.7
Acquisition of
treasury stock......... (149.9)
Issuance of stock
related to an
acquisition............ 10.0 12.0
Translation adjustment,
net of $9.3 translation
loss included in
discontinued
operations............. (35.2)
Unrealized gain on
investments............ .6
----- ------ ------ ------- ------ -------
BALANCE, JUNE 30, 1997.. 11.0 87.1 305.9 1,292.6 (49.9) (395.5)
Net loss................ (291.9)
Dividends:
4 Percent cumulative
preferred stock
($4.00 per share)..... (.4)
Common stock
($.66 per share)...... (48.1)
Stock option exercises.. 1.6 16.5
Income tax benefit from
stock options
exercised.............. 2.1
Acquisition of
treasury stock......... (9.7)
Investment plan match... 2.4 7.3
Restricted stock award.. 3.2 6.9
Translation adjustment.. (21.1)
Unrealized loss on
investments............ (1.6)
----- ------ ------ ------ ------- --------
BALANCE, JUNE 30, 1998.. $11.0 $87.1 $315.2 $952.2 $(72.6) $(374.5)
===== ====== ====== ====== ======= ========
(The accompanying Notes are an integral part of the Consolidated Financial
Statements.)
(/TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All references to years are to fiscal years ended June 30 unless
otherwise stated. Certain amounts in prior years have been
reclassified to conform to the current year presentation. All
earnings per share amounts are calculated on a diluted basis unless
otherwise stated.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Financial statements of all majority owned subsidiaries are
consolidated. Investments in 20 to 50 percent owned affiliates are
reported on the equity method.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the revenues and expenses
during the reporting period, as well as amounts included in the
Notes. While the Company uses its best estimates and judgments,
actual results could differ from these estimates.
FOREIGN CURRENCY TRANSLATION
The financial statements of most of the Company's international
affiliates are translated into U.S. dollars using current exchange
rates for balance sheets and weighted average rates for income
statements. Unrealized translation adjustments are included in
shareholders' equity in the Consolidated Balance Sheets.
The financial statements of international affiliates that operate in
hyperinflationary economies in certain Latin American countries are
translated at current and historical exchange rates, as appropriate.
Unrealized translation adjustments are included in operating results
for these affiliates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist primarily of certificates of
deposit, time deposits and other short-term securities with
maturities of three months or less from the date of purchase.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost for
inventories is determined on either an average or first-in, first-out
basis.
INVESTMENTS
The Company's investments in marketable equity securities are
classified as "available-for-sale" and are carried at fair market
value, with the unrealized gains and losses included, net of income
taxes, in shareholders' equity in the Consolidated Balance Sheets.
Interest, dividends and realized gains and losses on the sale of such
securities are included in interest income and other nonoperating
income (expense), net.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is
based upon estimated useful lives of 10 to 45 years for buildings and
3 to 15 years for machinery and equipment, using principally the
straight-line method.
The Company recognizes impairment losses for long-lived assets to be
held and used whenever events or changes in circumstances indicate
that the carrying amount of the assets exceeds the sum of the
expected undiscounted future cash flows associated with such assets.
The measurement of the impairment losses to be recognized is based on
the difference between the fair values and the carrying amounts of
the assets. Long-lived assets held for sale are reported at the
lower of carrying amount or fair value less cost to sell.
INTANGIBLE ASSETS
The cost of product line or business acquisitions accounted for using
the purchase method is allocated first to identifiable assets and
liabilities based on estimated fair values. The excess of cost over
identifiable assets and liabilities is recorded as goodwill.
Goodwill is amortized on a straight-line basis over 4 to 40 years
(weighted average life of 28 years). Technology is amortized on a
straight-line basis over 15 to 25 years (weighted average life of 16
years). Other intangible assets, consisting primarily of trademarks,
trade names, and manufacturing and distribution agreements, are
amortized primarily on a straight-line basis over 3 to 40 years
(weighted average life of 20 years).
The carrying amounts of intangible assets and goodwill are reviewed
if facts and circumstances suggest that they may be impaired. If
this review indicates that the carrying amounts of intangible assets
and goodwill will not be recoverable, as determined based on the
estimated undiscounted cash flows of the entity acquired over the
remaining amortization period, the carrying amounts of the intangible
assets and goodwill are reduced by the estimated shortfall of cash
flows. In addition, intangible assets and goodwill associated with
assets acquired in a purchase business combination are included in
impairment evaluations when events and circumstances exist that
indicate the carrying amount of those assets may not be recoverable.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses interest rate swaps and options to manage the
interest rate characteristics of its outstanding debt to a more
desirable fixed or variable rate basis or to limit the Company's
exposure to rising interest rates; forward foreign exchange
agreements and currency swaps to minimize the exposure on
intercompany loans; and foreign exchange option contracts to minimize
the impact of anticipated foreign currency exposures which arise from
probable purchases of raw materials or other inventory, collection of
accounts receivable, settlement of accounts payable, and periodic
debt service by international subsidiaries which occur in the
ordinary course of business.
Interest rate differentials to be paid or received as a result of an
interest rate swap are accrued and recognized as an adjustment of
interest expense related to the designated debt. Interest rate
option premiums paid are amortized to interest expense ratably during
the life of the agreement. Amounts related to interest rate swaps
and the intrinsic value of terminated option agreements are deferred
and amortized as an adjustment to interest expense over the original
period of interest exposure, provided the designated liability
continues to exist or is probable of occurring.
The Company uses forward foreign exchange contracts and currency
swaps to hedge intercompany financial activity denominated in
currencies other than the functional currency of the entity involved.
Forward foreign exchange contracts and currency swaps are carried
off-balance-sheet with unrealized and realized gains and losses
included in the measurement and recording of the hedged transactions.
The Company hedges a portion of its anticipated foreign currency
exchange exposure using certain derivative financial instruments,
primarily purchased options to sell foreign currencies with little or
no intrinsic value at time of purchase. These contracts are
designated and effective as hedges of the Company's consolidated
foreign currency exchange exposures. Gains on option contracts that
are designated as hedges (including open, matured and terminated
contracts), and which have nominal intrinsic value at the time of
purchase, are deferred and recognized in earnings at the time the
underlying hedged exposure occurs. Premiums on purchased options are
recorded as assets and amortized over the lives of the options.
Realized and unrealized gains on options relating to exposures that
are no longer probable of occurring are included as foreign exchange
gains in the accompanying Consolidated Statements of Operations.
REVENUE RECOGNITION AND PRODUCT WARRANTY
The Company recognizes revenue at the time of product shipment and
provides currently for estimated discounts, rebates and product
returns and the cost to repair or replace products under the warranty
provisions in effect at the time of sale.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans using the
intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Financial
Accounting Standards Board (FASB) Statement No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), requires that companies
electing to continue using the intrinsic value method make pro forma
disclosures of net earnings and earnings per share as if the fair-
value-based method of accounting had been applied. See Note 16 for
the fair value disclosures required under SFAS 123.
ADVERTISING COSTS
All advertising costs are expensed as incurred and included in
selling, administrative and general expenses. Advertising expense
was $20.1 million, $20.5 million and $19.0 million in 1998, 1997 and
1996, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
ADOPTED
In April 1998, the American Institute of Certified Public Accountants
(AICPA) issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities" (SOP 98-5), which requires that costs related to start-up
activities be expensed as incurred. Prior to 1998, the Company
capitalized its pre-operating costs incurred in connection with
opening a new facility. In the fourth quarter of 1998, the Company
elected to early adopt the provisions of SOP 98-5 in its consolidated
financial statements for the year ended June 30, 1998. The effect of
adoption of SOP 98-5 was to record a charge of $8.4 million, net of
taxes, for the cumulative effect of an accounting change to expense
costs that had previously been capitalized prior to July 1, 1997.
In March 1998, the AICPA issued SOP 98-1, "Accounting For the Costs
of Computer Software Developed For or Obtained For Internal-Use" (SOP
98-1), which the Company early adopted effective July 1, 1997. SOP
98-1 requires the capitalization of certain costs incurred after the
date of adoption in connection with developing or obtaining software
for internal-use. The Company previously maintained a policy similar
to SOP 98-1 and, therefore, the adoption of SOP 98-1 did not have a
material impact on the Company's consolidated results of operations
or financial position.
In February 1997, the FASB issued Statement No. 128, "Earnings per
Share" (SFAS 128), which replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings
per share amounts for all periods have been presented and, where
appropriate, restated to conform to the SFAS 128 requirements. See
Note 3 for a reconciliation of the numerators and the denominators of
the basic and diluted per share computations for earnings from
continuing operations.
In October 1996, the AICPA issued SOP 96-1, "Environmental
Remediation Liabilities" (SOP 96-1), which requires the accrual of
environmental remediation liabilities when the criteria of FASB
Statement No. 5, "Accounting for Contingencies," are met. SOP 96-1
provides benchmarks to aid in the determination of when environmental
remediation liabilities should be recognized and specific guidance as
to how they should be measured. The Company adopted SOP 96-1
effective July 1, 1997. SOP 96-1 did not have a material impact on
the Company's consolidated results of operations or financial
position.
YET-TO-BE-ADOPTED
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), which is
required to be adopted in years beginning after June 15, 1999. The
Company has not determined when it will adopt SFAS 133, which may be
early adopted as of the beginning of any fiscal quarter after its
issuance. SFAS 133 will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are
not hedges must be adjusted to fair value through income. If the
derivatives are hedges and depending on the nature of the hedges,
changes in the fair value of derivatives which offset the change in
fair value of the hedged assets, liabilities or firm commitments will
either be recorded in earnings or deferred in shareholders' equity
until the hedged item is recognized in earnings. The ineffective
portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company has not yet determined what the
effect of SFAS 133 will be on the future consolidated results of
operations or financial position of the Company.
In February 1998, the FASB issued Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" (SFAS
132), which is effective for fiscal years beginning after
December 15, 1997. SFAS 132 addresses disclosure issues only and
does not change the measurement or recognition provisions for
pensions and postretirement benefits other than pensions.
Accordingly, the Company's adoption of SFAS 132 in 1999 will have no
impact on its consolidated results of operations or financial
position.
In June 1997, the FASB issued Statement No. 131, "Disclosures About
Segments of an Enterprise and Related Information" (SFAS 131), which
is effective for fiscal years beginning after December 15, 1997.
SFAS 131 changes the method of determining segments from that
currently required, and requires the reporting of certain information
about such segments. The Company has not determined how its segments
will be reported or whether and to what extent segment information
will differ from that currently presented.
In June 1997, the FASB issued Statement No. 130,"Reporting
Comprehensive Income" (SFAS 130), which is effective for fiscal years
beginning after December 15, 1997. SFAS 130 establishes new rules
for the reporting and display of comprehensive income and its
components; however, adoption in 1999 will have no impact on the
Company's consolidated results of operations or shareholders' equity.
NOTE 2 - CHANGES IN BUSINESS
ACQUISITIONS
NELLCOR PURITAN BENNETT INCORPORATED
On August 28, 1997, the Company acquired Nellcor Puritan Bennett
Incorporated (Nellcor) through an agreement to purchase for cash all
of the outstanding shares of common stock of Nellcor for $28.50 per
share. The aggregate purchase price of the Nellcor acquisition was
approximately $1.9 billion. Nellcor manufactures and markets
products that monitor, diagnose and treat respiratory impaired
patients. The product lines include pulse oximetry monitors and
sensors, critical care and portable ventilators, home oxygen therapy
products, sleep apnea diagnostic and therapy products, and medical
gas products and distribution systems. The Company completed the
acquisition using cash and cash equivalents and borrowed
approximately $1.1 billion under a $2.0 billion credit facility
established in July 1997, and amended and restated in September 1997.
The acquisition was accounted for under the purchase method of
accounting and, accordingly, the results of operations of Nellcor
have been included in the Company's consolidated financial statements
since September 1, 1997. The purchase price of the acquisition was
allocated to the assets acquired and liabilities assumed based on
their estimated fair values at the date of acquisition. The excess
of the purchase price over the fair value of the net identifiable
assets, totaling $724.2 million, was allocated to goodwill and is
being amortized on a straight-line basis over 30 years. The Company
also recorded a deferred tax liability of $211.0 million,
representing the tax effect of timing differences recorded as part of
the acquisition.
Approximately $925.4 million of the purchase price was allocated to
identifiable intangible assets including purchased research and
development ($398.3 million), technology ($374.2 million), and
trademarks and trade names and assembled work force ($152.9 million).
(See Note 1 for amortization periods and methods for intangible
assets.) The purchased research and development represents the value
of numerous new medical devices and other products/technologies in
all major product lines (e.g., sensors, monitors and ventilators)
that were in various stages of development and had not reached
technological feasibility. No alternative future uses were
identified prior to reaching technological feasibility because of the
uniqueness of the projects. The purchased research and development
was valued using the income approach, which includes an analysis of
the markets, cash flows and risks associated with achieving such cash
flows. This intangible asset, which had no tax benefit, was charged
to results of operations during the first quarter of 1998. Of the
total charge of $398.3 million, $2.0 million relates to the Aero
Systems division which was sold and reclassified to discontinued
operations in the fourth quarter of 1998.
In connection with the Company's filing of a shelf registration
statement for debt securities, Mallinckrodt is engaged in discussions
with the staff of the Securities and Exchange Commission regarding
the purchase price allocation related to its acquisition of Nellcor.
The Company and its auditors, Ernst & Young LLP, believe that the
allocation and related amortization charges are in accordance with
generally accepted accounting principles. Nevertheless, if there are
any significant changes as a result of these discussions to the
amounts allocated to purchased research and development or other
intangible assets or changes in the lives over which such amounts are
amortized, these could have a material impact on the related noncash
charges reflected in the 1998 results of operations and could
materially affect future results of operations as a result of
increased amortization expense.
The sale of Nellcor inventories, which were stepped up to fair value
in connection with allocation of purchase price, decreased earnings
by $75.4 million, $46.7 million net of taxes for 1998. Pretax
charges to the Respiratory Group and Aero Systems division, which was
divested and reclassified to discontinued operations in the fourth
quarter, were $74.4 million and $1.0 million, respectively.
The following unaudited pro forma financial information presents the
combined results of operations of Mallinckrodt and Nellcor as if the
acquisition had occurred as of the beginning of 1997, after giving
effect to certain adjustments, including amortization of goodwill and
intangible assets, additional depreciation expense, increased
interest payments on debt related to the acquisition, reduced
interest income from cash utilized to complete the acquisition, and
the related tax effects. The pro forma financial information does
not necessarily reflect the results of operations that would have
occurred had Mallinckrodt and Nellcor operated as a combined entity
during such periods.
(In millions, except per share amounts ) 1998 1997
-------- --------
Net sales................................... $2,462.3 $2,436.8
Net earnings from continuing operations..... $112.3 $111.7
Net earnings per share from
continuing operations
Basic.................................... $1.53 $1.51
Diluted.................................. $1.52 $1.48
The pro forma financial information presented above does not include
nonrecurring charges for purchased research and development, the sale
of inventory stepped up to fair value at the date of acquisition, and
integration activities. These charges are included in the actual
results of operations for 1998.
Immediately after the acquisition was consummated, management of the
combined Company began to formulate an integration plan to combine
Mallinckrodt and Nellcor into one successful company. Since both
companies (Mallinckrodt and Nellcor) had global healthcare
operations, senior management, through transition teams, assessed
which activities should be consolidated. Management finalized and
approved a Nellcor integration plan during the year. Accordingly,
the Company recorded additional purchase liabilities of $50.1
million, $30.8 million net of related tax benefit, which were
included in the acquisition cost allocation and related goodwill.
The principal actions of the plan include the involuntary severance
of approximately 450 Nellcor employees as a result of work force
reduction primarily in U.S. administrative areas ($37.2 million),
relocation of Nellcor employees ($3.8 million), and the elimination
of contractual obligations of Nellcor which have no future economic
benefit ($9.1 million). Approximately $27.9 million of cash
expenditures were incurred through June 30, 1998 and liabilities of
$22.2 million related to the Nellcor integration plan remained in
accrued liabilities at June 30, 1998. The majority of the remaining
cash expenditures will occur in 1999 with the largest single category
related to severance for previously terminated employees. These
actions are to be completed in 1999 and, although none are expected,
reductions in the estimated liability for these integration
activities will be offset against the related goodwill.
During 1998, the Company recorded a pretax charge to selling,
administrative and general expenses of $19.1 million associated with
exiting certain activities related to Mallinckrodt operations. The
charge included severance costs of $17.1 million related to the
involuntary severance of approximately 130 Mallinckrodt employees as
a result of work force reduction primarily in the Europe
administration function and U.S. sales force, and facility exit costs
of $2 million. Payments made during 1998 relating to the above
totaled $3.5 million. The majority of the remaining $15.6 million
cash expenditures will occur in 1999. Restructuring actions are to
be complete in 1999 and no material adjustments to the original
reserve are anticipated.
The Company recorded a pretax charge to selling, administrative and
general expenses of $49.5 million in 1998 related to employee
transition bonuses of $16.6 million, increased asset valuation
reserves of $12.8 million, and other integration costs of $20.1
million. Charges to the reserve during 1998 were $25.0 million. The
remaining reserve of $24.5 million consists primarily of employee
transition bonuses to be paid in 1999.
OTHERS
In November 1996, the Company acquired D.M. Graham Laboratories,
Inc., a contract manufacturer of dosage pharmaceuticals and a
licensed producer of a variety of medicinal narcotics, for $22
million of the Company's common stock.
In January 1996, the Company acquired Liebel-Flarsheim Company, a
manufacturer of contrast media power injector systems for diagnostic
imaging procedures, x-ray components and specialized equipment for
diagnostic urology procedures, for $70.3 million. In December 1995,
King Pharmaceuticals' product line of specialty analgesic
pharmaceuticals was acquired for $32.4 million.
The above acquisitions were accounted for as purchases, and results
of operations were included in the consolidated financial statements
from their respective acquisition dates. Results of operations for
the periods prior to acquisition were not material to Mallinckrodt.
DISCONTINUED OPERATIONS
The Company sold certain chemical additive product lines in the
second quarter of 1998, and recorded a gain on sale, net of taxes, of
$8.7 million. In the fourth quarter of 1998, the Company sold its
catalyst business and Aero Systems division. The catalyst sale
resulted in a gain, net of taxes, of $60.2 million. No gain or loss
was recognized on the sale of the Aero Systems division, and there
were no earnings from operations. In June 1998, the Company
committed to the sale of the remaining chemical additives business of
the catalysts and chemical additives division, and closing of the
sale occurred on July 31, 1998. Certain liabilities for
environmental, litigation and employee benefits remained with the
Company, and reserves were established to address these liabilities
as deemed appropriate. Earnings, net of taxes, from the catalysts
and chemical additives division for 1998, 1997 and 1996 were $11.4
million, $10.5 million and $10.1 million, respectively.
On March 31, 1997, the Company disposed of Fries & Fries, Inc., a
wholly owned subsidiary which owned the Company's 50 percent interest
in Tastemaker, the flavors joint venture with Hercules Incorporated.
The Company recorded a gain on divestiture, net of taxes, of $270.6
million. Earnings, net of taxes, from the divested business for 1997
and 1996 were zero and $18.6 million, respectively. The disposition
included the assumption of $510 million of debt of Fries & Fries,
Inc. by the buyer. Interest expense related to the assumed debt of
$22.4 million and $2.5 million for 1997 and 1996, respectively, is
included in the above Fries & Fries, Inc. net after-tax results of
operations reclassified as discontinued operations.
On June 30, 1997, the Company sold the animal health segment for cash
plus the assumption of certain liabilities. The Company recorded a
loss on sale, including taxes, of $269.4 million. Environmental
liabilities, certain facility leases, and certain liabilities for
employee benefits, including postretirement benefits, remained with
the Company. Reserves were established to address the remaining
liabilities. Earnings, net of taxes, from the animal health segment
for 1997 and 1996 were $5.8 million and $18.9 million, respectively.
Interest expense related to debt assumed by the buyer of $5.6 million
and $5.0 million for 1997 and 1996, respectively, was included in the
above animal health segment net after-tax results reclassified to
discontinued operations. During the third quarter of 1998, the
Company recorded a one-time, after-tax charge of $7.9 million to
discontinued operations related to settlement costs from the sale of
the animal health segment.
In October 1995, the Company disposed of its feed ingredients
business. The gain on disposition, net of taxes, was $35.4 million
and earnings, net of taxes, from the divested business for 1996 were
$4.4 million.
Discontinued operations for 1997 and 1996 also included other
charges, primarily for environmental and litigation costs related to
previously divested operations, of $2.6 million and $19.1 million,
respectively.
The following schedule summarizes the components, net of tax, of
discontinued operations presented in the Consolidated Statements of
Operations (in millions).
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Catalysts and chemical additives division
Gain on sale.............................. $ 68.9
Earnings from operations.................. 11.4 $ 10.5 $ 10.1
Fries & Fries, Inc.
Gain on divestiture....................... 270.6
Earnings from operations.................. 18.6
Animal health segment
Loss on sale.............................. (7.9) (269.4)
Earnings from operations.................. 5.8 18.9
Feed ingredients business
Gain on divestiture....................... 35.4
Earnings from operations.................. 4.4
Environmental costs/other.................... (2.6) (19.1)
------- ------- -------
Discontinued operations $ 72.4 $ 14.9 $ 68.3
======= ======= =======
</TABLE>
The catalysts and chemical additives and Aero Systems divisions were
reclassified to discontinued operations effective June 30, 1998.
Fries & Fries, Inc. and the animal health segment were reclassified
to discontinued operations effective December 31, 1996 and March 31,
1997, respectively. The feed ingredients business was reclassified
to discontinued operations effective September 30, 1995. All prior
periods of the Consolidated Statements of Operations and Consolidated
Balance Sheets were reclassified to reflect this presentation.
Disclosures included in the Notes to Consolidated Financial
Statements relate to continuing operations, unless otherwise
indicated.
NOTE 3 - EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) from continuing operations per common share (in
millions, except share and per share amounts).
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Numerator:
Earnings (loss) from continuing operations.. $(355.9) $175.2 $143.6
Preferred stock dividends................... (.4) (.4) (.4)
-------- ------- -------
Numerator for basic earnings (loss) per
share and earnings (loss) per share
assuming dilution--income (loss)
available to common shareholders........... $(356.3) $174.8 $143.2
======== ======= =======
Denominator:
Denominator for basic earnings per share--
weighted-average shares.................. 72,920,659 73,837,424 75,183,729
Potential dilutive common shares--
employee stock options................... 1,270,405 1,172,234
---------- ---------- ----------
Denominator for diluted earnings (loss)
per share--adjusted weighted-average
shares and assumed conversions........... 72,920,659 75,107,829 76,355,963
========== ========== ==========
Basic earnings (loss) from continuing
operations per common share............... $(4.89) $2.37 $1.90
======= ===== =====
Earnings (loss) from continuing operations
per common share--assuming dilution....... $(4.89) $2.33 $1.88
======= ===== =====
</TABLE>
The diluted share base for the twelve months ended June 30, 1998
excludes incremental shares of 612,285 related to employee stock
options. These shares are excluded due to their antidilutive effect
as a result of the Company's loss from continuing operations during
1998.
NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Interest paid.................................. $ 83.7 $ 69.1 $ 48.6
Income taxes paid.............................. 73.3 82.2 65.0
Noncash investing and financing activities:
Assumption of liabilities related
to acquisitions.............................. 465.6 2.3 21.5
Principal amount of debt assumed by
buyers in conjunction with divestitures...... 1.0 530.6
Preferred stock received related to a
divestiture.................................. 88.9
Issuance of stock related to an acquisition... 22.0
</TABLE>
The interest paid and income taxes paid presented above include
amounts related to discontinued operations.
NOTE 5 - INVENTORIES
AT JUNE 30, (in millions) 1998 1997
------ ------
Raw materials and supplies.................... $208.4 $107.4
Work in process............................... 46.4 39.9
Finished goods................................ 215.2 144.5
------ ------
$470.0 $291.8
====== ======
NOTE 6 - INVESTMENTS AND OTHER NONCURRENT ASSETS
AT JUNE 30, (in millions) 1998 1997
------ ------
Preferred stock received related
to a divestiture............................. $ 86.1 $ 88.9
Other investments, net........................ 42.9 32.9
Other noncurrent assets, net.................. 25.5 23.3
------ ------
$154.5 $145.1
====== ======
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT
AT JUNE 30, (in millions) 1998 1997
--------- ---------
Land.......................................... $ 69.1 $ 50.6
Buildings and leasehold improvements.......... 354.2 300.1
Machinery and equipment....................... 916.9 778.5
Construction in progress...................... 71.3 59.2
-------- ---------
1,411.5 1,188.4
Accumulated depreciation...................... (516.6) (447.1)
--------- ---------
$ 894.9 $ 741.3
========= =========
Capitalized interest costs were $.8 million in 1998, $.7 million in
1997 and $1.6 million in 1996.
NOTE 8 - INTANGIBLE ASSETS
AT JUNE 30, (in millions) 1998 1997
------- -------
Goodwill...................................... $989.4 $280.5
Accumulated amortization...................... (89.9) (58.0)
------- -------
Goodwill, net................................. $899.5 $222.5
======= =======
Technology.................................... $390.4 $ 30.3
Accumulated amortization...................... (26.1) (5.9)
------- -------
Technology, net............................... $364.3 $ 24.4
======= ======
Other intangible assets....................... $337.4 $187.2
Accumulated amortization...................... (55.3) (42.8)
------- -------
Other intangible assets, net $282.1 $144.4
======= =======
NOTE 9 - FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
In the ordinary course of business, Mallinckrodt purchases materials
and sells finished products denominated in approximately 25 different
currencies. The Company is primarily exposed to changes in exchange
rates of the German deutsche mark and other European currencies
highly correlated with the German deutsche mark and the Japanese yen.
Overall, the Company is a net beneficiary when the U.S. dollar
weakens and is adversely affected by a stronger U.S. dollar relative
to the major currencies identified.
The Company enters into forward foreign exchange contracts and
currency swaps to minimize the exposure on intercompany loans. To
mitigate the short-term effect of changes in foreign currency
exchange rates on the Company's consolidated performance, the Company
hedges a portion of its non-U.S. dollar denominated exposures by
purchasing currency options which generally have terms of two years
or less. The Company uses the currency options with an objective of
limiting negative foreign exchange rate effects on overall
performance for both budget and prior year comparisons over a rolling
18- to 24-month horizon. The Company seeks to have effective
coverage levels over such 18- to 24-month horizon of 50 to 80 percent
of currency exposures that subject the Company to risk. There are no
hedging gains or losses that are explicitly deferred at June 30,
1998.
The Company's interest income and expense are most sensitive to
changes in the general level of U.S. interest rates. In this regard,
changes in U.S. interest rates affect the interest earned on the
Company's cash equivalents and short-term investments as well as
interest paid on its short-term debt. To mitigate the impact of
fluctuations in U.S. interest rates, the Company periodically enters
into interest rate swaps and option contracts.
Information on the duration by expected maturity, notional value,
purpose and fair value of instruments outstanding as of June 30, 1998
is provided below (in millions, except average strike price and
exchange rate):
<TABLE>
<CAPTION>
Fair Value
(Loss)
As of
1999 2000 2001 Total 6/30/98
------ ------ ------ ----- ----------
<S> <C> <C> <C> <C> <C>
Purchased option contracts to sell
for U.S.$ related to anticipated
foreign currency exposures
German deutsche mark
Notional value.................. $ 28.5 $ 55.0 $ 83.5 $ 3.9
Average strike price............ 1.71 1.75
Japanese yen
Notional value.................. $ 10.0 $ 37.5 $ 47.5 $ 6.7
Average strike price............ 114.2 112.8
Forward contracts and currency
swaps related to inter-company
financial transactions
Sale of Canadian dollar
Notional value.................. $ 2.4 $ 2.4 $ 0.0
Exchange rate.................... 1.46
Sale of French franc
Notional value................... $ 12.0 $ 12.0 $ 0.0
Exchange rate.................... 6.1
Sale of Polish zloty
Notional value................... $ 0.4 $ 0.4 $ 0.0
Exchange rate.................... 4.1
Purchase of British pounds
Notional value................... $ 5.1 $ 5.1 $ 0.0
Exchange rate.................... 0.6
Swap of Japanese yen
Notional value................... $ 12.9 $ 12.9 $ (0.1)
Exchange rate.................... 140.0
Interest rate swaps
Related to U.S.$ leases, the
Company pays fixed (9.9%)/
receives variable (LIBOR + 0.70%)
Notional value................... $ 35.6 $ 35.6 $ (2.2)
Related to 6.3% debentures, the
Company pays variable
(LIBOR + .3419%)/receives
fixed (6.3%)
Notional value................... $200.0 $200.0 $ 0.5
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
Non-derivative financial instruments included in the Consolidated
Balance Sheets are cash, short-term investment vehicles, short-term
debt and long-term debt. In the aggregate, these instruments were
carried at amounts approximating fair value at June 30, 1998 and
1997. The fair value of long-term debt was estimated based on future
cash flows discounted at current interest rates available to the
Company for debt with similar maturities and characteristics. See
Note 13 for the disclosure of fair value of long-term debt.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which expose Mallinckrodt to credit risk are
short-term investments (cash equivalents), trade receivables and
derivatives. The Company mitigates the risk that counterparties to
short-term investments and derivatives will fail to perform by
contracting only with major financial institutions having high credit
ratings. Mallinckrodt considers the likelihood of counterparty
failure to be remote.
Trade receivables stem from the Company's worldwide operations and
reflect Mallinckrodt's diverse customer base. The Company
periodically assesses the financial strength of its customers and
obtains proof of creditworthiness, as necessary, prior to extending
credit. Consequently, Mallinckrodt does not have a material
concentration of credit risk, either by transaction type, product
line or geographic region.
NOTE 10 - INCOME TAXES
Income taxes included in the Consolidated Statements of Operations
were (in millions):
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Continuing operations.......................... $ 18.4 $ 96.3 $ 84.3
Discontinued operations:
Sale of catalysts and chemical additives
division.................................... 45.4
Catalysts and chemical additives division
operations.................................. 5.3 6.0 5.7
Divestiture of Fries & Fries, Inc............ 158.9
Fries & Fries, Inc. operations............... (.5) 10.8
Sale of animal health segment................ (4.2) 21.9
Animal health segment operations............. 11.4 11.0
Divestiture of feed ingredients business..... 19.3
Feed ingredients business operations......... 2.2
Other........................................ (8.4) (1.4) (10.3)
------- ------- -------
Total discontinued operations................ 38.1 196.3 38.7
------- ------- -------
Cumulative effect of accounting change......... (4.1)
------- ------- -------
$ 52.4 $292.6 $123.0
======= ======= =======
</TABLE>
The geographical sources of earnings (loss) from continuing
operations before income taxes were (in millions):
1998 1997 1996
-------- ------- -------
U.S........................... $(443.3) $161.7 $123.0
Outside U.S................... 105.8 109.8 104.9
-------- ------- -------
$(337.5) $271.5 $227.9
======== ======= =======
The components of the income tax provision charged to continuing
operations follow (in millions):
1998 1997 1996
-------- ------- -------
Current:
U.S. Federal................ $ 53.3 $ 41.5 $ 26.1
U.S. state and local........ 4.4 7.0 4.1
Outside U.S................. 29.5 26.3 27.5
-------- ------ ------
87.2 74.8 57.7
-------- ------ ------
Deferred:
U.S. Federal................ (87.5) 8.8 20.5
U.S. state and local........ 14.2 2.7 2.6
Outside U.S................. 4.5 10.0 3.5
-------- ------ ------
(68.8) 21.5 26.6
-------- ------ ------
$ 18.4 $ 96.3 $ 84.3
======== ====== ======
The Company had the following deferred tax balances at June 30, 1998
and 1997 (in millions):
1998 1997
------- -------
Deferred tax assets:
Restructuring accruals..................... $ 16.2 $ 21.0
Pensions and deferred compensation......... 20.2 15.4
Net operating losses....................... 11.4 6.4
Environmental accruals..................... 28.2 24.0
Other, net................................. 44.1
------- -------
Gross deferred tax assets.................... 120.1 66.8
Valuation allowance........................ (30.4) (22.8)
------- -------
Total deferred tax assets.................... 89.7 44.0
------- -------
Deferred tax liabilities:
Property, plant and equipment.............. 133.9 126.6
Receivables................................ 18.8 47.8
Intangible assets.......................... 234.8 55.6
Other, net................................. 25.3
------- -------
Total deferred tax liabilities............... 387.5 255.3
------- -------
Net deferred tax liabilities................. $297.8 $211.3
======= =======
The tax benefit of the Company's net operating loss carryforwards of
$11.4 million relates primarily to its non-U.S. operations, and $5.6
million of the tax benefit will expire in years 2000 through 2010.
The remaining $5.8 million of the tax benefit relates to net
operating loss carryforwards with indefinite carryforward periods.
Factors causing the effective tax rate for continuing operations to
differ from the U.S. Federal statutory rate were (in millions):
1998 1997 1996
-------- ------- -------
Computed tax at the U.S.
Federal statutory rate.......... $(118.1) $ 95.0 $ 79.8
State income taxes, net of
Federal benefit................. 12.1 6.6 4.6
Effect of foreign operations..... (14.4) (15.8) (11.6)
Purchase accounting 145.6
Other items...................... (6.8) 10.5 11.5
-------- ------- -------
Income tax provision............. $ 18.4 $ 96.3 $ 84.3
======== ======= =======
Effective tax rate (5.5)% 35.5% 37.0%
Undistributed earnings of certain subsidiaries outside the U.S. are
considered to be permanently invested. Accordingly, no provision for
income taxes was made for undistributed earnings of such
subsidiaries, which aggregated $298.1 million at June 30, 1998.
NOTE 11 - ACCRUED LIABILITIES
AT JUNE 30, (in millions) 1998 1997
------ ------
Compensation and benefits.................... $118.1 $ 98.0
Environmental liabilities.................... 79.5 73.5
Other........................................ 334.4 219.7
------ ------
$532.0 $391.2
====== ======
NOTE 12 - LINES OF CREDIT
The Company has a $1.0 billion private placement commercial paper
program. The program is backed by a $1.6 billion revolving credit
facility expiring September 12, 2002. Under this facility, interest
rates on borrowings are based upon the London Interbank Offered Rate,
plus a margin dependent on the Company's senior debt rating. There
was no borrowing outstanding under the revolving credit facility at
June 30, 1998. Commercial paper borrowings under this program were
$285.8 million as of June 30, 1998.
Non-U.S. lines of credit totaling $141.9 million were also available,
and borrowings under these lines amounted to $17.2 million at
June 30, 1998. These non-U.S. lines are cancelable at any time.
NOTE 13 - DEBT
The components of short-term debt at June 30, 1998 and 1997 were (in
millions):
1998 1997
------ ------
Notes payable................................ $303.4 $ 5.6
Current maturities of long-term debt......... 8.0 6.0
------ ------
$311.4 $11.6
====== ======
The components of long-term debt at June 30, 1998 and 1997 were (in
millions):
<TABLE>
<CAPTION>
Fair Value Carrying Amount
---------------- --------------------
1998 1997 1998 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
9.875% debentures with
initial payment of $.9
million due 2002 and
annual installments of
$15.0 million beginning
in 2003, with final
payment in 2011.............. $150.9 $153.7 $135.1 $135.0
7% debentures due 2013........ 104.1 98.3 98.7 98.7
6.75% notes due 2005.......... 103.8 102.0 99.5 99.4
6.5% notes due 2007.......... 102.0 98.6 98.8 98.6
6.3% debentures due 2011..... 204.6 200.9
6% notes due 2003............ 100.1 98.2 99.6 99.5
5.99% debentures due 2010.... 205.0 203.0
Other........................ 16.9 19.1 16.9 19.1
------ ------
952.5 550.3
Less current maturities...... 8.0 6.0
------ ------
$944.5 $544.3
====== ======
</TABLE>
On August 28, 1997, the Company acquired Nellcor through an agreement
to purchase for cash all of the outstanding shares of common stock of
Nellcor for $28.50 per share. The aggregate purchase price of the
Nellcor acquisition was approximately $1.9 billion. The Company
completed the acquisition using cash and cash equivalents and
borrowed approximately $1.1 billion under a $2.0 billion credit
facility established in July 1997, and amended and restated in
September 1997. The credit facility consisted of a $400 million term
loan, which was repaid in March 1998, and a $1.6 billion five-year
revolving credit facility. Under this facility, interest rates on
borrowings are based upon the London Interbank Offered Rate, plus a
margin dependent on the Company's senior debt rating. There was no
borrowing outstanding under the revolving credit facility at June 30,
1998.
In January 1998, the Company issued $200 million aggregate principal
amount of notes maturing January 14, 2010. The notes bear interest
at 5.99 percent until January 14, 2000, at which time the interest
rate will be reset at a fixed annual rate of 5.64 percent plus the
Company's then incremental borrowing rate above the rate quoted on
U.S. Treasury ten-year notes. The notes are redeemable at the
election of the holder, in whole but not in part, at 100 percent of
the principal amount on January 14, 2000.
In March 1998, the Company issued $200 million aggregate principal
amount of notes maturing March 15, 2011. The notes bear interest at
6.3 percent until March 15, 2001, at which time the interest rate
will be reset at a fixed annual rate of 5.6219 percent plus the
Company's then incremental borrowing rate above the rate quoted on
U.S. Treasury ten-year notes. The notes are redeemable at the
election of the holder, in whole but not in part, at 100 percent of
the principal amount on March 15, 2001. In conjunction with this
issue, the Company entered into an interest rate swap transaction
whereby the effective periodic interest payment is equal to three-
month LIBOR plus .3419 percent. The rate is adjusted every three
months starting June 15, 1998. The swap contract expires on
March 15, 2001.
Proceeds of both of the above transactions were used to repay
commercial paper borrowings.
Maturities of long-term debt for the next five years are: 1999-$8.0
million; 2000-$203.9 million; 2001-$201.7 million; 2002-$1.6 million;
and 2003-$118.3 million. The 9.875 percent debentures are redeemable
at the option of Mallinckrodt at 100 percent in 2001 and thereafter.
The weighted average interest rates on short-term borrowings at June
30, 1998 and 1997 were 5.8 percent and 4.5 percent, respectively.
NOTE 14 - PENSION AND INVESTMENT PLANS
The Company has defined benefit pension plans covering a majority of
its U.S. employees. The majority of these plans provide for
retirement benefits based on years of service and the level of
compensation for the highest three to five years occurring generally
within a period of up to 10 years prior to retirement. Contributions
to the U.S. plans meet ERISA minimum funding requirements.
The components of net periodic defined benefit pension costs are as
follows (in millions):
1998 1997 1996
-------- ------- -------
Service cost...................... $21.1 $24.1 $20.4
Interest cost on projected
benefit obligation............... 34.8 35.8 35.3
Earnings on plan assets........... (104.5) (36.4) (64.3)
Net amortization and deferral..... 71.0 7.1 35.4
Special termination benefits and
curtailment gains/losses, net.... 7.5 8.0 2.2
-------- ------- -------
$29.9 $38.6 $29.0
======== ======= =======
U.S. pension expense in 1998, 1997 and 1996 was $24.2 million, $34.4
million and $25.8 million, respectively.
Assumptions used in determining the actuarial present value of
benefit obligations for U.S. pension plans follow:
1998 1997 1996
-------- ------- -------
Discount rate..................... 7.0% 8.0% 7.75%
Long-term rate of return
on plan assets................... 9.5% 9.5% 9.0%
Compensation increase rate........ 4.5% 5.0% 5.0%
The plans' assets primarily relate to U.S. plans and consist
principally of corporate equities, U.S. government debt securities
and units of participation in a collective short-term investment
fund.
The Company also sponsors seven defined contribution investment plans
for U.S. employees. Participation in these plans is voluntary.
Substantially all U.S. employees are eligible to participate.
Expenses related to the plans consist primarily of Company
contributions, which are based on percentages of certain employee
contributions, plus discretionary amounts determined on an annual
basis. Defined contribution investment plan expense for 1998, 1997
and 1996 was $12.6 million, $12.5 million and $14.0 million,
respectively.
The funded status of U.S. and significant non-U.S. defined benefit
pension plans and amounts recognized in the Consolidated Balance
Sheets at June 30, 1998 and 1997 follow (in millions):
<TABLE>
<CAPTION>
1998 1997
----------------------- ------------------------
Plans with Plans with Plans with Plans with
Assets in Accumulated Assets in Accumulated
Excess of Benefits Excess of Benefits
Accumulated in Excess Accumulated in Excess
Benefits of Assets Benefits of Assets
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets at fair value...... $427.2 $ 9.7 $356.9 $34.5
Actuarial present value
of benefit obligation:
Vested benefits......... 332.1 43.5 251.0 67.1
Nonvested benefits...... 33.0 10.4 39.3 5.9
----------- ----------- ----------- -----------
Accumulated benefit
obligation............. 365.1 53.9 290.3 73.0
Projected future
salary increases....... 96.6 11.7 79.2 11.5
----------- ----------- ----------- -----------
Projected benefit
obligation............. 461.7 65.6 369.5 84.5
----------- ----------- ----------- -----------
Projected benefit
obligation in excess
of plan assets........... 34.5 55.9 12.6 50.0
Items not yet recognized
in earnings:
Unrecognized prior
service cost........... (5.4) (2.9) (0.3) (8.9)
Unrecognized net
gain (loss)............ 5.3 (1.0) 7.5 7.8
Unamortized transition
asset (liability)...... 0.9 (3.7) 1.3 (5.6)
----------- ----------- ----------- -----------
Accrued pension
liability................ $ 35.3 $48.3 $ 21.1 $43.3
=========== =========== =========== ===========
</TABLE>
The pension and investment plan information presented above includes
related amounts for the businesses sold in 1998, 1997 and 1996,
except for 1997 pension expense, assets and liabilities of non-U.S.
animal health segment pension plans that were assumed by the buyer.
Mallinckrodt retained all pension assets and liabilities relating to
the frozen pension benefits of U.S. employees of the businesses sold
in 1998, 1997 and 1996.
NOTE 15 - POSTRETIREMENT BENEFITS
Mallinckrodt provides certain healthcare benefits for a majority of
its U.S. salaried and hourly retired employees through various self-
insured and fully-insured programs. Employees may become eligible
for healthcare benefits if they retire after attaining specified age
and service requirements while working for the Company.
The postretirement benefit information presented below includes
related amounts for the businesses sold in 1998, 1997 and 1996,
except for the accrued postretirement benefit cost of certain active
animal health segment employees which was assumed by the buyer.
The components of periodic postretirement benefits costs are as
follows (in millions):
1998 1997 1996
------- ------- -------
Service cost for benefits
earned during the year........... $ 3.1 $ 5.2 $ 4.8
Interest cost on benefit
obligation....................... 10.0 11.6 13.0
Amortization of unrecognized
net (gain) loss and prior
service cost..................... (1.9) .2
------- ------- -------
$11.2 $17.0 $17.8
======= ======= =======
The following table presents the plans' funded status reconciled with
amounts recognized in the Company's Consolidated Balance Sheets at
June 30, 1998 and 1997 (in millions):
1998 1997
------ ------
Accumulated postretirement
benefit obligation (APBO):
Retirees................................... $ 85.5 $ 79.7
Fully eligible active employees............ 10.7 12.5
Other active employees..................... 41.4 33.7
------ ------
Accumulated postretirement benefit
obligation in excess of plan assets......... 137.6 125.9
Unrecognized net gain........................ 16.2 18.1
Unrecognized prior service cost.............. 15.4 17.9
------ ------
Accrued postretirement benefit cost.......... $169.2 $161.9
====== ======
The discount rates used in determining the APBO for 1998 and 1997
were 7.0 percent and 8.0 percent, respectively. Changes in plan
provisions for both retirees and active employees reduced the APBO by
$24.6 million in 1997.
The assumed medical plan cost trend rates used in measuring the APBO
were 8.0 percent and 8.5 percent for 1998 and 1997, respectively,
gradually declining to 4.75 percent in 2006 and thereafter. A one
percentage point increase in the healthcare cost trend rate would
increase the APBO for 1998 by $11.4 million and the aggregate service
and interest cost by $1.2 million.
A $1.4 million curtailment gain relating to the sale of the catalyst
business in the fourth quarter of 1998 was included in the gain on
sale recorded in discontinued operations. A $1.3 million curtailment
gain relating to the sale of the animal health segment was included
in the loss on sale recorded in discontinued operations in 1997.
NOTE 16 - STOCK PLANS
The Company authorized a new non-qualified stock option plan in
October 1997. This plan provides for granting stock options at
prices not less than 100 percent of market price (as defined) at the
date of grant. Options are exercisable over nine years beginning one
year after the date of grant and are limited for the first and second
year of eligibility to 33-1/3 percent and 66-2/3 percent,
respectively. Options granted under previous non-qualified stock
option plans are exercisable over nine years beginning one year after
the date of grant and are limited to 50 percent during the first year
of eligibility.
The pro forma information regarding net earnings and earnings per
share required by SFAS 123 has been determined as if the Company had
accounted for its employee stock options under the fair value method.
The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following
weighted average assumptions:
1998 1997 1996
------ ------ ------
Risk free interest rate............. 5.95% 6.32% 5.46%
Expected dividend yield of stock.... 1.58% 1.53% 1.53%
Expected volatility of stock........ 23.8% 25.4% 30.0%
Expected life of option (years)..... 4.6 4.5 4.1
The weighted average fair values of options granted during 1998, 1997
and 1996 were $9.39, $11.09 and $10.06, respectively.
The estimated fair value of the options is amortized to expense over
the options' vesting period. Because the SFAS 123 method of
accounting has been applied only to grants after June 30, 1995, the
following effects on net earnings and EPS may not be representative
of the effects on reported net earnings for future years. The
Company's pro forma information follows (in millions, except per
share amounts):
1998 1997 1996
-------- ------- -------
Net earnings (loss):
As reported................. $(291.9) $190.1 $211.9
Pro forma................... (302.8) 183.6 209.9
Earnings (loss) per share:
As reported................. $ (4.01) $ 2.53 $ 2.77
Pro forma................... (4.16) 2.44 2.74
A summary of the Company's stock option activity and related
information follows:
1998
-----------------------------
Number Weighted Avg.
of Options Exercise Price
---------- --------------
Outstanding-beginning of year....... 5,821,316 $32.96
Granted............................. 2,601,227 35.68
Exercised........................... (614,320) 29.40
Canceled............................ (589,997) 35.44
----------
Outstanding-end of year............. 7,218,226 34.04
==========
Exercisable at end of year.......... 4,394,493 32.64
Reserved for future option grants... 2,768,000
1997
-----------------------------
Number Weighted Avg.
of Options Exercise Price
---------- ---------------
Outstanding-beginning of year....... 6,262,753 $31.54
Granted............................. 1,118,170 38.54
Exercised........................... (1,143,868) 29.60
Canceled............................ (415,739) 35.77
----------
Outstanding-end of year............. 5,821,316 32.96
==========
Exercisable at end of year.......... 4,275,547 31.40
Reserved for future option grants... 1,939,615
1996
------------------------------
Number Weighted Avg.
of Options Exercise Price
---------- ---------------
Outstanding-beginning of year....... 6,126,649 $30.14
Granted............................. 1,449,622 34.97
Exercised........................... (1,071,373) 27.75
Canceled............................ (242,145) 33.38
----------
Outstanding-end of year............. 6,262,753 31.54
==========
Exercisable at end of year.......... 4,300,204 30.60
Reserved for future option grants... 2,642,164
Outstanding stock options will expire over a period ending no later
than June 15, 2008. The average exercise price of outstanding stock
options at June 30, 1998 was based on an aggregate exercise price of
about $246 million. The weighted average remaining contractual life
of outstanding stock options is 6.9 years. Further breakdown of
outstanding stock options by price range follows:
Options Currently Outstanding
-----------------------------------------------
Number Weighted Avg. Weighted Avg.
Price Range of Options Exercise Price Remaining Life
- -------------- ----------- -------------- --------------
$13.06 - 29.98 1,396,566 $25.76 4.6
30.13 - 34.79 1,152,298 33.85 6.6
35.01 - 44.47 4,669,362 36.57 7.6
Options Exercisable
----------------------------
Number Weighted Avg.
Price Range of Options Exercise Price
- -------------- ----------- --------------
$13.06 - 29.98 1,346,766 $25.61
30.13 - 34.79 1,152,298 33.85
35.01 - 44.47 1,895,429 37.05
NOTE 17 - CAPITAL STOCK
The Company has authorized and issued 100,000 shares, 98,330
outstanding at June 30, 1998, of par value $100, 4 percent cumulative
preferred stock. This stock, with voting rights, is redeemable at
the Company's option at $110 a share. During the three years ended
June 30, 1998, the number of issued and outstanding shares did not
change. The Company has authorized 1,400,000 shares, par value $1,
of series preferred stock, none of which was outstanding during the
three years ended June 30, 1998.
Each outstanding common share includes a non-voting common stock
purchase right. If a person or group acquires or has the right to
acquire 20 percent or more of the common stock or commences a tender
offer for 30 percent or more of the common stock, the rights become
exercisable by the holder, who may then purchase $320 worth of common
stock for $160 unless, in lieu thereof, the Board of Directors causes
the exchange of each outstanding right for one share of common stock
(in either case, exclusive of the rights held by the acquiring person
or group which are voided). In the event of a merger or sale of 50
percent or more of the Company's assets, the rights may in certain
circumstances entitle the holder to purchase $320 worth of stock in
the surviving entity for $160. The rights may be redeemed by the
Board at a price of 5 cents per right at any time before they become
exercisable and, unless exercised, they will expire February 28,
2006.
The Company has a long-term incentive award program for executive
officers. There are 1,000,000 shares reserved for this plan.
Common shares reserved at June 30, 1998 consisted of the following:
Exercise of common stock purchase rights..................84,235,877
Exercise of stock options and granting of stock awards....11,061,226
----------
95,297,103
==========
The Company's Board of Directors previously authorized repurchase of
47 million shares of common stock and additional repurchases not to
exceed cash outlays of $250 million. Share repurchases under these
authorizations have totaled 36.8 million shares. Changes in the
number of shares of common stock issued and in treasury were as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Common stock issued.............. 87,116,289 87,116,289 87,116,289
Treasury common stock:
Balance, beginning of year..... 14,843,847 12,835,721 10,365,203
Stock options exercised........ (614,320) (1,143,868) (1,071,373)
Purchased...................... 241,753 3,654,995 3,540,018
Issuance of stock related
to an acquisition............. (503,001)
Restricted stock awards........ (252,136)
401(k) supermatch.............. (272,739)
Directors' stock award plan.... (4,767)
Cancellations of restricted
shares........................ 1,873
---------- ---------- ----------
Balance, end of year 13,941,638 14,843,847 12,835,721
---------- ---------- ----------
Common stock outstanding,
end of year..................... 73,174,651 72,272,442 74,280,568
========== ========== ==========
</TABLE>
NOTE 18 - BUSINESS SEGMENT
The Company operates globally primarily in one industry segment -
healthcare. Healthcare develops, manufactures and markets healthcare
products to hospitals, clinical laboratories, pharmaceutical
manufacturers and other customers on a worldwide basis. The Company
markets and distributes its products directly through its
geographically organized sales force, through various group
purchasing organizations, and through distributors in the U.S. and
internationally. Healthcare consists of three businesses:
Respiratory, Imaging and Pharmaceuticals. The Respiratory business
includes products for respiratory care, anesthesiology and blood
analysis. Such products include oxygen monitoring, critical care
ventilation, continuous core temperature monitoring systems, fluid
warming and convective warm air temperature management systems, and
airway management products. The Imaging business includes products
used in radiology, cardiology and nuclear medicine. Principal
products include iodinated contrast media (ionic and nonionic),
ultrasound contrast agents and interventional catheters and related
supplies, and radiopharmaceuticals used to provide images of numerous
body organs' anatomy and function, and to diagnose and treat
diseases. Pharmaceuticals products include analgesics such as
acetaminophen (APAP); codeine salts, morphine and other opium-based
narcotics and synthetic narcotics used to treat pain and coughs; and
peptides which are used in many new pharmaceuticals. Other
Pharmaceuticals products include laboratory and microelectronic
chemicals; Toleron brand of ferrous fumarate which stimulates the
formation of red blood cells; magnesium stearate for use as a
tableting aid in pharmaceuticals; potassium chloride for use as a
potassium supplement in pharmaceuticals and nutritionals; and other
salts, chemicals and reagents used in the production of
pharmaceutical and food products.
In July 1996, Mallinckrodt began supplying Premier, Inc. (Premier)
with x-ray contrast media under a five-year contract. Subsequently,
Mallinckrodt entered into sole-source agreements to supply Premier
member hospitals with tracheostomy tubes, temperature monitoring
systems, and radiopharmaceuticals and related products. Effective
July 1, 1997, Premier named Mallinckrodt a corporate partner,
extending all supply agreements to seven years. Premier's 1,650
member hospitals are provided incentives to use Mallinckrodt
products. For 1998 and 1997, net sales to hospitals under the
Premier agreement represented approximately 13 percent and 9 percent
of net sales, respectively. No individual customer, either through
Premier or otherwise, represented more than 10 percent of net sales
for any of the three years in the period ended June 30, 1998.
NOTE 19 - INTERNATIONAL OPERATIONS
Export sales to unaffiliated customers included in U.S. sales were
(in millions):
1998 1997 1996
------- ------ ------
Europe ..................... $ 36.4 $ 23.4 $ 24.9
Asia/Pacific................ 67.2 52.6 46.8
Latin America............... 42.0 26.2 23.0
Canada...................... 2.8 2.1 1.4
------- ------ ------
Total....................... $148.4 $104.3 $ 96.1
======= ====== ======
Net sales, earnings (loss) from continuing operations before income
taxes, and identifiable assets by geographic areas follow (in
millions):
<TABLE>
<CAPTION>
1998 United Asia/ Latin
States Europe Pacific America Canada Total
-------- ------ ------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Gross sales....... $1,929.2 $607.1 $121.6 $41.3 $116.2 $2,815.4
Intercompany...... 205.6 162.5 2.4 14.1 63.8 448.4
-------- ------ ------- ------- ------- --------
Net sales......... $1,723.6 $444.6 $119.2 $27.2 $ 52.4 $2,367.0
======== ====== ======= ======= ======= ========
1997
Gross sales....... $1,305.4 $473.8 $102.2 $37.7 $107.3 $2,026.4
Intercompany...... 117.0 124.4 3.1 10.3 73.5 328.3
-------- ------ ------- ------- ------ --------
Net sales......... $1,188.4 $349.4 $ 99.1 $27.4 $ 33.8 $1,698.1
======== ====== ======= ======= ====== ========
1996
Gross sales....... $1,187.8 $445.2 $107.4 $20.7 $ 86.3 $1,847.4
Intercompany...... 87.4 102.8 1.8 2.6 55.9 250.5
-------- ------ ------ ------- ------ --------
Net sales......... $1,100.4 $342.4 $105.6 $18.1 $ 30.4 $1,596.9
======== ====== ====== ======= ====== ========
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
1998 1997 1996
--------- ------- ---------
United States................................ $(324.3) $215.9 $215.9
Europe....................................... 96.9 84.9 94.4
Asia/Pacific................................. .8 4.7 6.1
Latin America................................ 4.0 4.8 2.7
Canada....................................... 6.4 8.0 6.1
Corporate.................................... (26.6) (24.7) (41.4)
Eliminations................................. (7.7) 3.9 (4.3)
--------- ------- ---------
Operating earnings (loss).................... (250.5) 297.5 279.5
Interest income and other nonoperating
income (expense), net....................... 14.8 22.0 (.3)
Interest expense............................. (101.8) (48.0) (51.3)
--------- ------- ---------
Consolidated................................. $(337.5) $271.5 $227.9
========= ======= =========
ASSETS
United States................................ $2,874.9 $1,245.5 $1,228.7
Europe....................................... 539.9 480.0 518.0
Asia/Pacific................................. 58.9 45.3 59.8
Latin America................................ 36.1 33.7 23.4
Canada....................................... 60.6 42.0 51.8
Corporate.................................... 198.0 1,004.1 531.9
Discontinued operations...................... 17.2 124.8 604.0
--------- -------- ---------
Consolidated................................. $3,785.6 $2,975.4 $3,017.6
========= ======== =========
</TABLE>
Transfers of products between geographic areas are at prices
approximating those charged to unaffiliated customers. All such
transfers are fully eliminated.
Net foreign exchange translation gains or losses from businesses in
hyperinflationary economies were not material in 1998, 1997 and 1996,
and have been included in other operating income, net in the
Consolidated Statements of Operations.
NOTE 20 - COMMITMENTS
The Company leases office space, data processing equipment, land,
buildings, and machinery and equipment. Rent expense for continuing
operations in 1998, 1997 and 1996 related to operating leases was
$31.5 million, $20.2 million and $22.4 million, respectively.
Minimum rent commitments for continuing operations at June 30, 1998
under operating leases with an initial or remaining noncancelable
period exceeding one year follow:
<TABLE>
<CAPTION>
After
(In millions) 1999 2000 2001 2002 2003 2003 Total
------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
$22.4 $16.6 $13.7 $10.6 $9.8 $45.4 $118.5
</TABLE>
NOTE 21 - CONTINGENCIES
The Company is subject to various investigations, claims and legal
proceedings covering a wide range of matters that arise in the
ordinary course of its business activities.
On October 6, 1994, Augustine Medical, Inc. (Augustine) commenced a
patent infringement litigation against Mallinckrodt Inc. and its
wholly owned subsidiary, Mallinckrodt Medical, Inc. (collectively,
the Company) in the U.S. District Court for the District of
Minnesota. Specifically, Augustine alleged that the Company's sale
of all five models of its convective warming blankets infringes
certain claims of one or more of its patents. The Company filed
counterclaims against Augustine in connection with the above actions
alleging unfair competition, antitrust violations, and invalidity of
the asserted patents, among other things.
The liability phase of the case was tried to a jury in August 1997
and the verdict was that the Company's blankets infringe certain
Augustine patents under the doctrine of equivalents, but do not
literally infringe the patents. There was also a finding of no
willful infringement. On September 22, 1997, the jury awarded
damages in the amount of $16.8 million for the period ended September
30, 1997 and the judge put in place an injunction which stopped the
Company from manufacturing and selling blankets in the United States.
The Company appealed the jury verdicts of liability and damages to
the Court of Appeals for the Federal Circuit (a special court for
patent appeals that does not involve a jury). The Court of Appeals
has stayed the injunction pending the outcome of the Company's
appeal, and the Company continues to sell and manufacture blankets in
the United States. With the advice of outside counsel, the Company
believes there was insufficient evidence of equivalents presented
and, consequently, for this and other reasons the verdicts were in
error. The Company is working vigorously in the Appeals Court to
overturn the verdicts and believes that it has strong arguments that
its blankets do not infringe Augustine's patents. Based on all the
facts available to management, the Company believes that it is
probable that the jury verdict and the trial court injunction will be
overturned on appeal. If damages were assessed in the same manner as
determined by the jury for sales subsequent to September 30, 1997
plus interest on the estimated total, the total liability would
approximate $22.4 million at June 30, 1998. The Company has not
recorded an accrual for payment of the damages, because an
unfavorable outcome in this litigation is, in management's opinion,
reasonably possible but not probable.
In connection with laws and regulations pertaining to the protection
of the environment, the Company is a party to several environmental
remediation investigations and clean-ups and, along with other
companies, has been named a "potentially responsible party" for
certain waste disposal sites. The Company accrues for losses
associated with environmental remediation obligations when such
losses are probable and reasonably estimable. Accruals for estimated
losses from environmental remediation obligations generally are
recognized no later than completion of the remedial feasibility
study. Such accruals are adjusted as further information develops or
circumstances change. Accruals for future expenditures for
environmental remediation are not discounted to their present value.
Recoveries, of which none exist at June 30, 1998 and 1997, of
environmental remediation costs from other parties are recognized as
assets when their receipt is deemed probable.
At June 30, 1998 and 1997, the Company had accruals, included in
current accrued liabilities and other noncurrent liabilities and
deferred credits, of $126.2 million and $115.7 million, respectively,
for costs associated with the study and remediation of Superfund
sites and the Company's current and former operating sites for
matters that meet the policy set forth above. Based upon currently
available information, the Company has concluded that it is not
reasonably possible at this time that additional liabilities will
result from the resolution of these matters that would have a
material adverse effect on the Company's consolidated results of
operations or financial position.
<PAGE>
<TABLE>
QUARTERLY RESULTS
(In millions, except per share amounts)
<CAPTION>
FISCAL 1998
Quarter (Unaudited)
-------------------------------------
First Second Third Fourth Year
-------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net sales.................. $ 454.6 $607.3 $649.8 $655.3 $2,367.0
Gross margins.............. 178.8 211.5 305.2 302.7 998.2
Earnings (loss) from
continuing operations..... (380.7) (18.6) 32.7 10.7 (355.9)
Discontinued operations.... 14.5 (4.0) 61.9 72.4
Cumulative effect of
accounting change......... (8.4) (8.4)
-------- -------- ------- -------- ---------
Net earnings (loss)........ (389.1) (4.1) 28.7 72.6 (291.9)
Preferred stock dividends.. (.1) (.1) (.1) (.1) (.4)
-------- -------- ------- -------- ---------
Available for common
shareholders.............. $(389.2) $ (4.2) $ 28.6 $ 72.5 $ (292.3)
======== ======== ======= ======== =========
Basic earnings per common
share:
Earnings (loss) from
continuing operations... $ (5.26) $ (.26) $ .45 $ .14 $ (4.89)
Discontinued operations.. .20 (.06) .85 .99
Cumulative effect of
accounting change....... (.11) (.11)
-------- -------- ------- -------- ---------
Net earnings (loss)...... $ (5.37) $ (.06) $ .39 $ .99 $ (4.01)
======== ======== ======= ======== =========
Earnings per common share -
assuming dilution:
Earnings (loss) from
continuing operations... $ (5.26) $ (.26) $ .44 $ .14 $ (4.89)
Discontinued operations.. .20 (.05) .85 .99
Cumulative effect
of accounting change.... (.11) (.11)
-------- -------- ------- -------- ---------
Net earnings (loss)...... $ (5.37) $ (.06) $ .39 $ .99 $ (4.01)
======== ======== ======= ======== =========
</TABLE>
On August 28, 1997, the Company acquired Nellcor Puritan Bennett
Incorporated (Nellcor) through an agreement to purchase for cash all
of the outstanding shares of common stock of Nellcor for $28.50 per
share. The aggregate purchase price of the Nellcor acquisition was
approximately $1.9 billion. Approximately $398.3 million of the
purchase price was allocated to purchased research and development.
This intangible asset, which had no tax benefit, was charged to
results of operations during the first quarter of 1998. Of the total
charge of $398.3 million, $2.0 million related to the Aero Systems
division which was sold and reclassified to discontinued operations
in the fourth quarter of 1998.
The sale of Nellcor inventories, which were stepped up to fair value
in connection with allocation of purchase price, decreased earnings
by $75.4 million, $46.7 million net of taxes for 1998. After-tax
charges to the Respiratory Group, which are included in earnings
(loss) from continuing operations, were $11.5 million and $34.6
million for the first and second quarters, respectively. After-tax
charges to discontinued operations related to the Aero Systems
division were $.2 million and $.4 million for the first and second
quarters, respectively.
Costs of exiting certain activities related to Mallinckrodt
operations plus integration costs of the combined Mallinckrodt and
Nellcor operations were $68.6 million, $46.4 million net of taxes.
The after-tax charge increased the loss from continuing operations in
the second quarter by $4.3 million, and reduced earnings from
continuing operations by $8.3 million and $33.8 million in the third
and fourth quarters, respectively. See the Acquisitions section of
Note 2 of the Notes to Consolidated Financial Statements for
additional disclosure.
The Company sold certain chemical additive product lines in the
second quarter of 1998, and recorded a gain on sale, net of taxes, of
$8.7 million. In the fourth quarter, the Company sold its catalyst
business and Aero Systems division. The catalyst sale resulted in a
gain, net of taxes, of $60.2 million. No gain or loss was recognized
on sale of the Aero Systems division. In June 1998, the Company
committed to the sale of the remaining chemical additives business of
the catalysts and chemical additives division, and closing of the
sale occurred on July 31, 1998. The net gain on sale of these
businesses and their results of operations were accounted for as
discontinued operations and, accordingly, prior year results have
been restated. See the Discontinued Operations section of Note 2 of
the Notes to Consolidated Financial Statements for additional
disclosure.
In the fourth quarter of 1998, the Company elected to early adopt the
provisions of AICPA SOP 98-5, "Reporting on the Costs of Start-Up
Activities" (SOP 98-5), in its financial statements for the year
ended June 30, 1998. The effect of adoption of SOP 98-5 was to
record a charge of $8.4 million, net of taxes, for the cumulative
effect of an accounting change to expense costs that had previously
been capitalized prior to July 1, 1997. The approximate effect of
the accounting change for each quarter of the year ended June 30,
1998 was to increase the net loss $7.7 million or 11 cents per share
in the quarter ended September 30, 1997; reduce the net loss $.6
million or 1 cent per share in the quarter ended December 31, 1997;
increase net earnings $.6 million or 1 cent per share in the quarter
ended March 31, 1998; and increase net earnings $.4 million or 1 cent
per share in the quarter ended June 30, 1998.
Net earnings per share for the four quarters of 1998 were less than
full year per share results by four cents due to increases in common
shares outstanding during 1998.
<PAGE>
QUARTERLY RESULTS (continued)
(In millions, except per share amounts)
<TABLE>
<CAPTION>
FISCAL 1997
Quarter (Unaudited)
-------------------------------------
First Second Third Fourth Year
-------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net sales.................. $404.6 $414.3 $429.6 $449.6 $1,698.1
Gross margins.............. 191.5 195.5 199.2 214.0 800.2
Earnings from
continuing operations..... 35.5 37.8 46.2 55.7 175.2
Discontinued operations.... (.1) 5.7 2.4 6.9 14.9
-------- -------- ------- -------- ---------
Net earnings............... 35.4 43.5 48.6 62.6 190.1
Preferred stock dividends.. (.1) (.1) (.1) (.1) (.4)
-------- -------- ------- -------- ---------
Available for common
shareholders.............. $ 35.3 $ 43.4 $ 48.5 $ 62.5 $ 189.7
======== ======== ======= ======== =========
Basic earnings per common
share:
Earnings from continuing
operations.............. $ .48 $ .51 $ .63 $ .76 $ 2.37
Discontinued operations.. .08 .03 09 .20
-------- -------- ------- -------- ---------
Net earnings............. $ . 48 $ .59 $ .66 $ .85 $ 2.57
======== ======== ======= ======== =========
Earnings per common share -
assuming dilution:
Earnings from continuing
operations.............. $ .47 $ .50 $ .61 $ .75 $ 2.33
Discontinued operations.. .07 .04 .09 .20
-------- -------- ------- -------- ---------
Net earnings............. $ .47 $ .57 $ .65 $ .84 $ 2.53
======== ======== ======= ======== =========
</TABLE>
During 1998, the Company sold, or committed to sell, its catalysts
and chemical additives division. The results of operations for this
division were reclassified to discontinued operations in the fourth
quarter of 1998 and, accordingly, results of operations for 1997 were
also reclassified. See the Discontinued Operations section of
Note 2 of the Notes to Consolidated Financial Statements for
additional disclosure.
On March 31, 1997, the Company disposed of Fries & Fries, Inc., a
wholly owned subsidiary which owned the Company's interest in
Tastemaker, the flavors joint venture. The Company recorded a net
after-tax gain of $270.6 million on the divestiture. Results for the
third quarter also included an estimated net after-tax loss of $275.3
million related to the planned sale of the animal health segment. On
June 30, 1997, the sale of the animal health segment was completed
and the net after-tax loss was adjusted to $269.4 million. The net
gain on disposal of these businesses and their results of operations
were accounted for as discontinued operations. See the Discontinued
Operations section of Note 2 of the Notes to Consolidated Financial
Statements for additional disclosure.
Earnings from continuing operations for the first quarter included a
one-time research and development charge of $6.0 million, $3.8
million after taxes, or 5 cents per share, resulting from a strategic
alliance to develop new magnetic resonance imaging technology.
Basic net earnings per share for the four quarters of 1997 were more
than full year per share results by one cent due to decreases in
common shares outstanding during 1997.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information concerning directors of the Registrant, see pages 2
through 5, and 11, incorporated herein by reference, of
Mallinckrodt's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on October 21, 1998. For information
concerning executive officers of the Registrant, see Part I Item 4 of
this report and page 11, incorporated herein by reference, of
Mallinckrodt's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on October 21, 1998.
ITEM 11. EXECUTIVE COMPENSATION
For information concerning executive compensation, see pages 6 and 7,
10 and 11, and 14 through 23, incorporated herein by reference, of
Mallinckrodt's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on October 21, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
For information concerning security ownership of certain beneficial
owners and management, see pages 8 and 9, incorporated herein by
reference, of Mallinckrodt's definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on October 21, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning certain relationships and related
transactions, see page 7, incorporated herein by reference, of
Mallinckrodt's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on October 21, 1998.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Financial Statements, Financial Statement Schedules and
Exhibits
(1)(2) See index on page 65 for a listing of financial statements and
financial statement schedules filed with this report.
(3) Exhibits filed with this report.
Exhibit
Number Description
- ------- -----------------------------------------------------------
2.1 Agreement dated February 4, 1997 among Mallinckrodt,
Hercules Incorporated, Roche Holdings, Inc. and Givaudan-
Roure (International) SA (incorporated herein by reference
to Exhibit 2.1 to Form 8-K, dated March 31, 1997)
2.2 First Amendment to Agreement dated March 28, 1997 among
Mallinckrodt, Hercules Incorporated, Roche Holdings, Inc.
and Givaudan-Roure (International) SA (incorporated herein
by reference to Exhibit 2.2 to Form 8-K, dated March 31,
1997)
2.3 Contribution Agreement dated February 4, 1997 among
Mallinckrodt, Roche Holdings, Inc. and Givaudan-Roure
(United States) Inc. (incorporated herein by reference to
Exhibit 2.3 to Form 8-K, dated March 31, 1997)
2.4 Stock Purchase Agreement, dated May 19, 1997, among
Mallinckrodt Inc., Mallinckrodt Veterinary, Inc.,
Mallinckrodt Veterinary International, Inc. and Schering-
Plough Corporation (incorporated herein by reference to
Exhibit 2.1 to Form 8-K, dated June 30, 1997)
2.5 Amendment No. 1 dated June 30, 1997 to the Stock Purchase
Agreement among Mallinckrodt Inc., Mallinckrodt Veterinary,
Inc., Mallinckrodt Veterinary International, Inc. and
Schering-Plough Corporation, which amendment was also
executed for certain purposes by Mallinckrodt Veterinary
Holdings, Inc. (incorporated herein by reference to Exhibit
2.2 to Form 8-K, dated June 30, 1997)
2.6 Agreement and Plan of Merger, dated as of July 23, 1997,
among Nellcor Puritan Bennett Incorporated ("Nellcor"),
Mallinckrodt Inc. and NPB Acquisition Corp. (incorporated
herein by reference to Nellcor's Current Report on Form 8-K
(File No. 0-14980) filed on August 5, 1997)
3.1(a) Restated Certificate of Incorporation of Mallinckrodt,
dated June 22, 1994 (incorporated herein by reference to
Exhibit 3.1 to 1994 Form 10-K)
3.1(b) Certificate of Amendment of the Certificate of
Incorporation of Mallinckrodt, dated October 16, 1996
(incorporated herein by reference to Exhibit 3.3 to
September 30, 1996 Form 10-Q)
3.2 By-Laws of Mallinckrodt as amended through April 15, 1992
(filed with this electronic submission)
4.1 Form 8-A Registration Statement under Section 12 of the
Securities Exchange Act of 1934, dated April 10, 1987
defining the rights of holders of Mallinckrodt's 4%
Cumulative Preferred Stock and Common Stock (incorporated
herein by reference to Exhibit 4.6 to 1989 Form 10-K,
Commission File No. 1-483)
4.2(a) Amended and Restated Rights Agreement dated as of
February 19, 1996, between the Company and The First
National Bank of Chicago, as Rights Agent (incorporated
herein by reference to Exhibit 2 to Amendment to
Registration Statement on Form 8-A/A dated February 26,
1996)
4.2(b) First Amendment, dated as of August 11, 1998, between the
Company and The First National Bank of Chicago, as Rights
Agent (incorporated herein by reference to Exhibit 1 to
Amendment to Registration Statement on Form 8-A/A dated
September 2, 1998)
4.3 Indenture dated as of March 15, 1985, as amended and
restated as of February 15, 1995, between Mallinckrodt and
First Trust of New York, National Association (incorporated
herein by reference to Exhibit 4.1 to Form S-3 Registration
Statement No. 33-57821)
4.4 The Company hereby agrees to file on request of the
Commission a copy of all instruments not otherwise filed
with respect to long-term debt of the Company or any of its
subsidiaries for which the total amount of securities
authorized under such instruments does not exceed 10% of
the total assets of the Company and its subsidiaries on a
consolidated basis
10.1 Form of Executive Life Insurance Plan Participation
Agreement, as entered into with the Company's executive
officers and certain other key employees (1) (incorporated
herein by reference to Exhibit 10.24 to 1996 Form 10-K)
10.2 Restated Mallinckrodt Executive Long-Term Disability Plan
effective January 1, 1987 (1) (incorporated herein by
reference to Exhibit 10.3 to 1989 Form 10-K, Commission
File No. 1-483)
10.3(a) Supplemental Benefit Plan for Participants in the
Mallinckrodt Retirement Plan as amended and restated
effective January 1, 1980 (1) (incorporated herein by
reference to Exhibit 10.6(a) to 1989 Form 10-K, Commission
File No. 1-483)
10.3(b) Amendment No. 1 dated June 20, 1989 to Supplemental Benefit
Plan for Participants in the Retirement Plan for Salaried
Employees of Mallinckrodt (1) (incorporated herein by
reference to Exhibit 10.6(b) to 1989 Form 10-K, Commission
File No. 1-483)
10.3(c) Amendment No. 2 dated April 20, 1990 to Supplemental
Benefit Plan for Participants in the Mallinckrodt
Retirement Plan (1) (incorporated herein by reference to
Exhibit 10.6(c) to 1990 Form 10-K, Commission File
No. 1-483)
10.4(a) Mallinckrodt Supplemental Executive Retirement Plan
restated effective April 19, 1988 (1) (incorporated herein
by reference to Exhibit 10.7(a) to 1989 Form 10-K,
Commission File No. 1-483)
10.4(b) Amendment No. 1 effective December 6, 1989, to Supplemental
Executive Retirement Plan (1) (incorporated herein by
reference to Exhibit 10.7(c) to 1990 Form 10-K, Commission
File No. 1-483)
10.4(c) Amendment No. 2 effective April 19, 1996, to Supplemental
Executive Retirement Plan (1) (incorporated herein by
reference to Exhibit 10.6(c) to 1996 Form 10-K)
10.5 Supplemental Executive Retirement and Supplemental Life
Plan of Mallinckrodt Inc. effective July 15, 1984 (1)
(incorporated herein by reference to Exhibit 10.20 to 1989
Form 10-K, Commission File No. 1-483)
10.6(a) Mallinckrodt Management Incentive Compensation Program as
amended and restated effective July 1, 1991 (1)
(incorporated herein by reference to Exhibit 10.9(b) to
1991 Form 10-K, Commission File No. 1-483)
10.6(b) Amendment No. 1 to the Management Incentive Compensation
Plan, effective April 19, 1996 (1) (incorporated herein by
reference to Exhibit 10.7(b) to 1996 Form 10-K)
10.7(a) Mallinckrodt 1973 Stock Option and Award Plan as amended
effective February 21, 1990 (1) (incorporated herein by
reference to Post-Effective Amendment No. 1 to Form S-8
Registration Statement No. 33-32109)
10.7(b) Amendment No. 1 to the Mallinckrodt 1973 Stock Option and
Award Plan dated June 19, 1991 (1) (incorporated herein by
reference to Form S-8 Registration Statement No. 33-43925)
10.8(a) Mallinckrodt 1981 Stock Option Plan as amended through
April 19, 1988 (1) (incorporated herein by reference to
Post-Effective Amendment No. 3 to Form S-8 Registration
Statement No. 2-80553)
10.8(b) Amendment to the 1981 Stock Option Plan effective
February 15, 1989 (1) (incorporated herein by reference to
Exhibit 10.12(b) to 1989 Form 10-K, Commission File
No. 1-483)
10.8(c) Amendment to the 1981 Stock Option Plan effective June 19,
1991 (1) (incorporated herein by reference to Exhibit
10.12(c) to 1991 Form 10-K, Commission File No. 1-483)
10.9(a) Long-Term Incentive Compensation Plan, effective July 1,
1994 (1) (incorporated herein by reference to Exhibit 10.30
to 1994 Form 10-K)
10.9(b) Amendment No. 1 to Long-Term Incentive Plan, effective
April 16, 1997 (1) (incorporated herein by reference to
Exhibit 10.9(b) to 1997 Form 10-K)
10.10(a) Management Compensation and Benefit Assurance Program (1)
(incorporated herein by reference to Exhibit 10.30 to 1988
Form 10-K, Commission File No. 1-483)
10.10(b) Amendments to Management Compensation and Benefit Assurance
Program (1) (incorporated herein by reference to Exhibit
10.12(b) to 1996 Form 10-K)
10.11 Agreement of Trust dated August 16, 1996, between
Mallinckrodt and Wachovia Bank of North Carolina, N.A.,
incident to the program described in Exhibits 10.10(a) and
10.10(b) (1) (incorporated herein by reference to Exhibit
10.13 to 1996 Form 10-K)
10.12(a) Corporate Staff Employee Severance and Benefit Assurance
Policy (1) (incorporated herein by reference to Exhibit
10.33 to 1988 Form 10-K, Commission File No. 1-483)
10.12(b) Mallinckrodt Inc. Corporate Staff Change in Control
Severance Plan (1) (incorporated herein by reference to
Exhibit 10.14(b) to 1996 Form 10-K)
10.13 Form of Severance Agreement referenced in Exhibit 10.10(b),
as entered into with the Company's executive officers and
certain other key employees (1) (incorporated herein by
reference to Exhibit 10.23 to 1996 Form 10-K)
10.14(a) Executive Incentive Compensation Agreement with Paul D.
Cottone dated as of October 24, 1996 (1) (incorporated
herein by reference to Exhibit 10.25 to March 31, 1997
Form 10-Q)
10.14(b) Severance and Separation Agreement with Paul D. Cottone
dated as of October 24, 1996 (1) (incorporated herein by
reference to Exhibit 10.26 to March 31, 1997 Form 10-Q)
10.15(a) Agreement effective June 30, 1997 with Robert G. Moussa (1)
(incorporated herein by reference to Exhibit 10.15(a) to
1997 Form 10-K)
10.15(b) Consulting Agreement effective July 1, 1997 with Robert G.
Moussa (1) (incorporated herein by reference to Exhibit
10.15(b) to 1997 Form 10-K)
10.16 Mallinckrodt Directors Retirement Services Plan as amended
and restated effective April 21, 1993 (1) (incorporated
herein by reference to Exhibit 10.10 to 1993 Form 10-K)
10.17 Mallinckrodt Directors' Stock Option Plan effective
October 17, 1990 (1) (incorporated herein by reference to
Exhibit 4(a) to Form S-8 Registration Statement No.
33-40246)
10.18(a) Consulting Agreement with Ronald G. Evens, M.D., for the
period from January 1, 1987, through December 31, 1989;
extended for the calendar years 1990, 1991 and 1992 (1)
(incorporated herein by reference to Exhibit 10.27 to
Amendment No. 1 to 1992 Form 10-K, Commission File
No. 1-483)
10.18(b) Amendment dated December 17, 1992 to Consulting Agreement
with Ronald G. Evens, M.D. (1) (incorporated herein by
reference to Exhibit 10.26(b) to 1993 Form 10-K)
10.18(c) Amendment dated January 7, 1994 to Consulting Agreement
with Ronald G. Evens, M.D., extending Agreement through
December 31, 1994 (1) (incorporated herein by reference to
Exhibit 10.9 to December 31, 1994 Form 10-Q)
10.18(d) Amendment dated February 1, 1995 to Consulting Agreement
with Ronald G. Evens, M.D., extending Agreement through
December 31, 1995 (1) (incorporated herein by reference to
Exhibit 10.10 to December 31, 1994 Form 10-Q)
10.18(e) Amendment dated January 10, 1996 to Consulting Agreement
with Ronald G. Evens, M.D., extending Agreement through
December 31, 1996 (1) (incorporated herein by reference to
Exhibit 10.2 to December 31, 1995 Form 10-Q)
10.18(f) Amendment dated February 20, 1997 to Consulting Agreement
with Ronald G. Evens, M.D., extending Agreement through
December 31, 1997 (1) (incorporated herein by reference to
Exhibit 10.17(f) to March 31, 1997 Form 10-Q)
10.19(a) Deferral Election Plan for Non-Employee Directors,
effective June 30, 1994 (1) (incorporated herein by
reference to Exhibit 10.29 to 1994 Form 10-K)
10.19(b) Amendment of Deferral Election Plan for Non-Employee
Directors, effective February 15, 1995 (1) (incorporated
herein by reference to Exhibit 10.22(b) to 1995 Form 10-K)
10.20 Directors Stock Award Plan of Mallinckrodt Inc., effective
October 15, 1997 (1) (incorporated herein by reference to
Appendix A to Definitive Proxy Statement (Schedule 14A) for
the Company's 1997 Annual Meeting of Stockholders, filed
with the Commission on September 12, 1997)
10.21 The Mallinckrodt Inc. Equity Incentive Plan, effective
April 16, 1997 (1) (incorporated herein by reference to
Appendix B to Definitive Proxy Statement (Schedule 14A) for
the Company's 1997 Annual Meeting of Stockholders, filed
with the Commission on September 12, 1997)
10.22 Employment Agreement dated September 5, 1997 between the
Company and C. Raymond Larkin (1) (filed with this
electronic submission)
10.23 Terms of Separation dated December 15, 1997 between the
Company and C. Raymond Larkin (1) (filed with this
electronic submission)
10.24(a) Credit Agreement dated May 22, 1996, among Mallinckrodt and
Morgan Guaranty Trust Company of New York, as
Administrative Agent and Citibank, N.A., as Documentation
Agent ($550 million facility) (incorporated herein by
reference to Exhibit 10.18 to 1996 Form 10-K)
10.24(b) Amendment No. 1 to Credit Agreement, dated as of
January 24, 1997 among Mallinckrodt, the Banks listed
therein, Morgan Guaranty Trust Company of New York, as
Administrative Agent and Citibank, N.A., as Documentation
Agent (incorporated herein by reference to Exhibit 10.18-A
to March 31, 1997 Form 10-Q)
10.25(a) Credit Agreement dated May 22, 1996 among Fries & Fries,
Inc. with Mallinckrodt and Morgan Guaranty Trust Company of
New York, as Administrative Agent and Co-Agent and
Citibank, N.A., as Documentation Agent ($600 million
facility) (incorporated herein by reference to Exhibit
10.19 to 1996 Form 10-K)
10.25(b) Amendment No. 1 to Credit Agreement, dated as of
January 24, 1997 among Fries & Fries, Inc. as Borrower,
Mallinckrodt as Guarantor, the Banks listed therein, Morgan
Guaranty Trust Company of New York, as Administrative Agent
and Citibank, N.A., as Documentation Agent (incorporated
herein by reference to Exhibit 10.19-A to March 31,1997
Form 10-Q)
10.25(c) Consent and Waiver dated as of March 21, 1997, to the
Credit Agreement dated as of May 22, 1996, among Fries &
Fries, Inc. as Borrower, Mallinckrodt as Guarantor, the
Banks listed therein, Morgan Guaranty Trust Company of New
York, as Administrative Agent, and Citibank, N.A., as
Documentation Agent (incorporated herein by reference to
Exhibit 10.19-B to March 31, 1997 Form 10-Q)
10.26(a) Credit Agreement dated as of January 24, 1997, among
Tastemaker as Borrower, Fries & Fries, Inc. and
Mallinckrodt as Guarantors, the Banks listed therein,
Morgan Guaranty Trust Company of New York, as
Administrative Agent, and Citibank, N.A., as Documentation
Agent (incorporated herein by reference to Exhibit 10.27(a)
to March 31, 1997 Form 10-Q)
10.26(b) Agreement dated as of March 21, 1997, comprising, inter
-----
alia, an Amendment and Waiver to the Credit Agreement dated
----
as of January 24, 1997 among Tastemaker as Borrower, Fries
& Fries, Inc. and Mallinckrodt as Guarantors, the Banks
listed therein, Morgan Guaranty Trust Company of New York
as Administrative Agent, and Citibank, N.A., as
Documentation Agent (incorporated herein by reference to
Exhibit 10.27(b) to March 31,1997 Form 10-Q)
10.27 Amended and Restated Credit Agreement dated as of
September 12, 1997, among Mallinckrodt, the Banks listed
therein, Morgan Guaranty Trust Company of New York, as
Administration Agent, Goldman Sachs Credit Partners L.P.
and Citibank, N.A. as Co-Syndication Agents, and Citibank,
N.A., Goldman Sachs Credit Partners L.P., and NationsBank,
N.A., as Co-Documentation Agents (incorporated herein by
reference to Exhibit 10.24 to September 30, 1997 Form 10-Q)
10.28 Offering Memorandum by J.P. Morgan for sale of the
commercial paper (CP) notes of Mallinckrodt. The CP
program is backed by the credit agreement filed as Exhibit
10.27 (incorporated herein by reference to Exhibit 10.29 to
1993 Form 10-K)
21 Subsidiaries of the Registrant (filed with this electronic
submission)
23.1 Consent of Ernst & Young LLP (filed with this electronic
submission)
27(a) Financial data schedule for the year ended June 30, 1998
(filed with this electronic submission)
27(b) Financial data schedule for the year ended June 30, 1997
(filed with this electronic submission)
27(c) Financial data schedule for the year ended June 30, 1996
(filed with this electronic submission)
- -------------------------------
(1) Management contract or compensatory plan required to be
filed pursuant to Item 601 of Regulation S-K.
(b) Reports on Form 8-K
During the quarter and through the date of this report, the following
reports on Form 8-K were filed.
- - Report dated April 22, 1998 under Item 5 regarding near-term
outlook in conjunction with third quarter earnings report.
- - Report dated May 6, 1998 under Item 5 regarding completion of the
sale of the catalyst business.
- - Report dated May 26, 1998 under Item 5 regarding European
approval of OPTISON*.
- - Amended report dated June 17, 1998 under Item 5 regarding
presentation of Nellcor Puritan Bennett Incorporated financial
statements for the three years ended July 7, 1996 and for the
three months and nine months ended April 6, 1997 and March 31,
1996 and pro forma statement of operations and balance sheet for
the combined results of Mallinckrodt Inc. and Nellcor Puritan
Bennett Incorporated.
- - Amended report dated June 17, 1998 under Item 5 to provide pro
forma statement of operations of the combined results of
Mallinckrodt Inc. and Nellcor Puritan Bennett Incorporated for
the six months ended December 31, 1997.
- - Amended report dated June 17, 1998 under Item 5 regarding
presentation of consolidated financial statements for Nellcor
Puritan Bennett Incorporated for the periods ended July 6, 1997
and July 7, 1996.
- - Report dated June 19, 1998 under Item 5 regarding announcement of
the new president of Respiratory Group.
- - Report dated June 25, 1998 under Item 5 regarding expectations
for fiscal year l999.
- - Report dated July 6, 1998 under Item 5 regarding the closure of
Nellcor Puritan Bennett Incorporated facilities in Lenexa,
Kansas.
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
------
Consolidated Balance Sheets at June 30, 1998 and 1997..... 35
For the years ended June 30, 1998, 1997 and 1996:
Consolidated Statements of Operations................... 34
Consolidated Statements of Cash Flows................... 36
Consolidated Statements of Changes in
Shareholders' Equity................................... 37
Notes to Consolidated Financial Statements.............. 38-56
Quarterly Results....................................... 57-58
- -----------
All other schedules are omitted as the required information is not
present in sufficient amounts or the required information is included
in the consolidated financial statements or notes thereto.
Financial statements and schedules and summarized financial
information of 50 percent or less owned entities are omitted, as none
of such entities are individually or in the aggregate significant
under the tests specified in Regulation S-X under Article 3-09 of
General Instructions as to Financial Statements.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Mallinckrodt Inc.
- ----------------------------
Registrant
By: MICHAEL A. ROCCA By: DOUGLAS A. MCKINNEY
------------------------- --------------------------
Michael A. Rocca Douglas A. McKinney
Senior Vice President and Vice President and Controller
Chief Financial Officer
Date: September 22, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
C. RAY HOLMAN Chief Executive Officer September 22, 1998
- ---------------- and Director
C. Ray Holman
MACK G.NICHOLS President, Chief Operating September 22, 1998
- ---------------- Officer and Director
Mack G. Nichols
MICHAEL A. ROCCA Senior Vice President and September 22, 1998
- ------------------ Chief Financial Officer
Michael A. Rocca
DOUGLAS A. MCKINNEY Vice President and Controller September 22, 1998
- ------------------- (Chief Accounting Officer)
Douglas A. McKinney
RAYMOND F. BENTELE Director September 22, 1998
- -------------------
Raymond F. Bentele
GARETH C. C. CHANG Director September 22, 1998
- -------------------
Gareth C. C. Chang
WILLIAM L. DAVIS Director September 22, 1998
- -------------------
William L. Davis
RONALD G. EVENS Director September 22, 1998
- -------------------
Ronald G. Evens
ROBERTA S. KARMEL Director September 22, 1998
- -------------------
Roberta S. Karmel
CLAUDINE B. MALONE Director September 22, 1998
- -------------------
Claudine B. Malone
BRIAN M. RUSHTON Director September 22, 1998
- -------------------
Brian M. Rushton
DANIEL R. TOLL Director September 22, 1998
- -------------------
Daniel R. Toll
ANTHONY VISCUSI
- -------------------
Anthony Viscusi Director September 22, 1998
Exhibit 10.22
September 5, 1997
Mr. C. Raymond Larkin
Nellcor Puritan Bennett Incorporated
4280 Hacienda Drive
Pleasanton, CA 94588
Re: Employment Agreement
Dear Mr. Larkin:
This letter confirms our agreement regarding the terms of your
continued employment with Nellcor Puritan Bennett Incorporated (the
"Company"). As you know, the Company, Mallinckrodt Inc.
("Mallinckrodt") and NPB Acquisition Corp. ("Purchaser") have entered
into an Agreement and Plan of Merger, dated as of July 23, 1997, (the
"Merger Agreement"), which provides that Purchaser will merge (the
"Merger") with and into the Company upon completion of the
contemplated tender offer. Upon consummation of the Merger, the
Company will be a wholly-owned subsidiary of Mallinckrodt. The terms
set forth below will become effective on the closing date of the
Merger ("Effective Date").
You agree to retain your position as President and Chief Executive
Officer of the Company and as Executive Vice President of
Mallinckrodt. During the period of your active employment with the
Company you agree that you will not engage in any other employment,
or business activities directly related to the business in which the
Company is now involved or becomes involved, nor will you engage in
any activity in conflict with your obligations to the Company.
In exchange for your continued services the Company will continue to
pay your salary at its current rate. You also remain eligible to
participate in the Company's 1998 Bonus Plan (attached hereto as
Exhibit A). In addition to the 1998 Bonus Plan you are eligible to
receive the following:
- retention bonus
- if you are actively employed one year from the Effective
Date, or the Company terminates your employment without
Cause (as defined below) prior to the one year anniversary
of the Effective Date, the Company will pay you a lump sum
of $250,000 paid on the earlier of the first anniversary of
the Effective Date or the date of termination;
- individual performance bonus
- if the Company and Mallinckrodt achieve cost reduction
synergies which will be specified in the plan for the
integration of the business of the Company and Mallinckrodt,
the company will pay you, within 30 days of the first
anniversary of the Effective Date, a bonus of $125,000;
- if you succeed in developing the successful strategy,
organization and integration of the global medical products,
the Company will pay you, within 30 days of the first
anniversary of the Effective Date, a bonus of $125,000; and,
- stock appreciation award
- Company will pay you, within 60 days after the first
anniversary of the Effective Date, an amount in cash equal
to the result of multiplying 25,000 by the excess of (i) the
closing price of one share of common stock of Mallinckrodt
on the New York Stock Exchange on the first anniversary of
the Effective Date over (ii) the closing price of one share
of Mallinckrodt's common stock on the New York Stock
Exchange on the Effective Date.
In addition, you will receive all benefits provided pursuant to the
1994 Severance Agreement (the "Severance Agreement," attached hereto
as Exhibit B). The Severance Agreement provides for benefits upon
termination of your employment after a Change of Control by the
Company without Cause or by you for Good Reason. The completion of
the tender offer of the Merger described above will constitute a
Change of Control under the Severance Agreement.
As a result of the change in the nature of your responsibilities and
position that will result from the Merger, your Severance Agreement
is amended, as of the Effective Time of the Merger, to provide that
in the event you terminate your employment for any reason at any time
after the consummation of the Merger and within twenty-four months
following the completion of the tender offer (i) such termination
shall be deemed to be for "Good Reason," as defined in your Severance
Agreement, and (ii) you will be entitled to all benefits arising
under the Severance Agreement applicable to a termination for Good
Reason following a Change in Control.
If you are still actively employed by the Company on the first
anniversary of the Effective Date, the Company will pay you all
benefits provided in the Severance Plan as though you had terminated
your employment for Good Reason. This payment will be made within 15
days of the first anniversary of the Effective Date.
In the event that any payment or benefit received or to be received
by you under this Agreement would result in all or a portion of such
payment to be subject to the excise tax on "golden parachute
payments" under Section 4999 of the Internal Revenue Code of 1986, as
amended, then your payment will be increased by the amount of the
excise tax.
The Company may terminate your employment at any time with or without
Cause. If the Company terminates your employment without Cause prior
to one year from the Effective Date, the Company will pay you, in
addition to all amounts due pursuant to the Severance Plan, a lump
sum amount equal to your salary for the remainder of the one year
period beginning on the Effective Date, the $250,000 retention bonus,
and the Stock Appreciation Award.
If the Company terminates your employment for Cause, the Company will
pay your salary up to the date of termination. The definition of
Cause set forth in Section 2.4 of the Severance Agreement is hereby
incorporated by reference and will apply to the terms of this
Agreement.
By execution of this letter, the Company and Mallinckrodt consent to
the terms set forth in this Agreement including all amendments to the
Severance Plan.
By signing below, you agree to accept the terms set forth in this
Agreement.
Sincerely,
Nellcor Puritan Bennett Incorporated Mallinckrodt Inc.
By:/s/ L. De Buono By:/s/ C. R. Holman
------------------------ --------------------
I accept and agree to the terms set forth above.
/s/ C. Raymond Larkin, Jr.
- ---------------------------
C. Raymond Larkin, Jr.
Date: September 5, 1997
----------------------
Exhibit A -- 1998 Bonus Plan
Exhibit B -- 1994 Severance Agreement
<PAGE>
Exhibit A
NELLCOR PURITAN BENNETT
Performance Incentive Plan
Purpose
The purpose of the Performance Incentive Plan (PIP) is to reward
eligible employees for achieving NPB's business plan goals and
provide a means for employees to share in the Company's success.
Eligibility
All NPB positions at the following levels are eligible for
consideration. This includes the following positions:
- - Officers
- - Senior Directors
- - Directors
- - Distinguished Engineer/Scientist
- - Managers (salary grades E07-E10)
- - Individual contributors (salary grades E07-E10)
In addition, employees must be employed by NPB for at least six
months before they are eligible to participate in the plan.
Eligibility to participate does not necessarily guarantee payment,
but it guarantees consideration for payment.
Part-time employees employed by Nellcor Puritan Bennett for 20 hours
or more per week are eligible to participate in the PIP on a pro-
rated basis.
Employees on a sales or commission plan are not eligible to
participate in PIP.
Definitions
Plan year refers to the Nellcor Puritan Bennett fiscal year.
Base salary amount is defined as the amount used to calculate
individual PIP awards which will be the participant's annualized base
salary on June 1 of the plan year.
Bonus Payouts
Bonus awards are paid on an annual basis and within 30 days of the
end of the plan year.
Except for death or disability, a participant must be employed by
Nellcor Puritan Bennett on the last day of the fiscal year to receive
award payments.
All part-time employees, part-year full-time employees, and employees
on leaves of absence for longer than 30 days will receive pro-rated
awards based on their actual time worked. Participants on leaves of
absence of less than 30 days will receive full awards as outlined in
the plan.
Participants who transfer between divisions during the plan year will
receive awards based on the performance results of the division in
which the employee spent the most time (6 months or longer).
Bonus awards under this plan shall be treated as wages and shall be
subject to all applicable withholding taxes at the time received.
Employees outside the United Stated will be paid their award amount
in local currency and are subject to any country specific
regulations.
Performance Measures
Incentive awards will be based on four annual measures:
- - NPB profit
- - NPB revenue
- - Division profit(1)
- - Division revenue(1)
Each of the four measures will be weighted according to the following
table.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Corporate Corporate Division Division Division
Executives Staff EVP/SVP VP Manager/IC's
---------- --------- -------- -------- ------------
NPB profit 75% 75% 56.25% 37.5% 30%
NPB revenue 25% 25% 18.75% 12.5% 10%
Division profit 18.75% 37.5% 45%
Division revenue 6.25% 12.5% 15%
100% 100% 100% 100% 100%
</TABLE>
Specific performance goals for each corporate and division measure
are established annually. No awards will be paid unless NPB achieves
85% of its annual profit plan.
Award Opportunities
Award opportunities (stated as a percent of base salary) vary by NPB
level as shown in the table below.
- -----------------------
(1) Division refers to a participant's immediate business unit
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Threshold Target Maximum
Performance Performance Performance
Award Award Award
----------- ----------- -----------
CEO 30% 60% 120%
EVP/Senior VP 25% 50% 100%
VP 20% 40% 80%
Senior Director 15% 30% 60%
Director and Director-equivalent
Individual Contributors 10% 20% 40%
Manager and Manager-equivalent
Individual Contributors 5% 10% 20%
</TABLE>
Actual incentives paid are based on corporate and division
performance results. Individual incentive awards may be adjusted by
up to +/- 25% on individual contributions.
Award Calculation
Individual PIP awards earned are calculated using a four step
process.
Step 1
- --------------------------------------------------------------------
Determine the performance adjustment modifier for each measure using
the table below:
Performance Result Achieved Performance Adjustment
(% of Goal Achieved) Modifier
--------------------------- ----------------------
85-89% 0.50
90-94% 0.65
95-99% 0.80
100-104% 1.00
105-109% 1.25
110-114% 1.50
115-119% 1.75
120+% 2.00
Note: Above table is simplified for illustration purposes. Actual
performance modifiers are calculated on a straight linear basis vs.
the buckets as shown.
Step 2
- --------------------------------------------------------------------
Calculate the total performance factor based on results achieved for
each performance measure.
<TABLE>
<CAPTION>
<S> <C> <C>
NPB Profit Performance Adjustment Modifier x Weight = NPB Profit Factor
NPB Revenue Performance Adjustment Modifier x Weight = NPB Revenue Factor
Division
Profit Performance Adjustment Modifier x Weight = Division Profit Factor
Division
Revenue Performance Adjustment Modifier x Weight = Division Revenue Factor
Total Performance Factor
</TABLE>
Step 3
- --------------------------------------------------------------------
Calculate preliminary award amount
Total Performance Factor x Target Award Opportunity x Base Salary
= Preliminary PIP Award Earned
Step 4
- --------------------------------------------------------------------
Adjust PIP award based on individual performance.
Preliminary PIP Award Earned x Individual Adjustment* (up to +/-25%) =
Actual PIP Award Earned
*The sum of individual adjustments at an EVP level may not exceed
zero.
Illustrative Example
The following example illustrates the award calculation for a
Division Manager with a base salary of $60,000. Assumed performance
results for purposes of this example are shown in the table below.
Performance Results
(% of goal achieved)
NPB Profit 100%
NPB revenue 105%
Division profit 97%
Division revenue 102%
Individual adjustment +5%
Step 1
- --------------------------------------------------------------------
Determine the performance adjustments modifier for each measure.
Measure Performance
NPB Profit 1.00
NPB Profit 1.25
Division Profit 0.80
Division Revenue 1.00
Step 2
- --------------------------------------------------------------------
Calculate the total performance factor.
NPB Profit 1.00 x 30% = 30%
NPB Revenue 1.25 x 10% = 12.5%
Division Profit 0.80 x 45% = 36%
Division Revenue 1.00 x 15% = 15%
Total Performance Factor 93.5%
Step 3
- --------------------------------------------------------------------
Calculate the preliminary award amount.
93.5% x 10% x $60,000 = $5,610 Preliminary PIP Award
Step 4
- --------------------------------------------------------------------
Adjust PIP award based on individual performance.
$5,610 x 1.05 = $5,891 Actual PIP Award Earned
Additional Information
- - Promotions that occur during the plan year will result in a change
target. The higher target will be applied in the calculation as
long as the promotion was in effect for 6 or more months during
the fiscal year. Otherwise the award calculation will be pro-
rated utilizing both targets.
- - Promotions into this plan from profit sharing eligibility that are
in effect for 6 months or greater will result in a full year
calculation under this plan.
- - If a participant is demoted out of the plan during the plan year,
he or she will not be eligible for an award payment from this plan
but will be eligible to receive profit sharing.
- - If an employee receives an unsatisfactory performance rating or
has been on a formal disciplinary performance improvement plan at
any time during the plan year, may not receive a payment under
this plan. The decision regarding payment will be made between
management and Human Resources.
- - Participation in the PIP is not a contract of employment and does
not alter the employment-at-will status of any participant.
- - Participants receiving bonus awards are not eligible to receive
profit sharing.
- - Award payments under this plan shall not be considered
compensation for the purposes of determining benefits under
company benefits programs.
- - Management reserves the right to make any changes as necessary or
to terminate the plan at any time.
<PAGE>
Exhibit B
SEVERANCE AGREEMENT
This Agreement, dated as of December 1, 1994, is entered into
between Nellcor Incorporated, a corporation organized under the laws
of the State of Delaware ("Nellcor"), and C. Raymond Larkin, Jr. (the
"Executive").
WHEREAS, the Board of Directors of the Company (the "Board")
recognizes that the possibility of a Change in Control (as
hereinafter defined) exists and that the threat or the occurrence of
a Change in Control can result in significant distractions to its key
management personnel because of the uncertainties inherent in such a
situation;
WHEREAS, the Board has determined that it is essential and in
the best interest of the Company and its stockholders to retain the
services of the Executive in the event of a threat or occurrence of a
Change in Control and to ensure the Executive's continued dedication
and efforts in such event without undue concern for the Executive's
personal, financial and employment security; and
WHEREAS, in order to induce the Executive to remain in the
employ of the Company, particularly in the event of a threat or the
occurrence of a Change in Control, the Company desires to enter into
this Agreement with the Executive to provide the Executive with
certain benefits in the event that the Executive's employment is
terminated as a result of, or in connection with, a Change in
Control.
NOW, THEREFORE, in consideration of the respective agreements of
the parties contained herein, it is agreed as follows:
1. Term of Agreement. This Agreement shall commence as of
-----------------
December 1, 1994 and shall continue in effect until December 1, 1996;
provided, however, that commencing on December 1, 1996 and on each
- -------- -------
December 1 thereafter, the term of this Agreement shall automatically
be extended for one (1) year unless the Company or the Executive
shall have given written notice to the other at least ninety (90)
days prior thereto that the term of this Agreement shall not be so
extended; and provided, further, however, that notwithstanding any
-------- ------- -------
such notice by the Company not to extend, the term of this Agreement
shall not expire prior to the expiration of twenty-four (24) months
after the occurrence of a Change in Control.
2. Definitions.
-----------
2.1 Accrued Compensation. For purposes of this Agreement,
--------------------
"Accrued Compensation" shall mean an amount which shall include all
amounts earned or accrued through the "Termination Date" (as
hereinafter defined) but not paid as of the Termination Date,
including (1) base salary, (ii) reimbursement for reasonable and
necessary expenses incurred by the Executive on behalf of the Company
during the period ending on the Termination Date, (iii) vacation pay
and (iv) bonuses and incentive compensation (other than the "Pro Rata
Bonus" (as hereinafter defined).
2.2 Base Amount. For purposes of this Agreement, "Base
-----------
Amount" shall mean the greater of the Executive's annual base salary
(a) at the rate in effect on the Termination Date or (b) at the
highest rate in effect at any time during the ninety (90) day period
prior to the Change in Control, and shall include all amounts of base
salary that are deferred under the employee benefit plans of the
Company or any other agreement or arrangement.
2.3 Bonus Amount. For purposes of this Agreement, "Bonus
------------
Amount" shall mean the greatest of: (a) 100% of the annual bonus
payable to the Executive under the Company's cash bonus incentive
plan for the fiscal year in which the Termination Date occurs; (b)
the annual bonus paid or payable to the Executive under the Company's
cash bonus incentive plan for the full fiscal year ended prior to the
fiscal year during which the Termination Date occurred; (c) the
annual bonus paid or payable to the Executive under the Company's
cash bonus incentive plan for the full fiscal year ended prior to the
fiscal year during which a Change in Control occurred; (d) the
average of the annual bonuses paid or payable to the Executive under
the Company's cash bonus incentive plan during the three full fiscal
years ended prior to the fiscal year during which the Termination
Date occurred; or (e) the average of the annual bonuses paid or
payable to the Executive under the Company's cash bonus incentive
plan during the three full fiscal years ended prior to the fiscal
year during which the Change in Control occurred.
2.4 Cause. For purposes of this Agreement, a termination
-----
of employment is for "Cause" if the basis of the termination is
fraud, misappropriation, embezzlement or willful engagement by the
Executive in misconduct which is demonstrably and materially
injurious to the Company and its subsidiaries taken as a whole (no
act, or failure to act, on the part of the Executive shall be
considered "willful" unless done, or omitted to be done, by the
Executive not in good faith and without a reasonable belief that the
action or omission was in the best interests of the Company and it
subsidiaries); provided, however, that the Executive shall not be
-------- -------
deemed to have been terminated for Cause unless and until there shall
have been delivered to the Executive a Notice of Termination (as
hereinafter defined) and copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters of those members of
the Company's Board of Directors who are not then employees of the
Company at a meeting of the Board called and held for the purpose
(after reasonable notice to the Executive and an opportunity for the
executive, together with the Executive's counsel, to be heard before
the Board), finding that, in the good faith opinion of the Board, the
Executive was guilty of the conduct set forth in the first sentence
of this Section 2.4 and specifying the particulars thereof in detail.
2.5 Change in Control. For purposes of this Agreement, a
-----------------
"Change in Control" shall mean any of the following events:
(a) An acquisition (other than directly from the Company)
of any voting securities of the Company (the "Voting Securities") by
any "Person" (as the term is used for purposes of Section 13(d) or
14(d) of the Securities Exchange Act of 1934, as amended (the "1934
Act")) immediately after which such Person has "Beneficial Ownership"
(within the meaning of Rule 13d-3 promulgated under the 1934 Act) of
twenty five percent (25%) or more of the combined voting power of the
Company's then outstanding Voting Securities; provided, however, that
in determining whether a Change in Control has occurred, Voting
Securities which are acquired in a "Non-Control Acquisition" (as
hereinafter defined) shall not constitute an acquisition which would
cause a Change in Control. A "Non-Control Acquisition" shall mean an
acquisition by (1) an employee benefit plan (or a trust forming a
part thereof) maintained by (A) the Company or (B) any corporation or
other Person of which a majority of its voting power or its equity
securities or equity interest is owned directly or indirectly by the
Company (a "Subsidiary"), (2) the Company or any Subsidiary, (3) any
Person in connection with a "Non-Control Transaction" (as hereinafter
defined);
(b) The individuals who are members of the Board as of the
date this Agreement is approved by the Board (the "Incumbent Board")
cease for any reason to constitute at least a majority of the Board;
provided, however, that if the appointment, election or nomination
- -------- -------
for election by the Company's stockholders, of any new director is
approved by a vote of at least two-thirds of the Incumbent Board,
such new director shall, for purposes of this Agreement, be
considered a member of the Incumbent Board; provided, further,
-------- -------
however, that no individual shall be considered a member of the
- -------
Incumbent Board if such individual initially assumed office as a
result of either an actual or threatened "Election Contest" (as
described in Rule 14a-11 promulgated under the 1934 Act) or actual or
threatened solicitation of proxies or consents by or on behalf of a
Person other than the Board (a "Proxy Contest") including by reason
of any agreement intended to avoid or settle any Election Contest or
Proxy Contest; or
(c) Approval by stockholders of the Company of:
(1) A merger, consolidation or reorganization involving the
Company, unless such merger, consolidation or reorganization
satisfies the conditions set forth in (A) or (B) below:
(A) (i) the stockholders of the Company immediately
before such merger, consolidation or reorganization, own immediately
following such merger, consolidation or reorganization, directly or
indirectly, at least fifty-one percent (51%) of the combined voting
power of the outstanding voting securities of the corporation
resulting from such merger or consolidation or reorganization (the
"Surviving Corporation") in substantially the same proportion as
their ownership of the Voting Securities immediately before such
merger, consolidation or reorganization;
(ii) the individuals who were members of the
Incumbent Board immediately prior to the execution of the agreement
providing for such merger, consolidation or reorganization constitute
at least a majority of the members of the board of directors of the
Surviving Corporation; and
(iii) no Person (other than the Company, any
Subsidiary, any employee benefit plan (or any trust forming a part
thereof) maintained by the Company, the Surviving Corporation or any
Subsidiary, or any Person who, immediately prior to such merger,
consolidation or reorganization, had Beneficial Ownership of twenty
five percent (25%) or more of the then outstanding voting Securities)
has Beneficial Ownership of twenty five percent (25%) or more of the
combined voting power of the Surviving Corporation's then outstanding
voting securities; or
(B) the entering into of any such transaction shall have
been approved by the Incumbent Board prior to or on the date that is
270 calendar days from the effective date of this Agreement and shall
have been intended by the Incumbent Board to be accounted for using
the "pooling of interests" method of accounting, such intent to be
evidenced in the resolutions of the Incumbent Board approving the
transaction;
A transaction described in subsections (A) and (B) above
shall herein be referred to as a "Non-Control Transaction";
(2) A complete liquidation or dissolution of the Company; or
(3) An agreement for the sale or other disposition of all or
substantially all of the assets of the Company to any Person (other
than a transfer to a Subsidiary).
Notwithstanding the foregoing, a Change in Control shall not be
deemed to occur solely because any Person (the "Subject Person")
acquired Beneficial Ownership of more than the permitted amount of
the outstanding Voting Securities as a result of the acquisition of
Voting Securities by the Company which, by reducing the number of
Voting Securities outstanding, increases the proportional number of
shares Beneficially Owned by the Subject Person, provided, however,
-------- -------
that, if a Change in Control would occur (but for the operation of
this sentence) as a result of the acquisition of Voting Securities by
the Company, and after such share acquisition by the Company the
Subject Person becomes the Beneficial Owner of any additional voting
Securities which increases the percentage of the then outstanding
Voting Securities Beneficially Owned by the Subject Person, then a
Change in Control shall occur.
2.6 Company. For purposes of this Agreement, the "Company"
-------
shall mean Nellcor Incorporated and its Subsidiaries and shall
include Nellcor's "Successors and Assigns" (as hereinafter defined).
2.7 Disability. For purposes of this Agreement, "Disability"
----------
shall mean a physical or mental infirmity which impairs the
Executive's ability to substantially perform the Executive's duties
with the Company for a period of one hundred eighty (180) consecutive
days and the Executive has not returned to full time employment prior
to the Termination Date as stated in the "Notice of Termination".
2.8 Good Reason.
-----------
(a) For purposes of this Agreement, "Good Reason" shall mean
the occurrence after a Change in Control of any of the events or
conditions described in subsections (1) through (8) hereof.
(1) a change in the Executive's status, title, position or
responsibilities (including reporting responsibilities) which, in the
Executive's reasonable judgment, represents an adverse change from
the Executive's status, title, position or responsibilities as in
effect at any time within ninety (90) days preceding the date of a
Change in Control or at any time thereafter; the assignment to the
Executive of any duties or responsibilities which, in the Executive's
reasonable judgment, are inconsistent with the Executive's status,
title, position or responsibilities as in effect at any time within
ninety (90) days preceding the date of a Change in Control or at any
time thereafter; or any removal of the Executive from or failure to
reappoint or reelect the Executive to any of such offices or
positions, except in connection with the termination of the
Executive's employment for Disability, Cause, as a result of the
Executive's death or by the Executive other than for Good Reason;
(2) A reduction in the Executive's base salary or any failure
to pay the Executive any compensation or benefits to which the
Executive is entitled within five (5) days of the date due;
(3) the Company's requiring the Executive to be based at any
place outside a 60-mile radius from Pleasanton, California, except
for reasonably required travel on the Company's business which is not
materially greater than such travel requirements prior to the Change
in Control;
(4) the failure by the Company to (A) continue in effect
(without reduction in benefit level and/or reward opportunities) any
material compensation or employee benefit plan in which the Executive
was participating at any time within ninety (90) days preceding the
date of a Change in Control or at any time thereafter, including, but
not limited to, the plans listed on Appendix A, unless such plan is
replaced with a plan that provides substantially equivalent
compensation or benefits to the Executive, or (B) provide the
Executive with compensation and benefits, in the aggregate, at least
equal (in terms of benefit levels and/or reward opportunities) to
those provided for under each other employee benefit plan, program
and practice in which the Executive was participating at any time
within ninety (90) days preceding the date of a Change in Control or
at any time thereafter;
(5) the insolvency or the filing (by any party, including the
Company) of a petition for bankruptcy of the Company, which petition
is not dismissed within sixty (60) days;
(6) any material breach by the Company of any provision of this
Agreement;
(7) any purported termination of the Executive's employment for
Cause by the Company which does not comply with the terms of Section
2, 4: or
(8) the failure of the Company to obtain an agreement,
satisfactory to the Executive, from any Successors and Assigns to
assume and agree to perform this Agreement, as contemplated in
Section 6 hereof.
(b) The Executive's right to terminate the Executive's
employment pursuant to this Section 2.8 shall not be affected by the
Executive's incapacity due to physical or mental illness.
2.9 Notice of Termination. For the purposes of this Agreement,
---------------------
following a Change in Control, "Notice of Termination" shall mean a
written notice of termination of the Executive's employment from the
Company, which notice indicates the specific termination provision in
this Agreement relied upon and which sets forth in reasonable detail
the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so
indicated.
2.10. Pro Rata Bonus. For purposes of this Agreement, "Pro
--------------
Rata Bonus" shall mean an amount equal to the Bonus Amount multiplied
by a fraction the numerator of which is the number of days in the
fiscal year through the Termination Date and the denominator of which
is 365.
2.11. Successors and Assigns. For purposes of this Agreement,
----------------------
"Successors and Assigns" shall mean a corporation or other entity
acquiring all or substantially all of the assets and business of the
Company (including this Agreement) whether by operation of law or
otherwise.
2.12. Termination Date. For purposes of this Agreement,
----------------
"Termination Date" shall mean in, the case of the Executive's death,
the Executive's date of death, in the case of Good Reason, the last
day of the Executive's employment and, in all other cases, the date
specified in the Notice of Termination; provided, however, that if
-------- -------
the Executive's employment is terminated by the Company for Cause or
due to Disability, the date specified in the Notice of Termination
shall be at least 30 days from the date the Notice of Termination is
given to the Executive, provided that, in the case of Disability, the
Executive shall not have returned to the full-time performance of the
Executive's duties during such period of at least 30 days.
3. Termination of Employment.
-------------------------
3.1 If, during the term of this Agreement, the Executive's
employment with the Company shall be terminated within twenty-four
(24) months following a Change in Control, the Executive shall be
entitled to the following compensation and benefits:
(a) If the Executive's employment with the Company shall be
terminated (1) by the Company for Cause or Disability, (2) by reason
of the Executive's death or (3) by the Executive other than for Good
Reason, the Company shall pay to the Executive the Accrued
Compensation and, if such termination is other than by the Company
for Cause, the Company shall also pay the Executive a Pro Rata Bonus.
(b) If the Executive's employment with the Company shall be
terminated for any reason other than as specified in Section 3.1(a),
the Executive shall be entitled to the following:
(i) the Company shall pay the Executive all Accrued
Compensation and a Pro Rata Bonus;
(ii) the Company shall pay the Executive as severance
pay and in lieu of any further compensation for periods
subsequent to the Termination Date, in a single
payment, an amount in cash equal to three times the sum
of (A) the Base Amount and (B) the Bonus Amount;
(iii) for a number of months equal to thirty six (36)
(the "Continuation Period"), the Company shall, at its
expense, continue on behalf of the Executive and the
Executive's dependents and beneficiaries the life
insurance, disability, medical, dental and
hospitalization benefits provided (A) to the Executive
at any time during the 90-day period prior to the
Change in Control or at any time thereafter or (B) to
other similarly situated executives who continue in the
employ of the Company during the Continuation Period.
The coverage and benefits (including deductibles and
costs) provided in this Section 3.1(b) (iii) during the
Continuation Period shall be no less favorable to the
Executive and the Executive's dependents and
beneficiaries, than the most favorable of such
coverages and benefits during any of the periods
referred to in clauses (A) and (B) above. The
Company's obligation hereunder with respect to the
foregoing benefits shall be limited to the extent that
the Executive obtains any such benefits pursuant to a
subsequent employer's benefits plans, in which case the
Company may reduce the coverage of any benefits it is
required to provide the Executive hereunder as long as
the aggregate coverages and benefits of the combined
benefit plans are no less favorable to the Executive
than the coverages and benefits required to be provided
hereunder. This subsection (iii) shall not be
interpreted so as to limit any benefits to which the
Executive or the Executive's dependents or
beneficiaries may be entitled under any of the
Company's employee benefit plans, programs or practices
following the Executive's termination of employment,
including without limitation, retiree medical and life
insurance benefits;
(iv) the restrictions on any outstanding equity
incentive awards, including stock options and
restricted stock, granted to the Executive under the
Company's 1991 Equity Incentive Plan (or any
predecessor plans thereto), the Company's 1994 Equity
Incentive Plan or under any other incentive plan or
arrangement shall lapse end such incentive award shall
become 100% vested and, in the case of stock options,
immediately exercisable;
(v) for the duration of the Continuation Period, the
Company shall, at its expense, provide the Executive
with out placement and career counseling services of
the Executive's choice, provided, however, that the
-------- -------
Company's obligation to pay for such services shall in
no event exceed an aggregate amount equal to 25% of the
Base Amount.
(c) The amounts provided for in Sections 3.1(a) and
3.1(b)(i) and (ii) shall be paid in a single lump sum cash payment
within forty five (45) days after the Executive's Termination Date
(or earlier, if required by applicable law).
(d) The Executive shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other
employment or otherwise, and no such payment shall be offset or
reduced by the amount of any compensation or benefits provided to the
Executive in any subsequent employment except as provided in Section
3.1(b) (iii).
3.2 (a) The severance pay and benefits provided for in this
Section 3 shall be in lieu of any other severance or termination pay
to which the Executive may be entitled under any Company severance or
termination plan, program, practice or arrangement.
(b) The Executive's entitlement to any other compensation
or benefits shall be determined in accordance with the Company's
employee benefit plans (including, the plans listed on Appendix A)
and other applicable programs, policies and practices then in effect,
4. Notice of Termination. Following a Change in Control,
---------------------
any purported termination of the Executive's employment shall be
communicated by Notice of Termination to the Executive. For purposes
of this Agreement, no such purported termination shall be effective
without such Notice of Termination.
5. Excise Tax Limitation.
---------------------
(a) Notwithstanding anything contained in this Agreement,
in the event that any payment or benefit (within the meaning of
Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended
(the "Code")), to the Executive or for the Executive's benefit paid
or payable or distributed or distributable pursuant to the terms of
this Agreement or otherwise in connection with, or arising out of,
the Executive's employment with the Company or a Change in Control (a
"Payment" or "Payments") would be subject to the excise tax imposed
by Section 4999 of the Code (the "Excise Tax"), the Payments shall be
reduced (but not below zero) if and to the extent necessary so that
no Payment to be made or benefit to be provided to the Executive
shall be subject to the Excise Tax (such reduced Payments being
hereinafter referred to as the "Limited Payment Amount"). Unless the
Executive shall have given prior written notice specifying a
different order to the Company to effectuate the Limited Payment
Amount, the Company shall reduce or eliminate the Payments by first
reducing or eliminating cash payments and then by reducing those
payments or benefits which are not payable in cash, in each case in
reverse order beginning with payments or benefits which are to be
paid the farthest in time from the Determination (as hereinafter
defined). Any notice given by the Executive pursuant to the
preceding sentence shall take precedence over the provisions of any
other plan, arrangement or agreement governing the Executive's rights
and entitlements to any benefits or compensation.
(b) An initial determination as to whether the Payments
shall be reduced to the Limited Payment Amount and the amount of such
Limited Payment Amount shall be made, at the Company's expense, by
the accounting firm that is the Company's independent accounting firm
as of the date of the Change in Control (the "Accounting Firm"). The
Accounting Firm shall provide its determination (the
"Determination"), together with detailed supporting calculations and
documentation, to the Company and the Executive within twenty (20)
days of the Termination Date if applicable, or such other time as
requested by the Company or by the Executive (provided the Executive
reasonably believes that any of the Payments may be subject to the
Excise Tax), and if the Accounting Firm determines that there is
substantial authority (within the meaning of Section 6662 of the
Code) that no Excise Tax is payable by the Executive with respect to
a Payment or Payments, it shall furnish the Executive with an opinion
reasonably acceptable to the Executive that no Excise Tax will be
imposed with respect to any such Payment or Payments. Within ten
(10) days of the delivery of the Determination to the Executive, the
Executive shall have the right to dispute the Determination (the
"Dispute"). If there is no Dispute, the Determination shall be
binding, final and conclusive upon the Company and the Executive
subject to the application of Section 5(c) below.
(c) As a result of the uncertainty in the application of
Sections 4999 and 280G of the Code, it is possible that the Payments
to be made to, or provided for the benefit of, the Executive either
will be greater (an "Excess Payment") or less (an "Underpayment")
than the amounts provided for by the limitations contained in Section
5(a). If it is established pursuant to a final determination of a
court or an Internal Revenue Service (the "IRS") proceeding which has
been finally and conclusively resolved that an Excess Payment has
been made, such Excess Payment shall be deemed for all purposes to be
a loan to the Executive made on the date the Executive received the
Excess Payment and the Executive shall repay the Excess Payment to
the Company on demand (but not less than ten (10) days after written
notice is received by the Executive) together with interest on the
Excess Payment at the "Applicable Federal Rate" (as defined in
Section 1274(d) of the Code) from the date of the Executive's receipt
of such Excess Payment until the date of such repayment. In the
event that it is determined by (i) the Accounting Firm, the Company
(which shall include the position taken by the Company, or together
with its consolidated group, on its federal income tax return) or the
IRS, (ii) pursuant to a determination by a court, or (iii) upon the
resolution to the Executive's satisfaction of the Dispute that an
Underpayment has occurred, the Company shall pay an amount equal to
the Underpayment to the Executive within ten (10) days of such
determination or resolution, together with interest on such amount at
the Applicable Federal Rate from the date such amount would have been
paid to the Executive until the date of payment.
6. Successors: Binding Agreement.
-----------------------------
(a) This Agreement shall be binding upon and shall inure to
the benefit of the Company, its Successors and Assigns and the
Company shall require any Successors and Assigns to expressly assume
and agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if no
such succession or assignment had taken place.
(b) Neither this Agreement nor any right or interest
hereunder shall be assignable or transferable by the Executive or the
Executive's beneficiaries or legal representatives, except by will or
by the laws of descent and distribution. This Agreement shall inure
to the benefit of and be enforceable by the Executive's legal
personal representative.
7. Fees and Expenses. The Company shall pay all legal fees
-----------------
and related expenses (including the costs of experts, evidence and
counsel) incurred by the Executive as they become due as a result of
(a) the Executive's termination of employment (including all such
fees and expenses, if any, incurred in contesting or disputing any
such termination of employment), (b) the Executive seeking to obtain
or enforce any right or benefit provided by this Agreement
(including, but not limited to, any such fees and expenses incurred
in connection with the Dispute whether as a result of any applicable
government taxing authority proceeding, audit or otherwise) or by any
other plan or arrangement maintained by the Company under which the
Executive is or may be entitled to receive benefits, and (c) the
Executive's hearing before the Board as contemplated in Section 2.4
of this Agreement; provided, however, that the circumstances set
-------- -------
forth in clauses (a) and (b) occurred on or after a Change in
Control.
8. Notice. For the purposes of this Agreement, notices and
------
all other communications provided for in the Agreement (including the
Notice of Termination) shall be in writing and shall be deemed to
have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the
respective addresses last given by each party to the other, provided
that all notices to the Company shall be directed to the attention of
the Board with a copy to the Secretary of the Company. All notices
and communications shall be denied to have been received on the date
of delivery thereof or on the third business day after the mailing
thereof, except that notice of change of address shall be effective
only upon receipt.
9. Non-exclusivity of Rights. Nothing in this Agreement shall
-------------------------
prevent or limit the Executive's continuing or future participation
in any benefit, bonus, incentive or other plan or program provided by
the Company (except for any severance or termination policies, plans,
programs or practices) and for which the Executive may qualify, nor
shall anything herein limit or reduce such rights as the Executive
may have under any other agreements with the Company (except for any
severance or termination agreement). Amounts which are vested
benefits or which the Executive is otherwise entitled to receive
under any plan or program of the Company shall be payable in
accordance with such plan or program, except as explicitly modified
by this Agreement.
10. Settlement of Claims. The Company's obligation to make the
--------------------
payments provided for in this Agreement and otherwise to perform its
obligations hereunder shall not be affected by any circumstances,
including, without limitation, any set-off, counterclaim, recoupment,
defense or other right which the Company may have against an
Executive or others.
11. Miscellaneous. No provision of this Agreement may be
-------------
modified, waived or discharged, unless such waiver, modification or
discharge is agreed to in writing and signed by the Executive and the
Company. No waiver by either party hereto at any time of any breach
by the other party hereto, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall
be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time. No agreement or
representation, oral or otherwise, express or implied, with respect
to the subject matter hereof have been made by either party which are
not expressly set forth in this Agreement.
12. Governing Law. This Agreement shall be governed by and
-------------
construed and enforced in accordance with the laws of the State of
California without giving effect to the conflict of laws principles
thereof. Any action brought by any party to this Agreement shall be
brought and maintained in a court of competent jurisdiction in
Alameda County in the State of California.
13. Severability. The provisions of this Agreement shall be
------------
deemed severable and the invalidity or unenforceability of any
provision shall not affect the validity or enforceability of the
other provisions hereof.
14. Entire Agreement. This Agreement constitutes the entire
----------------
agreement between the parties hereto and supersedes all prior
agreements, if any, understandings and arrangements, oral or written,
between the parties hereto with respect to the subject matter hereof.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and the Executive has
executed this Agreement as of the day and year first above written.
NELLCOR INCORPORATED EXECUTIVE
By: /s/ L. De Buono /s/ C. Raymond Larkin, Jr.
------------------------------- --------------------------
C. Raymond Larkin, Jr.
President and Chief
Executive Officer
Vice-President, Human Resources,
Its: General Counsel and Secretary
-----------------------------
ATTEST:
By: /s/ E. Harris
----------------------------
Its: ----------------------------
Exhibit 10.23
C. R. LARKIN
TERMS OF SEPARATION
- - Voluntary separation date of March 31, 1998.
- - Severance agreement (parachute) as exists.
- - My salary will be paid through August 25, 1998. (Paid in a lump
sum on March 31, 1998, or I will sign a consultant agreement and
my salary can be paid every two weeks, until August 25, 1998.)
- - Retention bonus of $250,000 to be paid on March 31, 1998.
- - Bonus based on NPB bonus plan on achievement of plan for full
fiscal '98 (prorated for 75% of fiscal year) (paid by 8/31/98).
- - Waiver of $125,000 bonus for cost reduction synergies
- - Waiver of $125,000 bonus for developing successful strategy
organization integration of global medical products company
- - Waiver of SAR
/s/ C. Raymond Larkin, Jr Date: 12/12/97
- --------------------------- ------------------
C. Raymond Larkin, Jr.
President and Chief Executive Officer
Nellcor Puritan Bennett
Executive Vice President Mallinckrodt
/s/ C. Raymond Holman Date: 12/15/97
- --------------------------- -----------------
C. Ray Holman
Chairman and Chief Executive Officer
Mallinckrodt Inc.
Exhibit 3.2
BY-LAWS OF MALLINCKRODT GROUP INC.
- ---------------------------------------------------------------------
(As Amended through April 15, 1992)
Article I
---------
Meetings of Stockholders
Section 1. The Annual meeting of Stockholders of this Corporation for
- ---------
the election of directors and the transaction of such other business
as may properly come before the meeting shall be held on such day in
September, October or November of each year and at such place and
hour as may be fixed by the Board of Directors prior to the giving of
the notice of the date, place and object of such meeting, or if no
other date, place and hour has been so fixed, on the third Wednesday
in October and in the office of the Corporation, 421 East Hawley
Street, Mundelein, Illinois 60060, at 10:00 o'clock a.m. Chicago
time. Notice of the time, place and object of such meeting shall be
given by mailing at least ten days previous to such meeting, postage
prepaid, a copy of such notice addressed to each stockholder at his
residence or place of business as the same shall appear on the books
of the Corporation.
Section 2. Special meetings of the stockholders other than those
- ---------
regulated by statute may be called at any time by the Chairman of the
Board, the President or by a majority of directors. Notice of every
special meeting stating the time, place and object thereof, shall be
given by mailing, postage prepaid, at least ten days before such
meeting, a copy of such notice addressed to each stockholder at his
post office address as the same appears on the books of the
Corporation.
Section 3. At all meetings of stockholders a majority of the capital
- ---------
stock outstanding, either in person or by proxy, shall constitute a
quorum, excepting as may be otherwise provided by law.
Section 4. The Board of Directors may fix a date not more than fifty
- ---------
days prior to the day of holding any meeting of stockholders as the
day as of which stockholders entitled to notice of and to vote at
such meeting shall be determined.
Section 5. At all meetings of stockholders all questions shall be
- ---------
determined by a majority vote of the stockholders entitled to vote
present in person or by proxy, except as otherwise provided by law.
Section 6. Except as may otherwise be required by applicable law or
- ---------
regulation, a stockholder may make a nomination or nominations for
director of the Corporation at an annual meeting of stockholders or
at a special meeting of stockholders called for the purpose of
electing directors or may bring up any other matter for consideration
and action by the stockholders at an annual meeting of stockholders
only if the provisions of Subsections A, B and C hereto shall have
been satisfied. If such provisions shall not have been satisfied,
any nomination sought to be made or other business sought to be
presented by a stockholder for consideration and action by the
stockholders at the meeting shall be deemed not properly brought
before the meeting, is and shall be ruled by the chairman of the
meeting to be out of order, and shall not be presented or acted upon
at the meeting.
A. The stockholder must, not less than seventy days and not more
than ninety-five days before the day of the meeting, deliver or cause
to be delivered a written notice to the Secretary of the Corporation;
provided, however, that in the event that less than eighty days'
notice or prior public disclosure of the date of the meeting is given
or made to the stockholders by the Corporation, notice by the
stockholder to the Secretary of the Corporation, to be timely, must
be received not later than the close of business on the tenth day
following the day on which such notice or prior public disclosure was
made. Notice by the Corporation shall be deemed to have been given
more than eighty days in advance of the annual meeting if the annual
meeting is called for the third Wednesday in October without regard
for when the notice or public disclosure thereof is actually given or
made. The stockholders' notice shall specify (a) the name and
address of the stockholder as they appear on the books of the
Corporation; (b) the class and number of shares of the Corporation
which are beneficially owned by the stockholder; (c) any interest of
the stockholder in the proposed business described in the notice
which is in the interest of a business or object other than the
business of the Corporation; (d) if such business is a nomination for
director, each nomination sought to be made and a statement signed by
each proposed nominee indicating his or her willingness so to serve
if elected and disclosing the information about him or her that is
required by the Securities Exchange Act of 1934 and the rules and
regulations promulgated thereunder to be disclosed in the proxy
materials for the meeting involved if he or she were a nominee of the
Corporation for election as one of its directors, and (e) if such
business is other than a nomination for director, a brief description
of such business and the reasons it is sought to be submitted for a
vote of the stockholders.
B. Notwithstanding satisfaction of the provisions of Subsection
A, the proposed business described in the notice may be deemed not to
be properly brought before the meeting if, pursuant to state law or
to any rule or regulation of the Securities and Exchange Commission,
it was offered as a stockholder proposal and was omitted, or had it
been so offered, it could have been omitted, from the notice of, and
proxy material for, the meeting (or any supplement thereto)
authorized by the Board of Directors.
C. In the event such notice is timely given and the business
described therein is not disqualified because of Subsection B, such
business (a) may nevertheless not be presented or acted upon at a
special meeting of stockholders unless in all other respects it is
properly before such meeting; and (b) may not be presented except by
the stockholder who shall have given the notice required by
Subsection A or a representative of such stockholder who is qualified
under the law of New York to present the proposal on the
stockholder's behalf at the meeting.
Article II
----------
Directors
Section 1. The number of directors of the Corporation may be
- ---------
determined from time to time by resolution adopted by a majority of
the entire Board of Directors, except that such number shall not be
less than ten nor more than sixteen, exclusive of directors, if any,
to be elected by the holders of 4% Cumulative Preferred Stock or the
holders of one or more of Series Preferred Stock pursuant to the
provisions of Article Third of the Certificate of Incorporation of
the Corporation. Until the first such resolution is adopted, the
Board shall consist of sixteen directors. As provided in the
Certificate of Incorporation and subject to the provisions of the
ninth sentence of Article Ninth thereof, (i) the directors shall be
divided into three classes as nearly equal in number as possible;
(ii) at each annual meeting directors to replace those whose terms
expire at such annual meeting shall be elected to hold office until
the third succeeding annual meeting and until their successors are
chosen; (iii) if the number of directors is changed, any newly
created directorships or decrease in directorships shall be so
apportioned among the classes as to make all classes as nearly equal
in number as possible; and (iv) if the number of directors is
increased by the Board of Directors and any newly created
directorships are filled by the Board, there shall be no
classification of the additional directors until the next annual
meeting of stockholders. No decrease in the Board shall shorten the
term of any incumbent director. As used in these By-Laws, "entire
Board of Directors" means the total number of directors which the
Corporation would have if there were no vacancies. Vacancies
occurring in the Board of Directors may be filled for the unexpired
term by a majority vote of the remaining directors. The Board of
Directors shall adopt such rules and regulations for the conduct of
the meetings and management of the affairs of the Corporation as they
may deem proper, not inconsistent with the laws of the State of New
York or these By-Laws. This By-Law may be amended only by the
affirmative vote of the holders of two-thirds of the shares of all
classes of stock of the Corporation entitled to vote in elections of
directors, considered for the purposes of this By-Law as one class.
Section 2. The directors shall elect one of their members, who may or
- ---------
may not be an officer of the Corporation, to act as Chairman of the
Board. He shall preside, when present, at all meetings of the Board
of Directors and stockholders.
Section 3. As soon as practicable after the Annual Meeting of
- ---------
Stockholders, the newly elected Board of Directors shall hold its
first meeting for the purpose of organization and the transaction of
business. At such organizational meeting the Board of Directors
shall elect the officers of the Corporation and shall prepare a
schedule fixing the time and place of all regular meetings of the
Board of Directors to be held during the next ensuing calendar year.
All such regular meetings of the Board of Directors may be held
without further notice to any director who shall have attended the
organizational meeting. Notice of the time and place fixed for such
regular meetings shall be given by personal notice or by mail or
telegraph to each director who shall not have attended the
organizational meeting at least ten days prior to the first Board of
Directors' meeting after such organizational meeting which such
director shall be eligible to attend. The Board of Directors shall
have authority to change the time and place of any regular meeting
previously fixed, provided that the foregoing provisions as to notice
thereof shall apply to any such changed regular meeting. The
Chairman of the Board of Directors or the President may, and at the
request of a majority of the Board of Directors in writing must, call
a special meeting of the Board of Directors, not less than
twenty-four hours' notice of which must be given by personal notice
or by mail, telephone, telegraph, facsimile (FAX), or other form of
communication. Nothing herein contained shall prevent a waiver of
notice of meeting by directors.
Section 4. At all meetings of the Board of Directors one-third of the
- ---------
entire Board of Directors as from time to time fixed under these
By-Laws shall constitute a quorum.
Article III
-----------
Officers
Section 1. The officers of the Corporation shall be a President
- ---------
(subject to Section 4 of this Article III), one or more Vice
Presidents, a Secretary, a Controller, a Treasurer, such Assistant
Secretaries, Assistant Controllers and Assistant Treasurers as the
Board of Directors may deem necessary, a Chairman of the Board if the
Board deems this necessary, and a Vice Chairman of the Board if there
is a Chairman and the Board deems a Vice Chairman necessary. Any two
offices, excepting those of Chairman of the Board and Secretary, and
President and Secretary, may be held by one person.
Section 2. The Chairman of the Board or the President, as designated
- ---------
by the Board of Directors, shall be the Chief Executive Officer of
the Corporation and subject to the control and direction of the Board
of Directors shall exercise the powers and perform the duties usual
to the chief executive officer, have general charge of the affairs of
the Corporation, see that all orders and resolutions of the Board are
carried into effect, and do and perform such other duties as from
time to time may be assigned to him by the Board of Directors or
these By-Laws.
Section 3. The Chairman of the Board shall preside at all meetings of
- ---------
the Board of Directors and of the stockholders and perform such other
duties as from time to time may be assigned to that office by the
Board or, when he is not the Chief Executive Officer, by the Chief
Executive Officer, or by these By-Laws.
Section 4. The President shall perform such duties as from time to
- ---------
time may be assigned to him by the Board of Directors, or when he is
not the Chief Executive Officer, by the Chief Executive Officer, or
by these By-Laws, and if there is no Chairman, or in the absence or
disability of the Chairman, the President shall perform the duties of
that office. When the Chairman of the Board is the Chief Executive
Officer, the Board need not designate a President and the duties of
President may be performed by the Chief Executive Officer or in part
by such officer and in part by another officer or officers of the
Corporation, as specified by the Board.
Section 5. The Vice Presidents, one or more of whom may be designated
- ---------
Executive or Senior Vice Presidents, shall perform such duties in
such capacities or as heads of their respective operating units as
may be assigned by the Board of Directors, or by the Chief Executive
Officer. In the absence or disability of the President, and in the
absence or disability of the Chairman when there is no President as
such, the duties of the respective office shall be performed by the
Vice Presidents in the order of priority established by the Board,
and unless and until the Board of Directors shall otherwise direct.
Section 6. The Controller shall be the chief accounting officer of
- ---------
the Corporation and shall be in charge of its books of account,
accounting records and accounting and internal auditing procedures.
He shall be responsible for the verification of all of the assets of
the Corporation and the preparation of all tax returns and other
financial reports to governmental agencies by the Corporation and
shall have such other duties and powers as shall be designated from
time to time by the Board of Directors or the Chairman of the Board.
The Controller shall be responsible to and shall report to the Board
of Directors, but in the ordinary conduct of the Corporation's
business shall be under the supervision of the Chairman of the Board
or such other officer as the Board of Directors shall designate.
Section 7. The Treasurer, subject to the direction and supervision of
- ---------
such officer and to such limitations on his authority as the Board of
Directors may from time to time designate or prescribe, shall have
the care and custody of the funds and securities of the Corporation,
sign checks, drafts, notes and orders for the payment of money, pay
out and dispose of the funds and securities of the Corporation and in
general perform the duties customary to the office of Treasurer.
Section 8. The Secretary shall keep the minutes of meetings of the
- ---------
Board of Directors and the minutes of the stockholders' meetings and
have the custody of the seal of the Corporation and affix and attest
the same to certificates of stock, contracts and other documents when
proper and appropriate. He shall perform all of the other duties
usual to that office.
Section 9. The Assistant Secretaries, Assistant Controllers and
- ---------
Assistant Treasurers shall perform such duties as may be assigned by
the Board of Directors.
Section 10. Each officer elected by the Board of Directors shall hold
- ----------
office until the next annual meeting of the Board of Directors and
until his successor is elected. Any officer may be removed at any
time with or without cause by a vote of a majority of the members of
the Board of Directors. A vacancy in any office caused by the death,
resignation or removal of the person elected thereto or because of
the creation of a new office or for any other reason, may be filled
for the unexpired portion of the term by election of the Board of
Directors at any meeting. In case of the absence or disability, or
refusal to act of any officer of the Corporation, or for any other
reason that the Board of Directors shall deem sufficient, the Board
may delegate, for the time being, the powers and duties, or any of
them of such officer to any other officer or to any director.
Article IV
----------
Capital Stock
Section 1. Subscriptions to the capital stock must be paid to the
- ---------
Treasurer at such time or times, and in such installments as the
Board of Directors may by resolution require.
Section 2. The certificate for shares of the Corporation shall be in
- ---------
such forms as shall be approved by the Board of Directors and shall
be signed by the Chairman of the Board or the President or a Vice
President and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary, and shall be sealed with the
seal of the Corporation or a facsimile thereof. The signatures of
the officers upon a certificate may be facsimiles if the certificate
is countersigned by a transfer agent or registered by a registrar
other than the Corporation itself or its employee. In case any
officer has signed or whose facsimile signature has been placed upon
a certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the Corporation with the
same effect as if he were such officer at the date of issue.
Section 3. Registration of transfers of shares shall be made upon the
- ---------
books of the Corporation by the registered holder in person or by
power of attorney, duly executed and filed with the Secretary or
other proper officer of the Corporation, and on surrender of the
certificate or certificates for such shares, properly assigned for
transfer.
Article V
---------
Committees of the Board
Section 1. The Board of Directors may elect from among its members,
- ---------
by resolution adopted by two-thirds of the entire Board of Directors,
an Executive Committee consisting of the Chairman of the Board and
three or more other members of the Board. From such Committee
members, the Board shall elect a Chairman of such Committee.
Section 2. During the intervals between meetings of the Board of
- ---------
Directors, the Executive Committee shall, subject to any limitations
imposed by law or the Board of Directors, possess and may exercise
all the powers of the Board of Directors in the management and
direction of the Corporation in such manner as the Executive
Committee shall deem best for the interests of the Corporation, in
all cases in which specific directions shall not have been given by
the Board of Directors.
Section 3. The Board of Directors may also elect from among its
- ---------
members, by resolutions adopted by a majority of the entire Board of
Directors, such other committee or committees as the Board of
Directors shall determine, each such committee to consist of at least
three members of the Board. The Board shall elect a Chairman of each
such committee, shall fix the number of and elect the other members
thereof, and shall establish the duties and authority thereof,
subject to such limitations as may be required by law.
Section 4. The Board of Directors shall fill any vacancies on any
- ---------
committee established under this Article, with the objective of
keeping the membership of each such committee full at all times.
Section 5. All action by any committee of the Board of Directors
- ---------
shall be referred to the Board of Directors at its meeting next
succeeding such action, and shall be subject to revision or
alteration by the Board of Directors provided that no rights or acts
of third parties shall be affected by any such revision or
alteration. Subject to such applicable resolutions as may be adopted
by the Board, each committee shall fix its own rules of procedure and
shall meet where and as provided in such rules, but in any case the
presence of a majority shall be necessary to constitute a quorum.
Article VI
----------
Meetings by Consent
Section 1. Any action required or permitted to be taken by the Board
- ---------
of Directors or any committee thereof may be taken without a meeting
if all members of the Board or of the committee consent in writing to
the adoption of a resolution authorizing the action. The resolution
and the written consents thereto by the members of the Board or
committee shall be filed with the minutes of the proceedings of the
Board of committee.
Section 2. Any one or more members of the Board or any committee
- ---------
thereof may participate in a meeting of the Board or such committee
by means of a conference telephone or similar communications
equipment allowing all persons participating in the meeting to hear
each other at the same time. Participation by such means shall
constitute presence in person at a meeting.
Article VII
-----------
Indemnification
Section 1. The Company shall, to the fullest extent permitted by
- ---------
applicable law, indemnify any person who is or was made, or
threatened to be made, a party to any action or proceeding, whether
civil or criminal, whether involving any actual or alleged breach of
duty, neglect or error, any accountability, or any actual or alleged
misstatement, misleading statement or other act or omission and
whether brought or threatened in any court or administrative or
legislative body or agency, including an action by or in the right of
the Company to procure a judgment in its favor and an action by or in
the right of any other corporation of any type or kind, domestic or
foreign, or any partnership, joint venture, trust, employee benefit
plan or other enterprise, which any director or officer of the
Company is serving or served in any capacity at the request of the
Company, by reason of the fact that he, his testator, or intestate,
is or was a director or officer of the Company, or is serving or
served such other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise in any capacity, against
judgments, fines, amounts paid in settlement, and costs, charges and
expenses, including attorney's fees, or any appeal therein; provided,
however, that no indemnification shall be provided to any such person
if a judgment or other final adjudication adverse to the director or
officer establishes that (i) his acts were committed in bad faith or
were the result of active and deliberate dishonesty and, in either
case, were material to the cause of action so adjudicated, or (ii) he
personally gained in fact a financial profit or other advantage to
which he was not legally entitled.
Section 2. The Company may indemnify any other person to whom the
- ---------
Company is permitted to provide indemnification or the advancement of
expenses by applicable law, whether pursuant to rights granted
pursuant to, or provided by, the New York Business Corporation Law or
other rights created by (i) a resolution of shareholders, (ii) a
resolution of directors, or (iii) an agreement providing for such
indemnification, it being expressly intended that these by-laws
authorize the creation of other rights in any such manner.
Section 3. The Company shall, from time to time, reimburse or advance
- ---------
to any person referred to in Section 1 the funds necessary for
payment of expenses, including attorney's fees, incurred in
connection with any action or proceeding referred to in Section 1,
upon receipt of a written undertaking by or on behalf of such person
to repay such amount(s) if a judgment or other final adjudication
adverse to the director or officer establishes that (i) his acts were
committed in bad faith or were the result of active and deliberate
dishonesty and, in either case, were material to the cause of action
so adjudicated, or (ii) he personally gained in fact a financial
profit or other advantage to which he was not legally entitled.
Section 4. Any director or officer of the Company serving (i) another
- ---------
corporation, of which a majority of the shares entitled to vote in
the election of its directors is held by the Company, or (ii) any
employee benefit plan of the Company or any corporation referred to
in clause (i), in any capacity shall be deemed to be doing so at the
request of the Company.
Section 5. Any person entitled to be indemnified or to the
- ---------
reimbursement or advancement of expenses as a matter of right
pursuant to this Article may elect to have the right to
indemnification (or advancement of expenses) interpreted on the basis
of the applicable law in effect at the time of the occurrence of the
event or events giving rise to the action or proceeding, to the
extent permitted by law, or on the basis of the applicable law in
effect at the time indemnification is sought.
Section 6. The right to be indemnified or to the reimbursement or
- ---------
advancement of expenses pursuant to this Article (i) is a contract
right pursuant to which the person entitled thereto may bring suit as
if the provisions hereof were set forth in a separate written
contract between the Company and the director or officer, (ii) is
intended to be retroactive and shall be available with respect to
events occurring prior to the adoption hereof, and (iii) shall
continue to exist after the rescission or restrictive modification
hereof with respect to events occurring prior thereto.
Section 7. If a request to be indemnified or for the reimbursement or
- ---------
advancement of expenses pursuant hereto is not paid in full by the
Company within thirty days after a written claim has been received by
the Company, the claimant may at any time thereafter bring suit
against the Company to recover the unpaid amount of the Claim and, if
successful in whole or in part, the claimant shall be entitled also
to be paid the expenses of prosecuting such claim. Neither the
failure of the Company (including its Board of Directors, independent
legal counsel, or its shareholders) to have made a determination
prior to the commencement of such action that indemnification of or
reimbursement or advancement of expenses to the claimant is proper in
the circumstances, nor an actual determination by the Company
(including its Board of Directors, independent legal counsel, or its
shareholders) that the claimant is not entitled to indemnification or
to the reimbursement or advancement of expenses, shall be a defense
to the action or create a presumption that the claimant is not so
entitled.
Section 8. A person who has been successful, on the merits or
- ---------
otherwise, in the defense of a civil or criminal action or proceeding
of the character described in Section 1 shall be entitled to
indemnification only as provided in Sections 1 and 3, notwithstanding
any provision of the New York Business Corporation Law to the
contrary.
Article VIII
------------
Amendments
Section 1. These By-Laws may be amended at any stockholders' meeting
- ---------
by a majority of the votes cast at such meeting by the holders of
shares entitled to vote thereon, represented either in person or by
proxy.
Section 2. Subject to the limitations, if any, from time to time
- ---------
prescribed in By-Laws made by stockholders, the Board of Directors at
any regular or special meeting, by the vote of a majority of the
directors may make, alter, amend and repeal any By-Laws, but any
By-Laws made by the Board of Directors may be altered or repealed by
the stockholders.
Exhibit 21
Mallinckrodt Inc.
1998 LEGAL ENTITY MASTER FILE
LEGAL NAME JURISDICTION
- ---------- ------------
Accucomp (Pty.) Ltd. SOUTH AFRICA
Accufusion (Pty.) Ltd. SOUTH AFRICA
Alton Dean Medical, Inc. UTAH
Carnforth Limited BERMUDA
Coromandel Fertilisers Ltd. INDIA
Creative Solutions Industria e Comercio Ltda. BRAZIL
Crow River Industries, Incorporated MINNESOTA
Dittander Limited IRELAND
Dritte CORSA Verwaltungsgesellschaft mbH GERMANY
HemoCue AB SWEDEN
IMC Exploration Company MARYLAND
IMCERA Ltd. UNITED KINGDOM
Infrasonics Technologies, Inc. NEVADA
LF International FSC, Inc. BARBADOS
Liebel-Flarsheim Company DELAWARE
Mallinckrodt Athlone Holdings, Inc. DELAWARE
Mallinckrodt Baker B.V. NETHERLANDS
Mallinckrodt Baker, Inc. NEW JERSEY
Mallinckrodt Baker International, Inc. DELAWARE
Mallinckrodt Baker S.A. de C.V. MEXICO
Mallinckrodt Chemical Australia Pty. Limited AUSTRALIA
Mallinckrodt Chemical Canada Inc. CANADA
Mallinckrodt Chemical GmbH GERMANY
Mallinckrodt Chemical Holdings GmbH GERMANY
Mallinckrodt Chemical Holdings (U.K.) Ltd. UNITED KINGDOM
Mallinckrodt Chemical Limited UNITED KINGDOM
Mallinckrodt DAR Srl ITALY
Mallinckrodt Europe B.V. NETHERLANDS
Mallinckrodt FSC Inc. BARBADOS
Mallinckrodt Group Inc. DELAWARE
Mallinckrodt Holdings B.V. NETHERLANDS
Mallinckrodt Holdings Ireland IRELAND
Mallinckrodt Iberica S.A. SPAIN
Mallinckrodt Inc. DELAWARE
Mallinckrodt Inc. NEW YORK
Mallinckrodt International Corporation MISSOURI
Mallinckrodt International Financial
Services Company IRELAND
Mallinckrodt Medical IRELAND
Mallinckrodt Medical AG SWITZERLAND
Mallinckrodt Medical Argentina Limited UNITED KINGDOM
Mallinckrodt Medical Asia Pacific Pte. Ltd. SINGAPORE
Mallinckrodt Medical B.V. NETHERLANDS
Mallinckrodt Medical Caribe, Inc. DELAWARE
Mallinckrodt Medical do Brasil, Ltda. BRAZIL
Mallinckrodt Medical GmbH GERMANY
Mallinckrodt Medical Holdings GmbH GERMANY
Mallinckrodt Medical Holdings Ireland IRELAND
Mallinckrodt Medical Holdings (U.K.) Limited UNITED KINGDOM
Mallinckrodt Medical Imaging - Ireland IRELAND
Mallinckrodt Medical, Inc. CANADA
Mallinckrodt Medical International Holdings IRELAND
Mallinckrodt Medical Isle of Man ISLE OF MAN
Mallinckrodt Medical Limitada PORTUGAL
Mallinckrodt Medical PMC NEVADA
Mallinckrodt Medical Pty. Ltd. AUSTRALIA
Mallinckrodt Medical S.A. FRANCE
Mallinckrodt Medical S.A. SPAIN
Mallinckrodt Medical S.A. de C.V. MEXICO
Mallinckrodt Medical S.A./N.V. BELGIUM
Mallinckrodt Medical Srl ITALY
Mallinckrodt Medical (U.K.) Limited UNITED KINGDOM
Mallinckrodt Medical Vertriebs-GmbH AUSTRIA
Mallinckrodt Polska Sp.zo.o POLAND
Mallinckrodt Services B.V. NETHERLANDS
Mallinckrodt TMH NEVADA
Mallinckrodt Veterinary, Inc. DELAWARE
MMHC, Inc. DELAWARE
MMJ S.A. de C.V. MEXICO
Mobility Products and Design of Minnetonka, Inc. MINNESOTA
MSCH Company DELAWARE
National Catheter Corporation NEW YORK
Nellcor Foreign Sales Corporation BARBADOS
Nellcor Puritan Bennett Australia Pty. Limited AUSTRALIA
Nellcor Puritan Bennett Belgium N.V./S.A. BELGIUM
Nellcor Puritan Bennett Benelux B.V. NETHERLANDS
Nellcor Puritan Bennett Canada Ltd. CANADA
Nellcor Puritan Bennett Europe B.V. NETHERLANDS
Nellcor Puritan Bennett Export Inc. DELAWARE
Nellcor Puritan Bennett Finland Oy FINLAND
Nellcor Puritan Bennett France Developpement, S.A. FRANCE
Nellcor Puritan Bennett France Holdings SARL FRANCE
Nellcor Puritan Bennett France SARL FRANCE
Nellcor Puritan Bennett Germany GmbH GERMANY
Nellcor Puritan Bennett Hong Kong Limited HONG KONG
Nellcor Puritan Bennett Iberia, S.L. SPAIN
Nellcor Puritan Bennett Incorporated DELAWARE
Nellcor Puritan Bennett International Corporation DELAWARE
Nellcor Puritan Bennett Ireland IRELAND
Nellcor Puritan Bennett Ireland Holdings IRELAND
Nellcor Puritan Bennett Italia S.r.l. ITALY
Nellcor Puritan Bennett Japan Incorporated JAPAN
Nellcor Puritan Bennett (Melville) Ltd. CANADA
Nellcor Puritan Bennett Mexico, S.A. de C.V. MEXICO
Nellcor Puritan Bennett U.K. Limited UNITED KINGDOM
Puritan-Bennett Corporation DELAWARE
Puritan-Bennett Ireland Distribution IRELAND
Sterlington Land Co. LOUISIANA
Trigate (Pty.) Ltd. SOUTH AFRICA
Trigate Umndeni (Pty.) Ltd. SOUTH AFRICA
Trinance (Pty.) Ltd. SOUTH AFRICA
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
We consent to the incorporation by reference in the following
registration statements and related prospectuses filed by
Mallinckrodt Inc. under the Securities Act of 1933 of our report
dated August 12, 1998 with respect to the consolidated financial
statements of Mallinckrodt Inc. included in this Annual Report on
Form 10-K for the year ended June 30, 1998:
Commission File No.
-------------------
Form S-8, No. 2-65727
Form S-8, No. 2-80553
Form S-8, No. 2-90910
Form S-8, No. 2-94151
Form S-8, No. 33-10381
Form S-8, No. 33-32109
Form S-8, No. 33-40246
Form S-3, No. 33-43925
Form S-8, No. 333-34489
Form S-8, No. 333-38291
Form S-8, No. 333-38293
Form S-3, No. 333-42325
- -------------------------
Ernst & Young LLP
St. Louis, Missouri
September 22, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the consolidated balance sheets and consolidated statements of
operations of the Company's Form 10-K, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 55
<SECURITIES> 0
<RECEIVABLES> 503
<ALLOWANCES> 17
<INVENTORY> 470
<CURRENT-ASSETS> 1173
<PP&E> 1412
<DEPRECIATION> 517
<TOTAL-ASSETS> 3786
<CURRENT-LIABILITIES> 1182
<BONDS> 945
0
11
<COMMON> 87
<OTHER-SE> 820
<TOTAL-LIABILITY-AND-EQUITY> 3786
<SALES> 2367
<TOTAL-REVENUES> 2367
<CGS> 1369
<TOTAL-COSTS> 2618
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 102
<INCOME-PRETAX> (338)
<INCOME-TAX> 18
<INCOME-CONTINUING> (356)
<DISCONTINUED> 72
<EXTRAORDINARY> 0
<CHANGES> (8)
<NET-INCOME> (292)
<EPS-PRIMARY> (4.01)
<EPS-DILUTED> (4.01)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains restated summary financial information
extracted from the consolidated balance sheets and consolidated
statements of operations of the Company's Form 10-K for the year
ended June 30, 1998, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 808
<SECURITIES> 0
<RECEIVABLES> 344
<ALLOWANCES> 8
<INVENTORY> 292
<CURRENT-ASSETS> 1605
<PP&E> 1188
<DEPRECIATION> 447
<TOTAL-ASSETS> 2975
<CURRENT-LIABILITIES> 642
<BONDS> 544
0
11
<COMMON> 87
<OTHER-SE> 1153
<TOTAL-LIABILITY-AND-EQUITY> 2975
<SALES> 1698
<TOTAL-REVENUES> 1698
<CGS> 898
<TOTAL-COSTS> 1401
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48
<INCOME-PRETAX> 271
<INCOME-TAX> 96
<INCOME-CONTINUING> 175
<DISCONTINUED> 15
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 190
<EPS-PRIMARY> 2.57
<EPS-DILUTED> 2.53
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Excluding the restated summary balance sheet information, this
schedule contains restated summary financial information taken from
the consolidated statements of operations of the Company's Form 10-K
for the year ended June 30, 1998, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 496
<SECURITIES> 0
<RECEIVABLES> 323
<ALLOWANCES> 9
<INVENTORY> 313
<CURRENT-ASSETS> 1200
<PP&E> 1130
<DEPRECIATION> 388
<TOTAL-ASSETS> 3018
<CURRENT-LIABILITIES> 841
<BONDS> 557
0
11
<COMMON> 87
<OTHER-SE> 1134
<TOTAL-LIABILITY-AND-EQUITY> 3018
<SALES> 1597
<TOTAL-REVENUES> 1597
<CGS> 838
<TOTAL-COSTS> 1317
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 51
<INCOME-PRETAX> 228
<INCOME-TAX> 84
<INCOME-CONTINUING> 144
<DISCONTINUED> 68
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 212
<EPS-PRIMARY> 2.81
<EPS-DILUTED> 2.77
</TABLE>
