-----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, WE1vdeFBzv/ycFF2JgzukvjtvBZe3oTA0tivfQkgrlBo42UsMggTiKVcVh0II3PY hNEndR1sPKBp6xkj9pvKbA== 0000051396-97-000005.txt : 19970221 0000051396-97-000005.hdr.sgml : 19970221 ACCESSION NUMBER: 0000051396-97-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970211 SROS: CSX SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MALLINCKRODT GROUP INC 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 SEC ACT: 1934 Act SEC FILE NUMBER: 001-00483 FILM NUMBER: 97523498 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: IMCERA GROUP INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: INTERNATIONAL MINERALS & CHEMICAL CORP DATE OF NAME CHANGE: 19900614 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________________________ FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF --- THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1996 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.) 7733 Forsyth Boulevard St. Louis, Missouri 63105-1820 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 314-854-5200 ______________________________ 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. 73,965,042 shares excluding 13,151,247 treasury shares as of December 31, 1996. 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 1996 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 STATEMENT OF OPERATIONS (In millions, except per share amounts) Quarter Ended Six Months Ended December 31, December 31, ---------------- ------------------- 1996 1995 1996 1995 ------- ------- -------- --------- Net sales $ 571.1 $ 528.2 $1,112.5 $1,020.3 Operating costs and expenses: Cost of goods sold 307.9 289.1 604.2 557.4 Selling, administrative and general expenses 151.4 141.0 297.8 279.9 Research and development expenses 34.2 31.5 70.2 55.6 Other operating (income) expense, net 1.0 (4.2) (2.5) (7.4) -------- ------- -------- -------- Total operating costs and expenses 494.5 457.4 969.7 885.5 -------- ------- -------- -------- Operating earnings 76.6 70.8 142.8 134.8 Interest income and other nonoperating income (expense), net 6.4 (.5) 10.9 (.9) Interest expense (11.8) (14.7) (25.7) (28.6) -------- ------- -------- ------- Earnings from continuing operations before income taxes 71.2 55.6 128.0 105.3 Income tax provision 26.0 20.9 47.0 39.5 -------- ------- -------- ------- Earnings from continuing operations 45.2 34.7 81.0 65.8 Discontinued operations ( 1.7) 22.6 (2.1) 30.7 -------- ------- -------- ------- Net earnings 43.5 57.3 78.9 96.5 Preferred stock dividends (.1) (.1) (.2) (.2) -------- ------- -------- ------- Available for common shareholders $ 43.4 $ 57.2 $ 78.7 $ 96.3 ======== ======= ======== ======= Earnings per common share: Continuing operations $.59 $.45 $1.07 $.85 Discontinued operations (.02) .30 (.03) .40 -------- ------- -------- ------- Net earnings $.57 $.75 $1.04 $1.25 ======== ======= ======== ======= (See Notes to Condensed Consolidated Financial Statements on pages 5 and 6.)
CONDENSED CONSOLIDATED BALANCE SHEET (In millions, except share and per share amounts) December 31, June 30, 1996 1996 ------------ ------------ Assets Current assets: Cash and cash equivalents $ 551.0 $ 546.2 Trade receivables, less allowances of $14.8 at December 31 and $12.8 at June 30 453.9 453.9 Inventories 473.3 470.2 Deferred income taxes 42.3 42.9 Other current assets 64.5 57.7 ------------ ------------ Total current assets 1,585.0 1,570.9 Investments and long-term receivables, less allowances of $8.2 at December 31 and $8.1 at June 30 41.5 39.3 Property, plant and equipment, net 1,042.5 1,036.4 Intangible assets 651.8 647.5 Net noncurrent assets of discontinued operations 115.2 108.5 Deferred income taxes 1.4 1.1 ------------ ------------ Total assets $3,437.4 $3,403.7 ============ ============ Liabilities and Shareholders' Equity Current liabilities: Short-term debt $ 122.2 $ 112.2 Accounts payable 172.3 194.6 Accrued liabilities 310.1 312.3 Income taxes payable 49.8 38.5 Net current liabilities of discontinued operations 551.3 550.9 Deferred income taxes 3.3 3.3 ------------ ------------ Total current liabilities 1,209.0 1,211.8 Long-term debt, less current maturities 572.1 575.8 Deferred income taxes 95.8 97.9 Postretirement benefits 162.2 155.9 Other noncurrent liabilities and deferred credits 117.1 130.1 ------------ ------------ Total liabilities 2,156.2 2,171.5 ------------ ------------ 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 as of December 31 and June 30 87.1 87.1 Capital in excess of par value 298.4 283.5 Reinvested earnings 1,205.8 1,150.7 Foreign currency translation 1.0 (15.3) Treasury stock, at cost (322.1) (284.8) ------------ ------------ Total shareholders' equity 1,281.2 1,232.2 ------------ ------------ Total liabilities and shareholders' equity $3,437.4 $3,403.7 ============ ============ (See Notes to Condensed Consolidated Financial Statements on pages 5 and 6.)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (In millions) Six Months Ended December 31, ---------------- 1996 1995 ------- ------- Cash Flows - Operating Activities Net earnings $ 78.9 $ 96.5 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 77.8 68.2 Postretirement benefits 6.3 6.0 Undistributed equity in earnings of joint venture (9.6) (9.5) Deferred income taxes (2.6) 5.1 Gains on disposals of assets (.7) (53.7) ------- ------- 150.1 112.6 Changes in operating assets and liabilities: Trade receivables (4.2) (36.7) Inventories (2.3) (49.2) Other current assets (5.7) 1.9 Accounts payable, accrued liabilities and income taxes payable, net (19.2) 13.6 Net current liabilities of discontinued operations .3 20.2 Other noncurrent liabilities and deferred credits (14.3) 40.4 Other, net (3.5) (7.8) ------- ------- Net cash provided by operating activities 101.2 95.0 ------- ------- Cash Flows - Investing Activities Capital expenditures (56.4) (77.6) Acquisition spending (13.2) (81.0) Proceeds from asset disposals 35.2 118.8 Other, net 5.6 27.6 ------- ------- Net cash used by investing activities (28.8) (12.2) ------- ------- Cash Flows - Financing Activities Increase (decrease) in short-term debt 7.4 (56.4) Proceeds from long-term debt 196.5 Payments on long-term debt (6.8) (103.3) Issuance of Mallinckrodt common stock 21.6 9.3 Acquisition of treasury stock (66.0) (90.9) Dividends paid (23.8) (22.6) ------- ------ Net cash used by financing activities (67.6) (67.4) ------- ------- Increase in cash and cash equivalents 4.8 15.4 Cash and cash equivalents at beginning of period 546.2 60.9 ------- ------- Cash and cash equivalents at end of period $551.0 $ 76.3 ======= ======= (See Notes to Condensed Consolidated Financial Statements on pages 5 and 6.)
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (In millions, except per share amounts) 1996 1995 -------- --------- 4 Percent cumulative preferred stock: Balance at June 30 and December 31 $ 11.0 $ 11.0 Common stock: Balance at June 30 and December 31 87.1 87.1 Capital in excess of par value: Balance at June 30 283.5 274.1 Issuance of stock related to an acquisition 10.0 Stock options exercised 4.9 3.0 -------- ---------- Balance at December 31 298.4 277.1 -------- ---------- Reinvested earnings: Balance at June 30 1,150.7 984.5 Net earnings 78.9 96.5 Dividends: 4 Percent cumulative preferred stock ($2.00 per share) (.2) (.2) Common stock ($.32 per share in 1996 and $.295 per share in 1995) (23.6) (22.4) -------- --------- Balance at December 31 1,205.8 1,058.4 -------- --------- Foreign currency translation: Balance at June 30 (15.3) (9.3) Translation adjustment 16.3 (10.9) -------- --------- Balance at December 31 1.0 (20.2) -------- --------- Treasury stock: Balance at June 30 (284.8) (175.9) Purchase of common stock (66.0) (90.9) Stock options exercised 16.7 6.3 Issuance of stock related to an acquisition 12.0 -------- --------- Balance at December 31 (322.1) (260.5) -------- --------- Total shareholders' equity $1,281.2 $1,152.9 ======== ========= (See Notes to Condensed Consolidated Financial Statements on pages 5 and 6.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. On January 29, 1997, the Company's Board of Directors approved a formal plan to divest Fries & Fries, Inc., a wholly owned subsidiary which owns a fifty percent interest in Tastemaker, which is the Company's flavors joint venture with Hercules Incorporated. Accordingly, Fries & Fries, Inc.'s net after tax losses of $1.1 million and $.8 million for the quarter and six months ended December 31, 1996, respectively, and net after tax earnings of $3.6 million and $8.2 million for the quarter and six months ended December 31, 1995, respectively, have been reclassified as discontinued operations. Fries & Fries, Inc.'s $510 million of short-term debt which was outstanding as of January 29, 1997, will be assumed as part of the divestiture. Interest expense related to the debt recorded by Fries & Fries, Inc. and to be assumed by the buyer is included in discontinued operations and totals $4.7 million, net of tax and $9.5 million, net of tax for the quarter and six months ended December 31, 1996, respectively. The Company anticipates realizing a significant gain on this transaction, net of costs associated with divestiture, but cannot yet quantify the amount. 2. Included in earnings from continuing operations for the six months ended December 31, 1996, is a one-time research and development expense 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. 3. Results for the quarter and six months ended December 31, 1995 included a non-cash charge for write-off of purchased research and development of $3.7 million, $2.3 million after taxes, or 3 cents per share, relating to the acquisition of Syntro Corporation. The charge was recorded as research and development expenses. 4. Included in discontinued operations for the quarter and six months ended December 31, 1995, are earnings, net of taxes, from the divested feed ingredients business of $1.0 million and $5.5 million, respectively. Other principal factors affecting discontinued operations were an after tax gain of $34.4 million on the sale of the feed ingredients business and an after tax provision for additional environmental costs of $15.6 million. 5. Provisions for income taxes were based on estimated annual effective tax rates for each fiscal year. The Company's effective tax rate for the first six months was 36.7 percent, compared to last year's 37.5 percent. This decrease reflects an earnings mix toward lower statutory tax rate jurisdictions and the utilization of certain foreign net operating losses. 6. 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 clean-ups 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 has established accruals for matters that are in its view probable and reasonably estimable. Based on information presently available, management believes that existing accruals are sufficient to satisfy any known environmental liabilities. Further, any additional liability that may ultimately result from the resolution of these matters is not expected to have a material effect on Mallinckrodt's business, financial condition or results of operations. 7. Earnings per common share were based on the weighted average number of common and common equivalent shares outstanding (75,642,495 and 77,161,246 for the six months ended December 31, 1996 and 1995, and 75,795,411 and 76,397,750 for the quarters ended December 31, 1996 and 1995, respectively). 8. The components of inventory included the following as of December 31, 1996: (In millions) Raw materials and supplies $139.5 Work in process 98.0 Finished goods 235.8 ------ $473.3 ====== 9. As of December 31, 1996, 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: December 31, June 30, 1996 1996 ------------ ------------ Common stock 13,151,247 12,835,721 4 Percent cumulative preferred stock 1,670 1,670 10. At December 31, 1996, common shares reserved were: Exercise of common stock purchase rights 83,154,258 Exercise of stock options and granting of stock awards 9,189,216 ---------- Total 92,343,474 ========== 11. Supplemental cash flow information for the six months ended December 31 included: (In millions) 1996 1995 ------ ------ Interest paid $38.0 $21.4 Income taxes paid $34.8 $30.2 Non-cash investing and financing activities: Issuance of stock related to an acquisition $22.0 Assumption of liabilities related to acquisitions $4.7 $6.2 12. The Company has guaranteed repayment under a $600 million revolving credit facility established in January 1997 for its Tastemaker joint venture. Borrowings under the facility and the Company's guarantee are secured by investments purchased with the loan proceeds. At January 30, 1997, $500 million was outstanding under the revolving credit facility. The guarantee will be released concurrent with the divestiture of Tastemaker. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (1) Results of Operations General - ------- Earnings from continuing operations for the second quarter ended December 31, 1996 were $45.2 million, or 59 cents per share. This represents a 31 percent increase in per-share earnings from continuing operations compared with $34.7 million, or 45 cents per share, during the same period a year ago. Prior year results included a non-cash charge of $3.7 million, $2.3 million after taxes, or 3 cents per share, associated with the acquisition of Syntro Corporation. Excluding the prior year charge, earnings per share from continuing operations increased 23 percent. Net sales for the quarter were up 8 percent to $571.1 million, compared to $528.2 __________________________________ [1] The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the forward-looking statements. Certain statements contained herein are forward-looking, particularly the statements appearing under Part I. Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Part II. Item 1, "Legal Proceedings." Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include but are not limited to the following: the effect of business and economic conditions; constraints on supplies and/or changes in the cost of raw materials used in the manufacturing of certain of the Company's products; capacity 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; the effects of, and changes in, trade, monetary and fiscal policies, laws and regulations; risks associated with investments and operations in foreign jurisdictions, including those related to foreign regulatory requirements, exchange rate fluctuations, and local political, social, and economic factors; changes in governmental laws and regulations affecting environmental compliance, taxes, and other matters impacting the Company; the costs and effects of legal and administrative proceedings, including the environmental proceedings involving the Company; the ability of the Company to develop and execute effective marketing and sales strategies for its products; the potential erosion of prices for certain of the Company's products as a result of increased competition in its markets; and the risk factors reported from time to time in the Company's SEC reports. million a year earlier. Net earnings for the second quarter were $43.5 million, or 57 cents per share, compared with $57.3 million, or 75 cents per share, during the same period a year ago. Results for Fries & Fries, Inc., a wholly owned subsidiary of the Company, have been accounted for as a discontinued operation and, accordingly, prior year results have been restated. Fries & Fries, Inc. owns the Company's fifty percent interest in the Tastemaker flavors joint venture with Hercules Incorporated. Prior year net earnings also included a $34.4 million discontinued operations after tax gain resulting from the sale of the feed ingredients business in the second quarter, partially offset by a second quarter $15.6 million after tax adjustment of provisions for environmental costs related to discontinued operations. For the six months, earnings from continuing operations were $81.0 million, or $1.07 per share, compared to $65.8 million, or 85 cents per share during the same period a year ago. Current year results reflect a one-time research and development expense 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, while the prior year reflects the charge associated with the Syntro Corporation acquisition discussed above. Net sales for the first half were up 9 percent to $1.1 billion compared to $1.0 billion a year ago. Net earnings for the six months were $78.9 million or $1.04 per share, compared with $96.5 million or $1.25 per share for the same prior year period. A comparison of sales and operating earnings follows: (In millions) Quarter Ended Six Months Ended December 31, December 31, ---------------- ------------------- 1996 1995 1996 1995 ------- ------- ------ ------ Sales - ----- Human healthcare $ 372.4 $ 331.9 $ 734.1 $ 648.0 Specialty chemicals 80.6 80.3 161.1 155.4 Animal health 118.1 116.0 217.5 217.0 Intersegment sales (.2) (.1) -------- -------- --------- --------- $ 571.1 $ 528.2 $1,112.5 $1,020.3 ======== ======== ========= ========= Operating Earnings - ------------------ Human healthcare $ 68.4 $ 68.4 $ 135.8 $ 130.4 Specialty chemicals 6.0 5.5 11.5 10.1 Animal health 9.6 4.2 9.5 9.2 Corporate (7.4) (7.1) (14.0) (14.6) Eliminations (.2) (.3) -------- -------- --------- --------- $ 76.6 $ 70.8 $ 142.8 $ 134.8 ======== ======== ========= ========= Business Segments - ----------------- Human Healthcare Net Sales Quarter Ended Six Months Ended (In millions) December 31, December 31, ---------------- ------------------- 1996 1995 1996 1995 ------- -------- --------- -------- Imaging agents $ 201.2 $ 166.4 $ 399.8 $ 327.6 Critical care products 79.5 79.2 156.8 156.1 Pharmaceutical specialties 91.7 86.3 177.5 164.3 ------- -------- --------- -------- $ 372.4 $ 331.9 $ 734.1 $ 648.0 ======= ======== ========= =========
Human healthcare's operating earnings for the current quarter were equal to the prior year's second quarter at $68.4 million. Operating earnings for the six months were $135.8 million, or 4 percent greater than the corresponding prior year results. Excluding a first quarter one-time research and development expense of $6.0 million incurred in conjunction with a strategic alliance to develop new magnetic resonance imaging technology, operating earnings for the six months increased 9 percent over the corresponding prior year results. Net sales increased 12 percent and 13 percent compared to the corresponding prior year quarter and six months, respectively. Imaging agent sales increased 21 percent and 22 percent above the quarter and first half of the prior year, respectively. Iodinated contrast media market share increases in the U.S. and the acquisition of Liebel-Flarsheim in January 1996 were the major sales growth contributors. The increased sales volume was partially offset by lower contrast media selling prices. Critical care products experienced increased demand for respiratory therapy products and HemoCue blood hemoglobin and glucose analysis systems in both the three month and six month periods of the current year as compared with the corresponding periods in the prior year. These sales gains were nearly offset by the lower revenue associated with the blood gas and electrolyte business which was sold as of September 30, 1996. Sales of pharmaceutical specialties grew 6 percent and 8 percent compared to the three month and six month periods of the prior year, respectively. The sales growth, which occurred in the narcotics and peptides product lines, was principally the result of volume increases. In November 1996, the Company acquired D.M. Graham Laboratories, Inc., a contract manufacturer of dosage pharmaceuticals licensed to produce a variety of medicinal narcotics. This acquisition is a 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 FS069 (second-generation ultrasound imaging agent). As a result of this and earlier agreements, Mallinckrodt has marketing rights for Albunex and FS069 throughout the world except Japan, South Korea and Taiwan. Specialty Chemicals Net Sales Quarter Ended Six Months Ended (In millions) December 31, December 31, ---------------- ------------------- 1996 1995 1996 1995 ------ ------ ------ ------ $ 80.6 $ 80.3 $161.1 $155.4 ====== ====== ====== ====== Specialty chemicals' operating earnings were $6.0 million and $11.5 million for the second quarter and six months ended December 31, 1996, respectively, representing increases of 9 percent and 14 percent over the same prior year periods. Compared with corresponding prior year periods, sales were relatively flat for the second quarter, but up 4 percent for the first six months on the strength of volume growth of plastic additives. Animal Health Net Sales Quarter Ended Six Months Ended (In millions) December 31, December 31, ---------------- ------------------- 1996 1995 1996 1995 ------ ------ ------ ------ $118.1 $116.0 $217.5 $217.0 ====== ====== ====== ====== Animal health's operating earnings were $9.6 million and $9.5 million for the second quarter and six months, respectively. These results represent a 129 percent and 3 percent increase over the same prior year periods. Sales revenue for the second quarter and first six months, when compared to the corresponding periods of the prior year, benefited from increases in Asia as a result of a new distribution agreement entered into in January 1996, but were negatively impacted by lower sales volume and higher discounts in North America. Second quarter and first half operating earnings when compared to prior year results benefited from improved manufacturing performance and a one-time prior year pre-tax charge of $3.7 million for purchased research and development related to the October 1995 acquisition of Syntro Corporation, offset by higher operating expenses. Corporate Matters - ----------------- Corporate expense is up 4 percent for the second quarter, but down 4 percent for the first half of the year compared to the respective prior year periods. The Company's effective tax rate for the six months is 36.7 percent, compared to last year's 37.5 percent. This rate decrease reflects an earnings mix toward lower statutory rate jurisdictions and the utilization of certain foreign net operating losses. Financial Condition The Company's financial resources are expected to continue to be adequate to support existing businesses and fund new opportunities. Since June 30, 1996, cash and cash equivalents increased $4.8 million. Operations provided $101.2 million of cash, while acquisition and capital spending totaled $69.6 million. The Company received $35.2 million in proceeds from asset disposals, primarily from the blood gas and electrolyte business. The Company's current ratio at December 31, 1996, was 1.3:1. Debt as a percentage of invested capital was 35 percent. The Company's Board of Directors previously authorized repurchase of a total of 42 million shares of its common stock. Thirty-four and a half million shares have been repurchased under this authorization, 1.5 million during the six months ended December 31, 1996. In September 1995 and November 1995, the Company issued $100 million of 6.75 percent notes due September 15, 2005, and $100 million of 6.5 percent notes due November 15, 2007, respectively, from the $250 million shelf registration statement filed in February of 1995. As of December 31, 1996, $50 million of securities under this shelf and $50 million of securities under a shelf registration statement filed with the SEC in 1992 remain unissued. The Company has a $550 million private-placement commercial paper program. This program is backed by $550 million of U.S. lines of credit, available until May 2001. At December 31, 1996, no amounts were outstanding under the commercial paper program or the credit agreement. In addition, Fries & Fries, Inc., a wholly-owned subsidiary, has a $600 million committed line of credit available until May 1997, which is guaranteed by the Company. Borrowings under the credit agreement were $600 million at December 31, 1996. Non-U.S. lines of credit totaling $199.4 million were also available and borrowings under these lines amounted to $25.0 million at December 31, 1996. The non-U.S. lines are cancelable at any time. Estimated capital spending for the year ending June 30, 1997, is approximately $140 million. PART II. OTHER INFORMATION Item 1. Legal Proceedings. 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 clean-ups 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 has established accruals for matters that are in its view probable and reasonably estimable. Based on information presently available, management believes that existing accruals are sufficient to satisfy any known environmental liabilities. Further, any additional liability that may ultimately result from the resolution of these matters is not expected to have a material effect on the Company's business, financial condition or results of operations. There have not been any material developments in the legal proceedings previously reported in the Company's Form 10-K for its fiscal year ended June 30, 1996, as amended by the Company's report on Form 10-Q for its fiscal quarter ended September 30, 1996. Item 2. Changes in Securities. On November 20, 1996, the Company acquired all of the issued and outstanding voting capital stock of D.M. Graham Laboratories, Inc. ("Graham Laboratories"). In exchange, the Company issued a total of 503,001 shares of its Common Stock, par value $1.00 per share, to the seven then current stockholders of Graham Laboratories. The Company issued its shares in reliance on the exemption from federal securities registration set forth in Section 4(2) of the Securities Act of 1933, as amended. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. See Mallinckrodt's Form 10-Q for the three months ended September 30, 1996, for information about the Annual Meeting of Shareholders on October 16, 1996. Item 5. Other Information. Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 10.25 Executive Incentive Compensation Agreement with Paul D. Cottone dated as of October 24, 1996.* 10.26 Severance and Separation Agreement with Paul D. Cottone dated as of October 24, 1996.* 11.1 Primary earnings per share computation for the six months ended December 31, 1996 and 1995. 11.2 Fully diluted earnings per share computation for the six months ended December 31, 1996 and 1995. 11.3 Primary earnings per share computation for the quarters ended December 31, 1996 and 1995. 11.4 Fully diluted earnings per share computation for the quarters ended December 31, 1996 and 1995. 27 Financial Data Schedule. ___________________ * 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 October 16, 1996, under Item 5 regarding name change from Mallinckrodt Group Inc. to Mallinckrodt Inc. - Report dated October 17, 1996, under Item 5 regarding increased quarterly dividend and the election of four directors at the Company's Annual Shareholders Meeting. - Report dated October 24, 1996, under Item 5 regarding Molecular Biosystems, Inc. and Mallinckrodt Inc. joint announcement to file for PMA for next generation ultrasound imaging agent. - Report dated December 9, 1996, under Item 5 regarding approval to market GastroMARK in the U.S. - Report dated December 16, 1996, under Item 5 regarding expanded marketing rights for FS069, Molecular Biosystems, Inc.'s second generation ultrasound imaging agent. - Report dated February 6, 1997, under Item 5 regarding the divestiture of Tastemaker, the Company's flavors joint venture. *************** 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 Chief Financial Officer Controller Date: February 10, 1997 EX-11.1 2 Exhibit 11.1 EARNINGS PER SHARE PRIMARY COMPUTATION ($ in millions, except share and per share amounts) Six Months Ended Deceber 31, --------------------- 1996 1995 -------- ------- Basis for computation of earnings per common and common equivalent shares: Earnings from continuing operations $ 81.0 $ 65.8 Deduct dividends on 4 Percent cumulative preferred stock (.2) (.2) -------- ------- Earnings from continuing operations available to common shareholders 80.8 65.6 Discontinued operations (2.1) 30.7 -------- ------- Available for common shareholders $ 78.7 $ 96.3 ======== ======= Number of shares: Weighted average shares outstanding 74,173,030 76,098,488 Shares issuable upon exercise of stock options,net of shares assumed to be repurchased 1,469,465 1,062,758 ---------- ---------- 75,642,495 77,161,246 ========== ========== Earnings per common share: Continuing operations $ 1.07 $ .85 Discontinued operations (.03) .40 ------- ------ Net earnings $ 1.04 $ 1.25 ======= ====== EX-11.2 3 Exhibit 11.2 EARNINGS PER SHARE FULLY DILUTED COMPUTATION ($ in millions, except share and per share amounts) Six Months Ended December 31, --------------------- 1996 1995 ------- ------ Basis for computation of earnings per common and common equivalent shares: Earnings from continuing operations $ 81.0 $ 65.8 Deduct dividends on 4 Percent cumulative preferred stock (.2) (.2) -------- ------- Earnings from continuing operations available to common shareholders 80.8 65.6 Discontinued operations (2.1) 30.7 -------- ------- Available for common shareholders $ 78.7 $ 96.3 ======== ======= Number of shares: Weighted average shares outstanding 74,173,030 76,098,488 Shares issuable upon exercise of stock options,net of shares assumed to be repurchased 1,772,927 1,181,659 ---------- ---------- 75,945,957 77,280,147 ========== ========== Earnings per common share: Continuing operations $ 1.07 $ .85 Discontinued operations (.03) .40 ------- ----- Net earnings $ 1.04 $ 1.25 ======= ====== EX-11.3 4 Exhibit 11.3 EARNINGS PER SHARE PRIMARY COMPUTATION ($ in millions, except share and per share amounts) Quarter Ended December 31, --------------------- 1996 1995 -------- ------- Basis for computation of earnings per common and common equivalent shares: Earnings from continuing operations $ 45.2 $ 34.7 Deduct dividends on 4 Percent cumulative preferred stock (.1) (.1) ------- ------- Earnings from continuing operations available to common shareholders 45.1 34.6 Discontinued operations (1.7) 22.6 ------- ------- Available for common shareholders $ 43.4 $ 57.2 ======= ======= Number of shares: Weighted average shares outstanding 74,114,694 75,484,367 Shares issuable upon exercise of stock options,net of shares assumed to be repurchased 1,680,717 913,383 ---------- ---------- 75,795,411 76,397,750 ========== ========== Earnings per common share: Continuing operations $ .59 $ .45 Discontinued operations (.02) .30 ------ ----- Net earnings $ .57 $ .75 ====== ===== EX-11.4 5 Exhibit 11.4 EARNINGS PER SHARE FULLY DILUTED COMPUTATION ($ in millions, except share and per share amounts) Quarter Ended December 31, -------------------- 1996 1995 ------ ------ Basis for computation of earnings per common and common equivalent shares: Earnings from continuing operations $ 45.2 $ 34.7 Deduct dividends on 4 Percent cumulative preferred stock (.1) (.1) ------- ------- Earnings from continuing operations available to common shareholders 45.1 34.6 Discontinued operations (1.7) 22.6 ------- ------- Available for common shareholders $ 43.4 $ 57.2 ======= ======= Number of shares: Weighted average shares outstanding 74,114,694 75,484,367 Shares issuable upon exercise of stock options, net of shares assumed to be repurchased 1,772,926 1,181,659 ---------- ---------- 75,887,620 76,666,026 ========== ========== Earnings per common share: Continuing operations $ .59 $ .45 Discontinued operations (.02) .30 ------ ------ Net earnings $ .57 $ .75 ====== ====== EX-10.25 6 Exhibit 10.25 EXECUTIVE INCENTIVE COMPENSATION AGREEMENT This Executive Incentive Compensation Agreement ("Agreement") is made effective as of this 24th day of October, 1996, between Mallinckrodt Inc. (the "Company") and Paul D. Cottone (the "Executive"). WHEREAS, Executive is currently an executive employee of the Company's veterinary and animal products operations known as Mallinckrodt Veterinary, Inc., i.e. hereinafter the "Business", who is employed as its President and Chief Executive Officer and has significant management responsibilities in the operation of that Business; WHEREAS, the Company has determined to divest itself of the Business by selling or otherwise disposing of it; WHEREAS, the Company recognizes that Executive is a valuable resource to the Business and has determined that it requires the continued service of the Executive to maximize the proceeds to be realized from Divestiture of the Business; WHEREAS, Executive is willing to remain as an employee of the Business and the Company, as the Company determines, in exchange for enhanced compensation to be paid under certain circumstances; NOW, THEREFORE, in exchange for the promises and covenants described below and for other valid consideration, whose receipt and sufficiency is acknowledged, the Company and the Executive agree as follows: 1. Continued Employment. (a) The Company agrees to continue to employ Executive, and the Executive agrees to remain employed by the Company for such period as the Company determines appropriate. Executive shall continue to use his best efforts to perform his duties as President and Chief Executive Officer of the Business and such other duties as the Company directs him/her to perform. While employed by the Company, Executive agrees to devote his/her full business time, energy and attention exclusively to the affairs of the Company and performance of duties allocated to him. (b) Executive agrees to use his best efforts to cooperate with the Company, and to perform such tasks as allocated to him, to divest the Business, to maximize the value to be obtained by the Company upon the Business' Divestiture, to facilitate the Divestiture and to retain and motivate employees of the Business during the Divestiture process. 2. Compensation While an Employee. While an employee of the Business, Executive shall receive his annual base salary as it exists on the date of this Agreement and as established from the Company from time to time. Executive shall be eligible to continue to participate on a reasonable basis: (a) In any annual incentive, stock option, long-term incentive performance and other compensation plans and programs of the Company which are applicable to his position in such manner as established by the Company; (b) In all employee benefit plans and programs in accordance with their terms (including, but not limited to, medical, life and accident insurance, disability, retirement, investment and vacation plans) and perquisites applicable to his position and as may be established or maintained by the Company. All compensation, incentives and employee benefits shall be provided to Executive in accordance with the terms of those programs as administered by the Company. 3. Divestiture Incentive Compensation. If the Executive remains employed by the Company through the Closing Date, the Executive will be paid the compensations described below: (a) Retention Incentive Payment. The Company will pay to Executive an amount equal to one (1) time his/her annual base salary rate in effect on the Closing Date. This amount will be paid in cash to the Executive within 30 days following the Closing Date. (b) Sale Incentive Bonus. Immediately after the Closing Date, the Company will determine a Sale Incentive Bonus Pool as described below based upon the Value of Proceeds received by the Company, during the period commencing with the date of this Agreement and ending on the Closing Date, for the Business upon its Divestiture. The Company will then pay to Executive a Sale Incentive Bonus as described below based upon the size of the Bonus Pool established. Value of Proceeds Received Sale Incentive Amount of Executive's or Divestiture of the Bonus Pool Sale Incentive Bonus Business - -------------------------- -------------- --------------------- (Dollars in Millions) Up to $400 1/2% of value of 35% of Sale Incentive proceeds Bonus Pool $400-plus $2M + 4% of value of proceeds received over $400 The amount of the Executive's Sale Incentive Bonus will be paid to Executive in cash within sixty (60) days of the Closing Date. (c) Attainment of Fiscal Year 1997 Performance Objectives. Executive agrees that a critical aspect of his duties during the Divestiture process is management of the Business to attain its performance objectives under the Company's Management Incentive Compensation Plan ("MICP") for the fiscal year starting July 1, 1996 ("FY 97"). Accordingly, if the Closing Date occurs during FY97 and the Business meets its performance objectives or is on target when the Business is sold, then Executive shall receive, in lieu of the amounts that he would have otherwise been eligible to receive: (i) Two Hundred Percent (200%) of the payment that he would have otherwise been entitled to receive under the MICP for FY 97 and (ii) payment of amounts due him under the provisions of the Company's Long Term Incentive Plan for Senior Management without reduction or proration by reason of Divestiture of the Business or termination of the Executive's employment (unless terminated as described under subparagraph 4(b)) during FY97. (I) Entitlement to MICP and Long Term Incentive Plan payments, and time and manner of their payment, will otherwise be determined under the MICP for FY 97 and Long Term Incentive Plan in accordance with the MICP and Long Term Incentive Plan terms. (II) If the Business is divested prior to June 30, 1997, determination of the level of MICP entitlement will be evaluated based upon performance against objectives as of the Closing Date. If the Compensation Committee of the Board of Directors of Mallinckrodt Inc. concludes, in its judgment, that the Business would have attained 100% of its performance objectives but for the shortened performance period, the Business will be considered to have attained 100% of its objectives. (d) Definitions. For purposes of this Agreement, the terms used herein shall have the following meaning unless otherwise clearly provided. (I) "Closing Date" means the date on which the last of any and all transactions which constitute the Divestiture of the Business is closed, as such date is determined by the Company in its sole and exclusive judgment. None of the incentives described in paragraph 3 will be payable unless this date and Divestiture occurs on or before June 30, 1997, or if active negotiation with third parties for divestiture of the Business is ongoing at June 30, 1997 such later date as the Company in its sole and exclusive judgment may establish. (II) "Divestiture" means all transactions for the sale, disposition, exchange or other transfer of all or substantially all of the ownership of (I) the Business or (II) any entities owned directly or indirectly by, or affiliated with,allinckrodt Inc. or Mallinckrodt Veterinary, Inc. which own the Business, is transferred to persons or entities other than the Company and its affiliates. (III) "Value of Proceeds" means the sum of all amounts of cash received by the Company from all Divestiture transactions as defined above including the Fair Market Value of: (I) all real or personal, tangible or intangible property or rights to property of any type, negotiable or nonnegotiable securities of any type, whether registered or not under any security laws, and any rights to receive any other property and (II) all indebtedness of any type issued by any purchaser or entity which acquires all or part of the Business which sums of indebtedness are received or receivable by, paid or payable to the Company. Proceeds received by the Company or Business for the sale or deposition of assets of the Business in the ordinary course of its operations shall not be included in the Value of Proceeds. (IV) Fair Market Value. Shall be the value assigned by the Company to the Value of Proceeds received by the Company as determined by the Company in its sole and exclusive judgment. (V) Use of male gender terms, e.g. "he" or "him" shall be interpreted to also include the female gender if appropriate. (e) Treatment of Payments for Employee Benefit Plan Purposes. Executive agrees that all amounts described in paragraph 3, except for 50% of the amount of MICP payment, if any, described in subparagraph 3(c)(i), shall not be considered to be compensation, base compensation, earnings, annual incentive or bonus payments for purposes of determining Executive's accrued benefit or any other benefit entitlements under the Mallinckrodt Inc. Retirement Plan, the Investment Plan for Employees of Mallinckrodt Inc. or any other employee benefit or compensation plan or policy of the Company and any of its affiliates. 4. Termination of Executive's Employment. The following shall apply upon termination of Executive's employment with the Company or any of its affiliates. (a) Termination for Any Reason. If Executive's employment with the Company or any of its affiliates terminates for any reason and, unless otherwise provided pursuant to this or any other agreement with the Executive specifically concerning payment of compensation upon termination of employment, he shall only receive the compensations and benefits due to him pursuant to the compensation and employee benefit plans and policies of the Company described in paragraph 2. (b) Termination for Cause or Resignation. If prior to the Closing Date or at any time prior to payment of sums due under paragraph 3 (except for sums whose payment has been deferred), Executive resigns his employment with the Company or any of its affiliates for any reason or Executive's employment with the Company or any of its affiliates is terminated for Cause, Executive shall not be entitled to receive any amounts described in paragraph 3 which have not yet been paid to him. Cause shall be defined as: (I) The Executive's neglect of, or failure to satisfactorily or substantially perform, any of the duties of his position and any other duties assigned to him by the Company unless such failure is due to physical or mental incapacity; or (II) Any act or omission to act of the Executive which is determined to be inconsistent with the best interests of the Company or which has the effect of embarrassing or injuring the Company, its business or business relationships. For purposes of this Agreement, whether Executive has been terminated for Cause shall be determined in the sole and exclusive judgment of the Chairman of the Board of the Company and that determination shall be binding and final on all parties. In the event Executive is terminated for Cause, the Executive shall have an opportunity to meet with the Chairman of the Board before a final determination is made. (c) Termination Prior To The Closing Date For Reasons Other Than Cause or Resignation. If prior to the Closing Date Executive's employment with the Company or any of its affiliates terminates for any reason other than Cause or resignation, (e.g. because of death, disability, Divestiture of a part of the Business by which Executive is employed), Executive shall receive payment of the amounts described in paragraph 3, if any, determined as if he remained employed through the Closing Date. 5. Deferral Provisions. Any amounts payable under paragraph 3(c) with respect to the Company's MICP will be paid or deferred pursuant to elections previously made by Executive under that Plan, if any. Payment of any other amounts which become payable to Executive under paragraph 3 may be deferred until a later date. If Executive wishes to defer all such payments, Executive must elect, simultaneously with the execution of this Agreement, to defer them in the manner required by the Company. Any deferral election shall be irrevocable. The provisions of the MICP applicable to payments deferred thereunder will govern such deferrals. All sums deferred shall be credited with interest at the prime rate, compounded monthly, as established at the beginning of each month by Bankers Trust Company of New York. 6. Release. As a condition precedent to the Company having any obligation to pay the Executive or his Beneficiaries any of the amounts described in paragraph 3, the Company may demand that Executive first execute and shall not revoke an agreement wherein the Executive releases and waives any and all claims which the Executive may have against the Company and its affiliates and others as specified in the waiver and release. The Company may propose any form of release and waiver agreement which it deems appropriate and Executive and/or his Beneficiaries shall be obligated to execute it as a condition precedent to entitlement to any of the payments described in paragraph 3. 7. Payments Upon Death. Upon the death of the Executive, amounts due to Executive under paragraph 3 shall be distributed to his designated Beneficiary upon becoming payable. Executive may designate one or more Beneficiaries to whom benefits will be paid prior to distribution of such amounts. Each designation shall be in writing as prescribed by the Company and will become effective only when filed with the Company during the Executive's lifetime. Any designation may be changed by filing a new designation and all prior designations shall become void. If the Executive has made no effective designation or all designated Beneficiaries have predeceased the Executive, payments shall be made to the Executive's estate. 8. General Provisions. (a) Source of Payments. This Agreement shall not give the Executive or any person, any right to any specific property or assets of the Company. The Company's obligation hereunder is an unfunded, unsecured promise to pay money in the future and the Executive's claim shall be that of a general, unsecured creditor. (b) Nonalienation. Except for the Company's right to offset or forfeit payments stated below, neither Executive nor any other person, prior to the payment or distribution of amounts hereunder, may pledge, sell, anticipate, assign or in any way create a lien upon any amounts payable under this Agreement either by voluntary or involuntary acts or by operation of law. No amounts payable may be attached or subject to seizure for the payment of any debts, judgments, alimony or separate maintenance owed by the Executive or any other person. However, if the Executive is indebted to the Company in any manner when payments are due, the Company may offset such indebtedness against the payments and withhold it from any sums due hereunder. (c) No Contract of Employment. This Agreement is not a contract of employment for any term and shall not be interpreted as providing the Executive the right to continue to be retained in the employ of the Company or any of its affiliates or, upon the Executive's termination of employment, to have any right to any amount or benefit except as granted herein. This document shall not be interpreted to imply that the Executive, while employed by the Company, is anything other than an employee at will whose employment may be terminated at any time for any or no reason. (d) Successors. This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns, by operation of law or otherwise, including any entity or person which shall succeed (whether directly or indirectly, by purchase, merger, or otherwise) to all or substantially all of the business and/or assets of the Company. This Agreement shall be binding upon and inure to the benefit of Executive and his other legal representatives, heirs, and assigns. The duties of the Executive to perform services for the Company are personal and may not be assigned. (e) Amendment and Waiver. This Agreement may not be amended except in a writing which is executed by Executive and a duly authorized officer of the Company. No waiver by either party of any breach or any provision of this Agreement shall be deemed a waiver of a similar or dissimilar provision nor shall the failure of or delay by either party in exercising any right or privilege or operate as a waiver to preclude further exercise thereof or of any other right. (f) Withholding. All payments made by the Company pursuant to this Agreement shall be subject to withholding of such amounts of income and other taxes as the Company may reasonably determine is appropriate. (g) Entire and Exclusive Agreement. This Agreement constitutes the entire agreement of the parties in respect of the subject matter hereof and supersedes any and all negotiations, representations and prior agreements by and between the parties with respect to its subject matter. It specifically supersedes and replaces any other agreements which the Executive may have with the Company and its affiliates concerning payment of any compensation as a result of any Divestiture of the Business. (h) Severability. If any provision of this Agreement is determined to be invalid or unenforceable for any reason, the remaining provisions shall be unaffected and shall be construed and enforced in accordance with the terms of this Agreement. (i) Governing Law. This Agreement shall be governed by the law of the State of Missouri. (j) Notices. Any notice to be given will be in writing and delivered personally or sent by first class or certified mail addressed to the party concerned at the address below or at such other address as maybe subsequently provided: If to the Company: Mr. Roger Keller Vice President, General Counsel Mallinckrodt Inc. 7733 Forsyth Boulevard, Suite 2200 St. Louis, Missouri 63105 If to the Executive: Paul D. Cottone 190 Lancaster Ct. Lake Bluff, IL 60044 (k) Administration and Interpretation. The Chairman of the Board of the Company shall have the power to discharge all duties hereunder except that he may delegate them as he sees fit. The Chairman shall be allocated complete discretion to interpret this Agreement and to resolve any and all questions or issues arising under it. The Chairman's determinations shall be final, conclusive and binding on all parties and shall be accorded the maximum possible deference by any reviewing court or agency. (l) Payment to Guardian. If a distribution is payable to a minor or person declared incompetent or to a person that the Company concludes is incapable of handling the disposition of property, the Company may direct payment to the guardian, legal representative or person having the care and custody of such person. The Company may require proof of incompetency, minority, incapacity or guardianship as it may deem appropriate. Such distribution shall completely discharge the Company from all liability with respect to such benefit. 9. Breach. If it is determined by the Company, in its sole determination, that Executive has breached any term of this Agreement, all obligations which the Company may have to pay any amounts under this Agreement will cease and the Company shall be excused from performance of any and all other obligations contained in this Agreement. The right to cease future payments shall not preclude the Company from requesting any other remedies available, either at law or equity. 10. Termination. This Agreement shall terminate upon the earliest to occur of: (a) the day following the last date for incentives established in subparagraph 3(d)(I); however, if the Divestiture of the Business has occurred prior to that date then amounts which would be due pursuant to paragraph 3 may be paid or deferred thereafter as provided herein; (b) Payment to the Executive or his Beneficiary of all amounts due and payable pursuant to paragraph 3; or (c) Except as provided in subparagraph 4(c), upon termination of the Executive from the employment of the Company if as a result, or at the time, of that termination the Executive is not then entitled to receive any amounts under paragraph 3. However, the provisions of paragraphs 4, 5, 6, 8, and 9 shall survive the termination of the Agreement if any amounts are paid under paragraph 3. IN WITNESS WHEREOF, the Executive has executed this Agreement and, pursuant to authorization from its Board of Directors, the Company has caused this Agreement to be executed on its behalf, all as of the day and year first shown above. MALLINCKRODT INC. By: /s/ C. Ray Holman /s/ Paul D. Cottone -------------------- -------------------- C. Ray Holman Executive Chairman of the Board and CEO ATTEST: - --------------------------------- EX-10.26 7 Exhibit 10.26 SEVERANCE AND SEPARATION AGREEMENT This Severance and Separation Agreement ("Agreement") is made effective as of this 24th day of October, 1996 between Mallinckrodt Inc.(the "Company") and Paul D. Cottone (the "Executive"). WHEREAS, Executive is currently an executive employee of the Company's veterinary and animal products operations known as Mallinckrodt Veterinary, Inc., i.e. hereinafter the "Business", who is employed as its President and Chief Executive Officer and has significant management responsibilities in the operation of that Business; WHEREAS, the Company has determined to divest itself of the Business by selling or otherwise disposing of it; WHEREAS, the Company recognizes that Executive is a valuable resource, desires that he be able to devote his full energies and undivided attention to his duties without the attendant distractions which he may have concerning his financial well being in case of the Executive's termination of employment as described below: WHEREAS, the Company desires to assure that when Executive is involved in deliberations in connection with Divestiture of the Business, Executive would be in a secure position to participate in such transactions in the best interests of the Company; WHEREAS, Executive is willing to continue to serve the Company but desires assurance that in the event of his separation from employment with the Company or Successor as described below, he will have fair and reasonable financial protections; NOW, THEREFORE, in exchange for the promises and covenants described below and for other valid consideration, whose receipt and sufficiency is hereby acknowledged, the Company and the Executive agree as follows: 1. Payment of Severance Compensation Upon Termination of Employment Prior to Divestiture of the Business. If the employment of Executive with the Company or any of its affiliates terminates for any reason before the Closing Date, excluding termination resulting from the circumstances described in paragraph 5, the Company shall provide to the Executive those benefits and compensations described in paragraph 4 below. 2. Payment of Severance Compensation Upon Termination of Employment As a Result of or Subsequent to Divestiture of the Business. (a) If within 30 days following the Closing Date, or the closing of any transaction which constitutes Divestiture of all or part of the Business, Executive is not offered or retained in Comparable Employment by (i) any Successor to the Business, or (ii) the Company or any of its affiliates, unless he is not retained in or offered employment for the reasons described in paragraph 5 below, the Company shall provide to the Executive those benefits and compensations described in paragraph 4 below. (b) If following the Closing Date, Executive is retained in Comparable Employment with Mallinckrodt Inc. or any of its affiliates and his employment with them thereafter terminates for any reason, Executive shall not receive the benefits and compensations described in paragraph 4 but shall receive such payments and benefits provided under the compensation and employee benefit plans, programs and policies then maintained by Mallinckrodt Inc. and its affiliates for which the Executive is then eligible. (c) Under no circumstances shall Executive be entitled to the compensations and benefits described in paragraph 4 if Executive, within a 30 day period following any Divestiture transaction or the Closing Date, is offered or retained in Comparable Employment by a Successor or the Company or any of its affiliates except as described in paragraph 3. 3. Payment of Severance Compensation Upon Termination Following Divestiture of the Business. If within 30 days following the Closing Date or the closing of any transaction which constitutes Divestiture of all or part of the Business, Executive is retained in Comparable Employment with any Successor and the Executive's employment with such entity terminates for any reason, except for those described in paragraph 5, within twelve (12) months after the start of his/her employment with the Successor, the Company shall provide to the Executive those benefits and compensations described in subparagraphs 4(a) and (b) below. 4. Severance Compensation. Except as otherwise provided in subparagraph 4(c), the Company will pay and provide the following as specified to Executive should his employment be terminated under any of the conditions described in paragraphs 1 through 3 which would make him eligible to receive them: (a) Base Severance Pay. (i) If circumstances exist so that if paragraph 1 or subparagraph 2(a) is applicable, Executive shall receive a cash payment equal to one year of Executive's base salary in effect on the date of this Agreement. (ii) If circumstances exist so that paragraph 3 is applicable, Executive shall receive a cash payment equal to the greater of (a) two weeks of Executive's base salary in effect on the date of this Agreement, per each full year and any fraction of year of Executive's combined service with the Company and the Successor subject to a minimum of twelve (12) weeks and a maximum of fifty-two (52) weeks of base salary regardless of Executive's actual service or (b) one year of Executive's base salary in effect on the date of this Agreement multiplied by a fraction the numerator of which equals the number of calendar days remaining from the date of Executive's termination by the Successor to the first calendar year anniversary of the Closing Date and the denominator equals 365 days. (b) Benefit Continuation Payment. Executive shall receive a cash payment equal to the cost which employee would be required to pay to acquire continuation coverage, pursuant to the provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), 29 U.S.C. Sections 1161-1167, under the medical benefit plan which covered Executive immediately prior to his termination of employment for a period equal to the total number of weeks of base salary which the Executive is entitled to receive under subparagraph 4(a). (c) Retirement Benefit Improvements. If terminated under any conditions described in paragraphs 1 and 2, Executive shall receive the following improvements to the amount of his benefits determined under the Company's Qualified Retirement Plan (the "Plan"): (i) If not already vested, he shall become fully vested in pensions accrued under the Plan: (ii) He shall have his pension calculated by adding an additional two (2) years of Credited Service to his existing Credited Service under the Plan; (iii) If Executive is age 55 or older on the date on which his employment terminates, he will be eligible to receive an early retirement pension benefit under the Plan calculated without any reduction in accrued pension because of commencement prior to age 62; (iv) If Executive is at least age 54 but not age 55 on the date on which his employment terminates, he will be eligible to receive an early retirement pension benefit upon attaining age 55 determined as though he had terminated employment at age 55 and had been on unpaid leave of absence from the date of his actual termination of employment from the Company and its affiliates until age 55. If the value or the effect of any item described in subparagraphs 4(c)(i) through (iv) cannot be paid from or provided through the Plan for any reason, as determined by the Plan Administrator in his judgment, then the value of such item(s) will be provided in an equivalent cash payment to the Executive. This payment shall equal the actuarial equivalent of the particular value or effect determined using the assumptions and methods then employed under the Plan to determine the lump sum equivalent of pensions payable under the Plan. Such calculations shall be made by the Plan Administrator and shall be final and conclusive. (d) Payment for Unvested Options. The Company shall pay Executive for any unvested options of the Company's shares at the rate of $6.84 per share for those shares covered by options awarded before August 1996 and $3.42 per share for those shares covered by options awarded during or after August 1996. (e) Executive Out placement Assistance. The Company will make available to Executive an Out placement assistance program (i.e. "Out placement") which would be provided through a provider selected by the Company in accordance with such terms as negotiated by the Company which terms shall be reasonably consistent with Out placement previously provided by the Company to former executive employees. Outplacement shall be provided only if Executive notifies the Company within thirty (30) days of his termination of employment that he elects it. (f) Treatment of Payments for Employee Benefit Plan Purposes. Executive agrees that the payments described in this paragraph 4 shall not considered to be compensation, base compensation, annual incentive or bonus payments for purposes of determining Executive's accrued benefit or any other benefit entitlements under the Mallinckrodt Inc. Retirement Plan, the Investment Plan for Employees of Mallinckrodt Inc. or any other employee benefit or compensation plan or policy of the Company and any of its affiliates. Any amounts due to Executive under this paragraph 4 shall be paid to him as soon as practical after his termination of employment. No combination of circumstances described in paragraphs 1 through 3 shall result in multiple payment of any amount stated in paragraph 3. 5. No Entitlement to Severance Payments. If the employment of the Executive with the Company or any of its affiliates or a Successor terminates because of any reason described in (a) through (d) below, Executive shall not be entitled to any of the payments described in paragraph 4. In such case, the Executive shall only be entitled to such compensation and benefits as are available under the applicable employee benefit plans and other compensation programs of the Company, if any, or a Successor, if his employment terminates from a Successor, in accordance with the provisions of such plans and programs. (a) Death. The Executive's employment with the Company or a Successor ends by reason of the Executive's death. (b) Disability. The Executive becomes incapacitated by reason of physical or mental disability and is unable to perform the essential functions of his position, with or without accommodation, and as a result, the Executive's employment with the Company or Successor is terminated; (c) Cause. The employment of the Executive with a Successor or the Company is terminated for Cause. For purposes of this Agreement, Cause shall mean: (i) The Executive's neglect of, or failure to satisfactorily or substantially perform, any of the duties of his position and any other duties assigned to him unless such failure is due to physical or mental incapacity; or (ii) Any act or omission to act of the Executive which is determined to be inconsistent with the best interests of the Company or Successor or which has the effect of embarrassing or injuring the Company or Successor, their business or business relationships. For purposes of this Agreement, whether Executive has been terminated for Cause shall be determined in the sole and exclusive judgment of the Chairman of the Board of Mallinckrodt Inc. and that determination shall be binding and final on all parties. In the event Executive is terminated for Cause, the Executive shall have an opportunity to meet with the Chairman of the Board before a final determination is made. (d) Voluntary Resignation. The employment of the Executive with a Successor or the Company is terminated by the Executive upon his voluntary resignation for any reason. The resignation of Executive shall be deemed "voluntary" unless it occurs for any one of the reasons described in (i) or (ii) below in which case it shall be deemed to be "involuntary" and the Executive shall be entitled to the benefits described in paragraph 4: (i) The Executive's resignation or retirement (other than mandatory retirement pursuant to a written employment agreement or Company or Successor policy) is requested by a Successor or the Company other than for Cause; or (ii) The Executive's resignation or retirement results from the failure by a Successor or the Company to comply with any of the provisions of any written employment contract with the Executive. 6. Definitions. For purposes of this Agreement, the terms used herein shall have the following meaning unless otherwise clearly provided. (a) "Closing Date" means the date on which the last of any and all transactions which constitute the Divestiture of the Business is closed as such date is determined by the Company in its sole and exclusive judgment. If such date has not occurred prior to June 30, 1997, or if active negotiation with third parties for divestiture of the Business is ongoing at June 30, 1997, such later date as the Company in its sole and exclusive judgment may establish, such date shall not occur. (b) "Divestiture" means all transactions for the sale, disposition, exchange or other transfer of all or substantially all of the ownership of (i) the Business, or (II) any entities owned directly or indirectly by, or affiliated with, Mallinckrodt Inc. or Mallinckrodt Veterinary, Inc. which own the Business, is transferred to persons or entities other than the Company and its Affiliates. (c) Comparable Employment means employment which would compensate Executive with an annual base salary and annual bonus which in total would be at least 90% of Executive's annual base salary and normal annual MICP bonus payable to Executive on the date of this Agreement. For purposes of this Agreement, whether Executive has been offered Comparable Employment shall be determined in the sole and exclusive judgment of the Chairman of the Board of Mallinckrodt Inc. and that determination shall be binding and final on all parties. In the event a question arises whether the Executive has been offered Comparable Employment, the Executive shall have an opportunity to meet with the Chairman of the Board before a final determination is made. (d) "Successor" means any person, entity or affiliate of such person or entity which acquires, succeeds to and/or retains any portion of the Business as a result of, following, or in connection with any transaction constituting part of the Divestiture of the Business. (e) Use of male gender terms, e.g. "he" or "him" shall be interpreted to also include the female gender if appropriate. 7. Release. As a condition precedent to the Company having any obligation to pay the Executive or his Beneficiaries of any of the amounts described in paragraph 4, the Company may demand that Executive first execute and shall not revoke an agreement wherein the Executive releases and waives any and all claims which the Executive may have against the Company and its affiliates and others as specified in the waiver and release. The Company may propose any form of release and waiver agreement which it deems appropriate and Executive and/or his Beneficiaries shall be obligated to execute it as a condition precedent to entitlement to any of the payments described in paragraph 4. 8. Payments Upon Death. Upon the death of the Executive, amounts due to Executive under paragraph 4, if any, shall be distributed to his designated Beneficiary upon becoming payable. Executive may designate one or more Beneficiaries to whom benefits will be paid prior to distribution of such amounts unless otherwise payable under the terms of the Mallinckrodt Inc. Retirement Plan. Each designation shall be in writing as prescribed by the Company and will become effective only when filed with the Company during the Executive's lifetime. Any Beneficiary designation may be changed by filing a new designation and all prior designations shall become void. If the Executive has made no effective Beneficiary designation or all designated Beneficiaries have predeceased the Executive, then payment shall be made to the Executive's estate. 9. Exclusivity of Provisions Regarding Payments Upon Termination of Employment. The terms of this Agreement shall specifically supersede, replace and render null and void (a) any agreement or commitment, or portion thereof, which the Executive may have with the Company or its affiliates and (b) any portion of any employee benefit plan, program or other policy of the Company or its affiliates which may pertain to the Executive, that provides for the payment of any severance or separation compensation upon termination of the Executive's employment with the Company, an Affiliate or a Successor. However, the provisions of the Executive Incentive Compensation Agreement between the Company and the Executive dated October 24, 1996, and rights, if any, under any agreement relating to a Change in Control of the Company shall remain in full force and effect. Executive shall also be entitled to receive all compensation and benefits due to him upon termination of employment which he accumulates through that date pursuant to the Mallinckrodt Inc. Retirement Plan, the Investment Plan for Employees of Mallinckrodt Inc., the Mallinckrodt Inc. Management Incentive Compensation Plan and Long Term Incentive Compensation Plan for Senior Management. 10. General Provisions. (a) Source of Payments. This Agreement shall not give Executive or any person, any right to any specific property or assets of the Company. The Company's obligation hereunder is an unfunded, unsecured promise to pay money in the future and the Executive's claim, shall be that of a general, unsecured creditor. (b) Nonalienation. Except for the Company's right to offset or forfeit payments stated below, neither Executive nor any other person, prior to the payment or distribution of amounts hereunder, may pledge, sell, anticipate, assign or in any way create a lien upon any amounts payable under this Agreement either by voluntary or involuntary acts or by operation of law. No amounts payable may be attached or subject to seizure for the payment of any debts, judgments, alimony or separate maintenance owed by the Executive or any other person. However, if the Executive is indebted to the Company in any manner when payments are due, the Company may offset the amount of any indebtedness against the payments and withhold it from any sums due hereunder. (c) No Contract of Employment. This Agreement is not a contract of employment for any term and shall not be interpreted as providing the Executive the right to continue to be retained in the Company's employ or, upon the Executive's termination of employment, to have any right to any amount or benefit except as expressly granted herein. This document shall not be interpreted to imply that the Executive, while employed by the Company, is anything other than an employee at will whose employment may be terminated at any time for any or no reason. (d) Successors. This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns, by operation of law or otherwise, including any entity or person which shall succeed (whether directly or indirectly, by purchase, merger or otherwise) to all or substantially all of the business and/or assets of the Company. This Agreement shall be binding upon and inure to the benefit of Executive and his other legal representatives, heirs, and assigns. (e) Amendment and Waiver. This Agreement may not be amended except in a writing which is signed the by Executive and a duly authorized officer of Mallinckrodt Inc. No waiver by either party of any breach or any provision of this Agreement shall be deemed a waiver of a similar or dissimilar provision nor shall the failure of or delay by either party in exercising any right or privilege operate as a waiver to preclude further exercise thereof or of any other such right. (f) Withholding. All payments made by the Company pursuant to this Agreement, shall be subject to withholding of such amounts of income and other taxes as the Company may reasonably determine is appropriate. (g) Entire and Exclusive Agreement. This Agreement constitutes the entire agreement of the parties in respect of the subject matter hereof, and supersedes any and all negotiations, representations and prior agreements by and between the parties with respect to its subject matter except as stated in paragraph 9 above. (h) Severability. If any provision of this Agreement is determined to be invalid or unenforceable for any reason, the remaining provisions shall be unaffected and shall be construed and enforced in accordance with the terms of this Agreement. (i) Governing Law. This Agreement shall be governed by the law of the State of Missouri. (j) Notices. Any notice to be given will be in writing and delivered personally or sent by first class or certified mail, addressed to the party concerned at the address below or at such other address as maybe subsequently provided: If to the Company: Mr. Roger Keller Vice President, General Counsel Mallinckrodt Inc. 7733 Forsyth Boulevard, Suite 2200 St. Louis, Missouri 63105 If to the Executive: Paul D. Cottone 190 Lancaster Ct. Lake Bluff, IL 60044 (k) Administration and Interpretation. The Chairman of the Board of the Company shall have the power to discharge all duties hereunder except that he may delegate them as he sees fit. The Chairman shall be allocated complete discretion to interpret this Agreement and to resolve any and all questions or issues arising under it. The Chairman's determination shall be final, conclusive and binding on all parties and shall be accorded the maximum possible deference by any reviewing court or agency. (l) Payment to Guardian. If a distribution is payable to a minor or person declared incompetent or to a person that the Company concludes is incapable of handling the disposition of property, the Company may direct payment to the guardian, legal representative or person having the care and custody of such person. The Company may require proof of incompetency, minority, incapacity or guardianship as it may deem appropriate. Such distribution shall completely discharge the Company from all liability with respect to such benefit. 11. Breach. If it is determined by the Company, in its sole determination, that Executive has breached any term of this Agreement, all amounts which are or may become payable by the Company under this Agreement will cease, and the Company shall be excused from performance of any and all other obligations contained in this Agreement. The election to cease future payments shall not preclude the Company from requesting all other remedies, either at law or equity. 12. Termination. This Agreement shall terminate upon the earliest to occur of: (a) 30 days following the last date for incentives established in subparagraph 3(d)(I) of the Executive Incentive Compensation between the Company and Executive dated October 24, 1996; however, if the Divestiture of the Business has occurred prior to that date then this expiration date shall be extended to twelve months and one day after Executive is employed by a Successor, if he is employed by a Successor within the time described in paragraph 3; (b) Payment to the Executive or his Beneficiary of amounts due and payable pursuant to paragraph 4; or (c) Termination of the Executive from the employment of the Company for any reason if as result, or at the time, of that termination of employment, the Executive is not then entitled to receive any benefits or amounts under paragraph 4. However, the provisions of paragraphs 7, 8, 9, 10 and 11 shall survive the termination of the Agreement. IN WITNESS WHEREOF, the Executive has executed this Agreement and, pursuant to authorization from its Board of Directors, the Company has caused this Agreement to be executed on its behalf, all as of the day and year first shown above. MALLINCKRODT INC. By:/s/ C. Ray Holman /s/ Paul D. Cottone - --------------------- ---------------------- C. Ray Holman Executive Chairman of the Board and CEO ATTEST: - ----------------------------- EX-27 8
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 6-MOS JUN-30-1997 DEC-31-1996 551 0 454 15 473 1585 1633 591 3437 1209 572 0 11 87 1183 3437 1113 1113 604 970 0 0 26 128 47 81 (2) 0 0 79 1.04 1.04
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