SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A No. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
June 17, 1998
Mallinckrodt Inc.
(Exact name of registrant as specified in its charter)
New York 1-483 36-1263901
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
675 McDonnell Boulevard, St. Louis, MO 63134
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, (314) 654-2000
including area code
<PAGE>
Pursuant to Rule 12b-15 of the Securities Exchange Act of 1934, as
amended, this Form 8-K/A is hereby filed with respect to that certain
Current Report on Form 8-K of Mallinckrodt Inc. filed with the
Securities and Exchange Commission on March 23, 1998 (as amended, the
"Form 8-K"). In accordance therewith, Item 5 of the Form 8-K is
hereby restated in its entirety as follows:
Item 5. Other Events
This document provides additional information for the benefit of our
investors which was not included in the Company's Current Report on
Form 8-K filed March 23, 1998.
Mallinckrodt Inc.
Unaudited Pro Forma Condensed Consolidated Financial Statements
On August 28, 1997, Mallinckrodt Inc. (the Company or Mallinckrodt)
acquired Nellcor Puritan Bennett Incorporated (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
acquisition was accounted for using the purchase method of
accounting.
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. Eleven
transition teams comprised of employees of Mallinckrodt and Nellcor
were established in the second quarter to focus on business strategy,
revenue enhancement, global development, sales force integration,
product development, operations and administrative consolidation.
All segments of the employee work force could be impacted by these
efforts. The transition teams are expected to complete their work
during fiscal 1998. Since both companies (Mallinckrodt and Nellcor)
have global healthcare operations, senior management, through the
transition teams, is assessing which activities should be
consolidated, including customer service, logistics and sales. In
addition, from a physical and legal perspective, assessment of the
need for existing regional sales offices, country operations and
headquarters are being evaluated.
Upon the approval of exit plans, the resulting costs, which will
include involuntary severance of Nellcor employees as a result of
work force reduction, relocation of Nellcor employees, and the
elimination of contractual obligations of Nellcor which will have no
future economic benefit when the plan is complete, will be recognized
as a liability assumed as of the acquisition date. The contractual
obligations include facility leases and consulting arrangements which
are no longer required for software implementation and other projects
which may be stopped. Termination and relocation arrangements will
be communicated in sufficient detail for the affected Nellcor
employee groups to determine the types and amounts of benefits they
will receive if terminated or relocated.
Nellcor corporate staff functions, which were performed at the
Nellcor headquarters located in Pleasanton, California, will now be
performed at the Mallinckrodt headquarters in St. Louis, Missouri.
The Nellcor corporate staff employees in legal, treasury, human
resources, corporate accounting, financial services, communications
and investor relations have been notified.
Integrating these two large international organizations is a complex
process. The most complex undertaking for the transition teams is
the determination of whether certain functions should be consolidated
and where they should be located. The breadth of international
operations creates logistic, legal and tax structural issues which
must be assessed to derive the greatest value for the Company going
forward. Decisions that result from the integration team
recommendations will impact the valuation of assets acquired as
determinations are made to end product lives and shut down or
consolidate operations. Significant actions needed to complete the
plan include determination of the legal ramifications of closing
operations in certain countries, assessment of the tax implications
of various alternative strategies, and analysis of the costs
associated with the various activities to be exited and employees to
be terminated.
At March 31, 1998, the Company estimates that Nellcor integration
actions taken to date combined with those under consideration will
result in accruals totaling approximately $75 million. Approximately
80 percent of these accruals will relate to Nellcor employee
severance and relocation costs.
As of December 31, 1997, $26.9 million has been accrued and included
in the acquisition cost allocation, and $1.6 million has been paid
and charged against this accrual. The primary component of this
balance relates to severance agreements in place prior to the
acquisition date which provide certain employees with specified
benefits in the event that their employment with Nellcor is
terminated or there is an adverse change, based upon the employee's
judgment, in the employee's status, title, position or
responsibilities. As additional accruals are recorded for Nellcor
integration actions, there will be a corresponding increase in
goodwill.
Allocations of the purchase price have been determined based upon
preliminary estimates of value, and therefore, are subject to change.
As refinements are made, goodwill will be adjusted accordingly. The
most significant refinement of the purchase price allocation will
result from the integration plan being formulated by management.
Based upon information currently available regarding actions under
consideration, the differences between the preliminary and final
allocations are not expected to have a material impact on either the
results of operations or financial position.
The integration plan will also identify exit activities related to
the operations of Mallinckrodt prior to the acquisition of Nellcor.
Costs of these exit activities will include severance of Mallinckrodt
employees. A liability for these costs will be recognized at the
time management commits to the plan and communicates termination
arrangements in sufficient detail for the affected Mallinckrodt
employee groups to determine the types and amounts of benefits they
will receive if terminated. In addition, integration costs of the
combined Company, such as transition bonuses and consulting costs,
will generally be expensed as incurred. Based upon decisions made
during the third quarter and those under consideration at March 31,
1998, the Company now expects costs of exit activities related to the
operations of Mallinckrodt prior to the acquisition of Nellcor plus
integration costs of the combined Company to total $75 million to
$100 million, and will be a nonrecurring charge to fiscal 1998
operating results. During the first half of fiscal 1998, the actions
taken have resulted in pre-tax charges to operations of $6.8 million,
consisting of $3.8 million for transition bonuses, $1.5 million for
involuntary severance, and $1.5 million for other integration costs.
As of December 31, 1997, payments made relating to the above totaled
$0.1 million for involuntary severance and $1.5 million for other
integration costs. Anticipated costs and cost savings associated
with the integration of the two companies have not been reflected in
this presentation.
The following Unaudited Pro Forma Condensed Consolidated Statement of
Operations is based upon the historical financial statements of
Mallinckrodt and Nellcor, and has been prepared under the assumptions
set forth in the accompanying Notes to Unaudited Pro Forma Condensed
Consolidated Statement of Operations. The Unaudited Pro Forma
Condensed Consolidated Statement of Operations for the six months
ended December 31, 1997 has been prepared as if the purchase
transaction and the related financing had occurred at the beginning
of fiscal 1997. The pro forma adjustments are based upon available
information and certain assumptions that management believes are
reasonable.
The Unaudited Condensed Consolidated Balance Sheet as of December 31,
1997 is presented in the Mallinckrodt Inc. Form 10-Q for the period
ended December 31, 1997 filed on February 12, 1998 and amended
June 17, 1998.
The Unaudited Pro Forma Condensed Consolidated Statement of
Operations does not purport to represent what Mallinckrodt's results
of operations would have been if consummation of the acquisition had
occurred at the beginning of fiscal 1997 or which may be achieved in
the future.
The Unaudited Pro Forma Condensed Consolidated Statement of
Operations should be read in conjunction with the historical
financial statements and accompanying notes for Mallinckrodt.
Mallinckrodt Inc.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
Six Months Ended December 31, 1997
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Mallinckrodt(A) Nellcor(A) Adjustments Combined
--------------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Net sales................. $1,154.3 $101.1 $1,255.4
Operating costs and
expenses:
Cost of goods sold...... 664.4 61.0 $ (.3)(B) 725.1
Selling, administrative
and general expenses... 308.5 37.4 7.8 (B) 353.7
Research and development
expenses............... 67.7 9.3 77.0
Restructuring charges... 2.4 2.4
Other operating
income, net............ (18.4) (18.4)
--------- ------- ------ ---------
Total operating costs
and expenses............. 1,022.2 110.1 7.5 1,139.8
--------- ------- ------ ---------
Operating earnings
(loss)................... 132.1 (9.0) (7.5) 115.6
Interest income and other
nonoperating income
(expense), net........... 11.5 (6.9)(C) 4.6
Interest expense.......... (47.4) (.1) (11.5)(D) (59.0)
--------- ------- ------ ---------
Earnings (loss) before
income taxes............. 96.2 (9.1) (25.9) 61.2
Income tax provision
(benefit)................ 37.3 (2.9) (9.4)(E) 25.0
--------- ------- ------ ---------
Net earnings (loss)....... 58.9 (6.2) (16.5) 36.2
Preferred stock
dividends................ (.2) (.2)
--------- ------- ------- ---------
Available for common
shareholders............. $ 58.7 $ (6.2) $(16.5) $ 36.0
========= ======= ======= =========
Earnings per common share (F)
Basic.................... $ .81 $ .50
========= =========
Assuming dilution........ $ .80 $ .49
========= =========
The accompanying Notes are an integral part of the Unaudited Pro Forma
Condensed Consolidated Statement of Operations.
</TABLE>
Mallinckrodt Inc.
Notes to Unaudited Pro Forma Condensed
Consolidated Statement of Operations
Six Months Ended December 31, 1997
(A) The acquisition of Nellcor occurred on August 28, 1997. The
Nellcor results represent July and August activity. The results
of Nellcor subsequent to acquisition are included with
Mallinckrodt. The Mallinckrodt results exclude the $75.4
million step-up of Nellcor's inventory to fair value at date of
acquisition and the $398.3 million purchased research and
development, which were charged to operations during the first
half of fiscal 1998, as well as the $28.7 million tax benefit
related to the write-off of the stepped-up inventory.
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 are in various stages of development and have
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 FDA (or international regulatory body) 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 (and/or international regulatory body approval, where
applicable), specifically costs and efforts incurred for
clinical trials and preparation of FDA submission and
interaction with the FDA (and international regulatory bodies,
where applicable). None of these medical devices or products
had received FDA (or international regulatory body) 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 same
methodology (income approach) was utilized to evaluate purchased
research and development as was utilized to evaluate the other
Nellcor identifiable intangible assets acquired, except the cost
approach was utilized to evaluate the assembled work force.
(B) Intangible and goodwill amortization expense related to the
acquisition, less amortization expense previously recorded by
Nellcor. Intangibles and goodwill are amortized on a straight-
line basis over 10 to 30 years (weighted average life of 25
years). The amortization expense is based on preliminary
allocation and further adjustments, which may be significant,
are expected during the allocation period. The amortization
expense includes $0.3 million related to the exit of Nellcor
activities.
(C) Elimination of Mallinckrodt domestic interest income related to
cash on hand used to pay for a portion of the acquisition, plus
$0.1 million amortization of debt issuance cost.
(D) Interest at 6.0 percent on the borrowing of approximately $1.1
billion to complete the acquisition. The interest rate is based
on the London Interbank Offered Rate plus a margin dependent
upon the Company's senior debt ratings.
(E) Income taxes have been provided for the adjustments referred to
in (B), (C) and (D). The effective tax rate is adversely
impacted by goodwill amortization expense which is not tax
effected.
(F) The earnings per common share amounts have been restated to
conform with the Financial Accounting Standards Board Statement
No. 128, Earnings Per Share. Statement 128 replaced the
previously reported 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.
Earnings per common share were based upon the weighted average
number of shares of common stock for basic (72,716,625 shares)
and common and common stock equivalents for diluted (73,446,360
shares) outstanding for the six-month period ended December 31,
1997.
********
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunder duly authorized.
Mallinckrodt Inc.
DOUGLAS A. MCKINNEY
Vice President and Controller
Date: June 12, 1998
