-----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, TmJwrFgEes0qdmuZ+3aV8B6EWgBFrl0bNLKMrz4QXbX7xtu2qBu9EWrOd4hbW4Xr 9GY+Fps2gSjAmF3O31vmOA== 0000051396-98-000034.txt : 19980513 0000051396-98-000034.hdr.sgml : 19980513 ACCESSION NUMBER: 0000051396-98-000034 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980512 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 SEC ACT: SEC FILE NUMBER: 001-00483 FILM NUMBER: 98616416 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 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 March 31, 1998 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. 73,164,601 shares excluding 13,951,688 treasury shares as of April 30, 1998. (*) Indicates registered trademark 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, 4 and 5 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)
Quarter Ended Nine Months Ended March 31, March 31, --------------------- --------------------- 1998 1997 1998 1997 --------- --------- -------- --------- Net sales $ 691.2 $ 469.7 $1,845.5 $1,364.8 Operating costs and expenses: Cost of goods sold 371.5 257.9 1,111.3 748.7 Selling, administrative and general expenses 196.1 104.9 504.6 319.7 Purchased research and development 398.3 Research and development expenses 43.4 26.8 111.1 82.7 Other operating income, net (5.0) (3.4) (23.4) (3.2) --------- --------- --------- --------- Total operating costs and expenses 606.0 386.2 2,101.9 1,147.9 --------- --------- --------- --------- Operating earnings (loss) 85.2 83.5 (256.4) 216.9 Interest income and other nonoperating income, net 1.5 4.6 13.0 15.4 Interest expense (28.2) (11.9) (75.6) (36.5) --------- --------- --------- --------- Earnings (loss) from continuing operations before income taxes 58.5 76.2 (319.0) 195.8 Income tax provision 22.6 26.6 31.2 70.5 --------- --------- --------- --------- Earnings (loss) from continuing operations 35.9 49.6 (350.2) 125.3 Discontinued operations (7.9) (1.0) (7.9) 2.2 --------- --------- --------- --------- Net earnings (loss) 28.0 48.6 (358.1) 127.5 Preferred stock dividends (.1) (.1) (.3) (.3) --------- --------- --------- --------- Available for common shareholders $ 27.9 $ 48.5 $ (358.4) $ 127.2 ========= ========= ========= ========= Basic earnings per common share: Earnings (loss) from continuing operations $ .49 $ .67 $ (4.81) $ 1.69 Discontinued operations (.11) (.01) (.11) .03 --------- --------- --------- --------- Net earnings (loss) $ .38 $ .66 $ (4.92) $ 1.72 ========= ========= ========= ========= Earnings per common share - assuming dilution: Earnings (loss) from continuing operations $ .49 $ .66 $ (4.81) $ 1.66 Discontinued operations (.11) (.01) (.11) .03 --------- --------- --------- --------- Net earnings (loss) $ .38 $ .65 $ (4.92) $ 1.69 ========= ========= ========= ========= (See Notes to Condensed Consolidated Financial Statements on pages 5 through 10.)
CONDENSED CONSOLIDATED BALANCE SHEETS (In millions, except share and per share amounts)
March 31, June 30, 1998 1997 ---------- ---------- Assets Current assets: Cash and cash equivalents $ 50.0 $ 808.5 Trade receivables, less allowances of $21.0 at March 31 and $8.4 at June 30 498.3 356.0 Inventories 507.1 315.9 Deferred income taxes 68.8 36.8 Other current assets 76.0 99.6 ---------- ---------- Total current assets 1,200.2 1,616.8 Investments and long-term receivables, less allowances of $14.3 at March 31 and $14.1 at June 30 171.3 145.1 Property, plant and equipment, net 974.3 827.9 Goodwill, net 899.2 226.2 Technology, net 382.3 24.2 Other intangible assets, net 290.6 146.7 Deferred income taxes 26.1 .8 ---------- ---------- Total assets $3,944.0 $2,987.7 ========== ========== Liabilities and Shareholders' Equity Current liabilities: Short-term debt $ 649.0 $ 11.7 Accounts payable 182.4 169.3 Accrued liabilities 467.8 396.1 Income taxes payable 33.9 76.4 Deferred income taxes .2 .2 ---------- ---------- Total current liabilities 1,333.3 653.7 Long-term debt, less current maturities 949.5 545.2 Deferred income taxes 463.5 248.7 Postretirement benefits 167.9 161.9 Other noncurrent liabilities and deferred credits 171.8 127.0 ---------- ---------- Total liabilities 3,086.0 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 313.1 305.9 Reinvested earnings 898.2 1,292.6 Foreign currency translation (75.9) (49.9) Treasury stock, at cost (375.5) (395.5) ---------- ---------- Total shareholders' equity 858.0 1,251.2 ---------- ---------- Total liabilities and shareholders' equity $3,944.0 $2,987.7 ========== ========== (See Notes to Condensed Consolidated Financial Statements on pages 5 through 10.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions)
Nine Months Ended March 31, ---------------------- 1998 1997 --------- --------- Cash Flows - Operating Activities Net earnings (loss) $ (358.1) $ 127.5 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 91.9 86.6 Amortization 58.8 30.9 Postretirement benefits 6.0 8.3 Undistributed equity in earnings of joint venture (17.0) Gains on disposals of assets (15.8) (162.0) Deferred income taxes (27.1) 128.0 Write-off of purchased research and development 398.3 Sale of inventory stepped up to fair value at acquisition 75.4 --------- --------- 229.4 202.3 Changes in operating assets and liabilities: Trade receivables 3.7 (13.4) Inventories ( 26.8) .3 Other current assets 53.9 (15.7) Accounts payable, accrued liabilities and income taxes payable, net (172.9) 11.8 Net current liabilities of discontinued operations 1.3 Other noncurrent liabilities and deferred credits 26.9 6.2 Other, net (10.2) 18.6 --------- --------- Net cash provided by operating activities 104.0 211.4 --------- --------- Cash Flows - Investing Activities Capital expenditures (110.3) (87.6) Acquisition spending (1,790.3) (16.9) Proceeds from asset disposals 29.6 35.0 Other, net .4 (.5) --------- --------- Net cash used by investing activities (1,870.6) (70.0) --------- --------- Cash Flows - Financing Activities Increase (decrease) in short-term debt 616.4 (87.5) Proceeds from long-term debt 404.7 2.0 Payments on long-term debt (3.9) (11.0) Issuance of Mallinckrodt common stock 36.9 30.1 Acquisition of treasury stock (9.7) (97.3) Dividends paid (36.3) (36.1) --------- --------- Net cash provided (used) by financing activities 1,008.1 (199.8) --------- --------- Decrease in cash and cash equivalents (758.5) (58.4) Cash and cash equivalents at beginning of period 808.5 496.1 --------- --------- Cash and cash equivalents at end of period $ 50.0 $ 437.7 ========= ========= (See Notes to Condensed Consolidated Financial Statements on pages 5 through 10.)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In millions, except per share amounts)
1998 1997 -------- -------- 4 Percent cumulative preferred stock: Balance at June 30 and March 31 $ 11.0 $ 11.0 Common stock: Balance at June 30 and March 31 87.1 87.1 Capital in excess of par value: Balance at June 30 305.9 283.5 Stock option exercises 1.5 6.4 Restricted stock award 3.3 Investment plan match 2.4 Issuance of stock related to an acquisition 10.0 -------- -------- Balance at March 31 313.1 299.9 -------- -------- Reinvested earnings: Balance at June 30 1,292.6 1,150.7 Net earnings (loss) (358.1) 127.5 Dividends: 4 Percent cumulative preferred stock ($3.00 per share) (.3) (.3) Common stock ($.495 per share in fiscal 1998 and $.485 per share in fiscal 1997) (36.0) (35.8) -------- -------- Balance at March 31 898.2 1,242.1 -------- -------- Foreign currency translation: Balance at June 30 (49.9) (15.3) Translation adjustment (26.0) (22.3) -------- -------- Balance at March 31 (75.9) (37.6) -------- -------- Treasury stock: Balance at June 30 (395.5) (284.8) Acquisition of treasury stock (9.7) (97.3) Stock option exercises 15.5 23.7 Investment plan match 7.3 Restricted stock award 6.9 Issuance of stock related to an acquisition 12.0 -------- -------- Balance at March 31 (375.5) (346.4) -------- -------- Total shareholders' equity $ 858.0 $1,256.1 ======== ======== (See Notes to Condensed Consolidated Financial Statements on pages 5 through 10.)
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 $702.4 million at March 31, 1998 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 $14.6 million and $35.3 million for the quarter and nine-month period ended March 31, 1998. Since the results of Nellcor have only been included in the Company's consolidated results since September, the year-to-date amortization represents only seven months of activity. The Company has also recorded a deferred tax liability of approximately $220.2 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. Eleven transition teams comprised of employees of Mallinckrodt and Nellcor were established in the second quarter to focus on business strategy, revenue enhancement, global development, sales force integration, product development, operations and administrative consolidation. All segments of the employee work force could be impacted by these efforts. The transition teams are expected to complete their work during fiscal 1998. Since both companies (Mallinckrodt and Nellcor) have global healthcare operations, senior management, through the transition teams, is assessing which activities should be consolidated. During the third quarter, most of the transition teams finalized their proposals and transferred responsibility for implementation of the recommendations to the appropriate operating management. 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. 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. Actions taken to date include determination of the management organization structure, along with the associated announcement of management appointments, and the headquarters locations for corporate staff functions and operating management units in the United States, Asia-Pacific, Japan and Latin America. Nellcor corporate staff functions, which were performed at the Nellcor headquarters located in Pleasanton, California, will now be performed at the Mallinckrodt headquarters in St. Louis, Missouri. The Nellcor corporate staff employees in legal, treasury, human resources, corporate accounting, financial services, communication and investor relations have been notified. Nellcor customer service operations will be consolidated by the end of calendar 1998, thus eliminating the need for customer service personnel in the former Nellcor headquarters in California. In addition, the operations transition team is implementing a manufacturing rationalization plan involving Nellcor facilities in Ireland, Mexico and the United States. Implementation of this plan, which calls for reductions in manufacturing and staff personnel, is underway and targeted for completion during calendar 1998. With the organization structure and key personnel appointments completed, remaining integration actions, which impact the existing Nellcor work force, contractual obligations and assets, can be finalized. The most complex undertaking is the determination of whether certain functions should be consolidated and where they should be located. The breadth of international operations creates logistic, legal and tax structural issues which must be assessed to derive the greatest value for the Company going forward. Decisions that result from the integration team recommendations will impact the valuation of assets acquired as determinations are made to end product lives and shut down or consolidate operations. Significant actions needed to complete the plan include determination of the legal ramifications of closing operations in certain countries, assessment of the tax implications of various alternative strategies, and analysis of the costs associated with the various activities to be exited and employees to be terminated. The Company currently estimates that Nellcor integration actions taken to date combined with those under consideration will result in accruals totaling approximately $75 million. Approximately 80 percent of these accruals will relate to Nellcor employee severance and relocation costs. As of March 31, 1998, $30.7 million has been accrued and included in the acquisition cost allocation, and $8.5 million has been paid and charged against this accrual. The primary component of this balance relates to severance agreements in place prior to the acquisition date which provide certain employees with specified benefits in the event that their employment with Nellcor is terminated or there is an adverse change, based upon the employee's judgment, in the employee's status, title, position or responsibilities. 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. Costs of exit activities related to the operations of Mallinckrodt prior to the acquisition of Nellcor plus integration costs of the combined Company are expected to total $75 million to $100 million, and will be a nonrecurring charge to fiscal 1998 operating results. During the third quarter and first nine months of fiscal 1998, the actions taken have resulted in pre-tax charges to operations of $12.4 million and $19.2 million, respectively, consisting of $9.1 million for transition bonuses, $1.5 million for involuntary severance, and $8.6 million for other integration costs. As of March 31, 1998, payments made relating to the above totaled $1.5 million for transition bonuses, $.7 million for involuntary severance and $5.4 million for other integration costs. 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. Nine Months Ended March 31, -------------------- (In millions, except per share amounts) 1998 1997 -------- -------- Net sales $1,946.6 $1,931.1 Net income $ 72.1 $ 77.5 Net income per share Basic $ .99 $ 1.04 Diluted $ .98 $ 1.02 The pro forma financial information presented above does not include non-cash 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 nine months ended March 31, 1998. 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, which was repaid in March 1998, 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. There was no borrowing outstanding under the revolving credit facility at March 31, 1998. 2. Included in operating earnings for the nine months ended March 31, 1998 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 operating earnings by $75.4 million, $46.7 million net of taxes for the nine months ended March 31, 1998. Pre-tax charges to the healthcare segment and specialty chemicals segment for the nine months ended March 31, 1998 were $74.4 million and $1.0 million, respectively. In addition, results of operations for the quarter and nine months ended March 31, 1998 included integration charges of $12.4 million, $8.3 million net of taxes, and $19.2 million, $12.6 million net of taxes, respectively, related to the healthcare segment. Included in the results of operations for the nine months ended March 31, 1998 is a gain of $15.8 million, $8.9 million after taxes resulting from the sale of specialty chemical product lines. The following schedule summarizes the above information in relation to earnings (loss) from continuing operations:
Quarter Ended Nine Months Ended (In millions) March 31, 1998 March 31, 1998 ---------------- ----------------- Earnings from continuing operations excluding acquisition- and divestiture-related items $45.4 $98.5 Nellcor - Write-off of purchased research and development (398.3) - Inventory stepped up to fair value (46.7) - Integration charges (8.3) (12.6) Divestiture of two specialty chemical product lines (1.2) 8.9 --------- --------- Earnings (loss) from continuing operations $35.9 $(350.2) ========= =========
3. Included in the results of operations for the quarter and nine months ended March 31, 1998 is a charge of $5.7 million, $3.7 million net of taxes for a change in estimates in reserves for receivables, inventory and warranty of Nellcor. 4. Included in earnings from continuing operations for the nine months ended March 31, 1997 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. 5. 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 percent interest in Tastemaker, the flavors joint venture with Hercules Incorporated, which was divested March 31, 1997. During the third quarter of fiscal 1998, the Company recorded a one-time, after-tax charge of $7.9 million to discontinued operations related to settlement costs from the sale of the animal health segment. 6. 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. If damages were assessed in the same manner as determined by the jury for sales subsequent to September 30, 1997 plus interest on the estimated total, payment would approximate $20.5 million at March 31, 1998. The Company has not recorded an accrual for payment of the damages, because an unfavorable outcome in this litigation is, in management's opinion, reasonably possible but not probable. See Part II, Item 1 "Legal Proceedings" for additional information about this and related claims by Augustine against the Company. 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. 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 which has no tax benefit, discussed in Notes 1 and 2, the Company's effective tax rate for the first nine months was 39.3 percent, compared to last year's 36.0 percent. 9. As of March 31, 1998, 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: March 31, June 30, 1998 1997 -------------- -------------- Common stock 13,979,560 14,843,847 4 Percent cumulative preferred stock 1,670 1,670 10. At March 31, 1998, common shares reserved were: Exercise of common stock purchase rights 82,045,737 Exercise of stock options and granting of stock awards 8,910,679 -------------- Total 90,956,416 ============== 11. In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share. Statement 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented and, where necessary, restated to conform to the Statement 128 requirements. 12. The following table sets forth the computation of basic and diluted earnings (loss) from continuing operations per common share (in millions, except shares and per share amounts).
Quarter Ended Nine Months Ended March 31, March 31, --------------------- --------------------- 1998 1997 1998 1997 -------- -------- --------- -------- Numerator: Earnings (loss) from continuing operations $ 35.9 $ 49.6 $(350.2) $ 125.3 Preferred stock dividends (.1) (.1) (.3) (.3) -------- --------- -------- -------- Numerator for basic earnings (loss) per share and earnings (loss) per share assuming dilution--income (loss) available to common shareholders $ 35.8 $ 49.5 $(350.5) $ 125.0 ======== ======== ======== ======== Denominator: Denominator for basic earnings per share--weighted- average shares 73,080,647 73,826,057 72,837,966 74,057,373 Potential dilutive common shares-- employee stock options 694,661 1,352,215 1,439,319 ---------- ---------- ---------- ---------- Denominator for diluted earnings (loss) per share-- adjusted weighted- average shares and assumed conversions 73,775,308 75,178,272 72,837,966 75,496,692 ========== ========== ========== ========== Basic earnings (loss) from continuing operations per common share $ .49 $ .67 $ (4.81) $ 1.69 ======== ======== ======== ======== Earnings (loss) from continuing operations per common share-- assuming dilution $ .49 $ .66 $ (4.81) $ 1.66 ======== ======== ======== ========
The diluted share base for the nine months ended March 31, 1998 excludes incremental shares of 718,680 related to employee stock options. These shares are excluded due to their antidilutive effect as a result of the Company's loss from continuing operations during this period. 13. The components of inventory included the following as of March 31, 1998: (In millions) Raw materials and supplies $ 203.5 Work in process 67.0 Finished goods 236.6 ------- $ 507.1 ======= 14. Supplemental cash flow information for the nine months ended March 31 included: (In millions)
1998 1997 -------- -------- Interest paid $65.3 $60.1 Income taxes paid $67.8 $47.2 Non-cash investing and financing activities: Assumption of liabilities related to an acquisition $452.5 $3.2 Principal amount of debt assumed by buyer related to a divestiture $1.0 $510.0 Preferred stock received related to a divestiture $88.9 Issuance of stock related to an acquisition $22.0
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. [1] Results of Operations General - ------- The Company recorded earnings from continuing operations of $35.9 million, or 49 cents per share for the quarter ended March 31, 1998. Excluding charges related to the acquisition of Nellcor and a charge associated with the second quarter sales of two specialty chemical product lines, earnings from continuing operations were $45.4 million, or 62 cents per share on a basic earnings per share basis, 61 cents per share on a diluted basis. The acquisition-related charges of $12.4 million, $8.3 million net of taxes, were related to stay-on bonuses, consulting and other charges of a nonrecurring nature. The charge related to the specialty chemical product lines reduced the after-tax gain recorded in the second quarter by $1.2 million. Earnings from continuing operations for the same quarter last year were $49.6 million, or 67 cents per share on a basic earnings per share basis, 66 cents per share on a diluted basis. Net earnings for the third quarter were $28.0 million, or 38 cents per share on a basic and diluted basis. These results include a one- time after-tax charge of $7.9 million related to costs to settle obligations from the sale of the animal health segment on June 30, 1997. Net earnings for the third quarter of last year were $48.6 million, or 66 cents per share on a basic earnings per share basis, and 65 cents per share on a diluted basis. The fiscal 1997 results for the third quarter included a net loss of $1.0 million from discontinued operations. The net loss from discontinued operations in last year's results included a gain on the sale of the Company's share of a flavors joint venture which was sold on March 31, 1997 and an estimated loss on the sale of the animal health segment which was sold on June 30, 1997. Net sales for the quarter rose 47 percent to $691.2 million, compared to $469.7 million a year earlier. Excluding the sales of Nellcor, which was acquired at the end of August 1997, the Company's net sales were $473.6 million, an increase of $3.9 million or 1 percent compared to a year earlier. For the nine-month period ended March 31, 1998, the Company recorded a net loss from continuing operations of $350.2 million, or $4.81 per share on a basic and diluted basis. This loss included charges related to the Nellcor acquisition and a gain associated with the second quarter divestiture of two specialty chemical product lines. The acquisition-related charges are a one-time $398.3 million write- off of purchased research and development, which had no offsetting tax benefits, a cost of goods sold charge of $75.4 million, $46.7 million net of taxes, related to the sale of inventories stepped up to fair value, and expenses of $19.2 million, $12.6 million net of taxes associated with the integration of Nellcor into the Company. Excluding the acquisition- and divestiture-related items, the Company had earnings from continuing operations of $98.5 million, or $1.35 per share on a basic earnings per share basis, $1.33 per share on a diluted basis. For the same period last year, the Company recorded earnings from continuing operations of $125.3 million, or $1.69 per share on a basic earnings per share basis, $1.66 per share on a diluted basis. For the nine-month period ended March 31, 1998, the Company had a net loss of $358.1 million, or $4.92 per share on a basic and diluted basis, which included a $7.9 million charge, or 11 cents per share, in discontinued operations. For the corresponding period of the prior year, net income was $127.5 million, or $1.72 per share on a basic earnings per share basis, $1.69 per share on a diluted basis, and included a net gain of $2.2 million, or 3 cents per share from discontinued operations. Net sales for the first nine months rose 35 percent to $1.85 billion compared to $1.36 billion a year earlier. The current year sales amount included seven months of sales of Nellcor which was acquired at the end of August 1997. Excluding Nellcor sales, the Company's net sales were $1.35 billion, or 1 percent below the corresponding nine-month period last year. - ---------------------------- [1] This report contains a number of forward-looking statements, all of which are based on current expectations. These statements involve risks and uncertainties and actual results could differ materially from those discussed. Among the factors that could cause actual results to differ materially 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. A comparison of sales and operating earnings follows:
(In millions) Quarter Ended Nine Months Ended March 31, March 31, -------------------- --------------------- 1998 1997 1998 1997 -------- -------- --------- --------- Sales - ----- Healthcare $ 597.6 $ 387.2 $1,573.7 $1,121.3 Specialty chemicals 94.2 82.6 272.6 243.7 Intersegment sales (.6) (.1) (.8) (.2) -------- -------- --------- --------- $ 691.2 $ 469.7 $1,845.5 $1,364.8 ======== ======== ========= ========= Operating earnings (loss) - ------------------------- Healthcare $ 75.0 $ 80.6 $ (284.7) $ 216.4 Specialty chemicals 15.8 8.4 46.5 19.9 Corporate (5.6) (5.5) (18.2) (19.4) -------- -------- --------- --------- $ 85.2 $ 83.5 $ (256.4) $ 216.9 ======== ======== ========= ========= Business Segments - ----------------- Healthcare Quarter Ended Nine Months Ended Net sales March 31, March 31, -------------------- --------------------- (In millions) 1998 1997 1998 1997 -------- -------- --------- --------- Respiratory care $ 285.9 $ 78.2 $ 703.5 $ 235.0 Imaging agents 190.9 190.1 557.3 589.9 Pharmaceutical specialties 120.8 118.9 312.9 296.4 -------- -------- --------- --------- $ 597.6 $ 387.2 $1,573.7 $1,121.3 ======== ======== ========= =========
Healthcare reported operating earnings for the quarter of $75.0 million, including the respiratory care product results of Nellcor which was acquired at the end of August 1997. The third quarter results include $12.4 million in charges for integration activities involving Nellcor. Excluding the impact of the integration-related charges, healthcare operating earnings would have been $87.4 million or 8 percent above the $80.6 million reported for the same period last fiscal year. Healthcare reported an operating loss for the nine-month period of $284.7 million. These results include a $396.3 million write-off of purchased research and development, a $74.4 million fair value step- up charge related to the sale of inventories acquired and $19.2 million in charges for integration activities involving Nellcor. Excluding the impact of these charges, healthcare operating earnings would have been $205.2 million, which is 5 percent below the $216.4 million reported by this business segment for the same period in fiscal 1997. The nine-month year-to-year earnings decline is primarily attributable to lower selling prices in imaging agents which are only partially offset by volume growth. Global efforts toward healthcare cost containment continue to exert pressure on product pricing. The demand for price discounts from customer buying groups has adversely impacted earnings growth. This industry trend is expected to continue. 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. Net sales of the healthcare segment in the third quarter were $597.6 million, an increase of 54 percent over the $387.2 million reported for the same period in fiscal 1997. Excluding Nellcor, healthcare sales were $391.7 million, or 1 percent above the same quarter last year. For the first nine months of the year, net sales for the healthcare segment, which includes seven months of Nellcor results, were $1.57 billion or 40 percent above the prior year period. Excluding Nellcor, healthcare sales were $1.10 billion, or 2 percent below prior year. Respiratory care includes critical care products and Nellcor sales. Excluding Nellcor sales, the business had a sales increase of $1.8 million or 2 percent, and a decrease of $2.6 million or 1 percent for the current quarter and nine-month period, respectively, when compared to the corresponding periods last fiscal year. The third quarter improvement is attributable to volume growth of $8 million or 10 percent, offset by the strong U.S. dollar ($4 million) and lower selling prices of respiratory care and anesthesiology products ($3 million). The comparison of the first nine months shows similar results with sales volume increases of $24 million, offset by a negative impact of the strong U.S. dollar ($13 million) and lower prices of respiratory therapy products ($10 million). The year-to- date sales results are also negatively impacted ($6 million) when compared to the prior year by the divestiture of the blood gas and electrolyte product business in September 1996. Imaging agent sales for the third quarter were about equal to the prior year, but for the first nine months were almost 6 percent or $33 million behind prior year results. This sales decline is attributable to continued erosion of selling prices of all imaging agents, in spite of volume increases in all major product lines. For the third quarter, sales volume of iodinated contrast media, the most significant product line in the imaging agent business, increased $9 million, but total sales for these products declined approximately $4 million as a result of continued price erosion. For the first nine months, iodinated contrast media sales volume increased by approximately $35 million but total sales of these products were down almost $41 million primarily as a result of price erosion. Although price erosion appeared to moderate somewhat in the current quarter, pricing pressure, especially in the U.S. iodinated contrast media market, is expected to continue as the Company and its competitors work to maintain market shares in a market largely driven by the consolidation of hospital buying groups. 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. Pharmaceutical specialty sales increased $2 million (2 percent) and $17 million (6 percent) over the three-month and nine-month periods of the prior year, respectively. The sales increase for the first nine months is primarily due to volume increases, reflecting $12 million for dosage narcotics, including the acquisition of D.M. Graham Laboratories, Inc. in November 1996, and $4 million for acetaminophen (APAP). Overall pricing in this business has remained relatively constant for the quarter and year to date when compared to prior year. Specialty Chemicals Quarter Ended Nine Months Ended Net sales March 31, March 31, ------------------ ----------------- (In millions) 1998 1997 1998 1997 ------ ------ ------ ------ $ 94.2 $ 82.6 $272.6 $243.7 ====== ====== ====== ====== Specialty chemicals segment operating earnings for the third quarter were $15.8 million which includes the activities of the Nellcor Aero Systems business. Excluding Aero Systems, operating earnings for the three months were $14.5 million, 73 percent above the prior year amount of $8.4 million. The earnings improvement is attributable to product mix and manufacturing cost and expense control. Operating results for the first nine months of the year were $46.5 million. These results include Aero Systems operations and its associated acquisition-related charges of $3.0 million for the write-off of purchased research and development and sale of inventories stepped up to fair value at acquisition. In addition, year-to-date results include a $15.8 million gain resulting from the sale of two specialty chemical product lines divested in the second quarter of fiscal 1998. Excluding Aero Systems and the divestiture gains, the year-to-date results were $29.5 million, or 48 percent greater than the results for the same period of fiscal 1997. The year-to-year improvement is primarily attributable to a decline in expenses and sales mix. Sales for the third quarter were up $11.6 million, or 14 percent over the prior year. Excluding Aero Systems sales of $11.7 million, sales for the three months were $82.5 million, or flat with the prior year. Sales for the nine-month period were $272.6 million, or $28.9 million higher than the amount for the corresponding period of fiscal 1997. Excluding Aero Systems sales of $28.3 million, sales for the nine- month period are flat compared to prior year because two plastic additive product lines of the segment were divested in the second quarter. The plastic additives business reported sales of $26.5 million during the first nine months of fiscal 1998 as compared with $41.9 million during the same period last year. Corporate Matters - ----------------- Corporate expense is up 2 percent for the quarter but down 6 percent for the nine months as compared to the respective periods of the prior year. Excluding the one-time non-cash write-off of purchased research and development which had no tax benefit, the Company's effective tax rate for the nine months is 39.3 percent, compared to last year's 36.0 percent. This rate increase is primarily due to nondeductible goodwill amortization directly associated with the acquisition of Nellcor on August 28, 1997. 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 $758.5 million, primarily as a result of the acquisition of the outstanding common shares of Nellcor in August 1997. Operations provided $104.0 million of cash, while acquisition and capital spending totaled $1,900.6 million. The Company received $29.6 million in proceeds from asset disposals. Debt as a percentage of invested capital was 65.1 percent. The current ratio had declined to .7:1 at the end of the second quarter as a result of short-term borrowings during the first quarter of fiscal 1998 to acquire the outstanding shares of Nellcor common stock. During the third quarter, the Company issued $400 million in long-term debt, as described below, with the proceeds used to reduce short-term borrowing and thus improving the current ratio to .9:1 at March 31, 1998. In addition, earlier this year the Company had announced plans to divest its specialty chemicals segment which, when completed, will provide cash which the Company anticipates will be used to further reduce short-term borrowings. The catalyst business and Aero Systems were divested in the fourth quarter for cash proceeds of $210 million and $69.7 million, respectively. 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, which was repaid in March 1998, 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. There was no borrowing outstanding under the revolving credit facility at March 31, 1998. In January 1998, the Company issued $200 million aggregate principal amount of notes maturing January 14, 2010. The notes bear interest at 5.99 percent until January 14, 2000, at which time the interest rate will be reset at a fixed annual rate of 5.64 percent plus the Company's then incremental borrowing rate above the rate quoted on U.S. Treasury ten-year notes. As consideration for this feature, the Company received an up-front premium in the amount of $4.4 million, which has been deferred and will be recognized as an adjustment to interest expense over the term of the underlying debt. The notes are redeemable at the election of the holder, in whole but not in part, at 100 percent of the principal amount on January 14, 2000. In March 1998, the Company issued $200 million aggregate principal amount of notes maturing March 15, 2011. The notes bear interest at 6.3 percent until March 15, 2001, at which time the interest rate will be reset at a fixed annual rate of 5.6219 percent plus the Company's then incremental borrowing rate above the rate quoted on U.S. Treasury ten-year notes. As consideration for this feature, the Company received an up-front premium in the amount of $5.6 million, which has been deferred and will be recognized as an adjustment to interest expense over the term of the underlying debt. The notes are redeemable at the election of the holder, in whole but not in part, at 100 percent of the principal amount on March 15, 2001. In conjunction with this issue, the Company entered into an interest rate swap transaction whereby the effective periodic interest payment is equal to three-month LIBOR plus .3419 percent. The rate is adjusted every three months starting June 15, 1998. The swap contract expires on March 15, 2001. Proceeds of both of the above transactions were used to repay commercial paper borrowings. During the second quarter, the Company entered into two contracts of $100 million each to hedge against a potential rise in interest rates on its anticipated financing activities. One hedge was terminated in January 1998 effective with the issuance of the notes maturing in 2010. The second contract was terminated in March 1998 with the issuance of the notes maturing in 2011. The $4.3 million total realized losses on the termination of the contracts has been deferred and will be recognized as an adjustment to interest expense over the terms of the underlying debt. In December 1997, the Company filed a $500 million shelf debt registration statement. The unused portions of shelf registrations filed in 1995 and 1992 have been cancelled. At March 31, 1998, the Company has a $1.0 billion private-placement commercial paper program. The program is backed by the $1.6 billion five-year U.S. revolving credit facility available until September 2002. At March 31, 1998, there was $630.8 million commercial paper borrowings outstanding. There was no borrowing outstanding under the revolving credit facility at March 31, 1998. Non-U.S. lines of credit totaling $140.6 million were also available and borrowings under these lines amounted to $17.6 million at March 31, 1998. The non-U.S. lines are cancelable at any time. The Company's Board of Directors previously authorized repurchase of 47 million shares of common stock and additional repurchases not to exceed cash outlays of $250 million. Share repurchases have totaled 36.8 million shares, including 240 thousand shares during the nine months ended March 31, 1998. Estimated capital spending for the year ending June 30, 1998 is approximately $160 million. Impact of Year 2000 - ------------------- The Year 2000 issue is the result of computer programs that were written using two digits rather than four to define the applicable year. Any such computer programs that have time-sensitive software may recognize a year containing "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations including, among other things, a temporary inability to process transactions or engage in similar normal business activities. The Company has completed an assessment and will have to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. Both internal and external resources will be used to reprogram or replace non-compliant software, and to appropriately test Year 2000 modifications. Such modifications are being funded through operating cash flows and are estimated to be immaterial to current or future results of operations and financial position. The project to address Year 2000 modifications has been underway since February 1997 and is estimated to be substantially completed no later than January 1999, which is prior to any anticipated significant impact on Mallinckrodt's operations. The Company believes that with modifications to existing software and conversions to new software, the Year 2000 issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made or are not completed timely, the Year 2000 issue could have a material impact on the operations of the Company. The cost of the project and the date on which the Company believes it will substantially complete Year 2000 modifications are based on management's best estimates. Such estimates were derived using software surveys and programs to evaluate calendar date exposures and numerous assumptions of future events, including the continued availability of certain resources and other factors. Because none of these estimates can be guaranteed, actual results could differ materially from those anticipated. Specific factors that might cause such differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. Item 3. Quantitative and Qualitative Disclosures About Market Risk. The Company has determined that its market risk exposures, which arise primarily from exposures to fluctuations in interest rates and foreign currency rates, are not material to its future earnings, fair value and cash flows. 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 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. See Part I, Item 1 "Notes to Condensed Consolidated Financial Statements" for information about the manner in which the Company establishes accruals for financial contingencies, including contingencies related to legal proceedings involving the Company. Previously Reported Matters - --------------------------- The following is a discussion of material developments in proceedings previously reported in the Company's annual report on Form 10-K for its year ended June 30, 1997, as amended by the Company's reports on Form 10-Q for the quarters ended September 30, 1997 and December 31, 1997: Environmental Matters - --------------------- Orrington, ME--As previously reported, the U.S. Environmental Protection Agency (USEPA) and the State of Maine Department of Environmental Protection (DEP) had requested additional information to complete the Site Investigation which was provided by the Company. Based on the data, USEPA and Maine DEP have asked the Company and the current owner to complete certain interim tasks to prevent potential migration of materials offsite. Upon completion of the interim tasks, the parties will finalize the Site Investigation and propose a remedial action plan. Auburn Hills, MI--The Company met with the State of Michigan Department of Environmental Quality (DEQ) to discuss the DEQ's position regarding certain additional activities. The DEQ intends to complete certain additional tasks which will supplement the characterization of the site. The Company has held several settlement meetings with other PRP's, but has not settled the litigation. Further discovery is proceeding. Springville, UT--As previously reported, the Company has been sued along with The Ensign-Bickford Company in connection with the Company's former ownership of this site in the following two matters: Stephens et al v. Trojan Corporation et al and Don Henrichsen et al v. The Ensign-Bickford Company et al. Both suits are pending in the United States District Court, District of Utah, Central Division. Discovery is proceeding in both of these matters with depositions currently being completed. Other Litigation - ---------------- Augustine Medical, Inc.-- On February 24, 1998, Augustine Medical, Inc. filed an action in the District Court of The Hague, the Netherlands, against Mallinckrodt Inc., various Mallinckrodt European entities and Mallinckrodt distributors (collectively "Mallinckrodt") alleging that Mallinckrodt Warm Touch(*) blankets infringe its European patent EP0311336. Augustine is seeking an injunction against future sales and damages. A preliminary hearing is scheduled for May 26, 1998. This European patent is a counterpart of Augustine's United States patent which is the subject matter of litigation between the parties, as previously reported, in the U.S. District Court in the District of Minnesota currently under appeal to the Court of Appeals for the Federal Circuit in Washington D.C. Mallinckrodt will vigorously defend this action contending that the Augustine patent is invalid or not infringed. See Part I, Item 1 "Notes to Condensed Consolidated Financial Statements" for additional information about the ongoing United States patent infringement litigation between Augustine and Mallinckrodt. Nycomed Imaging AS--On April 21, 1998, Nycomed Imaging AS ("Nycomed") filed an action in the District Court of The Hague, the Netherlands, against various Mallinckrodt European entities (collectively "Mallinckrodt") and Mallinckrodt's licensor, Molecular BioSystems, Inc. ("MBI"), alleging that Optison(*) ultrasound agent infringed or will infringe its European patent EP0576521. Nycomed is seeking an injunction against future sales and damages. A preliminary hearing is scheduled for October 19, 1998. This European patent is the counterpart of Nycomed's U.S. patent that is the subject matter of litigation between the parties in the U.S. District Court in the District of Columbia as previously reported. Mallinckrodt and MBI will vigorously defend this action contending that the Nycomed European patent is invalid or not infringed. Item 2. Changes in Securities and Use of Proceeds. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information. Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Filed with Exhibit Incorporated Herein Electronic Number Description by Reference to: Submission - ------- ----------- ------------------- ---------- 27 Financial Data Schedule X (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 January 7, 1998 under Item 5 regarding new ultrasound imaging agent, Optison(*) being cleared by the FDA. - Report dated January 22, 1998 under Item 5 regarding Mallinckrodt exploring additional portfolio realignments. - Report dated February 2, 1998 under Item 5 regarding European approval of new ultrasound imaging agent Optison(*). - Report dated February 3, 1998 under Item 5 regarding pro forma statements to present the combined results of operations of Mallinckrodt Inc. and Nellcor Puritan Bennett Incorporated by quarter for the year ended June 30, 1997. - Report dated February 25, 1998 under Item 5 regarding Engelhard plans to acquire Mallinckrodt catalyst business. - Report dated March 2, 1998 under Item 5 regarding presentation of consolidated financial statements for Nellcor Puritan Bennett Incorporated for the periods ended July 6, 1997 and July 7, 1996. - Report dated March 4, 1998 under Item 7 regarding presentation of Nellcor Puritan Bennett Incorporated financial statements for the years ended July 7, 1996 and July 2, 1995, and for the three-month and nine-month periods ended April 6, 1997 and March 31, 1996. - Report dated March 23, 1998 under Item 5 to provide pro forma statement of operations to present the combined results of Mallinckrodt Inc. and Nellcor Puritan Bennet Incorporated for the six months ended December 31, 1997. - Report dated March 23, 1998 under Item 7 regarding financial statements, pro forma financial information and exhibits with respect to that certain Current Report on Form 8-K filed on September 5, 1997 as amended by that certain Form 8-K/A of Mallinckrodt filed on November 3, 1997 and as further amended by that certain Form 8-K/A filed on March 4, 1998. - Report dated April 22, 1998 under Item 5 regarding near-term outlook in conjunction with third quarter earnings report. - Report dated May 6, 1998 under Item 5 regarding completion of the sale of the catalyst business. ************** 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: May 12, 1998 EX-27 2
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 9-MOS JUN-30-1998 MAR-31-1998 50 0 498 21 507 1200 1539 565 3944 1333 950 0 11 87 760 3944 1846 1846 1111 2102 0 0 76 (319) 31 (350) (8) 0 0 (358) (4.92) (4.92)
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