-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WDchhmhkivvg0L7SvSszmoxkrdhr66F5fOEZ4x1CGEvz1r3Jm6lCnr3t/pxtOF6X 8TQ9M0iLpiSjACvjnFFuEw== 0000051396-97-000060.txt : 19970925 0000051396-97-000060.hdr.sgml : 19970925 ACCESSION NUMBER: 0000051396-97-000060 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970924 SROS: CSX SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MALLINCKRODT INC /MO CENTRAL INDEX KEY: 0000051396 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 361263901 STATE OF INCORPORATION: NY FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-00483 FILM NUMBER: 97684790 BUSINESS ADDRESS: STREET 1: 7733 FORSYTH BLVD CITY: ST LOUIS STATE: MO ZIP: 63105-1820 BUSINESS PHONE: 3148545299 MAIL ADDRESS: STREET 1: 7733 FORSYTH BLVD CITY: ST LOUIS STATE: MO ZIP: 63105-1820 FORMER COMPANY: FORMER CONFORMED NAME: MALLINCKRODT INC /MO DATE OF NAME CHANGE: 19970625 FORMER COMPANY: FORMER CONFORMED NAME: MALLINCKRODT GROUP INC DATE OF NAME CHANGE: 19940322 FORMER COMPANY: FORMER CONFORMED NAME: IMCERA GROUP INC DATE OF NAME CHANGE: 19920703 10-K 1 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, 1997 --- 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 of (I.R.S. Employer incorporation or organization) Identification No.) 7733 Forsyth Boulevard St. Louis, Missouri 63105-1820 (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: 314-854-5200 ------------------------------ 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: $2,639,222,814 as of August 29, 1997. Market value is based on the August 29, 1997, 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: 72,372,134 shares as of August 29, 1997. Documents Incorporated By Reference: Information required by Items 10, 11, 12 and 13 of Part III is incorporated by reference from pages 1 through 4, and 9 through 11; pages 5 and 6, 9 and 10, and 21 through 30; pages 7 and 8; and pages 6, 9 and 10, respectively, of the Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on October 15, 1997. 1997 FORM 10-K CONTENTS Item Page - ---- ---- Part I: 1. Business.............................................. 1 Introduction.......................................... 1 General Factors Related to Business Segments.......... 2 International Operations.............................. 2 Healthcare............................................. 3 Specialty Chemicals................................... 8 Other Actions - Discontinued Operations............... 9 Subsequent Event...................................... 9 Other Activities...................................... 9 2. Properties............................................ 11 3. Legal Proceedings..................................... 11 4. Submission of Matters to a Vote of Security Holders... 14 Executive Officers of the Registrant.................. 15 Part II: 5. Market for the Registrant's Common Stock and Related Stockholder Matters.................................. 17 6. Selected Financial Data............................... 18 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 19 8. Financial Statements and Supplementary Data........... 24 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................. 50 Part III: 10. Directors and Executive Officers of the Registrant........................................... 50 11. Executive Compensation................................ 50 12. Security Ownership of Certain Beneficial Owners and Management....................................... 50 13. Certain Relationships and Related Transactions........ 50 Part IV: 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................... 50 Signatures...................................................... 59 PART I. ITEM 1. BUSINESS INTRODUCTION Company Profile - --------------- Mallinckrodt Inc. (Mallinckrodt, the Company, or the Corporation) is a global company serving specialty markets in healthcare and chemicals. The Company was incorporated in New York in 1909 under the name International Agricultural Corporation. The corporate headquarters is located at 7733 Forsyth Boulevard, St. Louis, Missouri 63105, and the telephone number is (314) 854-5200. Current plans call for the corporate headquarters to be relocated to owned facilities at 675 McDonnell Boulevard, St. Louis, Missouri 63134 by the end of November 1997. 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 3 years the transition has involved the following: - In June 1994, the Company recorded a restructuring charge of $46 million after taxes to reengineer Mallinckrodt Medical in order to enhance responsiveness to healthcare customer needs, and compete more effectively in a market that was changing as a result of healthcare reform. - 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. Those businesses are now managed through divisions with global responsibility under a corporate chief operating officer. - 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 disposed of the animal health segment for $405 million cash. The Company retained certain liabilities, as well as various parcels of idle real property, and efforts are underway to divest these assets. - On July 23, 1997, the Company announced the execution of a definitive agreement to purchase for cash all outstanding shares of Nellcor Puritan Bennett Incorporated (Nellcor) common stock for $28.50 per share. The acquisition was completed on August 28, 1997 and the aggregate purchase price of the common stock is $1.9 billion. Other recent acquisitions, divestitures and continuing investments in each of Mallinckrodt's businesses are described in the discussions of the business segments, Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 on pages 19-23, and Notes 1 and 21 of the Notes to Consolidated Financial Statements. - --------------------- "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: With the exception of historical information, the matters discussed in this annual report to stockholders are forward-looking statements that involve risks and uncertainties, and actual results could differ materially from those discussed. Among the factors that could cause actual results to differ materially are the following: 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; and the risk factors reported from time to time in the Company's SEC reports. 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 has two business segments: healthcare and specialty chemicals. The term "operating earnings" of a business segment represents that business segment's revenues, including sales to the other Mallinckrodt business segment, less all operating expenses. Intersegment sales are not material to the business segments and are eliminated in reported consolidated results of Mallinckrodt. Operating expenses of a business segment 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 BUSINESS SEGMENTS In general, Mallinckrodt's business segments, including related working capital requirements, are not materially affected by seasonal factors. Mallinckrodt's business segments do not 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 business segments involves price, service, quality and technological innovation. Competition is strong in all markets served. Financial information about industry segments 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 on page 27. Financial information about foreign and domestic operations and export sales is included in Note 17 of the Notes to Consolidated Financial Statements. INTERNATIONAL OPERATIONS The Company operates globally, with manufacturing and distribution facilities in various countries throughout the world, and is subject to certain opportunities and risks, including currency fluctuations and government actions. Mallinckrodt generates a significant portion of its operating earnings and cash flows outside the United States and is positioned to benefit naturally from its use of approximately 19 currencies, as currency fluctuations are often offsetting. Operations in each country are monitored so 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 uses certain derivative financial instruments, principally purchased options, forward contracts and currency swaps, to manage its exposure to fluctuations in foreign exchange and interest rate risk. The Company uses the derivatives over a rolling 18- to 24-month coverage period with an objective of limiting negative rate effects on overall performance for both budget and prior year comparisons. The Company seeks to have effective coverage levels 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. Additionally, various operational initiatives are employed to help manage business risks. The net impact of foreign exchange activities on earnings was immaterial for 1997, 1996 and 1995, 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 $44 million in 1997 due to the strengthening of the U.S. dollar against the functional currency of many of the Company's international affiliates. 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. Mallinckrodt sales outside the U.S. represented approximately 28 percent of consolidated net sales during the three-year period ended June 30, 1997. Products are manufactured and marketed through a variety of subsidiaries and affiliates around the world. See discussions of individual business segments included below; under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations; and in Note 17 of the Notes to Consolidated Financial Statements for additional information. HEALTHCARE Healthcare sales were: Years ended June 30, -------------------------- 1997 1996 1995 ------- ------- ------ (in millions) Net sales Imaging agents.................. $ 801 $ 716 $ 688 Critical care products.......... 321 338 324 Pharmaceutical specialties...... 404 368 325 ------- ------- ------- $1,526 $1,422 $1,337 ======= ======= ======= Healthcare products are instrumental in the delivery of healthcare services and are sold to hospitals, clinical laboratories, pharmaceutical manufacturers and other customers on a worldwide basis. Healthcare products are related 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 improve the quality of life while lowering the cost of care are two major factors fueling growth within the industry. The healthcare industry is experiencing a period of 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 have a dramatic effect on pricing or potential 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 companies 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 short-term and long-term cost containment pressures, as well as the possibility of regulatory reform, may have an adverse impact on the Company's results of operations. On July 1, 1996, Mallinckrodt began supplying Premier, Inc. (Premier), the largest healthcare alliance in the U.S., with x-ray contrast media under a five-year contract, an agreement believed to be the largest contract ever written for contrast media products. 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. As a corporate partner, Mallinckrodt's products will be used preferentially by Premier's 1,650 member hospitals. Healthcare provides advanced, innovative products for radiology, cardiology, nuclear medicine, anesthesiology, critical care and therapeutic pharmaceuticals. Principal products of this industry segment are contrast media for various imaging modalities, radiopharmaceuticals for medical diagnostic procedures, disposable medical devices, drug chemicals, high-purity process chemicals and peptides. 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. During 1994, Mallinckrodt conducted studies to develop strategies to effectively respond to healthcare customer needs and compete in a market that is changing rapidly as the result of healthcare reform. As a result of these efforts, in the fourth quarter of 1994 Mallinckrodt recorded a charge of $74 million, $46 million after taxes, related to implementing organization and process changes. The key components of the charge included the reorganization of the medical specialty oriented U.S. sales structure into a unified organization divided into geographical districts; reorganization to reduce, centralize and standardize certain non-sales related functions and management processes; and manufacturing rationalization. The process of reorganizing the U.S. sales force addressed new alliances being created on a market-by-market basis and the changing dynamics of existing customers' decision-making processes. Sales organizations for imaging agents and critical care products were consolidated into one team to increase responsiveness to the customer. The consolidation also created 10 geographic regions to improve planning and strategy development on a local basis. Emphasis continues to be placed on contact with the clinical community within its customer base; however, the sales structure provides a single point of contact with each purchasing entity, providing quicker, more efficient and more effective customer service. Pretax cash expenditures for this restructuring approximate the original estimate of $65 million, consisting of $28 million for severance costs for about 500 people at various locations around the world, $15 million for consulting, $13 million for manufacturing rationalization and $9 million for other items. The $9 million noncash pretax portion of the charge primarily related to manufacturing rationalization. Approximately $58 million of the cash expenditures were incurred through June 30, 1997. The majority of the remaining cash expenditures will occur in 1998 with the largest single category related to severance for previously terminated employees. Restructuring actions are complete at June 30, 1997 and no material adjustments to the original reserve have been required. Imaging Agents - -------------- Imaging agents include the manufacture, sale and distribution of products used in radiology, cardiology and nuclear medicine. Radiology products include iodinated contrast media (ionic and nonionic), ultrasound contrast agents, magnetic resonance imaging agents, and catheters for use in studies of the brain, abdominal organs, renal system, peripheral vascular system and other areas of the body to aid in diagnosis and therapy. Pursuant to the restructuring discussed above, these products are marketed in the U.S. principally by a geographically organized sales force. Internationally, these products are marketed through direct sales forces and distributors. Since its introduction in the U.S. eight years ago, Optiray*, a low osmolar, nonionic medium, has been widely accepted in both radiology and cardiology procedures. Optiray* began to be introduced outside the U.S. in 1991. To source 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. In addition, capacity expansion projects at Mallinckrodt's existing plant in St. Louis, Missouri were completed in 1994 and again in June of 1997. 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. 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 does not affect the marketing of Albunex. The CDER will be able to rely, as appropriate, on the extensive analysis already done by the CDRH, the comments and recommendations of the February 1997 advisory panel, and any conclusions already reached by the CDRH. MBI will be expected to amend its New Drug Application (NDA) with the appropriate patient information, proposed drug labeling and other information needed to support the approval of an NDA. 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 Other Litigation section of Legal Proceedings in Item 3 on pages 11-14. In addition to purchases of x-ray contrast media by individual hospitals and integrated healthcare networks, the majority of contrast media 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 thirty percent of all x-ray contrast media purchased. In addition, Mallinckrodt has a purchasing agreement with Tenet Healthcare Corporation, another large group purchasing organization. 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 1995, Mallinckrodt signed a license agreement with Immunomedics for Mallinckrodt to market CEA-Scan* in select European countries subject to receipt of regulatory approval in those countries. In 1996, a license agreement was signed for the U.S. CEA-Scan* is an in vivo diagnostic imaging product for colorectal cancer. 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. In 1990, Mallinckrodt introduced TechneScan* MAG3* for improved imaging of the kidneys and the renal system. Unlike a standard X-ray based imaging procedure, a nuclear medicine scan utilizing MAG3* can accurately assess renal tubular function in addition to providing anatomical information. In 1991, the Company introduced the UltraTag* RBC blood pool imaging kit which is used for gated blood pool, "first pass" cardiac studies, and for the detection of hemangiomas and gastrointestinal bleeding sites. 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 agents 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 36 nuclear pharmacies located in population centers throughout the U.S. Critical Care Products - ---------------------- The critical care business includes products for anesthesiology, respiratory care and blood analysis. Anesthesiology products 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 postoperatively. The airway management product line consists of basic and specialty tracheal tubes, and other disposables used in hospitals for maintaining a secure airway during anesthesia and intensive care, and tracheostomy tubes which are used in hospitals and alternate site facilities for maintaining airways during respiratory care. Anesthesiology and respiratory products are marketed directly through Mallinckrodt's geographically organized sales force and through distributors in the U.S. and internationally. HemoCue products, which include blood hemoglobin and glucose analysis systems for use in hospitals and alternate site facilities, are distributed directly by the Company and through independent distributors in the U.S. and internationally. With the acquisition of Nellcor in August 1997, Mallinckrodt will be a leader in anesthesia and respiratory care products. Nellcor's worldwide leadership position in oxygen monitoring, critical care ventilation and other respiratory products, combined with Mallinckrodt's leadership positions in airway management disposables and other critical care products will form the largest organization in this area of medical products. In June 1995, Mallinckrodt 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. 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. Mallinckrodt capitalized on the rapid conversion to disposable tracheal tubes in Europe by expanding its anesthesiology products plant in Athlone, Ireland. Also, the Argyle, New York tracheal tube manufacturing operation has been closed and a new facility in Juarez, Mexico is now in operation. On September 30, 1996, the Company sold Mallinckrodt Sensor Systems, Inc., a Michigan corporation, 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. Critical care manufacturing facilities are located in Angelholm, Sweden; Argyle, New York; Athlone, Ireland; Irvine, California; Juarez, Mexico; and Mirandola, Italy. Mallinckrodt owns the Argyle, Athlone and Mirandola 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 critical care business, see Legal Proceedings in Item 3 on pages 11-14. Pharmaceutical Specialties - -------------------------- Pharmaceutical specialties 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 pharmaceutical specialties products include 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 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. Mallinckrodt expanded its product offering in healthcare by acquiring an analgesic pharmaceutical product line from King Pharmaceuticals, Inc. in 1996. Most pharmaceutical specialties products are sold 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. All pharmaceutical specialties are marketed through distributors and by a direct sales force. 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. Pharmaceutical specialties are manufactured in Derbyshire, England; Greenville, Illinois; Hobart, New York; Mexico City, Mexico; Paris, Kentucky; Phillipsburg, New Jersey; Raleigh, North Carolina; St. Louis, Missouri; and Torrance, California. The Company has healthcare distribution locations in Athlone, Ireland; Bondoufle, France; Brussels, Belgium; Catano, Puerto Rico; Cincinnati, Ohio; El Paso, Texas; Gemenos, France; Hennef, Germany; Madrid, Spain; Mexico City, Mexico; Mission Viejo, California; Northampton, United Kingdom; Nottinghill, Australia; Petten, the Netherlands; Pointe Claire, Canada; Singapore; Tokyo, Japan; Vienna, Austria; and Zurich, Switzerland. Mallinckrodt owns the facilities in Athlone, Cincinnati, Mexico City, Petten and Pointe Claire. The remainder are leased. SPECIALTY CHEMICALS Specialty chemicals sales were: Years ended June 30, -------------------------- 1997 1996 1995 ------ ------ ------ (in millions) Net sales $ 335 $ 332 $ 252 ====== ====== ====== Specialty chemicals products are sold to a variety of markets. These products possess a higher degree of technology and service than is characteristic of commodity chemicals. Generally, specialty chemicals products are sold as chemical intermediates which are used by customers worldwide as components, ingredients or reagents, rather than as final consumer products. Many specialty chemicals products are processed in multi-purpose manufacturing facilities. Specialty chemicals products include catalysts, chemical additives, polymer stearates, and laboratory and microelectronics chemicals. Catalysts are sold to the petrochemical and food industries. They include such products as platinum and palladium on carbon or alumina substrates; copper chromite; tableted, flaked and droplet shapes of nickel catalysts; and a variety of custom catalysts. Such catalysts are used to manufacture plasticizers, detergents, rubber products, insecticides, synthetic motor oil and edible fats and oils. These catalysts are marketed directly by Mallinckrodt under the registered trademark Calsicat*. Catalyst Resources, based in Pasadena, Texas, produces custom and proprietary catalysts for manufacturers of polypropylene and polyethylene. Catalyst Resources products are marketed by a direct sales force, with a large percentage of sales to international customers. TRIMET, based in Allentown, Pennsylvania, manufactures chemical additives to enhance the performance of water-based paints and coatings. Its products are sold internationally through Mallinckrodt's sales force and selected agents. Other chemical additives include customized additive blends for use as processing aids in the production of polymers, and calcium stearates and other metal soaps for use as internal lubricants to facilitate the manufacture of molded and extruded plastics. These chemical additives are sold internationally to industrial consumers through a direct sales force and selected agents. Laboratory chemical products include high-purity reagent chemicals used in research and development and analytical laboratories. These high-purity products consist of thousands of reagent chemicals sold primarily through distributors to medical, industrial, educational and governmental laboratories. Microelectronic chemicals encompass high purity acids, solvents, etchants and photoresist strippers used for the manufacture of semiconductor chips. A direct sales force is used to offer approximately 500 microelectronic chemicals and photoresist strippers to worldwide semi-conductor chip producers. In 1995, Mallinckrodt acquired J.T. Baker Inc., a worldwide manufacturer and supplier of laboratory, process and microelectronic chemicals. The acquisition brought an excellent brand name and a strong organization, including international operations, to specialty chemicals' existing laboratory chemicals business. To maximize the synergies of the two businesses, specialty chemicals has combined its laboratory chemicals business with J.T. Baker's and renamed the business Mallinckrodt Baker, Inc. Former facilities and offices from both organizations are now being operated under the Mallinckrodt Baker name. Specialty chemicals are manufactured in Allentown, Pennsylvania; Dalum, Germany; Deventer, the Netherlands; Erie, Pennsylvania; Greenville, Illinois; Hayward, California; Mexico City, Mexico; Paris, Kentucky; Pasadena, Texas; Phillipsburg, New Jersey; and St. Louis, Missouri. OTHER ACTIONS - DISCONTINUED OPERATIONS On June 30, 1997, the Company disposed of the animal health segment for cash plus the assumption of certain liabilities. The Company retained various parcels of idle real property, and efforts are underway to divest these assets. In addition, 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 sold its feed ingredients business. Discontinued operations for 1997, 1996 and 1995 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 on pages 19-23, and Note 1 of the Notes to Consolidated Financial Statements. SUBSEQUENT EVENT On August 28, 1997, the Company acquired more than 90% of the outstanding shares of Nellcor common stock for $28.50 per share. The Company acquired the remaining outstanding shares of Nellcor pursuant to a second-step merger on August 29, 1997 in which the remaining shares were converted into the right to receive $28.50 per share in cash. The aggregate purchase price of the common stock is approximately $1.9 billion. The acquisition will be accounted for using purchase accounting. Nellcor is the world leader in providing products that monitor, diagnose and treat the respiratory impaired patient. With the acquisition, Mallinckrodt becomes a more important healthcare force serving hospital, alternate care and pharmaceutical markets. Substantial cost savings are expected to be realized from the combined operations through procurement and economies of scale benefits, and the elimination of duplication. 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 the operating efficiencies from integrating the companies. The Company expects to record a charge against earnings during 1998 in connection with the integration effort. For additional information about the acquisition of Nellcor, and its impact on the Company, see Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 on pages 19-23, and Notes 11 and 21 of the Notes to Consolidated Financial Statements. 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. Internal research efforts in each of its business segments are supplemented with third-party and university technical agreements. Healthcare's various development activities are focused on market-place needs. Research and development activities carried on within the Company are performed by a centralized organization for imaging agents. These same research and development activities for critical care products and pharmaceutical specialties are performed within these businesses. Specialty chemicals' research and development efforts are organized within its operating divisions to focus technical resources on the development of new and improved products meeting defined market and customer needs. Technical personnel for process support are located at each manufacturing location. 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. Environmental and Other Regulatory Matters - ------------------------------------------ The Company is subject to various environmental protection and occupational safety and health laws and regulations in the United States and foreign countries in which it operates. In addition, in its current operations and over the years, the Company has handled, and will continue to deal in or otherwise handle, materials and wastes classified as hazardous or toxic by one or more regulatory agencies. The Company is also subject to the Federal Food, Drug, and Cosmetic Act, other federal statutes and regulations, various state statutes and regulations, and laws and regulations of foreign governments affecting and involving testing, approval, production, labeling, distribution, post-market surveillance and advertising of most of the Company's existing, new and prospective products. Significant capital expenditures, as well as operating costs, have been incurred to comply with the laws and regulations governing the protection of the environment, occupational safety and health, and the handling of hazardous materials. There are inherent and unquantifiable risks in handling hazardous or toxic materials and wastes. On the basis of its best information, the Company does not believe the expenditures and risks occasioned by these circumstances have become materially adverse to its financial condition or results of operations; however, no assurance can be given that this will continue to be true. Similarly, the manner of interpretation and enforcement of the laws and regulations of government agencies, such as the U.S. Food and Drug Administration and the U.S. Environmental Protection Agency (EPA), and state and foreign counterparts, pertaining to any particular production site or in connection with any particular product or any proposed new or modified product may be different than anticipated, and could result in production interruption and product holds or recalls. The Company endeavors to comply with all of these laws and regulations, as well as with all other 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. 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 1997 and $13 million in 1996. The Company currently estimates that environmental capital expenditures for 1998 and 1999 will average about $16 million per year. During 1996, the Company assumed and was compensated for certain costs to remediate various sites in the future. In addition, the Company established additional environmental reserves for discontinued operations. The Company has accruals of $116 million at June 30, 1997 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 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. Environmental cleanup costs are often incurred over extended periods of time. Nevertheless, to the extent these costs can be reasonably estimated and the Company's responsibility is probable, although the costs are not yet payable, accruals are established and reflected in the Company's consolidated financial statements. Based on information presently available, the Company believes any amounts to be paid in excess of the accrued liabilities will not have a material adverse effect on its financial position or results of operations. See also Item 3., Legal Proceedings, and Note 20 of the Notes to Consolidated Financial Statements for additional information. Employees - --------- Mallinckrodt had 7,871 employees at June 30, 1997, consisting of 5,057 U.S. based employees and 2,814 employees outside the U.S. Labor Relations - --------------- In the U.S., the Company has nine collective bargaining agreements with eight U.S. international unions or their affiliated locals covering 884 employees. Three agreements covering 157 employees were negotiated during 1997, with no work stoppages. Two agreements covering 206 employees will expire in 1998. Seven operating locations outside the U.S. have collective bargaining agreements and/or work counsel agreements covering approximately 1,014 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 respective business segment and other actions discussions in Item 1., Business. 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'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. The Company is involved in various administrative or judicial proceedings relating to the environment that have been initiated by EPA, by state authorities or by third parties. These proceedings are in various stages of development and generally include demands for reimbursement of previously incurred costs and for future investigation or 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 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 discontinued operations of the Company. To the extent costs and related liabilities for environmental matters can be reasonably estimated and the Company's responsibility is probable, accruals are established although costs are not yet payable. In establishing accruals, the Company considers, among other things: its past experience at the site in question and at other sites; the probable costs to be paid by other potentially responsible parties, if any; total projected remediation costs for the site, if known; existing technology; and the currently enacted laws and regulations. The Company frequently engages qualified environmental contractors to assist it in evaluating and developing an appropriate response to environmental issues. Based on information presently available, the Company believes any amounts to be paid in excess of the accrued liabilities will not have a material adverse effect on its financial position or results of operations. 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 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. Hanlin also alleged that the Company illegally caused carbon tetrachloride and chloroform contamination at the facility. The parties settled these claims in 1991. The facility was subsequently sold to HoltraChem Manufacturing Company, L.L.C.; 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 information is needed to address questions from EPA and Maine. The Company is completing additional work to supplement the investigation prior to revising the remedial 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 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 and the present owner of the facility 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 cleanup 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 court held status conferences on this matter in February and June 1997. The Company and other parties have agreed to determine if settlement is possible. The Company has submitted a remedial action plan to the State of Michigan for this site and met with the State to address comments. The Company is completing additional work for the State to obtain concurrence from the State of Michigan on the proposed Remedial Action Plan. The Company prepared a report describing the results of the additional work and submitted it to the Court on August 27, 1997. A few more tasks need to be finalized and the Company will incorporate the data into 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 Characterization Plan to NRC and has implemented the Characterization Plan. The Company is developing a Decommissioning and Decontamination Plan to submit to the NRC. Raleigh, NC -- The Company owns a bulk pharmaceutical facility which has been operating since the mid-1960s. The facility 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. 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, 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 Utah. The Company and EBI have entered into an interim allocation agreement with two additional parties to address funding remedial activities at this site. As previously reported, a resident with property bordering the site filed suit against EBI for nuisance and trespass for contamination that allegedly migrated onto the resident's property. The Company has now also been sued by this plaintiff. The Company and EBI have also been sued 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. Various pretrial motions are pending in both of these cases. The State also has advised EBI that it is investigating a natural resource damages claim. All parties have entered into a Tolling Agreement with the State in connection with the potential natural resource damages claim. Pierce County, WA -- In 1995, Centrum Properties Corporation (Centrum) filed an action in the U.S. District Court for the Western District of Washington against the Company and Olin Corporation (Olin) concerning property that was owned by Olin between 1935 and 1963 and by the Company between 1963 and 1976. The suit alleges that the property's groundwater is contaminated with carbon tetrachloride, and that this contamination was caused by releases from the explosives manufacturing facility operated on the property first by Olin and then by the Company. As previously reported, the Company, Olin, Boeing Company and Centrum negotiated a settlement and the lawsuit has been dismissed. Centrum did not recover its past costs, but Mallinckrodt and Olin agreed to take over future remedial actions at the site. Since the Company and Olin have been named "potentially responsible parties" for this site by the Washington Department of Ecology, the Company and Olin negotiated an order that would govern remedial activities at the site with the Department of Ecology. The Department of Ecology issued the Agreed Order effective April 1997. The Company and Olin are preparing a remedial work plan for the site. For additional information relating to environmental matters, see Item 1., Business--Environmental and Other Regulatory Matters. 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 the results of the Company's operations. The most significant of these matters involve two products, OPTISON* ultrasound imaging agent and convective warming blankets. In July 1997, the Company and its licensor Molecular BioSystems, Inc. ("MBI"), filed suit in United States District Court for the District of Columbia against four potential competitors - Sonus Pharmaceuticals, Inc., Nycomed Imaging AS, ImaRx Pharmaceutical Corp. and its marketing partner DuPont Merck, and Bracco International BV - seeking declarations that certain of their ultrasound contrast agent patents are invalid. The complaint filed by the Company and MBI alleges that each of the defendants' patents are invalid on a variety of independent grounds under the U.S. patent laws. In addition to requesting that all of the patents in question held by defendants be declared invalid, the complaint requests a declaration that, contrary to defendants' contentions, MBI and the Company do not infringe the patents, and asks that defendants be enjoined from proceeding against MBI and the Company for infringement until the status of defendants' patents has been determined by the Court or the U.S. Patent and Trademark Office. The complaint alleges that each defendant has claimed that its patent or patents cover OPTISON* ultrasound contrast agent and that each defendant will attempt to prevent its commercialization after receiving regulatory approval. See Item 1., Business, on page 5 regarding the regulatory approval process of OPTISON*. The Company has obtained a copy of, but has not yet been served with, a complaint filed by Sonus Pharmaceuticals alleging that the manufacture and sale of OPTISON* by the Company and MBI will infringe two patents owned by Sonus Pharmaceuticals. These two patents are among patents for which the Company and MBI are seeking a declaration of invalidity as described in the preceding two paragraphs. The complaint by Sonus Pharmaceuticals was filed in the United States District Court for the Western District of Washington after the Company and MBI filed their lawsuit in the United States District Court for the District of Columbia. The Company is aware of, but has not yet been served with, a complaint filed by Nycomed in early September alleging that the manufacture and sale of OPTISON* by the Company and MBI will infringe one patent owned by Nycomed. This patent is among the patents for which the Company and MBI are seeking a declaration of invalidity and non-infringement as described in the preceding paragraphs. The complaint by Nycomed was filed in the United States District Court for the District of Columbia. On October 6, 1994, Augustine Medical, Inc. ("Augustine") commenced a 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 infringe certain claims of one or more of the aforementioned 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. 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, the '371 patent (Remaining Patents) and as to whether the '188 patent is infringed under the doctrine of equivalents. The Company has 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. The Judge has indicated that he will put in place an injunction that will stop the Company from manufacturing and selling its blankets in the United States. However, the Judge indicated that he would stay the injunction until January 1, 1998, so as to allow the Company to serve existing customers until that date. The Company's sales in the United States in fiscal 1997 were $8 million. On September 22, 1997, the jury awarded damages in the amount of $16.8 million. The Company will appeal 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 will work vigorously in the Appeals Court to overturn the verdicts. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the three months ended June 30, 1997, 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, 1997 were as follows: C. Ray Holman Age 54. Chairman of the Company since October 1994; Chief Executive Officer of the Company since December 1992; President of the Company from 1992-1995; Vice President of the Company from October 1990 to December 1992; President and Chief Executive Officer, Mallinckrodt Medical, Inc. from January 1989 until December 1992. Mack G. Nichols Age 59. 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 57. 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 45. Vice President of the Company since May 1996; President, Medical Imaging Division, since December 1995; Senior Vice President, Mallinckrodt Medical, Inc., 1994-1995; Group Vice President, Imaging, Mallinckrodt Medical, Inc., 1992-1994; and Vice President and General Manager, Radiology, Mallinckrodt Medical, Inc., 1990-1992. Ashok Chawla Age 47. Vice President, Strategic Management, of the Company since July 1991. Charles R. Clark III Age 45. Vice President, Strategic Services, of the Company since May 1996; Group Vice President, Mallinckrodt Medical, Inc., 1994 to May 1996; and Vice President and General Manager, Anesthesiology U.S., Mallinckrodt Medical, Inc., 1988-1994. Michael J. Collins Age 44. Vice President of the Company since May 1996; President, Pharmaceutical Specialties Division since December 1995; and Group Vice President, Pharmaceutical Specialties, Mallinckrodt Chemical, Inc., 1992-1995. Paul D. Cottone Age 49. Senior Vice President of the Company since October 1994; President, Mallinckrodt Veterinary Division since December 1995; President and Chief Executive Officer, Mallinckrodt Veterinary, Inc., 1994-1995; Vice President, U.S. Operations of the Merck AgVet Division from 1993 to October 1994; and Executive Director, International Operations of the Merck AgVet Division from 1987 to 1993. (Mr. Cottone terminated his employment with the Company effective June 30, 1997, concurrent with the sale by the Company of its animal health division.) Bruce K. Crockett, Ph.D. Age 53. Vice President, Human Resources, of the Company since March 1995; and Vice President, Organization Development at Eastern Enterprises from 1990 to February 1995. J. Eugene Fox, Ph.D. Age 62. Vice President, Science & Technology of the Company since December 1995; Senior Vice President, New Technology and Chief Scientist, Mallinckrodt Medical, Inc., since 1995; Senior Vice President, Science and Technology, Mallinckrodt Medical, Inc., 1992-1995; and Vice President, Science and Technology, Mallinckrodt Medical, Inc., 1989-1992. (Dr. Fox retired as an employee of the Company effective July 31, 1997.) Roger A. Keller Age 52. Vice President, Secretary and General Counsel of the Company since July 1993; and Senior Vice President and General Counsel, Mallinckrodt Medical, Inc., March 1992 to July 1993. Douglas A. McKinney Age 44. Treasurer of the Company since November 1995; and Assistant Treasurer July 1991 to November 1995. Terry D. Meier Age 58. Vice President and Controller since August 1996. Senior Vice President, Finance and Administration, Mallinckrodt Chemical, Inc., 1991 to 1996. Michael K. Milosovich Age 51. Vice President of the Company since May 1996; President, Pharmaceutical Chemicals Division since December 1995; Vice President and General Manager, Bulk Analgesics, Mallinckrodt Chemical, Inc., 1992-1995; and General Manager, PAP/APAP, Mallinckrodt Chemical, Inc., 1990-1992. David Morra Age 41. 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. Robert G. Moussa Age 50. President, International of the Company since December 1995; Senior Vice President of the Company since October 1993; Vice President of the Company 1992-1993; President and Chief Executive Officer, Mallinckrodt Medical, Inc., 1992-1995; Senior Vice President and Group Executive, Mallinckrodt Medical, Inc., September-December 1992; and Group Vice President, International, Mallinckrodt Medical, Inc., January 1989 to September 1992. (Mr. Moussa terminated his employment with the Company effective June 30, 1997.) Daniel B. Mulholland Age 45. 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, Inc., February 1995-1996. President, J.T. Baker Inc., October 1992 to 1995. Adeoye Y. Olukotun, M.D. Age 52. Vice President, Medical and Regulatory Affairs of the Company since June 1996; Vice President, Bristol-Meyers Squibb Company 1991 to June 1996. Michael A. Rocca Age 52. 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 54. Vice President, Information Services, since August 1996; and Vice President and Controller of the Company from November 1990 to August 1996. Thomas R. Trotter Age 49. Vice President of the Company since May 1996; President, Critical Care Division since December 1995; Senior Vice President, U.S. Markets, Mallinckrodt Medical, Inc., 1994-1995; Group Vice President, Critical Care and Anesthesiology, Mallinckrodt Medical, Inc., 1992-1994; and Vice President and General Manager, Mallinckrodt Critical Care, Mallinckrodt Medical, Inc., 1991-1992. Daniel E. Woods, Jr. Age 53. Vice President of the Company since May 1996; President, Catalysts & Chemical Additives Division since December 1995; Group Vice President, Catalysts & Chemicals, Mallinckrodt Chemical, Inc., 1993-1995; and Group Vice President, Catalysts, Performance & Laboratory Chemicals, Mallinckrodt Chemical, Inc., 1991-1993. 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 THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Common Stock Prices and Dividends Quarter --------------------------------- First Second Third Fourth ------ ------ ------ ------- Fiscal 1997 Dividends per common share...... $ .155 $ .165 $ .165 $ .165 Common stock prices High.......................... 42.63 45.88 44.25 41.63 Low........................... 35.25 41.38 39.63 34.88 Fiscal 1996 Dividends per common share...... $ .14 $ .155 $ .155 $ .155 Common stock prices High.......................... 41.88 39.88 42.00 40.88 Low........................... 35.13 32.50 35.13 36.75 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, 1997, the number of registered holders of common stock as reported by the Company's registrar was 8,120. ITEM 6. SELECTED FINANCIAL DATA (Dollars in millions, except per share amounts)
Years ended June 30, ------------------------------ 1997 1996 1995 -------- -------- -------- Summary of Operations Net sales................................. $1,861.2 $1,754.4 $1,588.3 Earnings from continuing operations....... 185.7 153.7 136.7 Discontinued operations (4)............... 4.4 58.2 43.6 Cumulative effects of accounting changes.. --------- --------- --------- Net earnings (loss) 190.1 211.9 180.3 Preferred stock dividends................. (.4) (.4) (.4) --------- --------- --------- Available for common shareholders $ 189.7 $ 211.5 $ 179.9 ========= ========= ========= Per Common Share Data Earnings from continuing operations....... $ 2.47 $ 2.01 $ 1.76 Net earnings (loss)....................... 2.53 2.77 2.32 Dividends declared........................ .65 .61 .55 Book value................................ 17.16 16.44 15.12 Other Data Total assets.............................. $2,987.7 $3,071.1 $2,496.6 Working capital........................... $ 963.1 $ 359.1 $ 271.9 Current ratio............................. 2.5:1 1.4:1 1.5:1 Total debt (5)............................ $ 556.9 $ 667.4 $ 584.0 Shareholders' equity...................... $1,251.2 $1,232.2 $1,171.5 Return on shareholders' equity (5)........ 15% 13% 12% Capital expenditures (5).................. $ 109.5 $ 129.0 $ 129.6 Total dividends paid...................... $ 48.2 $ 45.7 $ 42.2 Weighted average common shares (in millions)..................... 75.1 76.3 77.5 Common shares outstanding (in millions)... 72.3 74.3 76.8 Number of employees (5)................... 7,900 8,300 8,100 Years ended June 30, --------------------------------- 1994 (1) 1993 (2) 1992 (3) --------- ---------- ---------- Summary of Operations Net sales................................. $1,348.4 $1,178.2 $1,015.7 Earnings from continuing operations....... 79.2 60.4 81.6 Discontinued operations (4)............... 24.6 (180.2) 45.9 Cumulative effects of accounting changes.. (80.6) --------- ---------- --------- Net earnings (loss)....................... 103.8 (200.4) 127.5 Preferred stock dividends................. (.4) (.4) (.4) --------- ---------- --------- Available for common shareholders......... $ 103.4 $ (200.8) $ 127.1 ========= ========== ========= Per Common Share Data Earnings from continuing operations....... $ 1.01 $ .77 $ 1.04 Net earnings (loss)....................... 1.33 (2.60) 1.63 Dividends declared........................ .49 .43 .38 Book value................................ 13.05 11.77 16.02 Other Data Total assets.............................. $2,266.8 $1,958.9 $1,854.4 Working capital........................... $ 261.3 $ 203.7 $ 351.6 Current ratio............................. 1.5:1 1.5:1 2.2:1 Total debt (5)............................ $ 616.8 $ 571.7 $ 320.1 Shareholders' equity...................... $1,015.9 $ 910.5 $1,224.2 Return on shareholders' equity (5)........ 8% 6% 7% Capital expenditures (5).................. $ 144.3 $ 142.4 $ 96.3 Total dividends paid...................... $ 37.7 $ 33.2 $ 29.5 Weighted average common shares (in millions)..................... 77.6 77.4 77.8 Common shares outstanding (in millions)... 77.0 76.4 75.7 Number of employees (5)................... 7,700 7,100 6,300
(1) 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. (2) Results for 1993 included restructuring charges of $334.1 million, $242.2 million after taxes, or $3.13 per share. Pretax charges included in healthcare, specialty chemicals and discontinued operations related to animal health were $3.4 million, $47.9 million and $282.8 million, respectively. (3) Results for 1992 included gains totaling $10.7 million, $6.7 million after taxes, or 8 cents per share from sales of investments. (4) See Note 1 of Notes to Consolidated Financial Statements for information on discontinued operations in 1997, 1996 and 1995. Results for 1994, 1993 and 1992 represent earnings from the animal health segment, Fries & Fries, Inc., and the feed ingredients business, partially offset by environmental and related litigation charges. (5) Excludes discontinued operations. 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. 1997 vs. 1996 - ------------- Earnings from continuing operations for 1997 were $186 million, or $2.47 per share. This represents a 23 percent increase in per share earnings from continuing operations compared with $154 million, or $2.01 per share, during the same period a year ago. The strong performance improvement is attributable to growth in operating earnings, higher interest income, global tax strategies and common stock share repurchase activities. Net earnings for 1997 were $190 million, or $2.53 per share, compared with $212 million, or $2.77 per share, in 1996. On March 31, 1997, the Company disposed of Fries & Fries, Inc., a wholly owned subsidiary which owned a fifty percent interest in Tastemaker, the flavors joint venture. This action resulted in an aftertax gain of $271 million. On June 30, 1997, the Company disposed of the animal health segment, which resulted in an aftertax loss of $269 million. The results of these transactions and the results of operations from these businesses have been reclassified to discontinued operations and, accordingly, prior years results have also been reclassified. Net earnings for 1997 and 1996 included aftertax earnings of $6 million and $42 million, respectively, from the divested Fries & Fries, Inc., animal health segment and, for 1996, feed ingredients business. Net earnings for 1996 included a $35 million discontinued operations aftertax gain resulting from the disposition of the feed ingredients business in the second quarter, partially offset by a second quarter $16 million aftertax adjustment of provisions for environmental costs related to discontinued operations. Also included in prior year net earnings are earnings from the divested feed ingredients business of $4 million, net of taxes. Net sales for the year were up 6 percent to $1.86 billion, compared to $1.75 billion in 1996. Operating earnings were $314 million, an increase of 6 percent compared to $295 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 continue to exert pressure on product pricing. The demand for price discounts from customer buying groups has adversely impacted earnings growth. This industry trend is expected to continue, but the Company believes that its current policies and strategies will enable it to continue to compete effectively in this economic environment. 1996 vs. 1995 - ------------- Mallinckrodt's earnings from continuing operations for 1996 were $154 million, or $2.01 per share. This represents a 14 percent increase in per share earnings from continuing operations compared to $137 million, or $1.76 per share, in the prior year. Net earnings for 1996 were $212 million, or $2.77 per share, compared with $180 million, or $2.32 per share, in 1995. Fiscal 1996 net earnings included the gain resulting from the disposition of the feed ingredients business in the second quarter, partially offset by a second quarter adjustment of provisions for environmental costs related to discontinued operations. Net earnings for 1996 and 1995 included aftertax earnings of $42 million and $47 million, respectively, from the divested Fries & Fries, Inc., animal health segment and feed ingredients business. Net sales increased 10 percent to $1.75 billion, compared to $1.59 billion a year earlier. Operating earnings were $295 million for 1996, up 10 percent compared to $268 million in 1995. During 1996, a Strategic Change Initiative was announced which included major organizational and operating changes designed to enhance global growth and improve operational effectiveness. This initiative eliminated the management and administrative structures of the three former operating companies. Those businesses are now managed through divisions with global responsibility under a corporate chief operating officer. Mallinckrodt realigned its operating segments to reflect the customer focus of its divisions. HEALTHCARE Years ended June 30, --------------------------- 1997 1996 1995 ------- ------- ------- (In millions) Net sales........................ $1,526 $1,422 $1,337 ======= ======= ======= Operating earnings............... $ 306 $ 309 $ 276 ======= ======= ======= Operating earnings as a percent of sales................ 20.0% 21.7% 20.6% 1997 vs. 1996 - ------------- Healthcare's operating earnings for 1997 were $306 million, down 1 percent from $309 million in 1996. The operating earnings decline in 1997 when compared to the prior year is attributable to continued reduction of selling prices in several product lines offset by increased sales volumes, and an $18 million, or 24 percent increase in research and development expenses. Net sales increased 7 percent to $1.53 billion in 1997 as compared to $1.42 billion during the prior year. Sales for imaging agents were up 12 percent, primarily from iodinated contrast media market share increases in the U.S. and the acquisition of Liebel-Flarsheim Company in January 1996. The increased sales volume was partially offset by lower contrast media selling prices. Sales of critical care products decreased 5 percent. Critical care products 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. Pharmaceutical specialties sales increased 10 percent. The sales growth was primarily the result of increased volume of bulk and dosage narcotics. In November 1996, the Company acquired D.M. Graham Laboratories, Inc., a contract manufacturer of dosage pharmaceuticals that is also licensed to produce a variety of medicinal narcotics. This acquisition is another key step in the continuing growth of the Company's pharmaceutical specialties 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. For additional information about OPTISON*, see Item 1., Business, on page 5 and see Other Litigation section of Item 3., on pages 13 and 14. The restructuring actions initiated in 1994 were accomplished with the completion of substantially all of the manufacturing rationalization by the end of 1997. 1996 vs. 1995 - ------------- Healthcare's operating earnings for 1996 were $309 million, up 12 percent compared to $276 million in 1995. Net sales increased 6 percent to $1.42 billion. Productivity programs initiated during the last several years helped earnings improve at a faster rate than sales. Sales for imaging agents were up 4 percent, primarily from the acquisition of Liebel-Flarsheim in January 1996, and improved nuclear medicine sales in Europe. Volume gains for contrast media were offset by competitive pricing. Sales of critical care products increased 5 percent primarily from higher volume of respiratory therapy products in Japan and Europe. Pharmaceutical specialties sales increased 13 percent. Sales volume and pricing for medicinal narcotics were the main contributors to the increase. Sales also benefited from the acquisition of King Pharmaceuticals' specialty analgesic pharmaceuticals product line in December 1995. In January 1996, Liebel-Flarsheim Company, a leading manufacturer of contras media power injector systems for diagnostic imaging procedures and equipment for urology procedures, was acquired. The acquisition enhanced sales performance but modestly impaired operating earnings. SPECIALTY CHEMICALS Years ended June 30, -------------------------- 1997 1996 1995 ------ ------ ------ (In millions) Net sales........................ $335 $332 $252 ====== ====== ====== Operating earnings............... $ 33 $ 28 $ 21 ====== ====== ====== Operating earnings as a percent of sales................ 9.9% 8.4% 8.2% 1997 vs. 1996 - ------------- Specialty chemicals' operating earnings increased 19 percent in 1997, to $33 million. The current year earnings increase is attributable to the overall improvement in the net margin percent while holding selling and administrative expenses equal to the prior year. Net sales were $335 million, an improvement of 1 percent compared to 1996. 1996 vs. 1995 - ------------- Specialty chemicals' operating earnings increased 35 percent in 1996, to $28 million. Net sales were $332 million, an improvement of 32 percent compared to 1995. The 1995 acquisition and subsequent successful integration of J.T. Baker and existing laboratory chemical operations were principal contributors to year-to-year growth. CORPORATE MATTERS Corporate expense was 40 percent below prior year. The decrease in expense in 1997 is primarily attributable to certain nonrecurring costs, including consulting fees and employee related actions, which were included in 1996. Net interest and net other nonoperating income/expense decreased $25 million in 1997 from 1996. This decrease related primarily to higher interest income in 1997. Mallinckrodt's effective tax rate for continuing operations was 35.5 percent in 1997, compared with 36.9 percent in 1996. See Note 9 for additional information about income taxes. FINANCIAL CONDITION Financial resources currently available to the Company are expected to be adequate to support existing businesses and fund new opportunities. Since June 30, 1996, cash and cash equivalents increased $312 million. Operations provided $304 million of cash, while acquisition and capital spending totaled $126 million. Cash from the disposal of assets totaled $413 million. The Company's current ratio at June 30, 1997 was 2.5:1. See Note 21 for additional information about the acquisition activities subsequent to the financial statement date. On July 23, 1997, the Company announced the execution of a definitive agreement to purchase, for cash, all the outstanding shares of Nellcor Puritan Bennett Incorporated common stock. See Note 21 for additional information about the acquisition activities subsequent to the financial statement date. The Company's debt as a percentage of invested capital was 31 percent at June 30, 1997. As a result of the purchase of Nellcor Puritan Bennett Incorporated, the Company's debt as a percentage of invested capital will rise significantly. The Company will utilize available cash and cash equivalents and expects to borrow an additional $1.2 billion to fund the common stock tender. The Company will record non-recurring charges related to accounting for the purchase and expects they will be material in amount. The increase in borrowing and non-recurring charges are estimated to result in the Company's debt as a percentage of invested capital to be around 65 percent following the closing of the acquisition. In April 1992, a shelf registration statement was filed with the Securities and Exchange Commission (SEC) for $250 million of debt securities. As of June 30, 1997, $50 million of securities under the shelf remain unissued. In February 1995, a shelf registration statement was filed with the SEC for $250 million of debt securities. In September 1995 and November 1995, the Company issued $100 million of 6.75% notes due September 15, 2005, and $100 million of 6.5% notes due November 15, 2007, respectively. As of June 30, 1997, $50 million of securities under the February 1995 shelf remain unissued. Net proceeds from the sale of such debt securities would be used for general corporate purposes, except as noted in any prospectus supplement. As of June 30, 1997, the Company had a $550 million private placement commercial paper program. There were no amounts outstanding under the commercial paper program at June 30, 1997. See Notes 11 and 21 for additional information regarding a new credit facility. Non-U.S. lines of credit totaling $130 million were also available and borrowings under these lines were $6 million at June 30, 1997. These non-U.S. lines are cancelable at any time. The Company's Board of Directors has authorized repurchase of a total of 47 million shares of its common stock. Thirty six and a half million shares have been purchased under the authorization, 3.7 million during the year ended June 30, 1997. The Company has a plan for modifying computer software for the year 2000. The cost of the effort is currently estimated to not be material and will be expensed as incurred over the next two years. Estimated capital spending for the fiscal year ending June 30, 1998 is $160 million. ENVIRONMENTAL MATTERS The Company is subject to various environmental protection and occupational safety and health laws and regulations in the United States and foreign countries in which it operates. In addition, the Company has handled, and will continue to deal in or otherwise handle, materials and wastes classified as hazardous or toxic by one or more regulatory agencies. Significant capital expenditures, as well as operating costs, have been incurred to comply with the laws and regulations governing the protection of the environment, occupational safety and health, and the handling of hazardous materials. There are inherent and unquantifiable risks in handling hazardous or toxic materials and wastes. On the basis of its best information, the Company does not believe the expenditures and risks occasioned by these circumstances have as yet become materially adverse to its financial condition or results of operations; however, no assurance can be given that this will continue to be true. 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. 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 1997 and $13 million in 1996. The Company currently estimates that environmental capital expenditures over the next two years will average about $16 million per year. During 1996, the Company assumed and was compensated for certain costs to remediate various sites in the future. In addition, the Company established additional environmental reserves for discontinued operations. The Company has accruals of $116 million at June 30, 1997 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 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. Based on information presently available, the Company believes any amounts to be paid in excess of the accrued liabilities will not have a material adverse effect on its financial position or results of operations. 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 currency fluctuations and government actions. Mallinckrodt generates a significant portion of its operating earnings and cash flows outside the United States and is positioned to benefit naturally from its use of approximately 19 currencies, as currency fluctuations are often offsetting. 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 uses certain derivative financial instruments, principally purchased options, forward contracts and currency swaps, to manage its exposure to fluctuations in foreign exchange and interest rate risk. The Company uses the derivatives with an objective of limiting negative 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 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. Additionally, various operational initiatives are employed to help manage business risks. The net impact of foreign exchange activities on earnings was immaterial for 1997, 1996 and 1995, 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 $44 million in 1997 due to the strengthening of the U.S. dollar against the functional currency of many of the Company's international affiliates. 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Auditors................................ 25 Responsibility for Financial Reporting........................ 26 Information by Business Segment............................... 27 Consolidated Statements of Operations......................... 28 Consolidated Balance Sheets................................... 29 Consolidated Statements of Cash Flows......................... 30 Consolidated Statements of Changes in Shareholders' Equity.... 31 Notes to Consolidated Financial Statements.................... 32 Quarterly Results............................................. 49 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, 1997 and 1996, 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, 1997, appearing on pages 27 through 49. 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, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. Ernst & Young LLP St. Louis, Missouri July 30, 1997 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 -- both jointly and separately -- to review financial reporting matters and audit and control functions. Terry D. Meier Vice President and Controller July 30, 1997 Michael A. Rocca Senior Vice President and Chief Financial Officer July 30, 1997 INFORMATION BY BUSINESS SEGMENT (In millions)
Net Sales ------------------------------ 1997 1996 1995 --------- --------- --------- Healthcare....................... $1,526.7 $1,422.7 $1,336.8 Specialty chemicals.............. 334.8 332.0 251.8 Intersegment sales............... (.3) (.3) (.3) --------- --------- --------- Consolidated..................... $1,861.2 $1,754.4 $1,588.3 ========= ========= =========
Earnings from Continuing Operations Before Income Taxes Identifiable Assets ----------------------- ---------------------------- 1997 1996 1995 1997 1996 1995 ------- ------- ------- -------- -------- -------- Healthcare........... $305.7 $309.0 $276.0 $1,667.3 $1,706.7 $1,551.7 Specialty chemicals........... 33.1 27.9 20.6 316.3 323.0 291.3 Corporate............ (24.7) (41.4) (28.8) 1,004.1 531.9 92.6 Eliminations......... (.3) .1 Discontinued operations.......... 509.5 561.0 ------- ------- ------- Operating earnings............ 314.1 295.2 267.9 Interest income and other nonoperating income (expense), net................. 22.0 (.2) (4.2) Interest expense..... (48.1) (51.3) (45.1) ------- ------- ------- -------- -------- -------- Consolidated......... $288.0 $243.7 $218.6 $2,987.7 $3,071.1 $2,496.6 ======= ======= ======= ======== ======== ========
Capital Expenditures Depreciation and Amortization ---------------------- ----------------------------- 1997 1996 1995 1997 1996 1995 ------ ------ ------ ------ ------ ------ Healthcare............ $ 87.7 $100.2 $117.4 $105.8 $ 94.9 $ 82.0 Specialty chemicals... 17.5 24.6 9.6 18.9 18.2 13.5 Corporate............. 4.3 4.2 2.6 3.0 4.2 1.6 Discontinued operations........... 40.2 31.2 31.8 27.9 ------ ------ ------ ------ ------ ------ Consolidated ......... $109.5 $169.2 $160.8 $127.7 $149.1 $125.0 ====== ====== ====== ====== ====== ====== (See Notes 1 and 18 of the Notes to Consolidated Financial Statements.)
CONSOLIDATED STATEMENTS OF OPERATIONS (In millions, except per share amounts)
Years Ended June 30, --------------------------------- 1997 1996 1995 --------- --------- --------- Net sales................................ $1,861.2 $1,754.4 $1,588.3 Operating costs and expenses: Cost of goods sold..................... 1,017.6 956.8 864.8 Selling, administrative and general expenses...................... 428.7 420.8 378.0 Research and development expenses...... 108.0 86.1 77.7 Other operating income, net............ (7.2) (4.5) (.1) --------- --------- --------- Total operating costs and expenses....... 1,547.1 1,459.2 1,320.4 --------- --------- --------- Operating earnings....................... 314.1 295.2 267.9 Interest income and other nonoperating income (expense), net...... 22.0 (.2) (4.2) Interest expense......................... (48.1) (51.3) (45.1) --------- --------- --------- Earnings from continuing operations before income taxes..................... 288.0 243.7 218.6 Income tax provision..................... 102.3 90.0 81.9 --------- --------- --------- Earnings from continuing operations...... 185.7 153.7 136.7 Discontinued operations.................. 4.4 58.2 43.6 --------- --------- --------- Net earnings............................. 190.1 211.9 180.3 Preferred stock dividends................ (.4) (.4) (.4) --------- --------- --------- Available for common shareholders........ $ 189.7 $ 211.5 $ 179.9 ========= ========= ========= Earnings per common share Continuing operations.................... $ 2.47 $ 2.01 $ 1.76 Discontinued operations.................. .06 .76 .56 --------- --------- --------- Net earnings............................. $ 2.53 $ 2.77 $ 2.32 ========= ========= ========= (The accompanying Notes are an integral part of the Consolidated Financial Statements.)
CONSOLIDATED BALANCE SHEETS (In millions, except share and per share amounts)
June 30, --------------------- ASSETS 1997 1996 --------- --------- Current assets: Cash and cash equivalents.......................... $ 808.5 $ 496.1 Trade receivables, less allowances of $8.4 in 1997 and $9.7 in 1996..................... 356.0 336.8 Inventories........................................ 315.9 341.6 Deferred income taxes.............................. 36.8 38.6 Other current assets............................... 99.6 39.4 --------- --------- Total current assets................................. 1,616.8 1,252.5 Investments and long-term receivables, less allowances of $8.1 in 1997 and $5.6 in 1996......... 126.0 36.1 Property, plant and equipment, net................... 827.9 830.9 Intangible assets.................................... 416.2 441.7 Net noncurrent assets of discontinued operations.......................................... 509.5 Deferred income taxes................................ .8 .4 --------- --------- Total assets......................................... $2,987.7 $3,071.1 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt.................................... $ 11.7 $ 109.4 Accounts payable................................... 169.3 147.0 Accrued liabilities................................ 396.1 315.9 Income taxes payable............................... 76.4 38.5 Net current liabilities of discontinued operations........................................ 282.4 Deferred income taxes.............................. .2 .2 --------- --------- Total current liabilities............................ 653.7 893.4 Long-term debt, less current maturities.............. 545.2 558.0 Deferred income taxes................................ 248.7 106.2 Postretirement benefits.............................. 161.9 154.0 Other noncurrent liabilities and deferred credits.... 127.0 127.3 --------- --------- Total liabilities.................................... 1,736.5 1,838.9 --------- --------- 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..................... 305.9 283.5 Reinvested earnings................................ 1,292.6 1,150.7 Foreign currency translation....................... (49.9) (15.3) Treasury stock, at cost............................ (395.5) (284.8) --------- --------- Total shareholders' equity........................... 1,251.2 1,232.2 --------- --------- Total liabilities and shareholders' equity........... $2,987.7 $3,071.1 ========= ========= (The accompanying Notes are an integral part of the Consolidated Financial Statements.)
CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions)
Years Ended June 30, ----------------------------- 1997 1996 1995 ------- ------- ------- CASH FLOWS - OPERATING ACTIVITIES Net earnings................................ $190.1 $211.9 $180.3 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization............. 127.7 149.1 125.0 Postretirement benefits................... 7.9 10.9 12.1 Undistributed equity in earnings of joint venture......................... (17.0) (25.0) (19.1) (Gains) losses on asset disposals......... (182.5) (55.1) .5 Deferred income taxes..................... 144.1 30.5 66.6 ------- ------- ------- 270.3 322.3 365.4 Changes in operating assets and liabilities: Trade receivables.. .................... (34.3) (62.5) (44.1) Inventories............................. 17.8 (49.5) (16.3) Other current assets.................... (62.0) (2.7) (3.2) Accounts payable, accrued liabilities and income taxes payable, net.......... 111.6 22.8 (14.3) Net assets of discontinued operations... 9.8 (68.6) 1.4 Other noncurrent liabilities and deferred credits....................... (4.3) 49.7 2.4 Other, net.............................. (4.9) (41.1) (5.5) ------- ------- ------- Net cash provided by operating activities... 304.0 170.4 285.8 ------- ------- ------- CASH FLOWS - INVESTING ACTIVITIES Capital expenditures........................ (109.5) (169.2) (160.8) Acquisition spending........................ (16.8) (153.9) (111.5) Proceeds from asset disposals............... 412.8 120.5 21.2 Other, net.................................. (6.7) 5.1 (24.9) ------- ------- ------- Net cash provided (used) by investing activities.................................. 279.8 (197.5) (276.0) ------- ------- ------- CASH FLOWS - FINANCING ACTIVITIES Increase (decrease) in short-term debt....... (103.8) 511.7 19.9 Proceeds from long-term debt................. 1.1 199.5 3.2 Payments on long-term debt................... (10.2) (103.7) (10.3) Issuance of Mallinckrodt common stock........ 39.6 31.0 8.0 Acquisition of treasury stock................ (149.9) (130.5) (15.4) Dividends paid............................... (48.2) (45.7) (42.2) ------- ------- ------- Net cash provided (used) by financing activities.................................. (271.4) 462.3 (36.8) ------- ------- ------- Increase (decrease) in cash and cash equivalents................................. 312.4 435.2 (27.0) Cash and cash equivalents at beginning of year..................................... 496.1 60.9 87.9 ------- ------- ------- Cash and cash equivalents at end of year..... $808.5 $496.1 $ 60.9 ======= ======= ======= (The accompanying Notes are an integral part of the Consolidated Financial Statements.)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In millions, except per share amounts)
Capital in Preferred Common Excess of Reinvested Treasury Stock Stock Par Value Earnings Other Stock -------- ------ ---------- ---------- ------ -------- BALANCE, JUNE 30, 1994.. $11.0 $87.1 $268.2 $ 846.4 $(34.2) $(162.6) Net earnings............ 180.3 Dividends: 4 Percent cumulative preferred stock ($4.00 a share)....... (.4) Common stock ($.545 a share)....... (41.8) Stock option exercises.. 2.0 6.2 Income tax benefit from stock options exercised.............. 3.9 Acquisition of treasury stock.................. (15.4) Translation adjustment.. 24.9 Other................... (4.1) ------- ------ ---------- --------- ------- ------ 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 ($4.00 a share)....... (.4) Common stock ($.605 a 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.. (6.0) -------- ----- ---------- -------- ------- ------ 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 ($4.00 a share)....... (.4) Common stock ($.65 a 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............. (34.6) ------- ------ ------- -------- ------- -------- BALANCE, JUNE 30, 1997.. $11.0 $87.1 $305.9 $1,292.6 $(49.9) $(395.5) ======= ====== ======= ======== ======= ======== (The accompanying Notes are an integral part of the Consolidated Financial Statements.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In millions, except share and per share amounts) 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 amount 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 Sheet. The financial statements of international affiliates that operate in hyperinflationary economies in certain Latin American countries are translated at either current or 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. Property, Plant and Equipment Property, plant and equipment are recorded at cost. Depreciation is based upon estimated useful lives of 15 to 45 years for buildings and 3 to 15 years for machinery and equipment, using principally the straight-line method. Derivative Financial Instruments The Company hedges a portion of its anticipated foreign currency exposure using certain derivative financial instruments, primarily purchased options with little or no intrinsic value at time of purchase, forward contracts and currency swaps. These contracts are designated and effective as hedges of the Company's consolidated foreign 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 life of the option. 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 Statement of Operations. Anticipated foreign currency exposures arise from highly 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 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 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. 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 income and earnings per share as if the fair-value-based method of accounting had been applied. See Note 15 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 $20.5 million, $19.1 million and $18.5 million in 1997, 1996 and 1995, respectively. Recent Accounting Pronouncements In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information," which is effective for fiscal years beginning after December 15, 1997. The Statement 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," which is effective for fiscal years beginning after December 15, 1997. This Statement establishes standards for reporting and display of comprehensive income and its components in financial statements. In February 1997, the FASB issued Statement No. 128, "Earnings per Share" (SFAS 128), which requires adoption in the quarter ended December 31, 1997, and prohibits early compliance. At that time, the Company will be required to change the method used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The impact is expected to result in an increase in primary earnings per share of 4 cents for 1997 and 1996, and 3 cents per share for 1995. The impact of SFAS 128 on the calculation of fully diluted earnings per share for these periods is not material. In October 1996, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities," which will be effective in 1998. SOP 96-1 is not expected to have a material impact on the Company's financial position and results of operations, nor will it affect cash flows. In March 1995, the FASB issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121), which is effective for fiscal years beginning after December 15, 1995. This statement requires that long-lived assets and certain intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. The Company adopted the provisions of this statement effective July 1, 1996. There was no impact on the ongoing results of operations. Reclassifications Certain amounts in prior years have been reclassified to conform to the current year presentation. NOTE 1 CHANGES IN BUSINESS DISCONTINUED OPERATIONS 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 tax from the divested business for 1997, 1996 and 1995 were zero, $18.6 million and $15.8 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 the years ended June 30, 1997 and 1996, respectively, is included in the above Fries & Fries, Inc. net aftertax results reclassified as discontinued operations. On June 30, 1997, the Company disposed of the animal health segment for cash plus the assumption of certain liabilities. The Company recorded a loss on divestiture, including taxes, of $269.4 million. The Company has retained various parcels of idle real property, and efforts are under way to divest these assets. In addition, environmental liabilities, certain facility leases, and certain liabilities for employee benefits, including postretirement benefits, remain with the Company. Reserves have been established to address the remaining liabilities. Earnings net of tax from the divested business for 1997, 1996 and 1995 were $5.8 million, $18.9 million and $11.4 million, respectively. Interest expense related to debt assumed by the buyer of $5.6 million, $5.0 million and $10.4 million for the years ended June 30, 1997, 1996 and 1995, respectively, is included in the above animal health segment net aftertax results reclassified as discontinued operations. In October 1995, the Company sold its feed ingredients business. The gain on sale, net of taxes, was $35.4 million and earnings, net of taxes, from the divested business for 1996 and 1995 were $4.4 million and $20.2 million, respectively. Discontinued operations for 1997, 1996 and 1995 also included other charges, primarily for environmental and litigation costs related to previously divested operations, of $2.6 million, $19.1 million and $3.8 million, respectively. The following schedule summarizes the components, net of tax, of discontinued operations presented on the Consolidated Statement of Operations. 1997 1996 1995 ------- ------- ------- Fries & Fries, Inc. Gain on divestiture............ $270.6 Earnings from operations....... $ 18.6 $ 15.8 Animal health segment Loss on divestiture............ (269.4) Earnings from operations....... 5.8 18.9 11.4 Feed ingredients business Gain on divestiture............ 35.4 Earnings from operations....... 4.4 20.2 Environmental costs/other........ (2.6) (19.1) (3.8) -------- -------- ------- Discontinued operations.......... $ 4.4 $ 58.2 $ 43.6 ======== ======== ======= 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 classified to discontinued operations effective September 30, 1995. All prior periods of the Consolidated Statement of Operations and Consolidated Balance Sheet have been reclassified to reflect this presentation. Disclosures included in the Notes to Consolidated Financial Statements relate to continuing operations, unless otherwise indicated. ACQUISITIONS 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. Alton Dean, Inc., a manufacturer of products that warm sterile intravenous and irrigation solutions used during and after surgery, was acquired in June 1995 for $8.5 million. In February 1995, the Company acquired J.T. Baker Inc., a manufacturer of laboratory, process and microelectronic chemicals, for $95.0 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. RESTRUCTURING PROGRAMS In the fourth quarter of 1994, the Company recorded a restructuring charge of $73.9 million, $45.8 million after taxes, or $.59 per share, relating to its healthcare operations. The restructuring charge included the reorganization of the medical specialty oriented U.S. sales structure into a unified organization divided into geographical districts; reorganization to reduce, centralize and standardize certain non-sales functions and management processes; rationalization of manufacturing operations for substantial worldwide cost and sourcing improvements; and severance costs related to an associated workforce reduction. Pretax cash expenditures for this restructuring are expected to approximate the original estimate of $65 million, consisting of $28 million for severance costs for about 500 people at various locations around the world, $15 million for consulting, $13 million for manufacturing rationalization and $9 million for other items. The $9 million noncash pretax portion of the charge primarily related to manufacturing rationalization. Approximately $58 million of cash expenditures were incurred through June 30, 1997. The majority of the remaining cash expenditures will occur in 1998 with the largest single category related to severance for previously terminated employees. Restructuring actions are complete at June 30, 1997 and no material adjustments to the original reserve have been required. NOTE 2 - EARNINGS PER COMMON SHARE Earnings per common share amounts were computed on the basis of the weighted average number of common and common equivalent shares outstanding. Such weighted average shares used in the computations were 75,060,227 for 1997; 76,343,392 for 1996; and 77,458,114 for 1995. NOTE 3 SUPPLEMENTAL CASH FLOW INFORMATION
1997 1996 1995 ------ ------ ------ Interest paid................................. $ 46.7 $48.6 $47.9 Income taxes paid............................. 82.2 65.0 42.5 Noncash investing and financing activities: Issuance of stock related to an acquisition.. 22.0 Assumption of liabilities related to acquisitions............................. 2.3 21.5 42.4 Preferred stock received related to a divestiture............................ 88.9 Principal amount of debt assumed by buyers in conjunction with divestitures.. 530.6
The supplemental cash flow information for 1996 and 1995 has not been restated for the divestitures of Fries & Fries, Inc., the animal health segment and the feed ingredients business. NOTE 4 - INVENTORIES At JUNE 30, 1997 1996 --------- --------- Raw materials and supplies......... $ 114.5 $ 129.9 Work in process.................... 45.9 70.7 Finished goods..................... 155.5 141.0 --------- --------- $ 315.9 $ 341.6 ========= ========= NOTE 5 - INVESTMENTS AND LONG-TERM RECEIVABLES AT JUNE 30, 1997 1996 --------- --------- Preferred stock received related to a divestiture..................... $ 88.9 Other investments, net............. 32.9 $ 33.6 Other long-term receivables, net... 4.2 2.5 --------- --------- $ 126.0 $ 36.1 ========= ========= NOTE 6 - PROPERTY, PLANT AND EQUIPMENT AT JUNE 30, 1997 1996 --------- --------- Land............................... $ 51.7 $ 52.3 Buildings and leasehold improvements...................... 321.9 312.9 Machinery and equipment............ 891.2 835.6 Construction in progress........... 65.3 64.6 --------- --------- 1,330.1 1,265.4 Accumulated depreciation........... (502.2) (434.5) --------- --------- $ 827.9 $ 830.9 ========= ========= Capitalized interest costs were $0.7 million in 1997, $1.6 million in 1996 and $1.3 million in 1995. NOTE 7 - INTANGIBLE ASSETS AT JUNE 30, 1997 1996 --------- --------- Goodwill and other intangibles..... $ 444.7 $ 455.1 Patents and technology............. 63.8 70.3 --------- --------- 508.5 525.4 Accumulated amortization........... (111.4) (103.7) --------- --------- 397.1 421.7 Deferred charges, net.............. 19.1 20.0 --------- --------- $ 416.2 $ 441.7 ========= ========= Goodwill and other intangibles are amortized primarily on a straight-line basis over 3 to 40 years (weighted average life of 22 years). Patents and technology are amortized over estimated useful lives of 3 to 25 years (weighted average life of 18 years). The carrying amount of goodwill is reviewed if facts and circumstances suggest that it may be impaired. If this review indicates that 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 amount of the goodwill is reduced by the estimated shortfall of cash flows. NOTE 8 - FINANCIAL INSTRUMENTS DERIVATIVE FINANCIAL INSTRUMENTS In the ordinary course of business, Mallinckrodt purchases materials and sells finished products denominated in various currencies. The Company uses certain derivative financial instruments to manage its exposure to foreign currency exchange risk, principally purchased options, forward contracts and currency swaps. These contracts reduce the Company's overall exposure to exchange rate fluctuations and minimize the negative impact of unfavorable exchange rate movements by effectively fixing the transaction cost to the Company. 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. The U.S. dollar value of non-U.S. dollar denominated sales increases when the U.S. dollar weakens and decreases when the U.S. dollar strengthens against these currencies. Correspondingly, the U.S. dollar value of non-U.S. dollar denominated costs increases when the U.S. dollar weakens and decreases when the U.S. dollar strengthens against these currencies. 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 mitigate the short-term effect of changes in currency exchange rates on the Company's consolidated performance, the Company hedges a portion of its non-U.S. dollar denominated exposures by entering into forward foreign exchange contracts and purchasing currency options. These forward contracts and options generally have terms of less than two years. At the time of purchase, the currency options have little or no intrinsic value. 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. Certain of these swaps are intended to better match the Company's floating rate interest income to the fixed rate interest expense on its debt and to diversify a portion of the Company's exposure away from fluctuations in short-term U.S. interest rates. Information on the duration, notional value, purpose and fair value of instruments outstanding as of June 30, 1997 is provided below:
Principal (Notional) Amount by Expected Maturity (In millions, except average exchange rate) Fair Value As of FY1998 FY1999 FY2000 Total 6/30/97 ------ ------ ------ ----- ----------- Purchased option contracts to sell for U.S.$ related to anticipated cross currency sales Deutsche mark Notional value $12.5 $33.5 $46.0 $2.7 Average strike price 1.6301 1.6206 Yen Notional value $27.0 $20.0 $47.0 $1.1 Average strike price 111.04 115.48 Forward contracts and currency swaps related to intercompany financial transactions and long-term debt Sale of pounds sterling Notional value $5.3 $5.3 $5.2 Exchange rate 0.60 Sale of deutsche mark Notional value $7.7 $7.7 $7.7 Exchange rate 1.7544 Interest rate swaps and options Related to U.S.$ leases, the Company pays fixed/receives variable Notional value $35.6 $35.6 $(2.8) Fixed rate, 9.9% Floating rate, LIBOR + 0.70%
FAIR VALUE OF FINANCIAL INSTRUMENTS Non-derivative financial instruments included in the Consolidated Balance Sheet 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, 1997 and 1996. 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 12 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 9 - INCOME TAXES Income taxes included in the Consolidated Statement of Operations were: 1997 1996 1995 ------- ------- -------- Continuing operations............... $102.3 $ 90.0 $ 81.9 Discontinued operations: Sale of Fries & Fries, Inc......... 158.9 Fries & Fries, Inc. operations..... (.5) 10.8 9.5 Sale of animal health segment...... 21.9 Animal health segment operations... 11.4 11.0 6.9 Sale of feed ingredients business.. 19.3 Feed ingredients business operations........................ 2.2 12.2 Other.............................. (1.4) (10.3) (2.1) ------- ------- -------- Total discontinued operations...... 190.3 33.0 26.5 ------- ------- ------- $292.6 $123.0 $108.4 ======= ======= ======= The geographical sources of earnings from continuing operations before income taxes were: 1997 1996 1995 ------- ------- ------- U.S............................... $177.2 $138.3 $158.3 Outside U.S....................... 110.8 105.4 60.3 ------- ------- ------- $288.0 $243.7 $218.6 ======= ======= ======= The components of the income tax provision charged to continuing operations follow: 1997 1996 1995 ------- ------- ------- Current: U.S. Federal.................... $ 46.3 $ 30.8 $ 5.6 U.S. state and local............ 7.8 4.9 2.7 Outside U.S..................... 26.7 27.7 18.7 ------- ------- ------- 80.8 63.4 27.0 ------- ------- ------- Deferred: U.S. Federal.................... 8.8 20.5 35.6 U.S. state and local............ 2.7 2.6 5.1 Outside U.S..................... 10.0 3.5 14.2 ------- ------- ------- 21.5 26.6 54.9 ------- ------- ------- $102.3 $90.0 $81.9 ======= ======= ======= The Company had the following deferred tax balances at June 30, 1997 and 1996: 1997 1996 ------- ------- Deferred tax assets: Restructuring accruals........... $ 21.0 $ 24.6 Pensions and deferred compensation.................... 15.4 16.2 Net operating losses............. 6.4 7.6 Alternative minimum tax credit... 7.7 Environmental accruals........... 24.0 20.6 Other, net....................... 19.2 ------- ------- Gross deferred tax assets......... 66.8 95.9 Valuation allowance.............. (22.8) (5.2) ------- ------- Total deferred tax assets......... 44.0 90.7 ------- ------- Deferred tax liabilities: Property, plant and equipment.... 126.6 91.0 Receivables...................... 47.8 40.0 Intangible assets................ 55.6 27.1 Other, net....................... 25.3 ------- ------- Total deferred tax liabilities.... 255.3 158.1 ------- ------- Net deferred tax liabilities...... $211.3 $ 67.4 ======= ======= The tax benefit of the Company's net operating loss carryforwards of $6.4 million relates primarily to its non-U.S. operations, and $2.8 million of the tax benefit will expire in years 2000 through 2010. The remaining $3.6 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: 1997 1996 1995 ------- ------- ------- Computed tax at the U.S. Federal statutory rate................... $100.8 $ 85.3 $ 76.5 State income taxes, net of Federal benefit.................. 6.8 4.8 4.9 Other items....................... (5.3) (.1) .5 ------- ------- ------- Income tax provision.............. $102.3 $ 90.0 $ 81.9 ======= ======= ======= Effective tax rate................ 35.5% 36.9% 37.5% 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 $235.4 million at June 30, 1997. NOTE 10 - ACCRUED LIABILITIES AT JUNE 30, 1997 1996 ------ ------ Compensation and benefits............... $ 98.8 $ 57.3 Environmental liabilities............... 73.5 56.0 Other................................... 223.8 202.6 ------ ------ $396.1 $315.9 ====== ====== NOTE 11 - LINES OF CREDIT The Company has a $550 million private placement commercial paper program. The program had been backed by a $550 million U.S. credit line, which has subsequently been cancelled and replaced by the $1.6 billion revolving credit facility expiring July 24, 2002 as referenced in Note 21. No amounts were outstanding under either the commercial paper program or the credit agreement at June 30, 1997. The availability of a private placement commercial paper program is dependent on the review by the rating agencies of the financial condition of the Company subsequent to the acquisition of Nellcor Puritan Bennett Incorporated. Non-U.S. lines of credit totaling $130.4 million were also available, and borrowings under these lines amounted to $5.6 million at June 30, 1997. These non-U.S. lines are cancelable at any time. NOTE 12 - DEBT The components of short-term debt were: AT JUNE 30, 1997 1996 ------- ------- Notes payable............................. $ 5.6 $104.4 Current maturities of long-term debt...... 6.1 5.0 ------- ------- $ 11.7 $109.4 ======= ======= The components of long-term debt were:
Fair Value Carrying Amount ---------------- -------------------- AT JUNE 30, 1997 1996 1997 1996 ------- ------- -------- -------- 9.875% debentures due with an initial payment of $.9 million in 2002 and annual installments of $15.0 million beginning in 2003, with final payment in 2011.............. $153.7 $153.2 $135.0 $134.9 7% debentures due 2013........ 98.3 89.9 98.7 98.6 6.75% notes due 2005.......... 102.0 95.7 99.4 99.4 6.5% notes due 2007........... 98.6 90.7 98.6 98.5 6% notes due 2003............. 98.2 93.1 99.5 99.4 Other......................... 20.1 32.2 20.1 32.2 -------- ------- 551.3 563.0 Less current maturities....... 6.1 5.0 -------- ------- $545.2 $558.0 ======== =======
See Note 21 for additional information about acquisition activities subsequent to the financial statement date and the impact on future borrowing activities. Maturities of long-term debt for the next five years are: 1998-$6.1 million; 1999-$8.5 million; 2000-$.8 million; 2001-$.7 million, and 2002-$1.6 million. The 9.875% 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, 1997 and 1996 were 4.5% and 5.8%, respectively. NOTE 13 - PENSION AND INVESTMENT PLANS The Company has pension plans covering substantially all of its U.S. employees. 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 pension costs are as follows: 1997 1996 1995 ------ ------ ------ Service cost...................... $24.1 $20.4 $18.9 Interest cost on projected benefit obligation............... 35.8 35.3 31.7 Earnings on plan assets........... (36.4) (64.3) (24.0) Net amortization and deferral..... 7.1 35.4 (6.3) Special termination benefits and curtailment gains/losses, net.... 8.0 2.2 0.6 ------ ------ ------- $38.6 $29.0 $20.9 ====== ====== ======= U.S. pension expense in 1997, 1996 and 1995 was $34.4 million, $25.8 million and $17.9 million, respectively. Assumptions used in determining the actuarial present value of benefit obligations for U.S. pension plans follow: 1997 1996 1995 ------ ------ ------ Discount rate..................... 8.0% 7.75% 8.5% Long-term rate of return on plan assets................... 9.5% 9.0% 9.5% Compensation increase rate........ 5.0% 5.0% 5.5% 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 six 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 1997, 1996 and 1995 was $12.5 million, $14.0 million and $12.4 million, respectively. The funded status of U.S. and significant non-U.S. pension plans and amounts recognized in the Consolidated Balance Sheet follow:
1997 1996 ----------------------- ------------------------ 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 ----------- ----------- ----------- ------------ Assets at fair value...... $356.9 $ 34.5 $377.3 $ 30.4 Actuarial present value of benefit obligation: Vested benefits......... 251.0 67.1 303.3 59.7 Nonvested benefits...... 39.3 5.9 9.0 3.1 ----------- ----------- ----------- ----------- Accumulated benefit obligation............. 290.3 73.0 312.3 62.8 Projected future salary increases.............. 79.2 11.5 88.1 17.1 ----------- ----------- ----------- ----------- Projected benefit obligation............. 369.5 84.5 400.4 79.9 ----------- ----------- ----------- ----------- Projected benefit obligation in excess of plan assets........... (12.6) (50.0) (23.1) (49.5) Items not yet recognized in earnings: Unrecognized prior service cost.......... 0.3 8.9 1.0 10.8 Unrecognized net (gain) loss................... (7.5) (7.8) 12.0 (8.0) Unamortized transition (asset) liability...... (1.3) 5.6 (1.4) 8.3 ----------- ---------- ----------- ----------- Accrued pension liability................ $ (21.1) $(43.3) $(11.5) $(38.4) =========== =========== =========== ===========
The pension and investment plan information presented above includes related amounts for the divested animal health segment, 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. animal health segment employees. NOTE 14 - POSTRETIREMENT BENEFITS Mallinckrodt provides certain healthcare benefits for U.S. salaried and hourly retired employees through various self-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 divested animal health segment, except for the accrued postretirement benefit cost of active animal health segment employees which was assumed by the buyer. The components of periodic postretirement benefits costs are as follows: 1997 1996 1995 ------ ------ ------ Service cost for benefits earned during the year............ $ 5.2 $ 4.8 $ 4.9 Interest cost on benefit obligation........................ 11.6 13.0 13.0 Amortization of unrecognized net loss and prior service cost... .2 .6 ----- ------ ----- $17.0 $17.8 $18.5 ===== ====== ===== The following table presents the plans' funded status reconciled with amounts recognized in the Company's Consolidated Balance Sheet: 1997 1996 ------- ------- Accumulated postretirement benefit obligation (APBO): Retirees................................. $ 79.7 $ 88.1 Active employees......................... 46.2 64.0 ------- ------ Accumulated postretirement benefit obligation in excess of plan assets....... 125.9 152.1 Unrecognized net gain...................... 18.1 7.7 Unrecognized prior service cost............ 17.9 (5.8) ------- ------- Accrued postretirement benefit cost........ $161.9 $154.0 ======= ======= The discount rates used in determining the APBO for 1997 and 1996 were 8.0 percent and 7.75 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 8.5 percent and 9.0 percent for 1997 and 1996, 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 1997 by $10.4 million and the aggregate service and interest cost by $1.2 million. NOTE 15 - STOCK PLANS Three non-qualified stock option plans provide for granting options to purchase shares of common stock at prices not less than 100 percent of market price (as defined) at the date of grant. Options under these 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 income 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: Assumptions 1997 1996 ----------- ------ ------ Risk free interest rate 6.32% 5.46% Expected dividend yield of stock 1.53% 1.53% Expected volatility of stock 25.4% 30.0% Expected life of option (years) 4.5 4.1 The weighted average fair values of options granted during 1997 and 1996 were $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 income and EPS may not be representative of the effects on reported net income for future years. The Company's pro forma information follows (in millions, except for earnings per share information): 1997 1996 ------ ------ Net income: As reported $190.1 $211.9 Pro forma 183.6 209.9 Earnings per share: As reported $2.53 $2.77 Pro forma 2.44 2.75 A summary of the Company's stock option activity and related information for years ended June 30 follows: 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 1995 ----------------------------- Number Weighted Avg. of Options Exercise Price ---------- -------------- Outstanding-beginning of year 5,351,732 $30.00 Granted 1,419,656 29.92 Exercised (371,913) 22.14 Canceled (272,826) 37.17 ----------- Outstanding-end of year 6,126,649 30.14 =========== Exercisable at end of year 4,213,833 29.55 Reserved for future option grants 3,833,618 Outstanding stock options will expire over a period ending no later than December 8, 2006. The average exercise price of outstanding stock options at June 30, 1997 was based on an aggregate exercise price of about $192 million. The weighted average remaining contractual life of those options is 6.7 years. Further breakdown of this range follows: Options Currently Outstanding ----------------------------------------------- Number Weighted Avg. Weighted Avg. Price Range of Options Exercise Price Remaining Life - -------------- ----------- -------------- -------------- $13.06 - 29.98 1,705,476 $25.30 5.3 30.13 - 34.79 1,395,291 33.87 7.7 35.01 - 44.47 2,720,549 37.30 7.0 Options Exercisable ---------------------------- Number Weighted Avg. Price Range of Options Exercise Price - -------------- ----------- -------------- $13.06 - 29.98 1,705,476 $25.30 30.13 - 34.79 911,125 33.43 35.01 - 44.47 1,658,946 36.55 The 1973 non-qualified stock option and award plan also provides for the award of restricted shares of Mallinckrodt's common stock to executive officers. Under provisions of the plan, the grantee makes no cash payment for the award and the shares are held in escrow until vested, with the grantee being unable to dispose of the restricted shares until vested. Upon forfeiture of any share of restricted stock in accordance with the stock option and award plan, or the terms and conditions of the award, the shares would automatically be transferred to and reacquired by the Company at no cost. In 1995, the Company issued from its treasury stock 109 restricted shares. In 1996, the Company reacquired 1,873 shares of unrestricted stock in lieu of payment of withholding taxes on 5,000 shares of restricted stock which expired and vested on April 3, 1996. NOTE 16 - CAPITAL STOCK The Company has authorized and issued 100,000 shares, 98,330 outstanding at June 30, 1997, 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, 1997, 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, 1997. 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 three-year incentive award program for executive officers, and the current cycle expired June 30, 1997. It is anticipated that the Company will implement a new three-year cycle of its long-term incentive plan, effective July 1, 1997. Common shares reserved at June 30, 1997 consisted of the following: Exercise of common stock purchase rights................ 81,033,413 Exercise of stock options and granting of stock awards.. 8,760,971 ---------- 89,794,384 ========== Changes in the number of shares of common stock issued and in treasury were as follows:
1997 1996 1995 ---------- ---------- ---------- Common stock issued........... 87,116,289 87,116,289 87,116,289 Treasury common stock: Balance, beginning of year... 12,835,721 10,365,203 10,110,056 Stock options exercised...... (1,143,868) (1,071,373) (371,913) Purchased.................... 3,654,995 3,540,018 499,854 Issuance of stock related to an acquisition........... (503,001) Cancellations of restricted shares...................... 1,873 127,206 ----------- ----------- ----------- Balance, end of year......... 14,843,847 12,835,721 10,365,203 ----------- ----------- ----------- Common stock outstanding, end of year.................. 72,272,442 74,280,568 76,751,086 =========== =========== ===========
NOTE 17 - INTERNATIONAL OPERATIONS Export sales to unaffiliated customers included in U.S. sales were: 1997 1996 1995 ------ ------ ------ Europe................ $ 60.8 $ 56.1 $ 21.8 Asia/Pacific.......... 63.9 59.3 39.3 Latin America......... 31.9 27.3 20.9 Canada................ 7.6 6.2 6.2 ------ ------ ------ Total................. $164.2 $148.9 $ 88.2 ====== ====== ====== Net sales, earnings from continuing operations before income taxes, and identifiable assets by geographic areas follow:
1997 United Asia/ Latin States Europe Pacific America Canada Total -------- ------ ------- ------- ------ -------- Gross sales $1,468.5 $477.4 $102.2 $37.7 $107.3 $2,193.1 Intercompany 117.2 127.8 3.1 10.3 73.5 331.9 -------- ------ ------- ------ ------ -------- Net sales $1,351.3 $349.6 $ 99.1 $27.4 $ 33.8 $1,861.2 ======== ====== ======= ====== ====== ======== 1996 United Asia/ Latin States Europe Pacific America Canada Total -------- ------ ------- ------- ------ -------- Gross sales $1,344.8 $449.8 $107.5 $20.7 $ 86.7 $2,009.5 Intercompany 87.4 107.0 1.8 2.6 56.3 255.1 --------- ------ ------ ----- ------ -------- Net sales $1,257.4 $342.8 $105.7 $18.1 $30.4 $1,754.4 ========= ====== ====== ===== ====== ======== 1995 United Asia/ Latin States Europe Pacific America Canada Total -------- ------ ------- ------- ------ -------- Gross sales $1,219.2 $408.5 $114.7 $16.9 $77.4 $1,836.7 Intercompany 104.5 93.6 1.4 2.9 46.0 248.4 -------- ------ ------ ----- ----- -------- Net sales $1,114.7 $314.9 $113.3 $14.0 $31.4 $1,588.3 ======== ====== ====== ===== ===== ========
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 1997 1996 1995 --------- --------- --------- United States........................... $231.5 $231.1 $206.5 Europe.................................. 85.9 95.0 82.6 Asia/Pacific............................ 4.7 6.1 7.0 Latin America........................... 4.8 2.7 3.2 Canada.................................. 8.0 6.4 4.9 Corporate............................... (24.7) (41.4) (28.8) Eliminations............................ 3.9 (4.7) (7.5) --------- --------- --------- Operating earnings...................... 314.1 295.2 267.9 Interest income and other nonoperating income (expense), net.................. 22.0 (.2) (4.2) Interest expense........................ (48.1) (51.3) (45.1) --------- --------- --------- Consolidated $288.0 $243.7 $218.6 ========= ========= ========= ASSETS United States........................... $1,380.4 $1,374.3 $1,257.6 Europe.................................. 481.4 519.6 477.0 Asia/Pacific............................ 45.5 60.0 51.5 Latin America........................... 33.7 23.4 15.7 Canada.................................. 42.6 52.4 41.2 Corporate............................... 1,004.1 531.9 92.6 Discontinued operations................. 509.5 561.0 --------- --------- --------- Consolidated............................ $2,987.7 $3,071.1 $2,496.6 ========= ========= =========
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 1997, 1996 and 1995, and have been included in "Other operating income, net" in the Consolidated Statement of Operations. NOTE 18 - BUSINESS SEGMENTS The industry segments associated with continuing operations are as follows: HEALTHCARE Production and sale of products used primarily in hospitals, including X-ray contrast media, interventional products, diagnostic and therapeutic radiopharmaceuticals, airway management products, temperature monitoring products, blood analysis systems, analgesics and medicinal narcotics. SPECIALTY CHEMICALS Production and sale of catalysts, chemical additives, polymer stearates, and laboratory and microelectronic chemicals used by industry and research organizations. NOTE 19 - COMMITMENTS The Company leases office space, data processing equipment, land, buildings, and machinery and equipment. Rent expense for continuing operations in 1997, 1996 and 1995 related to operating leases was $22.4 million, $23.6 million and $23.4 million, respectively. Minimum rent commitments for continuing operations at June 30, 1997 under operating leases with an initial or remaining noncancelable period exceeding one year follow: YEARS ENDING JUNE 30, 1998.......................................... $14.8 1999.......................................... 11.1 2000.......................................... 7.4 2001........................................... 6.2 2002.......................................... 5.0 Later years................................... 30.2 ----- $74.7 ===== NOTE 20 - 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. In addition, in connection with laws and regulations pertaining to the protection of the environment, the Company is a party to several environmental remediation investigations and cleanups and, along with other companies, has been named a "potentially responsible party" for certain waste disposal sites. Each of these matters is subject to various uncertainties, and it is possible that some of these matters will be decided unfavorably against the Company. The Company had accruals, included in current accrued liabilities and other noncurrent liabilities, of $115.7 million and $97.3 million at June 30, 1997 and June 30, 1996, respectively, for costs associated with the study and remediation of Superfund sites and the Company's current and former operating sites for matters that are in its view probable and reasonably estimable. After reviewing information currently available, management believes any amounts paid in excess of the accrued liabilities will not have a material effect on its financial position or results of operations. Note 21 - SUBSEQUENT EVENT - ACQUISITION On July 23, 1997, the Company announced the execution of a definitive agreement to purchase for cash all outstanding shares of Nellcor Puritan Bennett Incorporated (Nellcor) common stock for $28.50 per share. Under the terms of the merger agreement unanimously approved by the boards of both of the companies, the Company commenced a tender offer for all of the outstanding shares of Nellcor on July 29, 1997. The offer expires on August 25, 1997 unless further extended. The tender offer was conditioned upon, among other things, there being validly tendered and not withdrawn a number of shares that equal at least a majority of the outstanding shares of Nellcor. After the consummation of the tender offer, the Company agreed to acquire any of the remaining outstanding shares of Nellcor pursuant to a second-step merger in which holders of such shares will receive $28.50 per share. The aggregate purchase price of the common stock is approximately $1.9 billion. The acquisition of Nellcor is anticipated to be completed during the first quarter of 1998 and will be accounted for using purchase accounting. In July 1997, Mallinckrodt finalized a $2.0 billion credit agreement to fund the acquisition of Nellcor. The credit facility consists of a $400 million two-year term loan and a $1.6 billion five-year revolving credit facility. Interest rates on borrowings under the agreement are based on the London Interbank Offered Rate (LIBOR), or other alternatives, plus a margin dependent on the Company's senior debt ratings. The Company's senior debt and commercial paper ratings are currently under review for downgrade and will likely be lowered upon the review of the rating agencies. It is expected that the review will be completed no later than the end of September 1997. Initial drawings under the credit agreement will be at LIBOR plus .30% or lower. Nellcor reported revenues of $779 million and net income of approximately $39 million for the fiscal year ended July 6, 1997. It also reported total assets of $673 million and shareholders' equity of $479 million at the end of fiscal 1997. QUARTERLY RESULTS (In millions, except per share amounts)
FISCAL 1997 Quarter (Unaudited) ------------------------------------ First Second Third Fourth Year ------- -------- ------- -------- --------- Net sales.................. $442.0 $453.1 $469.7 $496.4 $1,861.2 Gross margins.............. 200.0 204.3 211.8 227.5 843.6 Earnings from continuing operations................ 36.6 39.1 49.6 60.4 185.7 Discontinued operations................ (1.2) 4.4 (1.0) 2.2 4.4 ------- -------- ------- -------- --------- 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 ======= ======== ======= ======== ========= Earnings per common share: Continuing operations..... $.48 $.51 $.66 $.81 $2.47 Discontinued operations... (.01) .06 (.01) .03 .06 ------- -------- ------- -------- --------- Net earnings............... $.47 $.57 $.65 $.84 $2.53 ======= ======== ======= ======== =========
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 aftertax gain of $270.6 million on the sale. Results for the third quarter also include an estimated net aftertax loss of $275.3 million related to the planned divestiture of the animal health segment. On June 30, 1997, the sale of the animal health segment was completed and the loss was adjusted to $269.4 million. The net gain on disposal of these businesses and their results of operations have been accounted for as discontinued operations, and accordingly, prior year results have been restated. See the Discontinued Operations section of Note 1 for additional disclosure. Earnings from continuing operations for the first quarter include 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. FISCAL 1996
Quarter (Unaudited) ----------------------------------- First Second Third Fourth Year ------- -------- ------- -------- --------- Net sales.................. $391.1 $412.2 $460.3 $490.8 $1,754.4 Gross margins.............. 175.4 186.0 207.3 228.9 797.6 Earnings from continuing operations................ 30.0 33.2 40.4 50.1 153.7 Discontinued operations.... 9.2 24.1 8.0 16.9 58.2 ------- -------- ------- -------- --------- Net earnings............... 39.2 57.3 48.4 67.0 211.9 Preferred stock dividends.. (.1) (.1) (.1) (.1) (.4) ------- -------- ------- -------- --------- Available for common shareholders....... $ 39.1 $ 57.2 $ 48.3 $ 66.9 $ 211.5 ======= ======== ======= ======== ========= Earnings per common share: Continuing operations..... $.38 $.43 $.53 $.66 $2.01 Discontinued operations... .12 .32 .11 .23 .76 ------- -------- ------- -------- --------- Net earnings $.50 $.75 $.64 $.89 $2.77 ======= ======== ======= ======== =========
The results from operations for Fries & Fries, Inc., the animal health segment and the feed ingredients business have been reclassified and accounted for as discontinued operations. Other principal factors affecting discontinued operations were an aftertax gain of $35.4 million on the sale of the feed ingredients business and an aftertax provision for additional environmental costs of $15.6 million in the second quarter. Net earnings per share for the four quarters of 1996 are more than full year per share results by one cent due to a decrease in common shares outstanding. 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 1 through 4, and 10 and 11, incorporated herein by reference, of Mallinckrodt's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on October 15, 1997. For information concerning executive officers of the Registrant, see Part I of this report and pages 9 through 11, incorporated herein by reference, of Mallinckrodt's definitive Proxy Statement for the Annual Meeting of the Stockholders to be held on October 15, 1997. ITEM 11. EXECUTIVE COMPENSATION For information concerning executive compensation, see pages 5 and 6, 9 and 10, and 21 through 30, incorporated herein by reference, of Mallinckrodt's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on October 15, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT For information concerning security ownership of certain beneficial owners and management, see pages 7 and 8, incorporated herein by reference, of Mallinckrodt's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on October 15, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS For information concerning certain relationships and related transactions, see pages 6, 9 and 10, incorporated herein by reference, of Mallinckrodt's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on October 15, 1997. 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 58 for a listing of financial statements and financial statement schedules filed with this report. (3) Exhibits filed with this report. Incorporated Filed with Exhibit Herein by Electronic Number Description Reference to Submission - ------- -------------------------------- ------------ ---------- 2.1 Agreement dated February 4, Exhibit 2.1 to 1997 among Mallinckrodt, Form 8-K, dated Hercules Incorporated, Roche March 31, 1997. Holdings, Inc. and Givaudan- Roure (International) SA. 2.2 First Amendment to Agreement Exhibit 2.2 to dated March 28, 1997 among Form 8-K, dated Mallinckrodt, Hercules March 31, 1997. Incorporated, Roche Holdings, Inc. and Givaudan-Roure (International) SA. 2.3 Contribution Agreement dated Exhibit 2.3 to February 4, 1997 among Form 8-K, dated Mallinckrodt, Roche Holdings, March 31, 1997. Inc. and Givaudan-Roure(United States) Inc. 2.4 Stock Purchase Agreement, Exhibit 2.1 to dated May 19, 1997, among Form 8-K, dated Mallinckrodt Inc., June 30, 1997. Mallinckrodt Veterinary, Inc., Mallinckrodt Veterinary International,Inc. and Schering-Plough Corporation. 2.5 Amendment No. 1 dated June 30, Exhibit 2.2 to 1997 to the Stock Purchase Form 8-K, dated Agreement among Mallinckrodt June 30, 1997. 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. 3.1(a) Restated Certificate of Exhibit 3.1 to Incorporation of Mallinckrodt, 1994 Form 10-K. dated June 22, 1994. 3.1(b) Certificate of Amendment of Exhibit 3.3 to the Certificate of September 30, Incorporation of Mallinckrodt, 1996 Form 10-Q. dated October 16, 1996. 3.2 By-Laws of Mallinckrodt as Exhibit 3.3 to amended through April 18, 1990 Form 10-K 1990. Commission File No. 1-483. 4.1 Rights of the holders of Exhibit 3.1 to Mallinckrodt's equity 1994 Form 10-K. securities are stated in the Company's Restated Certificate of Incorporation, dated June 22, 1994. 4.2 Form 8-A Registration Exhibit 4.6 to Statement under Section 12 of 1989 Form 10-K, the Securities Exchange Act of Commission File 1934, dated April 10, 1987 No. 1-483. defining the rights of holders of Mallinckrodt's 4% Cumulative Preferred Stock and Common Stock. 4.3 Amended and Restated Rights Exhibit 2 to Agreement dated as of Amendment to February 19, 1996. Registration Statement on Form 8-A/A dated February 26, 1996. 4.4 Indenture dated as of March 15, Exhibit 4.1 to 1985, as amended and restated Form S-3 as of February 15,1995, Registration between Mallinckrodt and First Statement No. Trust of New York, National 33-57821. Association. 4.5 No class of long-term debt of Mallinckrodt exceeds 10% of the total assets of Mallinckrodt and its subsidiaries on a consolidated basis. Mallinckrodt agrees to furnish copies of agreements defining the rights of debt holders to the Securities and Exchange Commission upon request. 10.1 Form of Executive Life Exhibit 10.24 Insurance Plan Participation to 1996 Form Agreement, as entered into 10-K. with the named executive officers in Mallinckrodt's 1997 proxy statement and with other executives and key employees.(1) 10.2 Restated Mallinckrodt Exhibit 10.3 to Executive Long-Term Disability 1989 Form 10-K, Plan, effective January 1, Commission File 1987.(1) No. 1-483. 10.3(a) Supplemental Benefit Plan for Exhibit 10.6(a) Participants in the to 1989 Form Mallinckrodt Retirement Plan 10K, Commission as amended and restated File No. 1-483. effective January 1, 1980.(1) 10.3(b) Amendment No. 1 dated June 20, Exhibit 10.6(b) 1989 to Supplemental Benefit to 1989 Form Plan for Participants in the 10-K, Commission Retirement Plan for Salaried File No. 1-483. Employees of Mallinckrodt.(1) 10.3(c) Amendment No. 2 dated April 20, Exhibit 10.6(c) 1990 to Supplemental Benefit to 1990 Form Plan for Participants in the 10-K, Commission Mallinckrodt Retirement Plan. File No. 1-483. Plan.(1) 10.4(a) Mallinckrodt Supplemental Exhibit 10.7(a) Executive Retirement Plan to 1989 Form restated effective April 19, 10-K, Commission 1988.(1) File No 1-483. 10.4(b) Amendment No. 1 effective Exhibit 10.7(c) December 6, 1989, to to 1990 Form Supplemental Executive 10-K, Commission Retirement Plan.(1) File No. 1-483. 10.4(c) Amendment No. 2 effective Exhibit 10.6(c) April 19, 1996, to to 1996 Form Supplemental Executive 10-K. Retirement Plan.(1) 10.5 Supplemental Executive Exhibit 10.20 Retirement Plan and to 1989 Form Supplemental Life Plan 10-K, Commission of Mallinckrodt Inc. effective File No. 1-483. July 15, 1984.(1) 10.6(a) Mallinckrodt Management Exhibit 10.9(b) Incentive Compensation Program to 1991 Form as amended and restated 10-K, Commission effective July 1, 1991.(1) File No. 1-483. 10.6(b) Amendment No. 1 to the Exhibit 10.7(b) Management Incentive to 1996 Form Compensation Plan, 10-K. effective April 19, 1996.(1) 10.7(a) Mallinckrodt 1973 Stock Option Post-Effective and Award Plan as amended Amendment No. 1 effective February 21, to Form S-8 1990.(1) Registration Statement No. 33-32109. 10.7(b) Amendment No. 1 to the Form S-8 Mallinckrodt 1973 Stock Option Registration and Award Plan dated June 19, Statement No. 1991.(1) 33-43925. 10.8(a) Mallinckrodt 1981 Stock Option Post-Effective Plan as amended through Amendment No. 3 April 19, 1988.(1) to Form S-8 Registration Statement No. 2-80553. 10.8(b) Amendment to the 1981 Stock Exhibit 10.12(b) Option Plan effective to 1989 Form February 15, 1989.(1) 10-K, Commission File No. 1-483. 10.8(c) Amendment to the 1981 Stock Exhibit 10.12(c) Option Plan effective to 1991 Form June 19, 1991.(1) 10-K, Commission File No. 1-483. 10.9(a) Long-Term Incentive Exhibit 10.30 to Compensation Plan, 1994 Form 10-K. effective July 1, 1994.(1) 10.9(b) Amendment No. 1 to Long-Term X Incentive Plan, effective April 16, 1997.(1) 10.10(a) Management Compensation and Exhibit 10.30 to Benefit Assurance Program.(1) 1988 Form 10-K, Commission File No. 1-483. 10.10(b) Amendments to Management Exhibit 10.12(b) Compensation and Benefit to 1996 Form 10-K. Assurance Program.(1) 10.11 Agreement of Trust dated Exhibit 10.13 to August 16, 1996, between 1996 Form 10-K. Mallinckrodt and Wachovia Bank of North Carolina, N.A., incident to the program described in Exhibits 10.10(a) and 10.10(b).(1) 10.12(a) Corporate Staff Employee Exhibit 10.33 to Severance and Benefit 1988 Form 10-K, Assurance Policy.(1) Commission File No. 1-483. 10.12(b) Mallinckrodt Inc. Corporate Exhibit 10.14(b) Staff Change in Control to 1996 Form Severance Plan.(1) Form 10-K. 10.13 Form of Severance Agreement Exhibit 10.23 to referenced in Exhibit 10.10(b), 1996 Form 10-K. as entered into with the named executive officers in Mallinckrodt's 1997 proxy statement and with other executives and key employees.(1) 10.14(a) Executive Incentive Exhibit 10.25 to Compensation Agreement with March 31, 1997 Paul D. Cottone dated as of Form 10-Q. October 24, 1996.(1) 10.14(b) Severance and Separation Exhibit 10.26 to Agreement with Paul D. March 31,1997 Cottone dated as of Form 10-Q. October 24, 1996.(1) 10.15(a) Agreement effective June 30, X 1997 with Robert G. Moussa.(1) 10.15(b) Consulting Agreement effective X July 1, 1997 with Robert G. Moussa.(1) 10.16 Mallinckrodt Directors Exhibit 10.10 to Retirement Services Plan 1993 Form 10-K. as amended and restated effective April 21, 1993.(1) 10.17 Mallinckrodt Directors' Stock Exhibit 4(a) to option Plan effective Form S-8 October 17, 1990.(1) Registration Statement No. 33-40246. 10.18(a) Consulting Agreement with Exhibit 10.27 to Ronald G. Evens, M.D., for Amendment No. 1 the period from January 1, to 1992 Form 1987, through December 31, 10-K, Commission 1989; extended for the File No. 1-483. calendar years 1990, 1991 and 1992.(1) 10.18(b) Amendment dated December 17, Exhibit 10.26(b) 1992 to Consulting Agreement to 1993 Form with Ronald G. Evens, M.D.(1) 10-K. 10.18(c) Amendment dated January 7, Exhibit 10.9 to 1994 to Consulting Agreement December 31, 1994 with Ronald G. Evens, M.D., Form 10-Q. extending Agreement through December 31, 1994.(1) 10.18(d) Amendment dated February 1, Exhibit 10.10 1995 to Consulting to December 31, Agreement with Ronald G. 1994 From 10-Q. Evens, M.D., extending Agreement through December 31, 1995.(1) 10.18(e) Amendment dated January 10, Exhibit 10.2 to 1996 to Exhibit 10.2 to December 31,1995 Consulting Agreement with Form 10-Q. Ronald G. Evens, M.D., extending Agreement through December 31, 1996.(1) 10.18(f) Amendment dated February 20, Exhibit 10.17(f) 1997 to Consulting Agreement to March 31, 1997 with Ronald G. Evens, M.D. Form 10-Q. extending Agreement through December 31, 1997.(1) 10.19(a) Deferral Election Plan for Exhibit 10.29 to Non-Employee Directors, 1994 Form 10-K. effective June 30, 1994.(1) 10.19(b) Amendment of Deferral Exhibit 10.22(b) Election Plan for Non-Employee to 1995 Form 10-K. Directors effective February 15, 1995.(1) 10.20(a) Credit Agreement dated May 22, Exhibit 10.18 to 1996, among Mallinckrodt and 1996 Form 10-K. Morgan Guaranty Trust Company of New York, as Administrative Agent and Citibank, N.A., as Documentation Agent ($550 million facility). 10.20(b) Amendment No. 1 to Credit Exhibit 10.18-A Agreement, dated as of to March 31, January 24, 1997 among 1997 Form 10-Q. Mallinckrodt, the Banks listed therein, Morgan Guaranty Trust Company of New York, as Administrative Agent and Citibank, N.A., as Documentation Agent. 10.21(a) Credit Agreement dated May 22, Exhibit 10.19 to 1996 among Fries & Fries, Inc. 1996 Form 10-K. 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). 10.21(b) Amendment No. 1 to Credit Exhibit 10.19-A Agreement dated as of to March 31, January 24, 1997 among 1997 Form 10-Q. 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. 10.21(c) Consent and Waiver dated as of Exhibit 10.19-B March 21, 1997, to the Credit to March 31, Agreement dated as of May 22, 1997 Form 10-Q. 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. 10.22(a) Credit Agreement dated as of Exhibit 10.27(a) January 24, 1997, among to March 31, Tastemaker as Borrower, Fries 1997 Form 10-Q. & 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. 10.22(b) Agreement dated as of March 21, Exhibit 10.27(b) 1997, comprising, inter alia, to March 31, an Amendment and Waiver to the 1997 Form 10-Q. 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. 10.23 Offering Memorandum by J.P. Exhibit 10.29 to Morgan for sale of the 1993 Form 10-K. commercial paper (CP) notes of Mallinckrodt. The CP program is backed by the credit agreement included filed as Exhibit 10.20(a). 11.1 Primary earnings per share X computation for the three years ended June 30, 1997. 11.2 Fully diluted earnings per X share computation for the three years ended June 30, 1997. 21 Subsidiaries of the Registrant. X 23.1 Consent of Ernst & Young LLP. X 27 Financial data schedule for X the year ended June 30, 1997. - --------------------------- (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 March 31, 1997 under Item 5 regarding acceptance of marketing authorization application for ultrasound imaging agent, FS069, in the European union. - Report dated March 31, 1997 under Item 2 regarding divestiture of Fries & Fries, Inc. and its interest in Tastemaker, the flavors joint venture. - Report dated April 23, 1997 under Item 5 regarding Mallinckrodt's support of Molecular Biosystems' legal challenges to FDA review of FS069 case. - Report dated May 20, 1997 under Item 5 regarding Premier, Inc. selection of Mallinckrodt as corporate partner. - Report dated May 20, 1997 under Item 5 regarding agreement to sell animal health business to Schering-Plough Corporation. - Report dated June 26, 1997 under Item 5 regarding securing FDA clearance to supply U.S. customers with Molybdenum from Netherlands facility. - Report dated June 30, 1997 under Item 2 regarding June 30, 1997 closing of the sale of the animal health business. - Report dated July 1, 1997 under Item 5 regarding completion of the sale of the veterinary business and plans to increase share repurchase by $250 million. - Report dated July 23, 1997 under Item 5 regarding announcing definitive agreement to acquire Nellcor Puritan Bennett Incorporated. - Report dated August 26, 1997 under Item 5 regarding announcing completion of tender offer for Nellcor Puritan Bennett Incorporated. - Report dated September 4, 1997 under Item 2 regarding announcing completion of acquisition of Nellcor Puritan Bennett Incorporated. INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page ------ Consolidated Balance Sheets at June 30, 1997 and 1996... 29 For the years ended June 30, 1997, 1996 and 1995: Information by Business Segment....................... 27 Consolidated Statements of Operations................. 28 Consolidated Statements of Cash Flows................. 30 Consolidated Statements of Changes in Shareholders' Equity................................. 31 Notes to Consolidated Financial Statements............ 32-48 Quarterly Results..................................... 49 - ----------------------- 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. 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: TERRY D. MEIER -------------------- ---------------------------- Michael A. Rocca Terry D. Meier Senior Vice President and Vice President and Controller Chief Financial Officer Date: September 22, 1997 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, 1997 ---------------- and Director C. Ray Holman MACK G.NICHOLS President, Chief Operating September 22, 1997 - ---------------- Officer and Director Mack G. Nichols MICHAEL A. ROCCA Senior Vice President and September 22, 1997 - ------------------ Chief Financial Officer Michael A. Rocca TERRY D. MEIER Vice President and Controller September 22, 1997 - ------------------ (Chief Accounting Officer) Terry D. Meier RAYMOND F. BENTELE Director September 22, 1997 - ------------------- Raymond F. Bentele GARETH C. C. CHANG Director September 22, 1997 - ------------------- Gareth C. C. Chang WILLIAM L. DAVIS Director September 22, 1997 - ------------------- William L. Davis RONALD G. EVENS Director September 22, 1997 - ------------------- Ronald G. Evens ROBERTA S. KARMEL Director September 22, 1997 - ------------------- Roberta S. Karmel CLAUDINE B. MALONE Director September 22, 1997 - ------------------- Claudine B. Malone MORTON MOSKIN Director September 22, 1997 - ------------------- Morton Moskin BRIAN M. RUSHTON Director September 22, 1997 - ------------------- Brian M. Rushton DANIEL R. TOLL Director September 22, 1997 - ------------------- Daniel R. Toll ANTHONY VISCUSI - ------------------- Anthony Viscusi Director September 22, 1997 EX-10.9(B) 2 Exhibit 10.9(b) AMENDMENT NO. 1 TO THE MALLINCKRODT INC. LONG-TERM INCENTIVE COMPENSATION PLAN The Mallinckrodt Inc. Long-Term Incentive Compensation Plan (the "Plan") is hereby amended, effective as of April 16, 1997, as set forth below: 1. The second sentence of Section 5(a) of the Plan is hereby amended to read in its entirety as follows: Within the 90-day period immediately following the beginning of each Performance Cycle, the Committee will establish, in writing, the objective performance goals applicable to each Participant or class of Participants for the Performance Cycle. 2. Section 6 of the Plan is hereby amended by deleting the last sentence of such Section. 3. Section 7(b) of the Plan is hereby amended to read in its entirety as follows: (b) For purposes of this Plan, a "change in control" of the Corporation means the occurrences of any one of the following events: (i) any "person" (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the "Exchange Act") and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing 20% or more of the combined voting power of the Corporation's then outstanding securities eligible to vote for the election of the Board (the "Corporation Voting Securities"); provided, -------- however, that the event described in this paragraph (i) shall ------- not be deemed to be a Change in Control by virtue of any of the following acquisitions: (A) by the Corporation or any Subsidiary of the Corporation, (B) by any employee benefit plan sponsored or maintained by the Corporation or any Subsidiary of the Corporation, (C) by any underwriter temporarily holding securities pursuant to an offering of such securities, (D) pursuant to a NonControl Transaction (as defined in paragraph (iii)), (E) with respect to a Participant pursuant to any acquisition by the Participant or any group of persons including the Participant; or (F) except as provided in (iii) below, in which Corporation Voting Securities are acquired from the Corporation, if a resolution providing expressly that the acquisition pursuant to this clause (F) does not constitute a Change in Control under this paragraph (I) is approved by a vote of at least a majority of the directors comprising the Incumbent Board (as hereinafter defined); (ii) individuals who, on April 16, 1997, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to April 16, 1997, whose election, or nomination for election, by the Corporation's stockholders was approved by a vote of at least a majority of the directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Corporation in which such person is named as a nominee for director, without objection to such nomination) shall be, for purposes of this paragraph (ii), considered as though such person were a member of the Incumbent Board; provided, however, that no individual initially elected -------- ------- or nominated as a director of the Corporation as a result of an actual or threatened election contest with respect to directors or any other actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board shall be deemed to be a member of the Incumbent Board; (iii) the consummation of a merger, consolidation, share exchange or similar form of corporate reorganization of the Corporation or any such type of transaction requiring the approval of the Corporation's stockholders (whether for such transaction or the issuance of securities in the transaction or otherwise), or the consummation of the direct or indirect sale or other disposition of all or substantially all of the assets, of the Corporation (a "Business Combination"), unless immediately following such Business Combination: (A) more than 50% of the total voting power of the publicly-traded corporation resulting from such Business Combination (including, without limitation, any corporation which directly or indirectly has beneficial ownership of 100% of the Corporation Voting Securities or all or substantially all of the Corporation's assets) eligible to elect directors of such corporation is represented by shares that were Corporation Voting Securities immediately prior to such Business Combination (either by remaining outstanding or being converted), and such voting power is in substantially the same proportion as the voting power of such Corporation Voting Securities immediately prior to the Business Combination, (B) no person (other than any publicly- traded holding company resulting from such Business Combination, any employee benefit plan sponsored or maintained by the Corporation (or the corporation resulting from such Business Combination), or any person which beneficially owned, immediately prior to such Business Combination, directly or indirectly, 20% or more of the Corporation Voting Securities (a "Corporation 20% Stockholder")) becomes the beneficial owner, directly or indirectly, of 20% or more of the total voting power of the outstanding voting securities eligible to elect directors of the corporation resulting from such Business Combination and no Corporation 20% Stockholder increases its percentage of such total voting power, and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the approval of the Board of the execution of the initial agreement providing for such Business Combination (a "Non-Control Transaction"); or (iv) the stockholders of the Corporation approve a plan of complete liquidation or dissolution of the Corporation. Notwithstanding the foregoing, a Change in Control of the Corporation shall not be deemed to occur solely because any person acquires beneficial ownership of more than 20% of the Corporation Voting Securities as a result of the acquisition of Corporation Voting Securities by the Corporation which, by reducing the number of Corporation Voting Securities outstanding, increases the percentage of shares beneficially owned by such person; provided, that if a -------- ---- Change in Control of the Corporation would occur as a result of such an acquisition by the Corporation (if not for the operation of this sentence), and after the Corporation's acquisition such person becomes the beneficial owner of additional Corporation Voting Securities that increases the percentage of outstanding Corporation Voting Securities beneficially owned by such person, then a Change in Control of the Corporation shall occur. Notwithstanding anything in this Plan to the contrary, if a Participant's employment is terminated prior to a Change in Control, and the Participant reasonably demonstrates that such termination was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control and who effectuates a Change in Control, then for all purposes of this Plan with respect to such Participant, the date of a Change in Control shall mean the date immediately prior to the date of such termination of employment. EX-10.15(A) 3 Exhibit 10.15(a) AGREEMENT This Agreement is entered into between Robert G. Moussa and Mallinckrodt Inc., subject to and upon approval of the Board of Directors of Mallinckrodt Inc., or as delegated to an authorized Committee thereof ("MI" or "Mallinckrodt") pursuant to Moussa's voluntary tender of his irrevocable resignation of the position and office of President, International effective June 30, l997. It is the desire of the parties, among other things, to state the terms and conditions of the severance of their relationship as executive employee and employer undertaken on June 30, 1997 and to provide for, inter alia, a consulting agreement between Mallinckrodt and Moussa in exchange for which he makes certain pledges specified below. NOW THEREFORE, in consideration of the promises and the mutual covenants and representations made herein, the sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. I, Robert G. Moussa, voluntarily agree to resign from employment from MI effective June 30, 1997. Except as otherwise provided in this Agreement, I shall not be entitled to any wages, benefits or other forms of remuneration or compensation from Mallinckrodt after June 30,1997. I acknowledge that I have received all compensation and employee benefits to which I was entitled during my employment. An announcement of my resignation and the timing of such announcement shall be agreed upon in writing and made at a date no later than the date of my resignation, June 30, 1997. 2. I agree that in exchange for promises which I make in this Agreement, MI will provide me with the following additional compensation and benefits beyond those amounts to which I am otherwise entitled provided that I agree to give the Release and make the promises described below: (a) A Consulting Agreement entered into with MI and attached hereto for a period of twenty (20) months commencing July 1, 1997 providing compensation and benefits as specifically provided under the terms and conditions of that Consulting Agreement. (b) Qualified Retirement And SERP Plan Benefits. MI agrees to ------------------------------------------- pay and arrange for the payment from the Retirement Plans described below, to me the sum of One Million Four Hundred Thousand Dollars ($ 1,400,000.00) which shall be comprised of (i) the lump sum present value of my accrued benefit determined as of June 30, 1997 and payable to me or on my behalf as of that date from the tax qualified Mallinckrodt Inc. Retirement Plan, (ii) the lump sum present value of my accrued benefit determined as of June 30, 1997 pursuant to the actuarial assumptions applicable under those plans and in accordance with their terms in which I participated as an employee of Mallinckrodt, Gmbh and all other MI non-domestic subsidiaries regardless of whether such benefits are payable as a lump sum and with such lump sum present value calculation to be verified by an independent pension benefit consultant selected by me. If the difference in such calculation is greater than Five Thousand Dollars ($5,000.00), then a third calculation shall be undertaken at Mallinckrodt Inc.'s expense by an independent pension benefit consultant mutually acceptable to Mallinckrodt and me and such calculation shall govern and (iii) although I am ineligible for a benefit under the Company's Supplemental Executive Retirement Plan ("SERP"), an amount with respect to the SERP which amount, when combined with the amounts determined under (i) and (ii) above, shall equal One Million Four Hundred Thousand Dollars ($1,400,000.00). This payment shall be made as soon as possible after June 30, 1997 but no later than three (3) months after the date of my executive employment resignation. I agree that I shall not be entitled to accrue any further benefits under the SERP, the Mallinckrodt Inc. Retirement Plan, the Supplemental Benefit Plan for Participants in the Mallinckrodt Inc. Retirement Plan or any other retirement plan maintained by MI during the period of my Consulting Agreement. However, MI agrees that I will be entitled to receive an allocation of Supermatch contribution (whenever made) under the Investment Plan for Employees for Mallinckrodt Inc. for the Year ending June 30, 1997 in accordance with Plan terms, if any such contribution is made to the Plan. (c) Outplacement. Executive outplacement services during the ------------ twenty (20) month consultancy period, including, but not limited to, secretarial services and voice and phone mail and E-mail services. (d) Management Incentive Compensation Plan. An amount equal to -------------------------------------- 100% of the Fiscal Year 1997 Management Incentive Compensation Plan using the same formula as applicable to other participants in the Plan but paid before the end of the Fiscal Year 1997, and to the extent possible on the date awarded or as soon as practicable based upon projected Mallinckrodt performance with subsequent reimbursement by Moussa of the excess of any payment made based upon projected performance over the value actually due based upon actual Mallinckrodt Fiscal Year performance. (e) Long Term Incentive Plan. All Long Term Incentive Plan ------------------------ payments shall be made using the same formula as applicable to other participants in the Plan and in the same manner. All Long Term Incentive Plan payments shall be made as soon as practicable after calculation of the formula at the end of the Fiscal Year as set forth in the Plan. (f) Stock Options. Subject to approval by the Board of ------------- Directors, MI shall hereby provide additional periods during which I may exercise certain stock options or additional payments with respect to stock options as described below: (i) At the time of my termination of employment, I will be vested in and eligible to exercise the following options for purchase of shares of the Company's common stock: GRANT NUMBER OF OPTION ORIGINAL DATE SHARES PRICE EXPIRATION DATE ----- --------- ------- --------------- 02/20/90 5,625 19.18 02/20/2000 02/20/90 5,625 19.18 02/20/2000 12/04/90 5,625 22.26 12/04/2000 12/04/90 5,625 22.26 12/04/2000 12/03/91 2,650 36.80 12/03/2001 12/03/91 2,650 36.80 12/03/2001 12/01/92 2,550 38.03 12/01/2002 12/01/92 2,550 38.03 12/01/2002 12/15/92 3,450 37.68 12/15/2002 12/15/92 3,450 37.68 12/15/2002 11/30/93 6,750 35.01 11/30/2003 11/30/93 6,750 35.01 11/30/2003 12/13/94 8,250 29.97 12/13/2004 12/13/94 8,250 29.97 12/13/2004 12/12/95 8,250 34.79 12/12/2005 In exchange and as additional consideration for my execution of this Agreement, MI hereby provides Moussa with an additional period of time during which each of these options may be exercised. Subject to the aforementioned approval, the terms of the above described options are hereby further amended to provide that they may be exercised on any date through earlier of (I) their stated original expiration date (determined without reference to my termination of employment) or (II)February 28, 1999. All such options, if not exercised on or before such date shall expire on February 28, 1999. (ii) At the time of my termination of employment, I was not vested in and was not eligible to exercise, but would have become vested in and would have become eligible to exercise the following options for purchase of shares of the Company's common stock had I remained employed by the Company through February 28, 1999: NUMBER ORIGINAL GRANT OF VESTING OPTION EXPIRATION DATE OPTIONS DATE PRICE DATE ----- ------- ------- ------ ---------- 12/12/95 8,250 12/12/97 34.79 12/12/2005 08/20/96 6,200 08/20/97 38.43 08/20/2006 08/20/96 6,200 08/20/89 38.42 08/20/2006 In exchange and as additional consideration for Moussa's execution of this Agreement and subject to the foregoing approval, MI will provide to me an additional payment with respect to each of these options equal to the excess, if any, of (i) the price at which the Company's common stock closes on the New York Stock Exchange on any date that I may designate in writing to the Company with respect to participation (which designated date must be communicated in writing to MI's General Counsel within two (2) business days of such date), during the period commencing with the date on which each of the aforementioned options would have become vested (i. e. the Vesting Date) as described above) and ending on February 28, 1999 over (ii) the exercise price of these non-vested options. If the closing price of the Company's common stock as described in the preceding sentence does not exceed the exercise price of any of the non-vested options during the period described, then no payment shall be made under this subparagraph with respect to such options. Also, if the Executive does not designate a price determination date in writing to the Company, which designation is received within the two (2) day time period described above, then no payment under this subparagraph (c) shall be made. Amounts due and payable under this subparagraph, if any, less applicable federal and state withholding taxes shall be payable as described in paragraph 2 below. Payment of the aforementioned amounts shall be made as described following Moussa's execution of this Agreement and expiration of the revocation period described in paragraph 7 without Moussa having revoked this Agreement. All such amounts shall be subject to the remainder of this Agreement. (g) Relocation. Mallinckrodt agrees to pay Moussa One Hundred ---------- Thousand Dollars ($100,000.00), to cover the cost of relocation to Europe, if he determines during the twenty (20) month consultancy period to relocate to Europe, unless such relocation to Europe is based upon new employment requiring such relocation and the relocation cost is paid by Moussa's new employer. I agree that all income and other tax withholding determined by MI to be applicable shall be deducted from all benefits and compensations payable hereunder. 3. In exchange for all the benefits described above, I promise on behalf of myself, my heirs, my assigns and all others to discharge and release MI and each of its subsidiaries, parent and affiliated corporations, business entities and employee benefit plans and all of their past and present directors, officers, employees, agents and fiduciaries and their successors and assigns ("Released Parties") from any and all claims, causes of action or suits which I have or might have or might have had of whatever nature from the beginning of time, whether they are known or unknown, that arose, could arise or could be asserted relating to or arising out of my employment relationship with MI or the termination of that relationship up through and including the date of this Agreement or which may relate to any other facts, actions or circumstances which may have occurred or existed prior to the date of this Agreement. This Separation and Release and discharge of claims includes but is not limited to all claims of whatever type arising under common law, whether in contract or in tort, and all claims arising under federal, state or local law and regulation including, but not limited to, all claims for personal recovery under Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Employee Retirement Income Security Act of 1974 and all claims for benefits arising under any employee benefit plan as described in that Act (except for claims under benefit plans for the benefits described in paragraph 2), the Americans With Disabilities Act of 1990, the Age Discrimination in Employment Act of 1967, and the Family and Medical Leave Act of 1993, the Occupational Safety and Health Act, the Civil Rights Act of 1866, the Fair Labor Standards Act of 1938, as amended, the Rehabilitation Act of 1973, as amended, as well as, but not limited to, any claim, right or cause of action under the laws of the State of Missouri, inclusive of the Missouri Human Rights Act, Section 213.010, et seq., R.S.Mo. and the Missouri Service Letter Statute, Section 290.140, R.S.Mo.; any and all claims for intentional or negligent infliction of emotional distress, wrongful or retaliatory discharge, public policy violations, whistleblower, interference with contract, pain and suffering, compensatory or punitive damages, service letters, costs, interest, attorneys' fees and expenses, reinstatement or reemployment (collectively referred to as "Claims"). I further waive any right to future employment with MI, its subsidiaries, parent and affiliated corporations. In further consideration for the benefits described above, I hereby covenant and agree not to bring or assert any claim for further recovery, cause of action, administrative charge, lawsuit or other proceeding for further recovery against any Released Party related to or arising out of any Claim. If any court rules that such waiver of rights to file, or have filed on my behalf, any administrative or judicial charges or complaints for further recovery is ineffective, Moussa agrees not to seek or accept any money damages upon the filing of any such administrative or judicial charges or complaints. In the event any person brings any claim or action for further recovery which is contrary to or violates the above Release and Waiver, then the party defendant to that action shall be entitled to reimbursement for costs and attorneys' fees incurred in defense of that claim or action. 4. Moussa agrees that the existence of this Agreement, as well as the terms and conditions of this Agreement, are confidential and shall not be made public by him or disclosed by him to any other person, other than his immediate family, attorney and tax advisor, or as may be necessary by court order, without the express written consent of Mallinckrodt. Moussa further agrees that if he breaks this promise as determined by a Court of law to keep the existence and terms of this Agreement confidential, he will become immediately liable to Mallinckrodt for the amount of pay and benefits actually paid and received by Moussa pursuant to Paragraph 2, and any costs, including attorneys' fees, incurred by Mallinckrodt in collecting that amount from him. 5. Moussa acknowledges his obligations to MI of nondisclosure and confidentiality pursuant to and as provided in the Consulting Agreement entered effective July 1, 1997 and executed simultaneously herewith and as otherwise provided by law. Moussa agrees to deliver to Mallinckrodt, and not keep or deliver to anyone else, at any time, any and all records, documents, notes, memoranda, specifications, devices, including but not limited to, Mallinckrodt provided storage devices and other property, including but not limited to any telephones, computers, fax machines, keys, credit cards and in general, any and all material relating to Mallinckrodt's business or Confidential or Proprietary Information furnished to or acquired by him during the period of his employment with Mallinckrodt. To the extent any such information is stored on any computer, computer disk, or any other information storage devices, Moussa agrees to return such information to Mallinckrodt and not to retain such information in any fashion except as provided in the Consulting Agreement and except that Moussa shall be permitted to retain and use his computer, printer and fax machine during the twenty (20) month period of the Consulting Agreement and he may elect to purchase that computer equipment at the conclusion of the twenty (20) month consultancy for its fair market value. 6. By execution of this Agreement, Robert G. Moussa expressly waives any and all rights or claims arising under the Age Discrimination in Employment Act of 1967 ("ADEA") and: a. I acknowledge that my waiver of rights arising under the ADEA is in writing; b. I understand that this waiver refers to rights or claims arising under the ADEA; c. I understand that by execution of this Agreement, I do not waive any rights or claims under the ADEA that may arise after the date the waiver is executed; d. I acknowledge that the waiver of my rights arising under the ADEA is in exchange for the consideration outlined in paragraph 2 above, which is substantially greater than that to which I am otherwise entitled; e. I acknowledge that MI is hereby advising me to consult with an attorney of my choosing prior to executing this Agreement; f. I acknowledge that I have been advised by MI that I have a period of at least twenty-one (21) days from May 21, 1997, within which to consider this Agreement; g. I acknowledge that I have been advised by MI that I am entitled to revoke (if I execute this Agreement) this waiver of rights arising under the ADEA within seven (7) days after executing this Agreement and that the wavier will not and does not become effective or enforceable until the seven (7) day period has expired; h. I understand that this waiver has not been requested in connection with an exit incentive. I further acknowledge that the compensation and benefits to which I am entitled hereunder are greater than those which would be provided to Mallinckrodt employees who are affected by and whose employment has been or may be terminated as a result of its Strategic Change Initiative. I acknowledge that my termination is not part of an exit incentive or group employee termination program. i. I agree that if I exercise my right to revoke the waiver under subparagraph (g), this entire Agreement and its obligations are null and void and of no effect, and I will only be entitled to receive MI's normal executive severance benefit; and j. I agree that no sums or benefits described in Paragraph 2, which are in addition to those provided pursuant to standard severance policy shall be paid or provided until the revocation period specified in subparagraph (g) has expired. 7. Nothing contained in this Agreement shall be construed to require the commission of any act contrary to the law or to be contrary to law, and wherever there is any conflict between any provision of this Agreement and any present or future statute, law, governmental regulation or ordinance contrary to which the parties have no legal right to contract, the latter shall prevail, but in such event, the provisions of this Agreement affected shall be curtailed and restricted only to the extent necessary to bring them within legal requirements. Should however, Moussa contest the legality of this Agreement or any part thereof and such challenge by Moussa be sustained in whole or in part, then Mallinckrodt, at its sole option, may cancel this Agreement upon written notice to Moussa and any sums paid by it to Moussa under Paragraph 2, shall be repaid by Moussa to Mallinckrodt within thirty (30) days of such written notice. 8. Should it be determined by a Court of law that Moussa has breached any term of this Agreement, all remaining payments payable by Mallinckrodt under this Agreement will cease, and Mallinckrodt shall be excused from performance of any and all other obligations contained in this Agreement. The cessation of future payments shall not preclude Mallinckrodt from requesting all other remedies, either at law or equity, including injunctive relief or otherwise preclude a court of competent jurisdiction from awarding any other remedy, either at law or equity, including, but not limited to, restitution, court costs and attorneys' fees. The parties further agree that the amounts to be paid to Moussa pursuant to this Agreement shall be the measure of damages that may be sought in any action by Mallinckrodt for breach or specific performance of the terms stated. 9. I agree that the terms of this Agreement constitute the entire agreement between me and MI regarding the subject matters covered by it. I agree that in executing this Agreement, I am not relying upon any representation made by any person and that I am only relying upon the terms stated in this Agreement by MI. Any change or addition to this Agreement must be made in writing and signed by me and MI to be effective. However, I agree that all compensations and benefits described in this Agreement shall be paid in accordance with the terms of the Plans under which they are provided, except as otherwise provided herein or in the Consulting Agreement. 10. This Agreement is governed by and construed according to the laws of the State of Missouri. I HEREBY ACKNOWLEDGE THAT I HAVE READ THIS RELEASE AGREEMENT CONSISTING OF NINE (9) PAGES AND TEN (10) NUMBERED PARAGRAPHS; FULLY UNDERSTANDING AND ACCEPTING ALL OF ITS TERMS OF MY OWN FREE WILL; AND THAT I HAVE HAD AN ADEQUATE OPPORTUNITY TO DISCUSS THIS DOCUMENT WITH AN ATTORNEY AND HAVE DONE SO OR HAVE VOLUNTARILY ELECTED NOT TO DO SO. Date: May 21, 1997 ROBERT G. MOUSSA -------------------- Robert G. Moussa Date: May 21, 1997 MALLINCKRODT INC. By: C. RAY HOLMAN ------------------- C. Ray Holman Chairman and Chief Executive Officer STATE OF MISSOURI ) ) ss COUNTY OF ST. LOUIS) Comes now Robert G. Moussa, who states to me that he has read and understands the foregoing Separation Agreement and Release and agrees to and accepts its terms and conditions as a free act of his own volition. Sworn to before me this 21st day of May , 1997. ---------- -------- "NOTARY SEAL" Christine Bimslager, Notary Public St. Louis County, State of Missouri My Commission Expires 9/19/97 EX-10.15(B) 4 Exhibit 10.15(b) CONSULTING AGREEMENT THIS AGREEMENT, made on May 21, 1997 and effective as of the 1st day of July, 1997, by and between MALLINCKRODT INC., a New York corporation ("Mallinckrodt"), with principal offices at 7733 Forsyth Boulevard, St. Louis, MO 63105, and ROBERT G. MOUSSA ("Consultant" or "Moussa"), residing at 16191 Wilson Manor Drive, Chesterfield, Missouri 63005. WHEREAS, Consultant is an expert in the area of international medical marketing and development and has been instrumental as an executive employee of Mallinckrodt in developing these markets for a number of years; and WHEREAS, Mallinckrodt and Moussa are interested in establishing a consulting relationship for a period of twenty (20) months following Moussa's resignation from executive employment on June 30, 1997 to provide such consulting services to Mallinckrodt under the terms and conditions set forth in this Agreement; and WHEREAS, Mallinckrodt and Moussa have entered into an Agreement (hereinafter the "Termination Agreement") governing the terms and conditions of Moussa's resignation from executive employment and release of any and all claims which may have arisen as a result of his executive employment or resignation therefrom; NOW, THEREFORE, in consideration of the foregoing, and of the representations, warranties, covenants and agreements hereinafter contained, the parties hereby mutually agree as follows: 1. This Agreement shall commence on July 1,1997, and continue for a period of twenty (20) months thereafter, ending on February 28, 1999 (the "Term"). Mallinckrodt's obligation to Consultant and Consultant's obligation to Mallinckrodt shall terminate prior to February 28, 1999, only in the event of Consultant's death or, if Mallinckrodt determines that Consultant is in default of any of his obligations under this Agreement or the Termination Agreement between Mallinckrodt and Consultant or is guilty of wilful misconduct or gross negligence in the performance of his consulting services. 2. During the Term, Consultant shall serve as a consultant for Mallinckrodt in connection with projects and assignments specifically given to Consultant by Mr. C. R. Holman as Chairman and Chief Executive Officer of Mallinckrodt or his designee, as mutually agreeable to Mallinckrodt and Moussa as to both substantive content and as to commitment of time and resources by Moussa. 3. In consideration for the consulting services to be provided by Consultant hereunder and the confidentiality covenant set forth in Paragraph 6, in addition to those expenses set forth in Paragraph 4 of this Agreement, Mallinckrodt shall pay as a consulting fee to Moussa the sum of Fifteen Thousand Three Hundred Thirty-Three Dollars and Thirty-Three Cents ($15,333.33) on a twice per month basis commencing on or about July 15, 1997 and continuing through February 28, 1999 in exchange for his providing any services as needed or requested pursuant to this Agreement between Mallinckrodt and Moussa. Moussa understands and agrees that if he secures new employment during this twenty (20) month consultancy period, the Term shall not be shortened or otherwise affected and Mallinckrodt agrees it shall represent to any such new employer that the consulting agreement will not conflict with the new employment. All payments under this Agreement shall be paid to Moussa in accordance with Mallinckrodt's regular payroll schedule for its salaried employees and Mallinckrodt shall withhold any and all payroll taxes which it determines to be appropriate, if any. Mallinckrodt will continue to provide secretarial services and voice and phone mail and E-mail services to Moussa during this twenty (20) month consultancy period. Further, Mallinckrodt will continue to provide to Moussa, subject to the terms and conditions of the applicable employee benefit plans, including executive benefit plans, all employee and executive benefits to which he was entitled as an employee of Mallinckrodt through the twenty (20) month consultancy agreement period except that all such benefits entitlements shall cease immediately if Moussa commences new employment of any type with any person or entity before the date of conclusion of the twenty (20) month consultancy agreement. So long as Moussa continues to receive these executive benefits, he will be required to provide all contributions and/or deductions customarily required of all other executive employees in accordance with the terms of the plans, as currently in effect or as may be subsequently implemented by Mallinckrodt, and authorizes deduction of all required contributions for these coverages from any payments provided pursuant to this Paragraph. At the conclusion of the Term, COBRA Continuation Coverage shall be made available to Moussa thereafter for eighteen (18) months at the cost of 102% of coverage contributions, in accordance with the terms of the Mallinckrodt health care plan which covered Moussa at the end of the Term. At the conclusion of the Term, Moussa shall be entitled to convert the basic life insurance coverage to his ownership pursuant to and in accordance with the terms and conditions of the basic life insurance policy agreement. Moussa agrees and acknowledges that he shall have no entitlement to participate in and accrue benefits under the Mallinckrodt Inc. Retirement Plan, Investment Plan for Employees of Mallinckrodt Inc., the Supplemental Benefit Plan for Participants in the Mallinckrodt Inc. Retirement Plan, the Supplemental Executive Retirement Plan of Mallinckrodt Inc. or any other retirement plan maintained by Mallinckrodt or its affiliate after June 30, 1997 and specifically waives any rights to participate in those plans after June 30, 1997. 4. If Moussa incurs any out-of-pocket expenses in the rendition of services under this Agreement, Mallinckrodt shall reimburse Consultant for the amounts of such reasonable out-of pocket travel costs and expenses actually incurred by Moussa. Payment for such costs and expenses shall be made within fifteen (15) days following receipt by Mallinckrodt of a written statement detailing such costs and expenses which will be supported by accurate documentation upon approval thereof by C.R. Holman. 5. Consultant represents and warrants to Mallinckrodt that he has the right to enter into this Agreement without breaching or violating any fiduciary, contractual or statutory obligations owed to a third party. Consultant shall cooperate and work with Mallinckrodt in connection with his activities under this Agreement and shall keep Mallinckrodt informed of his activities as may be required by Mallinckrodt. 6. Consultant shall not, unless expressly authorized by Mallinckrodt to do so, either during or after completion of his services hereunder, disclose to any third party, use or publish information which is secret or confidential to Mallinckrodt. Such information, it is understood, includes, but is not limited-to, knowledge and data relating to processes, products, machines, compounds and compositions, formulae, research efforts, business plans and marketing, sales, financial, customer and supplier information and any other information originated, owned, controlled or possessed by Mallinckrodt or any of its subsidiaries regarding its businesses. Consultant shall consider information originated, owned, controlled or possessed by Mallinckrodt or any of its subsidiaries, which is not disclosed in printed publications stated to be available for distribution outside Mallinckrodt, as being secret and confidential to Mallinckrodt or its subsidiaries. In instances wherein doubt exists in Consultant's mind as to whether information is secret or confidential to Mallinckrodt or any of its subsidiaries, Consultant shall request an opinion, in writing, from Mallinckrodt's General Counsel. Items (including, but not limited to, products, data sheets, reports, memoranda, notes, records, plots, sketches, plans and other tangible items) which are in the possession of Consultant or to which he is given access as a result of his contacts and services with Mallinckrodt or its subsidiaries shall, at all times, be recognized as the exclusive property of Mallinckrodt. At no time, without express authorization from Mallinckrodt, shall Consultant make such items available to third parties and, upon termination or expiration of Consultant's Agreement with Mallinckrodt, Consultant shall deliver promptly to Mallinckrodt any such items (including copies thereof) which are in his possession. 7. The fees to be paid to Consultant pursuant to Paragraphs 3 and 4 of this Agreement shall be full consideration and compensation for Consultant's services and for the confidentiality and obligations of Consultant to Mallinckrodt hereunder. 8. Consultant shall be regarded as an independent contractor in all matters pertaining to services performed by Consultant hereunder, and (a) Consultant shall have no authority to assume, create or incur any liability or any obligation of any kind (express or implied) against or on behalf of Mallinckrodt or any of its subsidiaries, and (b) Mallinckrodt shall defend, indemnify and hold harmless Consultant from and against any claims, damages, injuries loss and expense, including reasonable attorneys' fees incurred by Consultant or made or asserted against Consultant by any third party or foreign power or government in connection with, relating to or arising out of the consulting services provided hereunder, except in the case of gross negligence or wilful misconduct of Consultant, (c) Consultant agrees to obtain the appropriate federal identification number, if applicable, shall be responsible for all gross receipts, income, social security and other state and federal taxes for fees he is paid under this Agreement and Consultant agrees to provide to Mallinckrodt such proof as it determines is appropriate that such taxes have been paid and acknowledges that he will not be treated as an employee for income, employment tax or other purposes, (d) Consultant shall not be under the specific direction of Mallinckrodt in the performance of his services, (e) Consultant shall be under no obligation to work any specific number of hours or at any specific place except as mutually agreed with Mallinckrodt, (f) Consultant retains the right to render similar services for any other person or entity, (g) Mallinckrodt agrees that it shall not have the right to control the details, manner or means by which Consultant performs his services, (h) Consultant agrees to secure any licenses or permits necessary for him to render services hereunder, and (i) Consultant shall provide his own supplies, facilities and such assistants as he determines is necessary to perform consulting services under this Agreement. 9. This Agreement shall be construed according to the laws of the State of Missouri. This Agreement may only be amended in writing which is agreed to by both of the Parties hereto. 10. Nothing contained in this Agreement shall be construed to require the commission of any act contrary to the law, and wherever there is any conflict between any provision of this Agreement and any present or future statute, law, governmental regulation or ordinance contrary to which the parties have no legal right to contract, the latter shall prevail, but in such event, the provisions of this Agreement affected shall be curtailed and restricted only to the extent necessary to bring them within legal requirements. 11. Should it be determined by a Court of law that Moussa has breached any term of this Agreement, all remaining payments payable by Mallinckrodt under this Agreement will cease, and Mallinckrodt shall be excused from performance of any and all other obligations contained in this Agreement. The cessation of future payments shall not preclude Mallinckrodt from requesting all other remedies, either at law or equity, including injunctive relief or otherwise preclude a court of competent jurisdiction from awarding any other remedy, either at law or equity, including, but not limited to, restitution, court costs and attorneys' fees. The parties further agree that the amounts to be paid to Moussa pursuant to this Agreement evidence the measure of damages that may be sought in any action by Mallinckrodt for breach or specific performance of the terms stated. ************************ IN WITNESS WHEREOF, the undersigned have executed this Agreement on the date first above written. MALLINCKRODT INC. By:C. R. HOLMAN ---------------------------- C. R. Holman Chairman and Chief Executive Officer ACCEPTED: BY:ROBERT G. MOUSSA --------------------- Robert G. Moussa DATED: May 21, 1997 EX-11.1 5 Exhibit 11.1
EARNINGS PER SHARE PRIMARY COMPUTATION Years Ended June 30, 1997, 1996 and 1995 ($ in millions, except share and per share amounts) 1997 1996 1995 ------ ------ ------- Basis for computation of earnings per common and common equivalent shares: Earnings from continuing operations $185.7 $153.7 $136.7 Deduct dividends on 4 Percent cumulative preferred stock (.4) (.4) (.4) ------- ------- ------- Earnings from continuing operations available for common shareholders 185.3 153.3 136.3 Discontinued operations 4.4 58.2 43.6 ------- ------- ------- Available for common shareholders $189.7 $211.5 $179.9 ======= ======= ======= Number of common and common equivalent shares: Weighted average shares outstanding 73,837,424 75,183,729 76,687,154 Shares issuable upon exercise of stock options, net of shares assumed to be repurchased 1,222,803 1,159,663 770,960 ---------- ---------- ---------- 75,060,227 76,343,392 77,458,114 ========== ========== ========== Earnings per common and common equivalent share: Continuing operations $2.47 $2.01 $1.76 Discontinued operations .06 .76 .56 ------ ------ ------ Net earnings $2.53 $2.77 $2.32 ====== ====== ======
EX-11.2 6 Exhibit 11.2
EARNINGS PER SHARE FULLY DILUTED COMPUTATION Years Ended June 30, 1997, 1996 and 1995 ($ in millions, except share and per share amounts) 1997 1996 1995 ------ ------ ------- Basis for computation of earnings per common and common equivalent shares: Earnings from continuing operations $185.7 $153.7 $136.7 Deduct dividends on 4 Percent cumulative preferred stock (.4) (.4) (.4) ------- ------- ------- Earnings from continuing operations available for common shareholders 185.3 153.3 136.3 Discontinued operations 4.4 58.2 43.6 ------- ------- ------- Available for common shareholders $189.7 $211.5 $179.9 ======= ======= ======= Number of common and common equivalent shares: Weighted average shares outstanding 73,837,424 75,183,729 76,687,154 Shares issuable upon exercise of stock options, net of shares assumed to be repurchased 1,334,525 1,309,994 1,089,504 ---------- ---------- ---------- 75,171,949 76,493,723 77,776,658 ========== ========== ========== Earnings per common and common equivalent share: Continuing operations $2.46 $2.00 $1.75 Discontinued operations .06 .76 .56 ------ ------ ------ Net earnings $2.52 $2.76 $2.31 ====== ====== ======
EX-21 7 Exhibit 21 Mallinckrodt Inc. 1997 LEGAL ENTITY MASTER FILE LEGAL NAME JURISDICTION - ---------- ------------ Alton Dean Medical, Inc. UTAH Carnforth Limited BERMUDA Coromandel Fertilisers Ltd. INDIA Creative Solutions Industria e Comercio Ltda. BRAZIL Dittander Limited IRELAND Dritte CORSA Verwaltungsgesellschaft mbH GERMANY D.M. Graham Laboratories, Inc. NEW YORK HemoCue AB SWEDEN IMC Exploration Company MARYLAND IMCERA Ltd. UNITED KINGDOM 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 S.A. de C.V. MEXICO Mallinckrodt Chemical Australia Pty. Limited AUSTRALIA Mallinckrodt Chemical Belgium B.V.B.A. BELGIUM Mallinckrodt Chemical Canada Inc. CANADA Mallinckrodt Chemical GmbH GERMANY Mallinckrodt Chemical Holdings GmbH GERMANY Mallinckrodt Chemical Holdings (U.K.) Ltd. UNITED KINGDOM Mallinckrodt Chemical, Inc. DELAWARE Mallinckrodt Chemical Limited UNITED KINGDOM Mallinckrodt DAR Srl ITALY Mallinckrodt Europe B.V. NETHERLANDS Mallinckrodt FSC Inc. BARBADOS Mallinckrodt Holdings B.V. NETHERLANDS Mallinckrodt Iberica S.A. SPAIN Mallinckrodt Inc. DELAWARE Mallinckrodt Inc. NEW YORK Mallinckrodt International Corporation MISSOURI Mallinckrodt Medical AG SWITZERLAND Mallinckrodt Medical Argentina Limited UNITED KINGDOM Mallinckrodt Medical Asia Pacific Pte. Ltd. SINGAPORE Mallinckrodt Medical B.V. HOLLAND Mallinckrodt Medical Caribe, Inc. DELAWARE Mallinckrodt Medical Co., Ltd. JAPAN 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 (U.K.) Ltd. UNITED KINGDOM Mallinckrodt Medical Imaging - Ireland IRELAND Mallinckrodt Medical, Inc. CANADA Mallinckrodt Medical, Inc. DELAWARE Mallinckrodt Medical International Holdings IRELAND Mallinckrodt Medical Isle of Man ISLE OF MAN Mallinckrodt Medical Lda. PORTUGAL Mallinckrodt Medical IRELAND 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 Medical PMC NEVADA Mallinckrodt Polska Sp.zo.o POLAND Mallinckrodt Radiopharma GmbH GERMANY Mallinckrodt Services B.V. NETHERLANDS Mallinckrodt TMH NEVADA Mallinckrodt Veterinary, Inc. DELAWARE Mallinckrodt Veterinary International, Inc. DELAWARE MMHC, Inc. DELAWARE MMI, Inc. DELAWARE MMJ S.A. de C.V. MEXICO Molecular Biosystems, Inc. DELAWARE MSCH Company DELAWARE National Catheter Corporation NEW YORK Paracet Laboratories, Inc. DELAWARE Pharm Tech Packaging Corporation NEW YORK Sterlington Land Co. DELAWARE Synbiotics Corporation CALIFORNIA EX-23 8 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 July 30, 1997 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, 1997: Commission File No. --------------------------- Form S-8, No. 2-65727 Form S-8, No. 2-70868 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-3, No. 33-47081 Form S-3, No. 33-57821 Form S-8, No. 333-34489 - ---------------------- Ernst & Young LLP St. Louis, Missouri September 22, 1997 EX-27 9
5 This schedule contains summary financial information extracted from the balance sheet and income statement, and is qualified in its entirety by reference to such financial schedules. 1,000,000 YEAR JUN-30-1997 JUN-30-1997 809 0 364 8 316 1,617 1,330 502 2,988 654 545 0 11 87 1,153 2,988 1,861 1,861 1,018 1,547 0 0 48 288 102 186 4 0 0 190 2.53 2.52
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