-----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, FLNHgHBcpNiNhuWSHyEjHRBM8DrLZCS/AEN0ulItG7SAJZqnd8S3bKZPRHDhXB1L yELT8/x49WuIZ5dvw6qWlg== 0000051396-98-000045.txt : 19980619 0000051396-98-000045.hdr.sgml : 19980618 ACCESSION NUMBER: 0000051396-98-000045 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19980617 SROS: CSX SROS: NYSE SROS: PCX 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-Q/A SEC ACT: SEC FILE NUMBER: 001-00483 FILM NUMBER: 98649505 BUSINESS ADDRESS: STREET 1: 675 MCDONNELL BLVD STREET 2: PO BOX 5840 CITY: ST LOUIS STATE: MO ZIP: 63134 BUSINESS PHONE: 3146542000 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 - -----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, P1gSbY5u3EBDrEie3qRAbQJ0UQJCLxJvhzOxQLlUde2UwHDn1s3DBBQpyPf5AQ3O /UpIQbrXo9gimExuZWMV6Q== 0000051396-98-000045.txt : 19980618 0000051396-98-000045.hdr.sgml : 19980618 ACCESSION NUMBER: 0000051396-98-000045 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19980617 SROS: CSX SROS: NYSE SROS: PCX 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-Q/A SEC ACT: SEC FILE NUMBER: 001-00483 FILM NUMBER: 98649505 BUSINESS ADDRESS: STREET 1: 675 MCDONNELL BLVD STREET 2: PO BOX 5840 CITY: ST LOUIS STATE: MO ZIP: 63134 BUSINESS PHONE: 3146542000 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-Q/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________________________ FORM 10-Q/A No. 1 X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF --- THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 OR --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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.) 675 McDonnell Boulevard St. Louis, Missouri 63134 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 314-654-2000 ______________________________ 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 . Applicable Only To Issuers Involved In Bankruptcy Proceedings During The Preceding Five Years: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes . No . Applicable Only To Corporate Issuers: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 72,934,630 shares excluding 14,181,659 treasury shares as of October 31, 1997. Pursuant to Rule 12b-15 of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), this Form 10-Q/A No. 1 is hereby filed with respect to that certain Quarterly Report on Form 10-Q for the three months ended September 30, 1997 of Mallinckrodt Inc. filed with the Securities and Exchange Commission on November 12, 1997 (the "Form 10-Q"). In accordance therewith, Part I "Financial Information" of the Form 10-Q is hereby restated in its entirety to provide additional disclosure as follows. PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited). The accompanying interim condensed consolidated financial statements of Mallinckrodt Inc. (the Company or Mallinckrodt) do not include all disclosures normally provided in annual financial statements. These financial statements, which should be read in conjunction with the consolidated financial statements contained in Mallinckrodt's 1997 Annual Report to Shareholders, are unaudited but include all adjustments which Mallinckrodt's management considers necessary for a fair presentation. These adjustments consist of normal recurring accruals except as discussed in Notes 1, 2, 3 and 4 of the Notes to Condensed Consolidated Financial Statements. Interim results are not necessarily indicative of the results for the fiscal year. All references to years are to fiscal years ended June 30 unless otherwise stated. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In millions, except per share amounts) Three Months Ended September 30, -------------------- 1997 1996 -------- -------- Net sales $ 498.1 $ 442.0 Operating costs and expenses: Cost of goods sold 309.0 242.0 Selling, administrative and general expenses 125.3 105.8 Purchased research and development 398.3 Research and development expenses 29.5 28.8 Other operating income, net (1.7) (.9) -------- -------- Total operating costs and expenses 860.4 375.7 -------- -------- Operating earnings (loss) (362.3) 66.3 Interest income and other nonoperating income, net 9.2 4.5 Interest expense (18.4) (12.7) -------- -------- Earnings (loss) from continuing operations before income taxes (371.5) 58.1 Income tax provision 9.9 21.5 -------- -------- Earnings (loss) from continuing operations (381.4) 36.6 Discontinued operations (1.2) -------- -------- Net earnings (loss) (381.4) 35.4 Preferred stock dividends (.1) (.1) -------- -------- Available for common shareholders $(381.5) $ 35.3 ======== ======== Earnings (loss) per common share: Continuing operations $ (5.21) $ .48 Discontinued operations (.01) -------- -------- Net earnings $ (5.21) $ .47 ======== ======== (See Notes to Condensed Consolidated Financial Statements on pages 5 through 8.) CONDENSED CONSOLIDATED BALANCE SHEETS (In millions, except share and per share amounts)
September 30, June 30, 1997 1997 ------------- ------------ Assets Current assets: Cash and cash equivalents $ 125.1 $ 808.5 Trade receivables, less allowances of $14.7 at September 30 and $8.4 at June 30 474.2 356.0 Inventories 568.9 315.9 Deferred income taxes 58.3 36.8 Other current assets 82.4 99.6 --------- --------- Total current assets 1,308.9 1,616.8 Investments and long-term receivables, less allowances of $9.6 at September 30 and $14.1 at June 30 172.5 145.1 Property, plant and equipment, net 984.7 827.9 Goodwill, net 896.4 226.2 Technology, net 396.5 24.2 Other intangible assets, net 295.2 146.7 Deferred income taxes 23.5 .8 --------- --------- Total assets $4,077.7 $2,987.7 ========= ========= Liabilities and Shareholders' Equity Current liabilities: Short-term debt $1,126.5 $ 11.7 Accounts payable 192.7 169.3 Accrued liabilities 456.8 396.1 Income taxes payable 57.4 76.4 Deferred income taxes 21.7 .2 --------- --------- Total current liabilities 1,855.1 653.7 Long-term debt, less current maturities 550.6 545.2 Deferred income taxes 468.1 248.7 Postretirement benefits 165.2 161.9 Other noncurrent liabilities and deferred credits 164.6 127.0 --------- --------- Total liabilities 3,203.6 1,736.5 --------- --------- 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 312.8 305.9 Reinvested earnings 899.1 1,292.6 Foreign currency translation (53.5) (49.9) Treasury stock, at cost (382.4) (395.5) --------- --------- Total shareholders' equity 874.1 1,251.2 --------- --------- Total liabilities and shareholders' equity $4,077.7 $2,987.7 ========= ========= (See Notes to Condensed Consolidated Financial Statements on pages 5 through 8.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) Three Months Ended September 30, ------------------------ 1997 1996 ---------- ---------- Cash Flows - Operating Activities Net earnings (loss) $ (381.4) $ 35.4 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 38.8 39.1 Postretirement benefits 3.3 2.8 Undistributed equity in earnings of joint venture (5.6) Losses on disposals of assets .1 Deferred income taxes (4.8) (3.7) Write-off of purchased research and development 398.3 Sale of inventory stepped up to fair value at acquisition 18.8 ---------- ---------- 73.1 68.0 Changes in operating assets and liabilities: Trade receivables 33.8 15.5 Inventories (17.4) ( 7.4) Other current assets 43.0 (.2) Accounts payable, accrued liabilities and income taxes payable, net (172.6) (21.8) Net current liabilities of discontinued operations (.3) Other noncurrent liabilities and deferred credits 18.4 (16.8) Other, net 1.1 21.3 ---------- ---------- Net cash provided (used) by operating activities (20.6) 58.3 ---------- ---------- Cash Flows - Investing Activities Capital expenditures (30.3) (22.9) Acquisition spending (1,734.6) (4.1) Proceeds from asset disposals 1.3 33.6 Other, net .7 1.9 ---------- ---------- Net cash provided (used) by investing activities (1,762.9) 8.5 ---------- ---------- Cash Flows - Financing Activities Increase in short-term debt 1,091.8 .4 Proceeds from long-term debt .4 1.6 Payments on long-term debt (1.9) Issuance of Mallinckrodt common stock 29.7 9.5 Acquisition of treasury stock (9.7) (22.5) Dividends paid (12.1) (11.7) ---------- ---------- Net cash provided (used) by financing activities 1,100.1 (24.6) ---------- ---------- Increase (decrease) in cash and cash equivalents (683.4) 42.2 Cash and cash equivalents at beginning of period 808.5 496.1 ---------- ---------- Cash and cash equivalents at end of period $ 125.1 $ 538.3 ========== ========== (See Notes to Condensed Consolidated Financial Statements on pages 5 through 8.) CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In millions, except per share amounts) 1997 1996 ---------- ---------- 4 Percent cumulative preferred stock: Balance at June 30 and September 30 $ 11.0 $ 11.0 Common stock: Balance at June 30 and September 30 87.1 87.1 Capital in excess of par value: Balance at June 30 305.9 283.5 Stock option exercises 6.9 1.9 ---------- --------- Balance at September 30 312.8 285.4 ---------- --------- Reinvested earnings: Balance at June 30 1,292.6 1,150.7 Net earnings (loss) (381.4) 35.4 Dividends 4 Percent cumulative preferred stock ($1.00 per share) (.1) (.1) Common stock ($.165 per share in fiscal 1998 and $.155 per share in fiscal 1997) (12.0) (11.6) --------- --------- Balance at September 30 899.1 1,174.4 --------- --------- Foreign currency translation: Balance at June 30 (49.9) (15.3) Translation adjustment (3.6) 2.8 --------- --------- Balance at September 30 (53.5) (12.5) --------- --------- Treasury stock: Balance at June 30 (395.5) (284.8) Acquisition of treasury stock ( 9.7) (22.5) Stock option exercises 8.7 7.6 Investment plan match 7.3 Restricted stock award 6.8 --------- --------- Balance at September 30 (382.4) (299.7) --------- --------- Total shareholders' equity $ 874.1 $1,245.7 ========= ========= (See Notes to Condensed Consolidated Financial Statements on pages 5 through 8.) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. On August 28, 1997, the Company acquired Nellcor Puritan Bennett Incorporated (Nellcor) through an agreement to purchase for cash all the outstanding shares of common stock of Nellcor for $28.50 per share. The aggregate purchase price of the Nellcor acquisition was approximately $1.9 billion. Nellcor, based in Pleasanton, California, is a developer and manufacturer of products to diagnose, monitor and treat respiratory impaired patients in all healthcare settings. The acquisition has been accounted for by the purchase method and accordingly, the results of Nellcor have been included in the Company's consolidated statements from September 1, 1997. The purchase price has been allocated based upon the estimated fair value of the assets acquired. Identifiable intangible assets are purchased research and development, technology, trademarks and trade names, and the assembled work force. The purchased research and development of $398.3 million, which represents the value of medical devices still in the development stage and not considered to have reached technical feasibility, was written off in the first quarter of fiscal 1998. See Note 2 for additional information. Technology, also referred to as core or base technology and which represents that portion of the existing technology that provides a basis for future generation products as well as existing products, was recorded at $374.2 million and is being amortized on a straight-line basis over 15 years. Other intangible assets of $152.9 million are being amortized on a straight-line basis over 10 to 25 years (weighted average life of 24 years). Goodwill, which represents the excess of acquisition costs over the fair value of the net assets acquired, was $674.6 million at September 30, 1997 and is being amortized on a straight-line basis over 30 years. The amortization of identifiable intangible assets and goodwill directly associated with the Nellcor acquisition was $5.7 million for the quarter ended September 30, 1997. Since the results of Nellcor have only been included in the Company's consolidated results since September, the year-to-date amortization represents only one month of activity. The Company has also recorded a deferred tax liability of approximately $234.6 million, representing the tax effect of timing differences recorded as part of the acquisition. Immediately after the acquisition was consummated, management of the combined Company began to formulate an integration plan to combine Mallinckrodt and Nellcor into one successful company. The objectives of the integration effort were to sustain and nurture the current sales base, develop revenue enhancement opportunities, and identify and implement profit improvements with the impact of these actions to be substantially realized in fiscal 1999. Management is evaluating numerous alternative courses of action, but additional analysis is required to determine the actions to select and the methods of implementation. No assurances can be made as to the amount of profit improvements that will actually be realized; however, substantial management resources will be applied to achieve operating efficiencies from integrating the two companies. The Company expects the integration plan to be completed during fiscal 1998. Upon the approval of exit plans, the resulting costs, which will include involuntary severance of Nellcor employees as a result of work force reduction, relocation of Nellcor employees, and the elimination of contractual obligations of Nellcor which will have no future economic benefit when the plan is complete, will be recognized as a liability assumed as of the acquisition date. The contractual obligations include facility leases and consulting arrangements which are no longer required for software implementation and other projects that may be stopped. Termination and relocation arrangements will be communicated in sufficient detail for the affected Nellcor employee groups to determine the types and amounts of benefits they will receive if terminated or relocated. At September 30, 1997, costs of these exit activities are expected to be significant but are not estimable. No accruals for Nellcor integration actions were recorded during the first quarter. As these accruals are recorded, there will be a corresponding increase in goodwill. Allocations of the purchase price have been determined based upon preliminary estimates of value, and therefore, are subject to change. As refinements are made, goodwill will be adjusted accordingly. The most significant refinement of the purchase price allocation will result from the integration plan being formulated by management. Based upon information currently available regarding actions under consideration, the differences between the preliminary and final allocations are not expected to have a material impact on either the results of operations or financial position. The integration plan will also identify exit activities related to the operations of Mallinckrodt prior to the acquisition of Nellcor. Costs of these exit activities will include severance of Mallinckrodt employees. A liability for these costs will be recognized at the time management commits to the plan and communicates termination arrangements in sufficient detail for the affected Mallinckrodt employee groups to determine the types and amounts of benefits they will receive if terminated. In addition, integration costs of the combined Company, such as transition bonuses and consulting costs, will generally be expensed as incurred. At September 30, 1997, cost of exit activities related to the operations of Mallinckrodt prior to the acquisition of Nellcor plus integration costs of the combined Company, which will be a nonrecurring charge to fiscal 1998 operating results, are expected to be material but are not estimable. During the first quarter, no accruals or expenses were recorded. The following unaudited pro forma financial information presents the combined results of operations of Mallinckrodt and Nellcor as if the acquisition had occurred as of the beginning of fiscal 1997, after giving effect to certain adjustments, including amortization of goodwill, additional depreciation expense, increased interest payments on debt related to the acquisition, reduced interest income from cash utilized to complete the acquisition and the related tax effects. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had Mallinckrodt and Nellcor operated as a combined entity during such periods. Three Months Ended September 30, ------------------ (In millions, except per share amounts) 1997 1996 ------- ------- Net sales $599.2 $612.9 Net income $ 5.9 $ 25.3 Net income per share $ .08 $ .33 The pro forma financial information presented above does not include noncash charges for purchased research and development and the sale of inventory stepped up to fair value at date of acquisition. These charges are included in the actual results of operations for the quarter ended September 30, 1997. See Note 2 for additional information. The Company utilized cash and cash equivalents and borrowed funds to complete the acquisition of Nellcor. The borrowing was obtained through a $2.0 billion credit facility established in July 1997, and amended and restated in September 1997. The credit facility consists of a $400 million term loan and a $1.6 billion five-year revolving credit facility. Under this agreement, interest rates on borrowing are based on the London Interbank Offered Rate (LIBOR) plus a margin dependent on the Company's senior debt rating. 2. Included in operating earnings for the three months ended September 30, 1997 are one-time noncash acquisition-related costs of $398.3 million for the write-off of Nellcor purchased research and development. Of this amount, $396.3 million relates to the healthcare segment and $2.0 million relates to the specialty chemicals segment. The purchased research and development represents the value of numerous new medical devices and other products/technologies in all major product lines (e.g., sensors, monitors and ventilators) that are in various stages of development and have significant technological hurdles remaining as of the transaction date. Medical devices are subjected to significant clinical analysis and screening to validate their safety and efficacy as well as determine their commercial viability. Accordingly, medical devices are considered technologically feasible upon FDA (or international regulatory body) market approval. The steps required to introduce these products include both research and development and clinical and regulatory costs and efforts to be expended over the next one to four years. Clinical and regulatory costs and efforts relate primarily to the costs and efforts associated with receiving FDA approval (and/or international regulatory body approval, where applicable), specifically costs and efforts incurred for clinical trials and preparation of FDA submission and interaction with the FDA (and international regulatory bodies, where applicable). None of these medical devices or products had received FDA (or international regulatory body) market approval as of the acquisition date, and therefore all were identified as in-process research and development that had not reached technological feasibility. No alternative future uses were identified prior to reaching technological feasibility because of the uniqueness of the projects. Additionally, no identifiable alternate markets were established for projects that were in such early stages of development. The same methodology (income approach) was utilized to evaluate purchased research and development as was utilized to evaluate the other Nellcor identifiable intangible assets acquired, except the cost approach was utilized to evaluate the assembled work force. The sale of Nellcor inventories, which were stepped up to fair value in connection with allocation of purchase price, decreased earnings by $18.8 million, $11.7 million net of taxes, for the month of September 1997. A similar inventory-related charge will impact results for the next three months based upon current expectations for sales of the acquired inventory. 3. Included in earnings from continuing operations for the three months ended September 30, 1996 is a one-time research and development expense of $6.0 million, $3.8 million after taxes, resulting from a strategic alliance to develop new magnetic resonance imaging technology. 4. Included in discontinued operations are the results of the animal health segment which was divested June 30, 1997 and the results of Fries & Fries, Inc., a wholly owned subsidiary which owned the Company's 50% interest in Tastemaker, the flavors joint venture with Hercules Incorporated, and which was divested March 31, 1997. 5. On October 6, 1994, Augustine Medical, Inc. (Augustine) commenced a patent infringement litigation against Mallinckrodt Inc. and its wholly owned subsidiary, Mallinckrodt Medical, Inc. (collectively, the Company) in the U.S. District Court for the District of Minnesota. Specifically, Augustine alleged that the Company's sale of all five (5) models of its convective warming blankets infringes certain claims of one or more of its patents. The Company filed counterclaims against Augustine in connection with the above actions alleging unfair competition, antitrust violations, and invalidity of the asserted patents, among other things. The liability phase of the case was tried to a jury in August 1997 and the verdict was that the Company's blankets infringe certain Augustine patents under the doctrine of equivalents, but do not literally infringe the patents. There was also a finding of no willful infringement. On September 22, 1997, the jury awarded damages in the amount of $16.8 million for the period ended September 30, 1997 and the judge put in place an injunction which stopped the Company from manufacturing and selling blankets in the United States. The Company appealed the jury verdicts of liability and damages to the Court of Appeals for the Federal Circuit (a special court for patent appeals that does not involve a jury). The Court of Appeals has stayed the injunction pending the outcome of the Company's appeal, and the Company continues to sell and manufacture blankets in the United States. With the advice of outside counsel, the Company believes there was insufficient evidence of equivalents presented and, consequently, for this and other reasons the verdicts were in error. The Company is working vigorously in the Appeals Court to overturn the verdicts and believes that it has strong arguments that its blankets do not infringe Augustine's patents. Based on all the facts available to management, the Company believes that it is probable that the jury verdict and the trial court injunction will be overturned on appeal. The Company has not recorded an accrual for payment of the damages, because an unfavorable outcome in this litigation is, in management's opinion, reasonably possible but not probable. See Part II, Item 1 "Legal Proceedings" for additional information about this claim by Augustine against the Company. 6. Provisions for income taxes were based on estimated annual effective tax rates for each fiscal year. Excluding the one- time $398.3 million write-off of purchased research and development discussed in Notes 1 and 2, the Company's effective tax rate for the first three months was 36.9 percent, compared to last year's 37.0 percent. 7. The Company is subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities. In addition, the Company is in varying stages of investigation or remediation of alleged or acknowledged contamination at currently or previously owned or operated sites and at off-site locations where its waste was taken for treatment or disposal. Once the Company becomes aware of its potential environmental liability at a particular site, the measurement of the related environmental liabilities to be recorded is based on an evaluation of currently available facts such as the extent and types of hazardous substances at a site, the range of technologies that can be used for remediation, evolving standards of what constitutes acceptable remediation, presently enacted laws and regulations, engineers and environmental specialists' estimates of the range of expected clean-up costs that may be incurred, prior experience in remediation of contaminated sites, and the progress to date on remediation in process. While the current law potentially imposes joint and several liability upon each party at a Superfund site, the Company's contribution to clean up these sites is expected to be limited, given the number of other companies which have also been named as potentially responsible parties and the volumes of waste involved. A reasonable basis for apportionment of costs among responsible parties is determined and the likelihood of contribution by other parties is established. If it is considered probable that the Company will only have to pay its expected share of the total clean-up, the recorded liability reflects the Company's expected share. In determining the probability of contribution, the Company considers the solvency of the parties, whether responsibility is disputed, existence of an allocation agreement, status of current action, and experience to date regarding similar matters. Current information and developments are regularly assessed by the Company, and accruals are adjusted on a quarterly basis, as required, to provide for the expected impact of these environmental matters. The Company has established accruals for matters that are in its view probable and estimable. Based upon information currently available, management believes that existing accruals are sufficient and that it is not reasonably possible at this time that any additional liabilities will result from the resolution of these matters that would have a material adverse effect on the Company's consolidated financial position and results of operations. 8. Earnings per common share were based on the weighted average number of common and common equivalent shares outstanding (73,166,456 and 75,501,070 for the three months ended September 30, 1997 and 1996, respectively). In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently 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 of Statement No. 128 on the calculation of primary and fully diluted earnings is not material for the quarters ended September 30, 1997 and 1996. 9. The components of inventory included the following as of September 30, 1997: (In millions) Raw materials and supplies $192.6 Work in process 68.9 Finished goods 307.4 ------ $568.9 ====== 10. As of September 30, 1997, the Company has authorized and issued 100,000 shares, par value $100, 4 Percent cumulative preferred stock of which 98,330 shares are outstanding. Mallinckrodt also has authorized 1,400,000 shares, par value $1, of Series preferred stock, none of which is outstanding. Shares included in treasury stock were: September 30, June 30, 1997 1997 -------------- -------------- Common stock 14,236,673 14,843,847 4 Percent cumulative preferred stock 1,670 1,670 11. At September 30, 1997, common shares reserved were: Exercise of common stock purchase rights 81,971,675 Exercise of stock options and granting of stock awards 9,092,049 -------------- Total 91,063,724 ============== 12. Supplemental cash flow information for the three months ended September 30 included: (In millions) 1997 1996 -------- -------- Interest paid $12.7 $22.2 Income taxes paid $4.8 $6.4 Noncash investing and financing activities: Assumption of liabilities related to an acquisition $488.5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. [1] Results of Operations General - - ------- The Company recorded a loss from continuing operations and a net loss of $381.4 million, or $5.21 loss per share for the quarter ended September 30, 1997. The loss includes certain noncash charges related to the acquisition of Nellcor which was completed at the end of August 1997. The acquisition-related charges are a one-time $398.3 million write-off of purchased research and development, which had no offsetting tax benefits, and a cost of goods sold charge of $18.8 million, $11.7 million net of taxes, related to the sale of inventories stepped up to fair value. Excluding the noncash charges related to the acquisition, the Company had earnings from continuing operations of $28.6 million, or 39 cents per share. Earnings from continuing operations for the first quarter of last year were $36.6 million, or 48 cents per share. Net earnings for the same quarter last year were $35.4 million, or 47 cents per share, and included a loss of $1.2 million from discontinued operations. Net sales for the quarter were $498.1 million, up 13 percent from the $442.0 million in the same period last year. The first quarter results of operations include one month of sales of Nellcor, which were $70.7 million. Excluding the sales of Nellcor, the Company's net sales would have been 3 percent below the corresponding period of last year. A comparison of sales and operating earnings follows: (In millions) Three Months Ended September 30, -------------------- 1997 1996 -------- ------- Sales - - ----- Healthcare $411.1 $361.7 Specialty chemicals 87.0 80.5 Intersegment sales (.2) -------- ------- $498.1 $442.0 ======== ======= Operating earnings (loss) - - ------------------------- Healthcare $(361.8) $ 67.4 Specialty chemicals 5.0 5.5 Corporate (5.5) (6.6) -------- ------- $(362.3) $ 66.3 ======== ======= Business Segments - - ----------------- Healthcare Three Months Ended Net Sales September 30, -------------------- (In millions) 1997 1996 ------- ------- Imaging agents $177.3 $198.6 Respiratory care 141.8 77.3 Pharmaceutical specialties 92.0 85.8 ------- ------- $411.1 $361.7 ======= ======= Healthcare reported an operating loss for the quarter of $361.8 million which includes Nellcor's results for one month. These results of operations include a $396.3 million write-off of purchased research and development, and an $18.6 million fair value step-up charge related to the sale of inventories. Excluding the impact of Nellcor noncash acquisition-related charges, healthcare operating earnings would have been $53.1 million, which is 21 percent below the $67.4 million reported for the same period last fiscal year. - - -------------------------------------------- [1] "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: With the exception of historical information, the matters discussed in this 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. 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. This industry trend is expected to continue. In response to these market changes, the Company has entered into a seven-year contract with Premier, Inc. (Premier), the largest healthcare purchasing group in the U.S., to supply x-ray contrast media, tracheostomy tubes, temperature monitoring systems, and radiopharmaceuticals and related products. Effective July 1, 1997, Premier named Mallinckrodt a corporate partner, and Mallinckrodt's products will be used preferentially by Premier's 1,650 member hospitals. The seven-year agreement with Premier aligns the Company with the largest healthcare purchasing group in the U.S., representing approximately thirty percent of all x-ray contrast media purchased. The Premier agreement is believed to be the largest contract ever written for contrast media products. Net sales for the first quarter were $411.1 million, an increase of 14 percent over the $361.7 million reported for the same quarter last year. Excluding Nellcor, healthcare sales were $344.5 million. This represents a decline of $17.2 million or 5 percent from the prior year. Imaging agent sales were $177.3 million, which is $21.3 million or 11 percent below the corresponding period last year. This sales decline is primarily attributable to pricing pressures which are expected to continue. Price declines in iodinated contrast media reduced net sales by $33 million and were partially offset by sales volume increases of $12 million. Excluding Nellcor sales for one month, respiratory care had sales of $75.2 million, which is $2.1 million or 3 percent below prior year. The strong U.S. dollar and the lack of sales of the blood gas and electrolyte business divested on September 30, 1996 have negatively affected the year-to-year comparison of respiratory care sales by $5 million and $5.4 million, respectively, partially offset by respiratory therapy and anesthesiology products volume increases of $9 million. Pharmaceutical specialties sales were $92.0 million, a $6.2 million or 7 percent increase over the prior year. This sales increase is attributable to $3 million in acetaminophen (APAP) volume and price improvements and the remainder is associated with dosage narcotics and the Company's acquisition of D.M. Graham Laboratories, Inc. in November 1996. Specialty Chemicals Three Months Ended Net Sales September 30, ------------------- (In millions) 1997 1996 ------ ------ $ 87.0 $ 80.5 ====== ====== Specialty chemicals operating earnings for the quarter declined 9 percent to $5.0 million from $5.5 million for the same period last year. The current year results of operations include one month of results of Aero Systems, which is part of Nellcor. Excluding Aero Systems' acquisition-related charges, the specialty chemicals segment had operating earnings of $7.2 million or 31 percent above last year primarily as a result of benefits derived from cost containment programs in effect. Net sales for the quarter were up 8 percent. After excluding sales of Aero Systems, specialty chemicals sales improved $2.3 million or 3 percent primarily the result of a $3 million volume increase in microelectronics. Corporate Matters - - ----------------- Corporate expenses were $5.5 million, or 17 percent below the $6.6 million reported for the same period last year. The Company's effective tax rate was negatively impacted by the non-deductible write-off of purchased research and development and goodwill amortization directly associated with the August 28, 1997 acquisition of Nellcor. Financial Condition The Company's financial resources are expected to continue to be adequate to support existing businesses. Since June 30, 1997, cash and cash equivalents decreased $683.4 million, primarily as a result of the acquisition of Nellcor common shares outstanding. Operations utilized $20.6 million of cash, while acquisition and capital spending totaled $1,764.9 million. The Company's current ratio at September 30, 1997 was .7:1. Debt as a percentage of invested capital was 65.7 percent. The current ratio has declined to its current level as a result of a reduction in cash and cash equivalents and increase in short-term borrowings to acquire the outstanding shares of common stock of Nellcor. The Company plans to restructure its debt in the near future in order to reduce its reliance on short-term borrowing facilities. On August 28, 1997, the Company acquired Nellcor through an agreement to purchase for cash all the outstanding shares of common stock of Nellcor for $28.50 per share. The aggregate purchase price of the Nellcor acquisition was approximately $1.9 billion. The acquisition was completed utilizing cash and cash equivalents and borrowed funds. The borrowing of approximately $1.1 billion, reported as a current liability, was obtained through a $2.0 billion credit facility established in July 1997, and amended and restated in September 1997. The credit facility consists of a $400 million term loan and a $1.6 billion five-year revolving credit facility. Under this agreement, interest rates on borrowings are based upon the London Interbank Offered Rate, plus a margin dependent on the Company's senior debt rating. At September 30, 1997, the Company has a $550 million private placement commercial paper program. The program is backed by the $1.6 billion five-year U.S. revolving credit facility available until September 2002. At September 30, 1997, no commercial paper borrowings were outstanding. There was $705 million of borrowing outstanding under the U.S. lines of credit at September 30, 1997. Non-U.S. lines of credit totaling $147.7 million were also available and borrowings under these lines amounted to $15.6 million at September 30, 1997. The non-U.S. lines are cancelable at any time. The Company's Board of Directors previously authorized repurchase of 47 million shares of common stock and additional repurchases not to exceed cash outlays of $250 million. Share repurchases have totaled 36.8 million shares, including 240 thousand shares during the three months ended September 30, 1997. Estimated capital spending for the year ending June 30, 1998 is approximately $200 million. ******************** SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Mallinckrodt Inc. - - --------------------------- Registrant By: MICHAEL A. ROCCA By: DOUGLAS A. MCKINNEY ---------------------------- ------------------------ Michael A. Rocca Douglas A. McKinney Senior Vice President and Vice President and Chief Financial Officer Controller Date: June 12, 1998 - -----END PRIVACY-ENHANCED MESSAGE----- -----END PRIVACY-ENHANCED MESSAGE-----