-----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, Ofl7W04JR1ll7Yh93gYyngHX0k79ecwEiPAyUltQaN5760lPi98mS5Kf9cOiDff3 aGaBKoSBnq8vouOyXcBPXQ== 0000051396-98-000057.txt : 19980928 0000051396-98-000057.hdr.sgml : 19980928 ACCESSION NUMBER: 0000051396-98-000057 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980925 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-K SEC ACT: SEC FILE NUMBER: 001-00483 FILM NUMBER: 98714759 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-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------ FORM 10-K x --- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the fiscal year ended June 30, 1998 --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to Commission file number 1-483 -------------------------------- MALLINCKRODT INC. (Exact name of Registrant as specified in its charter) New York 36-1263901 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 675 McDonnell Boulevard St. Louis, Missouri 63134 (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: 314-654-2000 ----------------------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- 4% Cumulative Preferred Stock, par value $100 per share New York Stock Exchange Common Stock, par value $1 per share New York Stock Exchange Chicago Stock Exchange Pacific Stock Exchange 9.875% Debentures due March 15, 2011 New York Stock Exchange 7% Debentures due December 15, 2013 New York Stock Exchange 6.75% Notes due September 15, 2005 New York Stock Exchange 6.5% Notes due November 15, 2007 New York Stock Exchange 6% Notes due October 15, 2003 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None ------------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. --- ------------------------------ State the aggregate market value of the voting stock held by non-affiliates of the Registrant: $1,673,807,983 as of August 31, 1998. Market value is based on the August 31, 1998 closing prices of Registrant's Common Stock and 4% Cumulative Preferred Stock. Applicable Only To Corporate Registrants: Indicate the number of shares outstanding of each of the Registrant's classes of common stock: 72,859,212 shares as of August 31, 1998. Documents Incorporated By Reference: Information required by Items 10, 11, 12 and 13 of Part III is incorporated by reference from pages 2 through 5, and 11; pages 6 and 7, 10 and 11, and 14 through 23; pages 8 and 9; and page 7, respectively, of the Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on October 21, 1998. 1998 FORM 10-K CONTENTS ITEM Page - ---- ---- Part I: 1. Business............................................... 1 Introduction........................................... 1 General Factors Related to the Business................ 2 International and Economic Risk Factors................ 2 Operations............................................. 3 Other Actions.......................................... 10 Other Activities....................................... 10 2. Properties............................................. 12 3. Legal Proceedings...................................... 12 4. Submission of Matters to a Vote of Security Holders.... 16 Executive Officers of the Registrant................... 16 Part II: 5. Market for Registrant's Common Stock and Related Stockholder Matters................................... 19 6. Selected Financial Data................................ 20 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 21 7A. Quantitative and Qualitative Disclosures About Market Risk........................................... 30 8. Financial Statements and Supplementary Data............ 31 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure................... 58 Part III: 10. Directors and Executive Officers of the Registrant..... 58 11. Executive Compensation................................. 58 12. Security Ownership of Certain Beneficial Owners and Management........................................ 59 13. Certain Relationships and Related Transactions......... 59 Part IV: 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................... 59 Signatures................................................... 66 Part I. ITEM 1. BUSINESS INTRODUCTION Company Profile - --------------- Mallinckrodt Inc. (Mallinckrodt, the Company, or the Corporation) is a global company serving selected healthcare markets with products used primarily for respiratory care, diagnostic imaging and pain relief. The Company was incorporated in New York in 1909 under the name International Agricultural Corporation. The corporate headquarters is located at 675 McDonnell Boulevard, St. Louis, Missouri 63134, and the telephone number is (314) 654-2000. Transition of the Company - ------------------------- During the past several years, many significant steps have been taken to transform the composition of the Company. During the past three years the transition has involved the following: - In December 1995, the Company announced a Strategic Change Initiative which eliminated the management and administrative structures of the three former operating companies: Mallinckrodt Chemical, Inc., Mallinckrodt Medical, Inc. and Mallinckrodt Veterinary, Inc. - On October 16, 1996, the shareholders approved changing the Company's name from Mallinckrodt Group Inc. to Mallinckrodt Inc. - On March 31, 1997, the Company disposed of Fries & Fries, Inc., a wholly owned subsidiary which owned the Company's 50 percent interest in Tastemaker, which was the flavors joint venture with Hercules Incorporated. The transaction generated a net value to the Company of $550 million. - On June 30, 1997, the Company sold the animal health segment for $405 million cash. The Company retained certain liabilities. - On August 28, 1997, the Company acquired Nellcor Puritan Bennett Incorporated (Nellcor) through an agreement to purchase for cash all of 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 is the worldwide market leader in providing products that monitor, diagnose and treat respiratory impaired patients. - During 1998, the Company sold, or committed to sell, its catalysts and chemical additives and Aero Systems divisions. The completed actions resulted in net cash proceeds of $308 million. - ------------------------------- CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Our discussion and analysis in this annual report contain some forward-looking statements. Forward-looking statements do not relate strictly to historical or current facts, but rather give our current expectations or forecasts of future events. Forward-looking statements may be identified by their use of words such as "plans," "expects," "will," "anticipates," "believes," and other words of similar meaning. Such statements may address, among other things, the Company's strategy for growth, product development, regulatory approvals, the outcome of contingencies such as legal proceedings, market position, expenditures, and financial results. Forward-looking statements are based on current expectations of future events. Such 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 from those projected in any such forward-looking statements are as follows: 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; difficulties or delays in addressing "Year 2000" problems (as discussed in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations); and the risk factors reported from time to time in the Company's SEC reports. The Company undertakes no obligation to update any forward-looking statements as a result of future events or developments. Other recent acquisitions, divestitures and continuing investments in each of Mallinckrodt's businesses are described in the discussions of the business groups in Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7, and Note 2 of the Notes to Consolidated Financial Statements in Item 8. General Points - -------------- In this report: Mallinckrodt Inc. and its subsidiaries, collectively, are called the "Company," the "Corporation" or "Mallinckrodt," unless otherwise indicated by the context. The Company now operates predominantly in the healthcare industry and is comprised of three groups - Respiratory, Imaging and Pharmaceuticals. The term "operating earnings" of a business represents revenues less all operating expenses. Operating expenses of a business do not include interest expense, corporate income or expense, and taxes on income. All references to years are to fiscal years ended June 30 unless otherwise stated. Registered trademarks are indicated by an asterisk (*). GENERAL FACTORS RELATED TO THE BUSINESS In general, Mallinckrodt's businesses, including related working capital requirements, are not materially affected by seasonal factors. Mallinckrodt's businesses do not routinely extend long-term credit to customers. The Company believes this credit policy, as well as its working capital requirements, are not materially different from the credit policies and working capital requirements of its competitors. Competition with manufacturers and suppliers in Mallinckrodt's businesses involves price, service, quality and technological innovation. Competition is strong in all markets served. The Company's operations are subject to numerous U.S. and international regulations which involve development, testing, manufacturing, packaging, distribution and marketing of its products. Financial information about the businesses is in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and in Item 8, Financial Statements and Supplementary Data. Financial information about foreign and domestic operations and export sales is included in Note 19 of the Notes to Consolidated Financial Statements in Item 8. INTERNATIONAL AND ECONOMIC RISK FACTORS The Company operates globally, with manufacturing and distribution facilities in various countries, and is subject to certain opportunities and risks, including foreign currency fluctuations and government actions. Various operational initiatives are employed to help manage business risks. In the ordinary course of business, Mallinckrodt purchases materials and sells finished products denominated in approximately 25 different currencies. The Company is primarily exposed to changes in exchange rates of the German deutsche mark and other European currencies highly correlated with the German deutsche mark and the Japanese yen. Overall, the Company is a net beneficiary when the U.S. dollar weakens and is adversely affected by a stronger U.S. dollar relative to the major currencies identified. To minimize exposure to foreign currency exchange rates, which occur in the ordinary course of business, the Company purchases currency options. The Company's interest income and expense are most sensitive to changes in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on the Company's cash equivalents and short-term investments as well as interest paid on its short-term debt. To manage the interest rate characteristics of its outstanding debt to a more desirable fixed or variable rate basis or to limit the Company's exposure to rising interest rates, the Company periodically enters into interest rate swaps and option contracts. For more information on the Company's risk management strategy, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data. The Company does not consider the present overall rate of inflation to have a significant impact on the businesses in which it operates; however, general price declines in hospital and alternate care products on a global basis due to healthcare cost containment have had a negative effect on operating results, and this trend is expected to continue. While future economic events cannot be predicted, the Company believes its current operations and future expansion plans will not result in a significantly different risk profile. Mallinckrodt sales to customers outside the U.S. represented approximately 33, 36 and 37 percent of consolidated net sales in 1998, 1997 and 1996, respectively. Products are manufactured and marketed through a variety of subsidiaries and affiliates around the world. For additional information, see discussions of individual business groups included below; under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations; and in Item 8, Note 19 of the Notes to Consolidated Financial Statements. OPERATIONS The Company provides advanced, innovative products for respiratory care, anesthesiology, radiology, cardiology, nuclear medicine, and pharmaceuticals. Principal products are oxygen monitoring, critical care ventilation, airway management, contrast media for various imaging modalities, radiopharmaceuticals for nuclear medicine, bulk and dosage pharmaceuticals used primarily for pain relief, peptides, and laboratory analysis and microelectronic chemicals. The Company is comprised of three business groups - Respiratory, Imaging and Pharmaceuticals. Net Sales by Group were (in millions): 1998 1997 1996 ------ ------ ------ Respiratory................ $ 991 $ 321 $ 338 Imaging.................... 760 802 716 Pharmaceuticals............ 616 575 543 ------ ------ ------ $2,367 $1,698 $1,597 ====== ====== ====== On August 28, 1997, the Company acquired Nellcor through an agreement to purchase for cash all of 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 is the worldwide market leader in providing products that monitor, diagnose and treat respiratory impaired patients. Product lines include pulse oximetry monitors and sensors, critical care and portable ventilators, home oxygen therapy products, sleep apnea diagnostic and therapy products, and medical gases. The acquisition was accounted for under the purchase method of accounting and, accordingly, the results of operations of Nellcor have been included in the Company's consolidated financial statements since September 1, 1997. The purchase price of the acquisition was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of the net identifiable assets, totaling $724.2 million, was allocated to goodwill and is being amortized on a straight-line basis over 30 years. The Company's products are instrumental in the delivery of healthcare services and are sold to hospital and alternate care sites, clinical laboratories, pharmaceutical manufacturers and other customers on a worldwide basis. Healthcare products are influenced by a high degree of innovation and technology, by regulation from agencies such as the U.S. Food and Drug Administration (FDA), industry standards and by markets served. They are significantly affected by conditions within the healthcare industry, including continuing legislative initiatives and public and private healthcare insurance and reimbursement programs. An aging population and demand for technologically superior products to extend and improve the quality of life are two major factors fueling growth within the industry. The healthcare industry is experiencing extensive change. All markets served by the Company are highly competitive in the United States and overseas. Legislative bodies, in all likelihood, will continue to review and assess alternative healthcare delivery systems and payment methodologies, and ongoing public debate of these issues can be expected. Cost containment initiatives, market pressures and proposed changes in applicable laws and regulations may significantly affect pricing or demand for medical products, the relative costs associated with doing business and the amount of reimbursement by both government and third-party payors. In particular, the industry is experiencing market-driven reforms from forces within the industry that are exerting pressure on healthcare providers and product manufacturers to reduce healthcare costs. These market-driven reforms are resulting in industry-wide consolidation that is expected to increase the downward pressure on healthcare product margins, as larger buyer and supplier groups exert pricing pressure on providers of medical devices and other healthcare products. Managed care and other healthcare provider organizations have grown substantially in terms of the percentage of the population in the United States that receives medical benefits through such organizations and in terms of the influence and control that they are able to exert over an increasingly large portion of the healthcare industry. These organizations are continuing to consolidate and grow, which may increase the ability of the organizations to influence the practices and pricing involved in the purchase of medical products, including those products sold by the Company. Both cost containment and regulatory reform may have an adverse impact on the Company's results of operations. The demand for price reductions from healthcare customer buying groups continued throughout 1998. This trend, which is expected to continue, had its most significant impact on the Company's Imaging business, where the potential for generic competitive products and available manufacturing capacity continue to lower prices. In response to this market trend, in 1996, the Company entered into a multi-year agreement, with prices subject to periodic renegotiation, with Premier, Inc. (Premier), the largest healthcare purchasing group in the United States. Effective July 1, 1997, Premier named Mallinckrodt a corporate partner and, accordingly, Premier's 1,650 member hospitals are provided incentives to use Mallinckrodt products. For 1998 and 1997, net sales to hospitals under the Premier agreement represented approximately 13 percent and 9 percent of net sales, respectively. No individual customer, either through Premier or otherwise, represented more than 10 percent of net sales for any of the three years in the period ended June 30, 1998. With the acquisition of Nellcor in August 1997, Mallinckrodt is a more significant supplier to healthcare providers. Customers will benefit from the combined companies' expanded product lines and strengthened position as a full service, single source for hospitals and national and regional purchasing organizations. After the acquisition of Nellcor was consummated, management of the combined Company formulated an integration plan to combine Mallinckrodt and Nellcor into one company. Since both companies (Mallinckrodt and Nellcor) had global healthcare operations, senior management, through transition teams, assessed which activities should be consolidated. Management finalized and approved a Nellcor integration plan during the year. Accordingly, the Company recorded additional purchase liabilities of $50.1 million, $30.8 million net of related tax benefit, which were included in the acquisition cost allocation and related goodwill. The principal actions of the plan include the involuntary severance of approximately 450 Nellcor employees as a result of work force reduction primarily in U.S. administrative areas ($37.2 million), relocation of Nellcor employees ($3.8 million), and the elimination of contractual obligations of Nellcor which have no future economic benefit ($9.1 million). These actions are to be completed in 1999 and, although none are expected, reductions in the estimated liability for these integration activities will be offset against the related goodwill. During 1998, the Company recorded a pretax charge to selling, administrative and general expenses of $19.1 million associated with exiting certain activities related to Mallinckrodt operations. The charge included severance costs of $17.1 million related to the involuntary severance of approximately 130 Mallinckrodt employees as a result of work force reduction primarily in the Europe administration function and U.S. sales force, and facility exit costs of $2 million. In addition, the Company recorded a pretax charge to selling, administrative and general expenses of $49.5 million in 1998 related to employee transition bonuses of $16.6 million, increased asset valuation reserves of $12.8 million, and other integration costs of $20.1 million. Substantial cost savings are expected to be realized by the combined operations through procurement and economies of scale in dealing with healthcare purchasing organizations, and the elimination of redundant activities. No assurance can be made as to the amount of cost savings that will actually be realized; however, the Company will apply substantial management resources in order to achieve operating efficiencies from integrating the companies. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations; and Item 8, Note 2 of Notes to Consolidated Financial Statements for additional information about business activities. Respiratory - ----------- The Respiratory Group, which includes Nellcor and Critical Care, develops and markets products that help diagnose, monitor and treat respiratory disorders, wherever patients receive care. Nellcor, which was acquired by Mallinckrodt in August 1997, had established the strategic objectives of focusing on the diagnosis, monitoring and treatment of the respiratory-impaired patient across the global continuum of care and of growing through product line extensions, new product development, acquisitions, and strategic combinations which would broaden its product line and enhance its competitive position. The most significant event occurred in 1995 when Nellcor Incorporated, with its core competency in pulse oximetry, joined with Puritan-Bennett Corporation, the leader in acute care ventilation. Today, the Company's product line is the broadest in the industry and is composed of 7 businesses - anesthesia and respiratory devices; oximetry, including monitors and sensors; critical care and portable ventilators; medical gas, oxygen therapy and spirometry; sleep diagnostic and therapy; blood analysis products; and maintenance services. Anesthesia and respiratory devices include continuous core temperature monitoring systems, fluid warming and convective warm air temperature management systems, and airway management products. Continuous core temperature monitoring and temperature management systems are utilized both in surgical procedures and post- operatively. The airway management product line consists of basic and specialty tracheal tubes, and a full range of disposables used in hospitals to connect the airway management products to anesthesia and ventilation machines, and tracheostomy tubes which are used in hospitals and alternate site facilities for maintaining airways during respiratory care. The Company's endotracheal and tracheostomy tubes are by far the world market leaders. Pulse oximetry products, including monitors and sensors, allow clinicians to monitor both oxygen saturation levels in the bloodstream and pulse rates of patients in a variety of clinical settings and the home. The Company is the world leader in pulse oximetry. The Company's fetal pulse oximeter is already approved in Europe and is undergoing clinical trials in the United States. It is believed this product will help lower the risks involved in childbirth by reducing unnecessary Caesarean section deliveries. The Company believes that fetal pulse oximetry can help clinicians make better- informed decisions regarding the status of a fetus during labor and delivery by providing information that helps them determine if the fetus is adequately oxygenated when the heart-rate pattern is non- reassuring. The Company's OEM oximetry modules are sold to manufacturers of multi-parameter monitoring systems which incorporate the Company's oximetry technology into their own systems. Mallinckrodt currently has agreements with 76 OEMs and licensees. These customers include medical equipment manufacturers in the United States, Europe, Asia, Japan and Latin America. During 1998, Mallinckrodt received 510(k) premarket notification clearance for its new stand-alone bedside pulse oximetry product line, including the NPB 190, NPB 195, NPB 290, and NPB 295. The critical care and portable ventilators business currently offers the world's most popular ventilator, the Puritan-Bennett 7200* ventilator system. The 7200* Series ventilator system is a critical care ventilator purchased primarily by hospitals to assist or manage patient respiration in a variety of acute care settings. The 7200* Series ventilator is designed to ease the work of patient breathing and lessen patient discomfort. During the fourth quarter of 1998, the Company received marketing clearance from the FDA to sell its new 840* ventilator, which is designed to become the world's leading infant-pediatric-adult critical care ventilator. During the second quarter of 1998, the Company received marketing clearance from the FDA to sell its new, state-of-the-art 740* ventilator. The low operating and maintenance costs of the 740* ventilator make it ideal for use in developing countries and in subacute care facilities. The medical gas, oxygen therapy and spirometry product family covers the entire range of oxygen therapy functions, from oxygen concentrators to portable liquid oxygen, to high-pressure oxygen cylinder systems and conservation devices. The Company is the largest producer of nitrous oxide in North America, and distributes this along with other medical and specialty gases through a nationwide system of 32 branches. The Company's spirometry system measures lung capacity and performance through a complete line of devices targeted at hospital pulmonologists and primary care physicians. The Company also received 510(k) premarket clearance for its new spirometry system, the Simplicity. This small, lightweight, handheld system is designed for primary care physicians. The Company also markets peak flow meters and other devices to help patients with asthma or other forms of chronic obstructive pulmonary disease (COPD) better manage their disease. Diagnostic and therapeutic sleep products are used in hospital sleep laboratories to diagnose sleep problems and in a variety of other settings to monitor and treat sleep disorders. HemoCue products include blood hemoglobin and glucose analysis systems for use in hospitals and alternate site facilities. The Company's service programs support customers during all stages of product ownership and assist healthcare providers in merging the most appropriate technology with the most cost-effective methods, including CliniVision, the market-leading handheld computing tool used in respiratory therapy. Mallinckrodt's customers have traditionally been physicians and healthcare professionals in clinical settings such as critical care units of hospitals. However, with the increasing pressure to lower health care costs, more patients are being treated in lower-cost areas in and outside the hospital. The Company's products are now purchased for use throughout the hospital, including intermediate care and step-down units, labor and delivery rooms, emergency rooms and general care floors, and are marketed and sold into the alternate site care market, including surgicenters, subacute care and skilled nursing facilities, physicians' offices, clinics, ambulatory care settings, and the growing alternate care setting in the home. The Company's products are sold in the major markets of the world, principally through a direct sales force, assisted by clinical consultants and specialists, corporate account managers, and distributors in the United States and internationally. During 1996, the Company entered into an agreement with Hewlett- Packard Company (HP) whereby it licensed to HP for the European market its proprietary fetal oximetry technology. Under the agreement, HP will use the Company's software algorithms, calibrations and fetal sensors for measuring fetal oxygen saturation in future integrated HP fetal/maternal monitors. In June 1995, the Company acquired Alton Dean, Inc. of Salt Lake City, Utah to complement its temperature management business. Alton Dean's products include in-line sterile fluid warmers, pressure infusers, and irrigation pumps used in operating rooms and intensive care units. These products are marketed through distributors in the U.S. and Europe. This acquisition has since been integrated into the Juarez, Mexico operation under the Warm Flo brand name. In 1994, Mallinckrodt acquired DAR S.p.A. of Mirandola, Italy to complement its tracheal and tracheostomy tube business and expand the airway management business into related anesthesia and respiratory disposables. DAR products include disposable filters, heat/moisture exchangers, masks and breathing circuits used in operating rooms and intensive care units to provide respiratory support to critically ill patients. In 1994, Juarez, Mexico became the new production base for the temperature monitoring systems products used in emergency and critical care settings. The Company capitalized on the rapid conversion to disposable tracheal tubes in Europe by expanding its anesthesiology products plant in Athlone, Ireland. In 1996, a new facility to manufacture tracheal tubes in Juarez, Mexico was fully operational and the Argyle, New York manufacturing facility was closed. On September 30, 1996, the Company sold Mallinckrodt Sensor Systems, Inc. to Instrumentation Laboratory Company. The financial statements include the results of this business prior to sale; however, the associated earnings and assets were not material to the healthcare segment or to Mallinckrodt Inc. Respiratory manufacturing facilities are located in Angelholm, Sweden; Argyle, New York; Athlone, Ireland; Carlsbad, California; Irvine, California; Galway, Ireland; Johannesburg, South Africa; Juarez, Mexico; Tijuana, Mexico; Indianapolis, Indiana; Mirandola, Italy; Nancy, France; Plymouth, Minnesota; and St. Charles, Missouri. The company also operates 32 branches which transfill and distribute medical gases. Mallinckrodt owns the Argyle, Athlone, Carlsbad, Galway, Mirandola and Nancy facilities. The remainder are leased. The Argyle, New York facility is no longer in production and efforts are underway to divest this facility. For information about legal activities involving the Respiratory Group, see the Other Litigation section of Legal Proceedings in Item 3. Imaging - ------- The Imaging Group includes the manufacture, sale and distribution of products used in radiology, cardiology and nuclear medicine. Radiology and cardiology products include iodinated contrast media (ionic and nonionic), ultrasound contrast agents, magnetic resonance imaging agents (MRI), and catheters for use in studies of the cardiovascular system, brain, abdominal organs, renal system, peripheral vascular system, and other areas of the body to aid in diagnosis and therapy. These products are marketed in the U.S. principally by a geographically organized sales force, and internationally through direct sales forces and distributors. Since its introduction in the U.S. in 1989, Optiray*, a low osmolar, nonionic x-ray medium, has been widely accepted in both radiology and cardiology procedures. Optiray* began to be introduced outside the U.S. in 1991. To provide capacity for growing Optiray* volumes in the international market, the Company opened a new production facility in Dublin, Ireland during 1994 for the manufacture of Optiray* in its bulk drug form. Capacity expansion projects at Mallinckrodt's existing plant in St. Louis, Missouri were completed in 1994 and again in June 1997. In addition, the Company developed a new process for the synthesis of Ioversol, the key compound in the production of Optiray*, which will result in lower cost and additional capacity. The process change was completed at the Dublin facility in February 1998 and is expected to be completed at the St. Louis manufacturing site in January 2000. In June 1990, Mallinckrodt introduced Ultraject*, a patented innovation in contrast media agent administration. This prefilled syringe provides a more efficient, convenient and safer method of delivering contrast agents. Ultraject* allows Mallinckrodt to differentiate its contrast media offering by providing advantages over traditional glass bottles and vials because it reduces handling hazards and the potential for dosage error. In January 1996, Mallinckrodt acquired Liebel-Flarsheim Company of Cincinnati, Ohio to enhance its position in the contrast imaging arena. Liebel- Flarsheim's products include contrast media power injectors for angiography and CT, x-ray components, and specialized equipment for diagnostic urology procedures. In September 1996, Mallinckrodt signed a collaboration agreement with Epix Medical Inc., formerly known as METASYN, Inc., to co-develop a blood pool MRI agent. Mallinckrodt has worldwide manufacturing rights for the products developed and has selling and marketing rights to them for all countries, except Japan. In April 1997, Mallinckrodt introduced GastroMARK*, an oral GI bowel marker used in magnetic resonance imaging procedures. This product was licensed from Advanced Magnetics, Inc. of Cambridge, Massachusetts and is distributed exclusively by Mallinckrodt in the U.S., Canada, Mexico, Japan, Australia and New Zealand. The cardiology business is directed toward meeting the needs of both invasive and non-invasive cardiology in diagnosing and treating diseases of the heart and the cardiovascular system. The business currently offers both ionic and nonionic contrast agents, ultrasound contrast agents, and interventional catheters and related supplies. These products are sold directly to hospitals, primarily by a dedicated sales organization within Mallinckrodt's geographically organized sales force. In addition to selling Imaging products to individual hospitals and integrated healthcare networks, a significant amount of sales occurs through various group purchasing organizations. In 1996, Mallinckrodt won a five-year agreement (since extended to seven years) with Premier. Premier is the largest healthcare purchasing group in the U.S., representing approximately 30 percent of all x-ray contrast media purchased. In April 1997, Nuclear Medicine products were added to the Premier contract. During 1989, Mallinckrodt acquired an equity position of less than two percent of the then outstanding common shares of Molecular Biosystems, Inc. (MBI) of San Diego, California, and obtained exclusive marketing rights in the Western Hemisphere for Albunex*, a new ultrasound contrast agent. Albunex* was unanimously recommended for approval by a Devices and Radiology Advisory Panel of the FDA in July 1992. MBI received an approvable letter for Albunex* from the FDA in April 1994. Final approval was received early in August 1994, with Mallinckrodt's launch of the product occurring in the second quarter of 1995. On September 7, 1995, Mallinckrodt entered into a new distribution and investment agreement for Albunex* and OPTISON*(FS069), a major new ultrasound contrast agent in development. Under the September 7, 1995 agreement, Mallinckrodt made an additional equity investment of $13 million in MBI. In addition, the agreement also provides for Mallinckrodt to partially fund OPTISON* clinical development and make various milestone payments. Mallinckrodt's total equity position in MBI pursuant to this agreement is under ten percent of that Company's outstanding and publicly traded common stock. In December 1996, Mallinckrodt extended the agreement with MBI to exclusively distribute in Europe, Africa, most of Asia, Australia and New Zealand. Albunex* received FDA approval in June 1997 for the diagnosis of fallopian tube patency as part of infertility workup. On October 17, 1996, MBI submitted a premarket approval application to the FDA's Center for Devices and Radiologic Health (CDRH) for OPTISON*. In February 1997, OPTISON* received unconditional recommendation for approval from the CDRH advisory panel of the FDA. Then as a result of a citizens petition and subsequent court request, the FDA reconsidered whether OPTISON* should continue to be reviewed as a device while other ultrasound contrast agents were regulated as drugs. On July 29, 1997, the FDA decided that all ultrasound contrast agents are drugs, not medical devices. Therefore, the OPTISON* premarket approval application to the CDRH was transferred to the Center for Drug Evaluation and Research (CDER). The FDA's decision did not affect the marketing of Albunex*. In a related matter, MBI and Mallinckrodt have taken legal action to preempt any competitor allegation regarding patent infringement by requesting the United States Patent Office to reexamine patents granted. For additional information about the legal action, see the Other Litigation section of Legal Proceedings in Item 3. On December 31, 1997, OPTISON* received final FDA approval. The product was launched in the United States on January 2, 1998. OPTISON*, the first of the perflourocarbon-containing ultrasound agents to reach the market, enables physicians to enhance resolution of anatomical structure where ultrasound alone is inadequate. The product is specifically indicated for use in patients with suboptimal echocardiograms to opacify the left ventricle and to improve the delineation of the left ventricular endocardial borders. Ultrasound cardiac imaging has several advantages over other imaging methods. It is minimally invasive, relatively inexpensive and can provide a real-time image. OPTISON* helps increase the effectiveness of echocardiography in diagnosing heart disease by introducing gas- filled microspheres into the blood. The microspheres travel in the bloodstream to the left ventricle of the heart, where the microspheres reflect the soundwaves generated from ultrasound equipment, enabling the development of a clearer, more diagnostic ultrasound image. On May 19, 1998, Mallinckrodt announced that OPTISON*, the world's first and only commercially available next-generation cardiac ultrasound contrast imaging agent, had received final marketing authorization by the European Commission for use in patients with suspected or known cardiovascular disease. The authorization covers all 15 member states of the European Union. Nuclear medicine products consist of radiopharmaceuticals used to provide images of numerous body organs, anatomy and function, and to diagnose and treat diseases. Nuclear medicine products are sold to hospitals and clinics in the U.S. by both a direct geographically organized sales force and through a nationwide network of nuclear pharmacies. Internationally, nuclear medicine products are marketed through direct sales forces and distributors. In 1995, Mallinckrodt signed an agreement with Medi+Physics to distribute healthcare proprietary radiopharmaceutical products through Medi+Physics' radiopharmacies in the U.S. and Canada. Additionally, in 1997, the Company signed a five-year co-marketing agreement with Medi+Physics to market Myoview* in the U.S. In June 1994, the FDA authorized U.S. marketing of OctreoScan*. This unique radiopharmaceutical assists physicians in diagnosing and determining the extent of spread of certain types of cancers, using a non-invasive procedure instead of surgical biopsy. OctreoScan* is manufactured at facilities in St. Louis, Missouri and Petten, the Netherlands. Introduction of the product began in June 1994 through key hospitals specializing in cancer treatment. Marketing of the product was expanded in 1995 upon FDA approval of promotional material. In 1992, Mallinckrodt signed an agreement with the Netherlands Energy Research Foundation to construct a plant in Petten, the Netherlands dedicated to the manufacture of molybdenum-99 (Mo99), a key raw material used in the production of the nuclear medicine imaging product technetium-99m. The Mo99 production facility, which began operation in June 1996, is a new facility adjacent to the existing manufacturing site. To meet growing worldwide demand for cyclotron-produced products, Mallinckrodt brought a new cyclotron on-line at Petten, the Netherlands in 1993 and expanded cyclotron capacity at its radiopharmaceutical production facility in Maryland Heights, Missouri in 1995. The Company expanded the Maryland Heights, Missouri manufacturing facility to introduce an improved technetium-99m generator product in early 1997. Imaging manufacturing facilities are located in Angleton, Texas; Cincinnati, Ohio; Maryland Heights, Missouri; Mexico City, Mexico; Mulhuddart, Ireland; Petten, the Netherlands; Pointe Claire, Canada; Raleigh, North Carolina; and St. Louis, Missouri. Mallinckrodt owns these facilities. The Company also operates 37 nuclear pharmacies located in leased facilities throughout the U.S. Pharmaceuticals - --------------- Pharmaceuticals Group products include analgesics such as acetaminophen (APAP) used to control pain and fever; codeine salts, morphine and other opium-based narcotics and synthetic narcotics used to treat pain and coughs; and peptides which are used in many new pharmaceuticals. Other Pharmaceuticals Group products include laboratory chemicals used in analysis and microelectronic chemicals used in the semiconductor industry; Toleron brand of ferrous fumarate which stimulates the formation of red blood cells; magnesium stearate for use as a tableting aid in pharmaceuticals; potassium chloride for use as a potassium supplement in pharmaceuticals and nutritionals; and other salts, chemicals and reagents used in the production of pharmaceutical and food products. Most pharmaceutical products are sold through distributors and by a direct sales force to the pharmaceutical industry for use in the manufacture of dosage form drugs. Narcotic prescription chemicals are sold directly to pharmaceutical manufacturers and pharmaceutical dosage products are sold directly to drug wholesalers and chain pharmacies, while opiate addiction products are sold primarily to clinics. Laboratory chemical products, which include thousands of high-purity reagent chemicals used in research and development and analytical laboratories, are sold primarily through distributors to medical, industrial, educational and governmental laboratories. A direct sales force is used to offer microelectronic chemicals and photoresist strippers to worldwide semi-conductor chip producers. Mallinckrodt expanded its product offering in healthcare by acquiring an analgesic pharmaceutical product line from King Pharmaceuticals, Inc. in 1996. In November 1996, Mallinckrodt acquired D.M. Graham Laboratories, Inc. of Hobart, New York. Graham Laboratories is a contract manufacturer of both tablet and capsule dosage pharmaceuticals and a licensed producer of a variety of medicinal narcotic substances. The Company expanded its capacity at its St. Louis, Missouri site to manufacture pharmaceutical intermediates and additives with the addition of an FDA registered facility in 1997. The APAP manufacturing at the Raleigh, North Carolina facility has been incrementally expanded over the past few years, while costs have been reduced. Capacity of the Derbyshire, England para-aminophenol (PAP, a precursor of APAP) manufacturing plant has also been significantly increased. Mallinckrodt also upgraded its Compap* production facility in Greenville, Illinois in 1997. In addition, the Company continues to work on several projects to expand and upgrade the narcotics facility in St. Louis, Missouri to meet growing worldwide demand. Pharmaceuticals are manufactured in Derbyshire, England; Deventer, the Netherlands; Greenville, Illinois; Hayward, California; Hobart, New York; Mexico City, Mexico; Paris, Kentucky; Phillipsburg, New Jersey; Raleigh, North Carolina; St. Louis, Missouri; and Torrance, California. The Company has distribution locations in the U.S. in Carlsbad, California; Mission Viejo, California; Plymouth, Minnesota; St. Charles, Missouri; St. Louis, Missouri; Cincinnati, Ohio; and El Paso, Texas. The Company leases space for its international operations in Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China, Columbia, France, Germany, Ireland, Italy, Japan, Korea, Malaysia, Mexico, the Netherlands, Philippines, Poland, Portugal, Puerto Rico, Singapore, South Africa, and Switzerland. OTHER ACTIONS Discontinued Operations - ----------------------- In 1998, the Company sold or committed to sell the catalysts and chemical additives and Aero Systems divisions. Certain liabilities for environmental, litigation and employee benefits remain with the Company. On June 30, 1997, the Company sold its animal health segment for cash plus the assumption of certain liabilities. Environmental liabilities, certain facility leases, and certain liabilities for employee benefits, including postretirement benefits, were retained by the Company. On March 31, 1997, the Company disposed of Fries & Fries, Inc., a wholly owned subsidiary which owned the Company's 50 percent interest in Tastemaker, which was the flavors joint venture with Hercules Incorporated. In October 1995, the Company disposed of its feed ingredients business. Discontinued operations for 1997 and 1996 also included other charges, primarily for environmental and litigation costs related to previously divested operations. The results of these transactions and the results of operations from these businesses have been reclassified to discontinued operations, and prior year results have also been reclassified. For additional information about discontinued operations, see Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7, and Note 2 of the Notes to Consolidated Financial Statements in Item 8. OTHER ACTIVITIES Research and Development - ------------------------ The Company performs applied research directed at development of new products, development of new uses for existing products, and improvement of existing products and processes. Research and development programs include laboratory research as well as product development and application. The Company's development activities are focused on market-place needs. Internal research efforts in each of its business groups are supplemented with third-party and university technical agreements. Research and development expenses, excluding purchased research and development as a result of the Nellcor acquisition in 1998, were $149.0 million, $100.5 million and $80.6 million in 1998, 1997 and 1996, respectively. Research and development activities for the Imaging Group are performed primarily in Angleton, Texas; Cincinnati, Ohio; Petten, the Netherlands; and St. Louis, Missouri. Research and development activities for the Pharmaceuticals Group are carried on in St. Louis. Technical personnel for process support are located at each manufacturing location. The Respiratory Group's research and development functions are individually aligned with each of the seven business units within the organization: anesthesia and respiratory devices; oximetry, including monitors and sensors; critical care and portable ventilators; medical gas, oxygen therapy and spirometry; sleep diagnostic and therapy; blood analysis products; and maintenance services. The research and development functions are housed most frequently near a primary manufacturing site, which are principally located in Carlsbad, California; Pleasanton, California; Hazelwood, Missouri; Irvine, California; Mirandola, Italy; Plymouth, Minnesota; St. Charles, Missouri; and Angelholm, Sweden. Patents, Trademarks and Licenses - -------------------------------- Mallinckrodt owns a number of patents and trademarks, has a substantial number of patent applications pending, and is licensed under patents owned by others. No single patent is considered to be essential to the Company as a whole, but in the aggregate, the patents are of material importance to the Company. Government Regulation - --------------------- Drug and Medical Device Regulation -- Most of the Company's businesses are subject to varying degrees of governmental regulation in the countries in which operations are conducted, and the general trend is toward regulation of increasing stringency. In the United States, the drug and device industries have long been subject to regulation by various federal, state and local agencies, primarily as to product safety, efficacy, advertising and labeling. The exercise of broad regulatory powers by the FDA continues to result in increases in the amounts of testing and documentation required for FDA clearance of new drugs and devices and a corresponding increase in the expense of product introduction. Similar trends toward product and process regulation are also evident in a number of major countries outside of the United States, especially in the European Economic Community where efforts are continuing to harmonize the internal regulatory systems. In 1997, the Food and Drug Administration Modernization Act was passed in the United States and was the culmination of a comprehensive legislative reform effort designed to streamline regulatory procedures within the FDA and to improve the regulation of drugs and medical devices. The legislation was principally designed to ensure the timely availability of safe and effective drugs and medical devices by expediting the premarket review process for new products. The regulatory agencies under whose purview the Company operates have administrative powers that may subject the Company to such actions as product recalls, seizure of products, and other civil and criminal sanctions. In some cases, the Company may deem it advisable to initiate product recalls voluntarily. Puritan-Bennett Corporation (Puritan-Bennett), which became a wholly owned subsidiary of Mallinckrodt as a result of the acquisition of Nellcor in August 1997, had entered into a consent decree with the FDA in January 1994, pursuant to which Puritan-Bennett agreed to maintain systems and procedures complying with the FDA's good manufacturing practices regulation and medical device reporting regulation in all of its device manufacturing facilities. Burton A. Dole, Jr., who currently serves as the sole director and the sole officer of Puritan-Bennett, is a party to the consent decree. Puritan-Bennett has experienced and will continue to experience incremental operating costs due to ongoing regulatory compliance requirements and quality assurance programs initiated in part as a result of the FDA consent degree. The amount of these incremental costs currently cannot be completely predicted and will depend upon a variety of factors, including future changes in statutes and regulations governing medical device manufacturers, and the manner in which the FDA continues to enforce and interpret the requirements of the consent decree. There can be no assurance that the Company will not experience problems associated with FDA regulatory compliance, including increased general costs of ongoing regulatory compliance and specific costs associated with the Puritan-Bennett consent decree. The Company could experience a material adverse effect on business, operations, profitability and outlook from, among other things: (i) requirements associated with the Puritan-Bennett consent decree; (ii) requirements arising from continuing company-wide adherence to quality assurance and good manufacturing practices; (iii) the results of future FDA inspections of the operations and facilities of the Company; and (iv) any modification, extension or adverse interpretation of the Puritan-Bennett consent decree or any product recall, plant closure or other FDA enforcement activity with respect to the Company. Environmental Regulation -- The Company's operations are subject to a variety of federal, state and local environmental laws and regulations that govern, among other things, the generation, handling, storage, transportation, treatment and disposal of hazardous substances, discharges to water, and air emissions from equipment and facilities. Most of the Company's environmental-related capital expenditures are in response to provisions of the Federal Clean Air Act; Water Pollution Control Act; Resource Conservation and Recovery Act; Comprehensive Environmental Response, Compensation, and Liability Act; and land use, air and water protection regulations of the various localities and states, and their foreign counterparts. Capital expenditures worldwide relating to air emission control, wastewater purification, land reclamation and solid waste disposal totaled approximately $6 million in 1998 and $6 million in 1997. The Company currently estimates that environmental capital expenditures during 1999 and 2000 will be $21 million and $14 million, respectively. During 1996, the Company assumed certain liabilities to remediate various sites in the future and was compensated by the previous owner of the applicable properties for certain remediation costs to be incurred. The Company established additional environmental reserves for discontinued operations. The Company had accruals, included in current accrued liabilities and other noncurrent liabilities and deferred credits, of $126.2 million at June 30, 1998 for costs associated with the study and remediation of Superfund sites and for the Company's current and former operating sites. Any claims for potential recovery from any sources have not been valued against the accrued environmental liabilities. While ongoing litigation may eventually result in recovery of costs expended at certain of the environmental sites, any recovery is contingent upon a successful outcome and has not been accrued. The Company has established accruals only for those 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 results of operations or financial position. Compliance -- Mallinckrodt endeavors to comply with all applicable laws and regulations, but there can be no assurance that its compliance efforts will always be acceptable. Instances of non-compliance have occurred in the past and, although they have not had a material adverse impact on the Company, such instances could occur in the future and possibly have a material adverse impact. In particular, the Company is unable to predict the extent to which it may be adversely affected by future regulatory developments such as new or changed laws or regulations. See also the Environmental Matters section of Legal Proceedings in Item 3, Management's Discussion and Analysis of Financial Condition and Results of Operation in Item 7, and Note 21 of the Notes to Consolidated Financial Statements in Item 8 for additional information. Employees - --------- Mallinckrodt had 12,823 employees at June 30, 1998, consisting of 7,706 U.S. based employees and 5,117 employees outside the U.S. Labor Relations - --------------- In the U.S., the Company has ten collective bargaining agreements with nine international unions or their affiliated locals covering 969 employees. Three agreements covering 348 employees were negotiated during 1998, with no work stoppages. Five agreements covering 527 employees will expire in 1999. Eight operating locations outside the U.S. have collective bargaining agreements and/or work counsel agreements covering approximately 1,210 employees. Recent wage and benefit increases were consistent with competitive industry and community patterns. ITEM 2. PROPERTIES Information regarding the principal plant and properties of Mallinckrodt is included in the Operations and Other Activities sections of Business in Item 1. Additionally, Mallinckrodt leases office space in St. Louis, Missouri. The Company believes its manufacturing and distribution facilities are adequate, suitable and of sufficient capacity to support its current operations. ITEM 3. LEGAL PROCEEDINGS Environmental Matters - --------------------- The Company is actively involved in the investigation or remediation of alleged contamination of 19 currently or previously owned or operated sites and at 19 off-site locations where its waste was taken for treatment or disposal. These actions are in various stages of development and generally include demands for reimbursement of previously incurred costs, or costs for future investigation and/or for remedial actions. In many instances, the dollar amount of the claim is not specified. For some sites, other potentially responsible parties may be jointly and severally responsible, along with the Company, to pay for any past remediation and other related expenses. For other sites, the Company may be solely responsible for remediation and related costs. The Company anticipates that a portion of these costs will be covered by insurance or third party indemnities. A number of the currently pending matters relate to historic and formerly owned operations of the Company. 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 only for those 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 results of operations or financial position. The following is a brief discussion of certain pending environmental proceedings which the Company believes, based on currently available information, are most significant: Orrington, ME - Hanlin Group, Inc. purchased a chemical manufacturing facility located in Orrington, Maine from the Company in 1982. In April 1989, Hanlin filed suit in the U.S. District Court for the District of Maine alleging that the Company had operated the facility in violation of federal and state environmental laws. More specifically, Hanlin asserted that the Company had allowed the discharge of unlawful amounts of mercury, contaminating the soil, air, groundwater and adjoining waterways. The parties settled these claims in 1991. The facility was subsequently sold to HoltraChem Manufacturing Company, L.L.C. (HoltraChem); the settlement agreement was assigned to HoltraChem as part of the sale. Under the settlement agreement, the Company agreed to pay specified costs of a study ordered by EPA. A draft Site Investigation has been completed. Additional investigation is required to address questions from EPA and Maine. The Company is completing additional work to supplement the investigation prior to submitting the final Site Investigation plan. Costs of implementing remedial action at the site will be shared by the Company and HoltraChem on a yet-to-be agreed basis. If the parties cannot reach agreement, the matter will be referred to binding arbitration. Auburn Hills, MI - The Company is a defendant in an action that was filed on January 13, 1986 and is currently pending in the U.S. District Court for the Eastern District of Michigan relating to a drum reconditioning facility located in Auburn Hills, Michigan that was leased and operated by the Company in the 1970s. The State of Michigan (State) and the present owner of the facility, Columbus Steel Drum Company, Inc., claim that the Company is jointly and severally liable, along with approximately twenty other former owners and operators of the facility, for alleged contamination of soil and groundwater resulting from improper disposal practices. The State seeks remedial measures at the site and reimbursement for costs incurred to date. The current owner seeks reimbursement for previously incurred clean-up costs and compensation for damages to the site. The Company denies any violation of applicable law on its part. The Company has filed a third-party complaint against approximately 110 parties that sent drums to the facility, seeking contribution for damages that might be assessed against the Company. The Company and other parties have explored settlement alternatives, but have not reached settlement to date. Discovery is proceeding. The Company submitted a remedial action plan to the State of Michigan for this site which was rejected. Although the Company completed additional work as requested by the State and prepared a report describing the results of the additional work and submitted it to the Court, the State decided to complete additional investigation. The Company is awaiting completion of the State investigations to determine if it will submit a Revised Remedial Action Plan. St. Louis, MO/CT Decommissioning - The Company processed certain ores, columbium and tantalum, under license with the Nuclear Regulatory Commission (NRC) in the 1960s through 1986. The Company is required to complete decommissioning of the processing areas, building and soil on the site where manufacturing occurred pursuant to NRC regulations. The Company submitted a Phase I Decommissioning Plan to NRC in November 1997 and is awaiting NRC comments. The Company is developing the Phase II Decommissioning and Decontamination Plan to submit to the NRC. This plan is due in December 1998. Raleigh, NC - The Company's bulk pharmaceutical facility has been operating since the mid 1960s. It has a Resource Conservation Recovery Act (RCRA) Part B permit which requires the facility to undergo corrective action. There are several phases to the corrective action process. The Company has worked with federal and state agencies to complete the Remedial Feasibility Investigation and identified certain Solid Waste Management Units (SWMUs). The Company received its permit and submitted a RCRA Facility Investigation Work Plan to the North Carolina Department of Environment, Health and Natural Resources (Agency) proposing to investigate the SWMUs. The Agency identified certain technical issues concerning the Work Plan and the Company has been responding to these issues through revisions to the Work Plan. The Company continues to work with the Agency to complete the RCRA process. A Revised Work Plan was submitted to the Agency in April 1997. Springville, UT - In 1996, the Company entered into an interim settlement agreement with Ensign-Bickford Industries, Inc. (EBI) to share certain costs of remediating groundwater that allegedly has been impacted by nitrates and explosive compounds emanating from EBI's Springville, Utah explosives plant. The plant, under a series of owners, has been manufacturing explosives at the mouth of the Spanish Fork Canyon in Utah since the 1940s. The Company sold the plant and related assets to the Trojan Corporation in 1982. EBI acquired the Trojan Corporation in 1986 and has operated the plant since that time. Pursuant to a 1991 stipulation and consent order with the State of Utah (State), EBI has conducted a feasibility study of alternatives for remediating impacted off-site groundwater. EBI also is conducting a corrective action study under a 1995 consent order with the State. The Company and EBI have entered into an interim allocation agreement with two additional parties to address funding remedial activities at this site. In October 1996, a resident with property bordering the Springville site filed suit against EBI in the U.S. District Court for the District of Utah (Don Henrichsen, et al. v. The Ensign-Bickford --------------------------------------------- Company, et al.) alleging nuisance and trespass for contamination - --------------- that allegedly migrated onto the resident's property. On January 31, 1997, the Company was added as a defendant. Some discovery has been proceeding in this case, but no significant developments have occurred. On October 24, 1996, the Company was also sued in the U.S. District Court for the District of Utah (Kent Gordon Stephens, et al. v. ------------------------------- Trojan Corporation, et al.) by certain other residents near the - -------------------------- plant alleging injuries and property damage which they claim to have suffered as a result of contamination of their drinking water by chemicals emanating from the plant. EBI had previously been sued by these parties. The Company and EBI were presented with a settlement demand by plaintiffs and have negotiated a final settlement in this lawsuit. The State also has advised EBI that it is investigating a natural resource damages claim. However, the State has not indicated it plans to pursue any claims. Nevertheless, all parties have entered into a Tolling Agreement with the State in connection with the potential natural resource damages claim. For additional information relating to environmental matters, see the Environmental Regulation section of Business in Item 1. Other Litigation - ---------------- The Company is a party to a number of other legal proceedings arising in the ordinary course of business. The Company does not believe that these pending legal matters will have a material adverse effect on its financial condition or results of operations. The most significant pending legal matters involve two products, OPTISON* and convective warming blankets. OPTISON* Patent Litigation - On July 31 1997, the Company and its licensor, Molecular BioSystems, Inc. ("MBI") filed suit (the "Mallinckrodt/MBI Action") in the United States District Court for the District of Columbia against four potential competitors - Sonus Pharmaceuticals, Inc. ("Sonus"), Nycomed Imaging AS ("Nycomed"), ImaRx Pharmaceutical Corp. ("ImaRx") and its marketing partner DuPont Merck, and Bracco International BV ("Bracco") - seeking declarations that certain of their ultrasound contrast agent patents are invalid. The complaint alleges that each of the defendant's patents are invalid on a variety of independent grounds under United States patent laws. In addition to requesting that all of the patents in question be declared invalid, the complaint requests a declaration that, contrary to the defendants' contentions, MBI and the Company do not infringe the defendants' patents, and asks that the defendants be enjoined from proceeding against MBI and the Company for infringement until the status of the defendants' patents has been determined by the court or the U.S. Patent and Trademark Office ("PTO"). The complaint alleges that each defendant has claimed or is likely to claim that its patent or patents cover OPTISON* and will attempt to prevent its commercialization. Each of the defendants, except Nycomed, filed a motion to dismiss the complaint on jurisdictional grounds. In January 1998, the court dismissed the complaint against (a) ImaRx (and its marketing partner, DuPont Merck) and Bracco for lack of jurisdiction, and (b) Sonus for improper venue. The court's ruling did not purport to rule on the merits of the Company and MBI's claims. The Company and MBI elected not to appeal the court's decision. Accordingly, only the action against Nycomed will proceed in the District Court for the District of Columbia. Following the dismissal of Sonus as a defendant in the above- described action, Sonus activated a patent infringement lawsuit (the "Sonus Action") that it had filed on August 4, 1997 against the Company and MBI in the United States District Court for the Western District of Washington. Although the complaint was filed in August 1997, Sonus had agreed not to proceed with its action until the jurisdictional motions were decided in the Mallinckrodt/MBI Action. Sonus's complaint alleges that the manufacture and sale of OPTISON* by the Company and MBI infringe two patents owned by Sonus. The Company and MBI have filed a counterclaim seeking a declaration of invalidity and noninfringement with respect to the Sonus patents. On April 21, 1998, Nycomed filed an action in the District Court of The Hague, the Netherlands against various Mallinckrodt European entities and MBI, alleging that OPTISON* infringed or will infringe its European patent EP0576521. Nycomed is seeking an injunction against future sales and damages and a preliminary hearing is scheduled for October 1998. The patent that is the subject of this action is the counterpart of Nycomed's United States patent that is the subject matter of the Mallinckrodt/MBI Action. The Company is vigorously defending its position in each of the above-described actions. Augustine Medical, Inc. - On October 6, 1994, Augustine Medical, Inc. ("Augustine") commenced patent infringement litigation against Mallinckrodt Group Inc. and Mallinckrodt Medical, Inc. (the "Company") in the U.S. District Court for the District of Minnesota. The original complaint was amended to include allegations of patent infringement regarding U.S. Patent Nos. 4,572,188 (the '188 patent); 5,300,102 (the '102 patent); 5,324,320 (the '320 patent); and 4,405,371 (the '371 patent). Specifically, Augustine alleged that the Company's sale of all five (5) models of its convective warming blankets infringes certain claims of one or more of the aforementioned patents. Augustine sought to have the Company permanently enjoined from further acts of alleged infringement and an award of damages adequate to compensate for the Company's alleged infringement, together with attorneys' fees. Augustine included a claim of willful infringement and requested enhanced damages based thereon. The Company filed a motion for summary judgment of non-infringement of all of the asserted patents and the magistrate judge issued a report and recommendations dated March 18, 1996 indicating that there is no literal infringement of the '188 patent, but that factual questions existed with respect to infringement of the '102 patent, the '320 patent, and the '371 patent (the "Remaining Patents") and as to whether the '188 patent is infringed under the doctrine of equivalents. The Company also filed a motion for summary judgment of invalidity of certain claims of the '371 patent. The Court granted the Company's motion for summary judgment and found claims 1, 3, 4 and 8 of Augustine's '371 patent to be invalid. In addition, on July 18, 1997, the magistrate judge issued a report and recommendation indicating that in addition to there being no literal infringement of the '188 patent, there is no infringement under the doctrine of equivalents. This was confirmed by the Court and the '188 patent was eliminated from the case. The liability phase of the case was tried to a jury in August 1997 and the verdict was that the Company's blankets infringe the Remaining Patents under the doctrine of equivalents, but do not literally infringe the patents. There was also a finding of no willful infringement. On September 22, 1997, the jury awarded damages in the amount of $16.8 million. The Company has appealed the jury verdicts of liability and damages to the Court of Appeals for the Federal Circuit (a special court for patent appeals). With the advice of outside counsel, the Company believes there was insufficient evidence of equivalents presented and consequently for this and other reasons the verdicts were in error. The Company is working vigorously in the Court of Appeals to overturn the verdicts. On September 26, 1997, the District Court judge ordered the Company to stop manufacturing and selling its blankets in the United States, except for sales to existing customers which were allowed to continue until January 1, 1998. The Company subsequently obtained a stay of the order from the Court of Appeals for the Federal Circuit, pending the Company's appeal of the jury's finding of infringement. The Court of Appeals indicated that the Company had raised a "substantial question" meriting review by the Court. The Company believes this is a positive development and supports its belief as to the ultimate reversal of the jury's verdict. A decision by the Court of Appeals is expected later in calendar year 1998. On February 24, 1998, Augustine 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 EPO311336. Augustine is seeking an injunction against future sales and damages. This European patent is a counterpart of Augustine's United States patent, which is the subject matter of above-described litigation between the parties in the U.S. District Court in the District of Minnesota. Trial of this action is currently set for December 1998. Mallinckrodt will vigorously defend this action contending that the Augustine patent is invalid or not infringed. See Note 21 of the Notes to Consolidated Financial Statements in Item 8 for additional information about the ongoing patent infringement litigation between Augustine and Mallinckrodt. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the three months ended June 30, 1998, there were no matters submitted to a vote of the Company's shareholders. EXECUTIVE OFFICERS OF THE REGISTRANT The ages and five-year employment histories of Mallinckrodt's executive officers at June 30, 1998 were as follows: C. Ray Holman Age 55. Chairman of the Company since October 1994; Chief Executive Officer of the Company since December 1992; and President of the Company from 1992-1995. Mack G. Nichols Age 60. President and Chief Operating Officer of the Company since December 1995; Senior Vice President of the Company since October 1993; Vice President of the Company from October 1990 to October 1993; President and Chief Executive Officer of Mallinckrodt Chemical, Inc. from January 1989 to December 1995. Barbara A. Abbett Age 58. Vice President, Communications of the Company since April 1994; Vice President and Senior Partner with Fleishman-Hillard, Inc., from 1979 to April 1994. James C. Carlile Age 46. Senior Vice President of the Company and President, Imaging Group, since February 1998; Vice President of the Company from May 1996 to February 1998; President, Medical Imaging Division, from December 1995 to February 1998; Senior Vice President, Mallinckrodt Medical, Inc., 1994-1995; and Group Vice President, Imaging, Mallinckrodt Medical, Inc., 1992-1994. Ashok Chawla Age 48. Senior Vice President of the Company and President, Global Business Group, since February 1998; Senior Vice President, Strategic Management, of the Company from October 1997 to February 1998; Vice President, Strategic Management, of the Company from July 1991 to October 1997. Michael J. Collins Age 44. Senior Vice President of the Company and President, Pharmaceuticals Group, since February 1998; Vice President of the Company from May 1996 to February 1998; President, Pharmaceutical Specialties Division, from December 1995 to February 1998; and Group Vice President, Pharmaceutical Specialties, Mallinckrodt Chemical, Inc., 1992-1995. Bruce K. Crockett, Ph.D. Age 54. Vice President, Human Resources, of the Company since March 1995; and Vice President, Organization Development at Eastern Enterprises from 1990 to February 1995. John Q. Hesemann Age 50. Senior Vice President of the Company and President, Respiratory Group, since June 1998; Vice President, Mallinckrodt Medical, Inc., Imaging-Contrast Media 1994-1998; and General Manager, Mallinckrodt Medical, Inc., 1993-1994. Roger A. Keller Age 53. Vice President, Secretary and General Counsel of the Company since July 1993. Douglas A. McKinney Age 45. Vice President and Controller of the Company since October 1997; Treasurer of the Company from November 1995 to October 1997; and Assistant Treasurer July 1991 to November 1995. Michael K. Milosovich Age 52. Vice President of the Company since May 1996; President, Pharmaceutical Chemicals Division, since December 1995; and Vice President and General Manager, Bulk Analgesics, Mallinckrodt Chemical, Inc., 1992-1995. David Morra Age 42. Vice President of the Company since May 1996; President, Nuclear Medicine Division, since December 1995; Senior Vice President, Europe, Mallinckrodt Veterinary, Inc., 1995; Group Vice President, Europe/Australia, New Zealand, Mallinckrodt Veterinary, Inc., 1994-1995; and Vice President and General Manager, Cardiology, U.S., Mallinckrodt Medical, Inc., 1991-1994. Daniel B. Mulholland Age 46. Vice President of the Company and President, Mallinckrodt Baker, Inc., (a wholly owned subsidiary of Mallinckrodt Inc.) since August 1996. Vice President & General Manager, Mallinckrodt Baker, February 1995-1996. President, J.T. Baker Inc., October 1992 to 1995. Adeoye Y. Olukotun Age 53. Vice President, Medical and Regulatory Affairs of the Company since June 18, 1996; Vice President, Bristol-Meyers Squibb Company 1991 to June 1996. Michael A. Rocca Age 53. Senior Vice President and Chief Financial Officer of the Company since April 1994; Corporate Vice President and Treasurer of Honeywell Inc., March 1992 to April 1994. William B. Stone Age 55. Vice President, Information Technology of the Company since August 1996; and Vice President and Controller of the Company from November 1990 to August 1996. Frank A. Voltolina Age 37. Staff Vice President and Treasurer of the Company since October 1997; Vice President, Corporate Tax, 1995-1997; and Assistant Controller, Director of Tax 1993-1995. Daniel E. Woods, Jr. Age 54. Vice President, Strategic Services of the Company since May 1998; Vice President of the Company since May 1996; President, Catalysts and Chemical Additives Division from December 1995 to May 1998; and Group Vice President, Catalysts & Chemicals, Mallinckrodt Chemical, Inc., 1993-1995. Miscellaneous All of the Company's officers are elected annually in October. No "family relationships" exist among any of the listed officers. PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Common Stock Prices and Dividends Quarter ------------------------------------ First Second Third Fourth ------- -------- ------- -------- Fiscal 1998 Dividends per common share..... $ .165 $ .165 $ .165 $ .165 Common stock prices High.......................... 41.375 39.438 40.063 39.750 Low........................... 34.750 36.000 34.688 29.000 Fiscal 1997 Dividends per common share..... $ .155 $ .165 $ .165 $ .165 Common stock prices High.......................... 42.625 45.875 44.250 41.625 Low........................... 35.250 41.375 39.625 34.875 The principal market on which Mallinckrodt's common stock is traded is the New York Stock Exchange. Common stock prices are from the composite tape for New York Stock Exchange issues, as reported in The Wall Street Journal. As of July 31, 1998, the number of registered holders of common stock as reported by the Company's registrar was 7,550. ITEM 6. SELECTED FINANCIAL DATA (Dollars in millions, except per share amounts)
Years Ended June 30, ------------------------------------------------------ 1998 (1) 1997 1996 1995 1994 (2) --------- --------- --------- --------- --------- SUMMARY OF OPERATIONS Net sales.............. $2,367.0 $1,698.1 $1,596.9 $1,433.8 $1,244.0 Earnings (loss) from continuing operations............ (355.9) 175.2 143.6 127.0 73.9 Discontinued operations (3)........ 72.4 14.9 68.3 53.3 29.9 Cumulative effect of accounting change (4)............ (8.4) --------- -------- -------- -------- --------- Net earnings (loss).... (291.9) 190.1 211.9 180.3 103.8 Preferred stock dividends............. (.4) (.4) (.4) (.4) (.4) --------- --------- --------- --------- --------- Available for common shareholders.......... $ (292.3) $ 189.7 $ 211.5 $ 179.9 $ 103.4 ========= ========= ========= ========= ========= PER COMMON SHARE DATA Diluted earnings (loss) from continuing operations............ $ (4.89) $ 2.33 $ 1.88 $ 1.63 $ .95 Diluted net earnings (loss)....... (4.01) 2.53 2.77 2.32 1.33 Dividends declared..... .66 .65 .61 .55 .49 Book value............. 12.40 17.16 16.44 15.12 13.05 OTHER DATA Total assets........... $3,785.6 $2,975.4 $3,017.6 $2,488.6 $2,258.2 Working capital........ $ (8.8) $ 963.1 $ 359.1 $ 271.9 $ 261.3 Current ratio.......... 1.0:1 2.5:1 1.4:1 1.5:1 1.5:1 Total debt (5)......... $1,255.9 $ 555.9 $ 666.1 $ 584.0 $ 616.8 Shareholders' equity... $ 918.4 $1,251.2 $1,232.2 $1,171.5 $1,015.9 Return on shareholders' equity (5)............ (33)% 14% 12% 12% 8% Capital expenditures (5)...... $ 142.7 $ 104.4 $ 116.6 $ 124.3 $ 140.9 Total dividends paid... $ 48.5 $ 48.2 $ 45.7 $ 42.2 $ 37.7 Weighted average common shares (in millions)......... 73.5 75.1 76.4 77.5 77.7 Common shares outstanding (in millions)......... 73.2 72.3 74.3 76.8 77.0 Number of employees (5)......... 12,800 8,000 8,000 7,800 7,400
(1) On August 28, 1997, the Company acquired Nellcor Puritan Bennett Incorporated (Nellcor) through an agreement to purchase for cash all of 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. Approximately $398.3 million of the purchase price was allocated to purchased research and development. This intangible asset, which had no tax benefit, was charged to results of operations during 1998. Of the total charge of $398.3 million, $2.0 million related to the Aero Systems division which was sold and reclassified to discontinued operations in 1998. The sale of Nellcor inventories, which were stepped up to fair value in connection with allocation of purchase price, decreased earnings by $75.4 million, $46.7 million net of taxes for 1998. After-tax charges to the Respiratory Group, which are included in earnings (loss) from continuing operations, were $46.1 million. After-tax charges to discontinued operations related to the Aero Systems division were $.6 million. Costs of exiting certain activities related to Mallinckrodt operations plus integration costs of the combined Mallinckrodt and Nellcor operations were $68.6 million, $46.4 million net of taxes. See the Acquisitions section of Note 2 of the Notes to Consolidated Financial Statements for additional disclosure. (2) Results for 1994 included restructuring charges of $93.9 million, $58.8 million after taxes, or 76 cents per share. Pretax charges included in healthcare and discontinued operations related to animal health were $73.9 million and $20.0 million, respectively. Results for 1994 also included favorable tax adjustments of $3.0 million, or 4 cents per share, resulting from U.S. and foreign tax law changes. (3) See Note 2 of Notes to Consolidated Financial Statements for information on discontinued operations in 1998, 1997 and 1996. Results for 1995 and 1994 represent earnings from the catalysts and chemical additives division, animal health segment, Fries & Fries, Inc., and the feed ingredients business, partially offset by environmental and related litigation charges. (4) In April 1998, the American Institute of Certified Public Accountants (AICPA) issued SOP 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5), which requires that costs related to start-up activities be expensed as incurred. Prior to 1998, the Company capitalized its preoperating costs incurred in connection with opening a new facility. The Company elected to early adopt the provisions of SOP 98-5 in its financial statements for 1998. The effect of adoption of SOP 98-5 was to record a charge of $8.4 million, net of taxes, for the cumulative effect of an accounting change to expense costs that had previously been capitalized prior to July 1, 1997. (5) Excludes discontinued operations. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW All references to years are to fiscal years ended June 30 unless otherwise stated. Certain amounts in prior years have been reclassified to conform to the current year presentation. All earnings per share amounts are calculated on a diluted basis unless otherwise stated. 1998 vs. 1997 - ------------- During the past two years, Mallinckrodt completed the largest acquisition in its history and divested certain businesses to improve the strategic position and focus of the Company. On August 28, 1997, the Company acquired Nellcor Puritan Bennett Incorporated (Nellcor) through an agreement to purchase for cash all of 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 is the worldwide market leader in providing products that monitor, diagnose and treat respiratory impaired patients. The product lines include pulse oximetry monitors and sensors, critical care and portable ventilators, home oxygen therapy products, sleep apnea diagnostic and therapy products, and medical gas products and distribution systems. The acquisition was accounted for under the purchase method of accounting and, accordingly, the results of operations of Nellcor have been included in the Company's consolidated financial statements since September 1, 1997. The purchase price of the acquisition was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. 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 was charged to expense in 1998. 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. The remaining identifiable 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 the purchase price over the fair value of the net assets acquired, was $724.2 million 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 $46.4 million for 1998. Since the results of Nellcor have only been included in the Company's consolidated results since September, the amortization for 1998 represents ten months of activity. The Company also recorded a deferred tax liability of $211.0 million, representing the tax effect of timing differences recorded as part of the acquisition. In connection with the Company's filing of a shelf registration statement for debt securities, Mallinckrodt is engaged in discussions with the staff of the Securities and Exchange Commission (SEC) regarding the purchase price allocation related to its acquisition of Nellcor. The Company and its auditors, Ernst & Young LLP, believe that the allocation and related amortization charges are in accordance with generally accepted accounting principles. Ernst & Young LLP has expressed their opinion that the Company's 1998 consolidated financial statements are fairly presented, in all material respects, in conformity with generally accepted accounting principles. Nevertheless, if there are any significant changes as a result of these discussions with the SEC to the amounts allocated to purchased research and development or other intangible assets or changes in the lives over which such amounts are amortized, these changes could have a material impact on the related noncash charges reflected in the 1998 results of operations and could materially affect future results of operations as a result of increased amortization expense. The Company's most significant divestitures were the animal health business and flavors joint venture in 1997 and the sale of the catalysts and chemical additives and Aero Systems divisions in 1998 and early in 1999. The Company now operates predominantly in the healthcare industry and is comprised of three business groups - Respiratory, Imaging and Pharmaceuticals. The Company incurred a loss from continuing operations of $355.9 million, or $4.89 per share, for 1998 due to nonrecurring acquisition and integration charges related to the acquisition of Nellcor which totaled $539.3 million, $488.8 million net of taxes or $6.70 per share. The nonrecurring noncash acquisition charges are purchased research and development and inventory stepped up to fair value. Purchased research and development, which was charged to results of operations during the first quarter of 1998, was valued at $398.3 million. Of this amount, $396.3 million related to the Respiratory Group and $2.0 million related to the Aero Systems division, which was sold and reclassified to discontinued operations in the fourth quarter of 1998. 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 were in various stages of development and had 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 United States Food and Drug Administration and/or international regulatory body (FDA) 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, specifically costs and efforts incurred for clinical trials and preparation of FDA submission and interaction with the FDA. None of these medical devices or products had received FDA 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 methodology (income approach) used to evaluate purchased research and development was used to evaluate the other Nellcor identifiable intangible assets acquired, with the exception of assembled work force, which was valued under the cost approach. The income approach focuses on the income producing capability of the assets over their useful lives. The steps followed in applying this approach involve estimating the projected net cash flows related to such products, incorporating the cost to complete development of the technology, if applicable, and the future revenues to be earned upon commercialization of the products. These cash flows are then discounted to their present value. The resulting projected net cash flows from such products were based upon management's estimate of revenue growth and expected profitability related to the overall product portfolio. The discounting process uses a rate of return which accounts for the time value of money and investment risk factors to appropriately reflect the risks of realization of the cash flows. The assumptions underlying the valuation of these assets were based upon management's assessment of the facts as known at the date of acquisition; however, no assurances can be given that actual results will not materially deviate from these assumptions. Revenue assumptions were based upon the growth rates for markets served and the estimated life of each product's technology. Significant aggregate revenue growth as projected by the Company's strategic marketing units for the developed and in-process products assumed increasing demand for medical devices, and the Company's ability to maintain a significant share of the market. The revenue generated by in-process technology products increases to $937 million in 2004 and then declines over subsequent years, while revenue assumptions for the developed products remain relatively flat in 1999 as compared with 1998 and then begin to decline gradually in subsequent periods. Cost of goods sold assumptions, expressed as a percentage of revenue, were expected to decrease from the current projection of 48 percent to 43 percent in 2006. Gross margins, as they relate inversely to costs of goods sold as a percentage of revenue, were assumed to increase, in the aggregate, over time due mainly to improving efficiency in the manufacturing processes and more profitable products having a greater impact on total sales. Selling, administrative and general expenses, excluding depreciation and amortization, expressed as a percentage of revenues were estimated at 24 percent for all periods. Research and development expenses for the cost to complete the in-process technologies were $52 million to be expended in ten strategic marketing units during the periods 1998 through 2001. Maintenance research and development expense, which includes routine changes, additions and modifications undertaken after a product is introduced to the market, were established at 2 percent of revenue for both developed and in-process technologies for all periods. An after-tax cash flow was then calculated by deducting income tax expense and contributory asset charges from operating income. The cash flows were discounted to present value utilizing an appropriate discount rate (15 percent for developed technology and 18 percent for in-process technology). Results to date have been consistent with the underlying projections and assumptions of revenues to be generated, estimated costs to complete and completion dates for the in-process projects and acquired technologies. Material negative variations from the projected results would impact the Company's expected return on its investment in Nellcor, its future results of operations and financial position. In 1998, the Company received market approval and launched the Model 740 and Model 840 ventilators. These products, although delayed approximately three months from expected launch date, have been well accepted in the market place. The sale of Nellcor inventories, which as part of the purchase price allocation were stepped up to fair value, decreased earnings by $75.4 million, $46.7 million net of taxes. The pretax charges to the Respiratory Group and Aero Systems division, which was sold and reclassified to discontinued operations in the fourth quarter, were $74.4 million and $1.0 million, respectively. With the acquisition complete, the Company began integrating the operations of Nellcor with those of Mallinckrodt's other businesses. Management finalized and approved a Nellcor integration plan during the year. Accordingly, the Company recorded additional purchase liabilities of $50.1 million, $30.8 million net of related tax benefit, which were included in the acquisition cost allocation and related goodwill. In addition, the Company recorded pretax charges to operations during 1998 of $68.6 million, $46.4 million net of taxes, associated with exiting certain activities related to the operation of Mallinckrodt prior to the acquisition of Nellcor and other integration costs of the combined Company. See Note 2 of the Notes to Consolidated Financial Statements for additional information. Excluding the nonrecurring acquisition and integration charges in 1998, the Company had earnings from continuing operations of $132.9 million, or $1.80 per share. Included in these results are after-tax charges of $8.5 million, or 12 cents per share, primarily to increase reserves for Nellcor trade receivables and inventory. Earnings from continuing operations for 1997 were $175.2 million, or $2.33 per share. The year to year decline in earnings from continuing operations, after excluding nonrecurring acquisition and integration charges, is primarily attributable to the dilutive effect of the Nellcor acquisition-related intangible and goodwill amortization expense and interest expense, and selling price reductions. The aggregate purchase price of Nellcor of approximately $1.9 billion was paid through use of available cash and cash equivalents and additional borrowings. The resulting higher interest expense exceeded the operating earnings of the Nellcor operations during 1998. The competitive demand for selling price reductions from healthcare customer buying groups continued throughout 1998. This trend, which is expected to continue, had its most significant impact on the Company's Imaging business where the potential for generic competitive products and available manufacturing capacity continue to lower prices. The Company recorded a net loss for 1998 of $291.9 million, or $4.01 per share as compared to net earnings of $190.1 million, or $2.53 per share during the prior year. During 1998, the Company sold, or committed to sell, its catalysts and chemical additives and Aero Systems divisions. The completed actions resulted in an after-tax gain of $68.9 million. The sale of the remainder of the catalysts and chemical additives division on July 31, 1998 will result in a gain to be included in the 1999 results of discontinued operations. The gains on the completed sales and the results of operations for these divisions have been reclassified to discontinued operations in the fourth quarter and, accordingly, prior year results have also been reclassified. Earnings, net of taxes, of these discontinued operations were $11.4 million and $10.5 million for 1998 and 1997, respectively. During the third quarter of 1998, the Company recorded an after-tax charge of $7.9 million related to settlement costs from the sale of the animal health business in the prior year. The net loss for 1998 also included an after-tax noncash charge of $8.4 million, or 11 cents per share, for the early adoption of a new standard of accounting related to previously capitalized start-up costs. The cumulative effect of the accounting change was recorded in the fourth quarter, but was effective as of July 1, 1997. Operating earnings would have been reduced by $2.3 million after taxes or 3 cents per share had the Company not adopted the accounting change. Net earnings for 1997 included a $270.6 million after-tax gain from discontinued operations resulting from the March 31, 1997 disposition of Fries & Fries, Inc., a wholly owned subsidiary which owned the Company's 50 percent interest in Tastemaker, the flavors joint venture, and a $269.4 million after-tax loss from discontinued operations resulting from the sale of the animal health segment on June 30, 1997. Net sales for the year increased 39 percent to $2.37 billion compared with $1.70 billion in 1997. Sales to customers outside the U.S. were $792 million or 33 percent of total 1998 sales. Excluding sales of Nellcor, which was acquired at the end of August 1997, sales were $1.69 billion which is equal to the prior year. Excluding the acquisition and integration charges discussed above, operating earnings were $288.8 million, a decrease of $8.7 million or 3 percent from the prior year. Excluding the results of Nellcor and the acquisition and integration charges discussed above, operating earnings were $248.1 million or 17 percent below the 1997 results of $297.5 million. The decline in operating earnings is driven by competitive price pressure in the Imaging and Critical Care businesses. 1997 vs. 1996 - ------------- The Company's earnings from continuing operations for 1997 were $175.2 million, or $2.33 per share. This represented a 24 percent increase in per share earnings from continuing operations compared with $143.6 million, or $1.88 per share during the same period in 1996. The strong performance improvement was attributable to growth in operating earnings, higher interest income, global tax strategies and common stock share repurchase activities. Net earnings for 1997 were $190.1 million, or $2.53 per share, compared with $211.9 million, or $2.77 per share, in 1996. In the fourth quarter of 1998, the Company reclassified the catalysts and chemical additives division to discontinued operations. The after- tax operating results from this division, which were $10.5 million and $10.1 million for 1997 and 1996, respectively, were also reclassified. On March 31, 1997, the Company disposed of Fries & Fries, Inc., a wholly owned subsidiary which owned a 50 percent interest in Tastemaker, the flavors joint venture. This action resulted in an after-tax gain of $270.6 million. On June 30, 1997, the Company disposed of the animal health segment, which resulted in an after-tax loss of $269.4 million. The results of these transactions and the results of operations from these businesses were reclassified to discontinued operations and, accordingly, prior years' results were also reclassified. Net earnings for 1997 and 1996 included after-tax earnings of $5.8 million and $41.9 million, respectively, from the divested Fries & Fries, Inc., animal health segment and, for 1996, feed ingredients business. Net earnings for 1996 included a $35.4 million after-tax gain in discontinued operations due to the disposition of the feed ingredients business in the second quarter, partially offset by $19.1 million after-tax adjustment of provisions for environmental and litigation costs related to discontinued operations. Net sales for 1997 were up 6 percent to $1.70 billion, compared to $1.60 billion in 1996. Operating earnings were $297.5 million, an increase of 6 percent compared to $279.5 million in 1996. The markets in which the Company conducts business are highly competitive, and in many instances regulated. Global efforts toward healthcare cost containment exerted pressure on product pricing and the resultant demand for price discounts from customer buying groups adversely affected earnings growth. OPERATING RESULTS (In millions) 1998 1997 1996 ------- ------- ------- Net sales Respiratory................. $ 991 $ 321 $ 338 Imaging..................... 760 802 716 Pharmaceuticals............. 616 575 543 ------- ------- ------- $2,367 $1,698 $1,597 ======= ======= ======= Operating earnings Respiratory............... $ 105 $ 76 $ 74 Imaging................... 124 164 179 Pharmaceuticals........... 83 82 67 ------- ------- ------- 312 322 320 Corporate expense......... (23) (25) (41) Acquisition and integration expense...... (539) ------- ------- ------- $ (250) $ 297 $ 279 ======= ======= ======= 1998 vs. 1997 - ------------- Healthcare is comprised of three business groups - Respiratory, Imaging and Pharmaceuticals. Operating earnings excluding charges related to acquisition and integration activities and corporate expenses were $312 million, which represents a 3 percent decline when compared to the prior year. Excluding the results of Nellcor, acquired in August 1997, the acquisition and integration charges, and corporate expenses, operating earnings would have been $271 million or 16 percent below 1997. This earnings decline is attributable to lower selling prices which were only partially offset by higher volume. The competitive pressures and the demand for price discounts from customer buying groups adversely affected earnings, and this trend is expected to continue. In response to this market trend, the Company entered into a multi-year agreement in 1996 with Premier, Inc. (Premier), the largest healthcare purchasing group in the United States. Effective July 1, 1997, Premier named Mallinckrodt a corporate partner and, accordingly, Premier's 1,650 member hospitals are provided incentives to use Mallinckrodt products. The Respiratory Group, which includes Nellcor and Critical Care, reported operating earnings of $105 million, an increase of 38 percent over the results for 1997. Excluding Nellcor, operating earnings were $64 million, a 16 percent decrease from prior year. The year to year earnings decline was attributable to sales decline of $16 million resulting from the negative impact of exchange rate movements caused by the strengthening of the U.S. dollar versus major European currencies and the Japanese yen, $8 million due to price declines and another $6 million attributable to the divestiture of a product line in September 1996. These sales shortfalls were only partially offset by volume increases of $14 million and $11 million in disposable respiratory and anesthesiology product lines, respectively. The Imaging Group had operating earnings of $124 million, which was a decline of $40 million or 24 percent from the prior year. The decline in profitability was directly attributable to a sales decline of $42 million - from $802 million in 1997 to $760 million in 1998. All product lines had volume increases which represented an increase of $85 million over the prior year. In spite of these increases, erosion of selling price accounted for a $102 million sales decline. The remainder of the shortfall in 1998 when compared to 1997 was attributable to the impact of exchange rate movements caused by the strengthening of the U.S. dollar versus major European currencies and the Japanese yen. Iodinated contrast media, the Group's most significant product line, had sales volume increases of $44 million, but price erosion reduced sales by $85 million. The pricing pressures were most significant in the U.S. where the Company and its contrast media competitors utilize price concessions to maintain or grow their shares in a market dominated by large customer buying groups. The agreement with Premier aligns the Company with the largest healthcare purchasing group in the U.S., representing 30 percent of all contrast media purchased. The Premier agreement is believed to be the largest contract ever written for these products. In spite of cost reductions in contrast media manufacturing and lower operating expenses, the price erosion reduced profitability, and is expected to reduce profitability in future periods but at a lower rate of decline than was experienced in 1998 and 1997. The Pharmaceuticals Group, which now includes bulk and dosage pharmaceuticals, peptides, and process, laboratory and microelectronic chemicals, had operating earnings of $83 million, which was $1 million or 1 percent above results for the prior year. In spite of higher sales, product mix, lower than expected sales of high margin dosage and other specialty products, and the related impact on plant efficiencies negatively impacted operating earnings. Sales were $616 million, which represented an increase of $41 million or 7 percent above 1997 results. The sales increase was partially generated by a $19 million increase in dosage analgesic volume, of which approximately $7 million was attributable to the full year impact from an acquisition in November 1996. The remainder of the sales increase was attributable to volume growth in all other product lines. The impact of buying groups is less evident in the Pharmaceuticals Group businesses. Overall, this group was able to maintain pricing at prior year levels. 1997 vs. 1996 - ------------- Operating earnings, excluding corporate expense, for 1997 were $322 million, as compared with $320 million in 1996. The flat operating earnings in 1997 when compared to the prior year was attributable to continued reduction of selling prices in several product lines offset by increased sales volumes, and a $20 million or 25 percent increase in research and development expenses. Net sales increased 6 percent to $1.70 billion in 1997 as compared to $1.60 billion during the prior year. The Critical Care business, now a component of the Respiratory Group, had operating earnings of $76 million, which was $2 million or 3 percent greater than in 1996. The improved profitability was the result of product mix. The operation had sales of $321 million, which is $17 million or 5 percent below prior year. The Critical Care business experienced increased demand for respiratory therapy products and HemoCue blood hemoglobin and glucose analysis systems. These sales gains were more than offset by lower prices of existing products and lost revenue associated with the blood gas and electrolyte business which was sold on September 30, 1996. The Imaging Group's operating earnings were $164 million, which was $15 million or 8 percent below the prior year. The decline in profitability was the result of selling price erosion, which was only partially offset by volume increases, and higher research and development expenditures. The Imaging Group was affected significantly by the demand for price discounts. The business had sales of $802 million, which was an increase of $86 million or 12 percent over the prior year level of $716 million. The sales increase was driven primarily by increased market share in iodinated contrast media ($41 million) and the acquisition of Liebel-Flarsheim during 1996 ($29 million). The growth of iodinated contrast media sales was most significant in the U.S. market where sales volume increased 49 percent, but prices declined 39 percent when compared to the prior year. Contrast media competitor strategies with regard to pricing were driven by customer consolidation and patent expiration of a competitor's second generation x-ray contrast product resulting in the potential for competitive generic products. In response to these market changes, the Company entered into a supply agreement with Premier, Inc., the largest hospital healthcare alliance in the U.S. The agreement is believed to be the largest contract ever written for contrast media products. The Pharmaceuticals Group, which includes bulk and dosage pharmaceuticals, peptides, and process, laboratory and microelectronic chemicals, had operating earnings of $82 million, which is $15 million or 22 percent greater than in 1996. The improvement in earnings was directly attributable to a sales increase of $32 million, or 6 percent, to $575 million as compared to the prior year. The sales increase was generated by a $24 million growth in bulk and dosage analgesic sales, partially the result of the acquisition of D.M. Graham Laboratories, Inc. in November 1996. The business also benefited from net price increases of approximately $14 million, which were generated by bulk sales of acetaminophen and narcotics in spite of somewhat lower prices of dosage products. D.M. Graham Laboratories, Inc. is a contract manufacturer of dosage pharmaceuticals and is also licensed to produce a variety of medicinal narcotics. This acquisition was another key step in the continuing growth of the Pharmaceuticals business. In December 1996, the Company acquired expanded sales and marketing rights for Molecular Biosystems, Inc.'s ultrasound imaging agents. As a result of this and earlier agreements, Mallinckrodt now has marketing rights for Albunex and OPTISON throughout the world except Japan, South Korea and Taiwan. In January 1996, the Company acquired Liebel-Flarsheim Company, a leading manufacturer of contrast media power injector systems for diagnostic imaging procedures and equipment for urology procedures. The acquisition enhanced sales performance but modestly impaired operating earnings. CORPORATE MATTERS Corporate expenses in 1998, excluding nonrecurring acquisition and integration charges, were $23 million as compared to $25 million in the prior year. Corporate expenses in 1997 were 40 percent below the 1996 level because the prior year included consulting and employee related actions of a nonrecurring nature. Excluding the one-time noncash write-off of purchased research and development which had no tax benefit, the Company's effective tax rate was 31.3 percent, compared to last year's 35.5 percent and the 1996 rate of 37.0 percent. See Note 10 of the Notes to Consolidated Financial Statements for additional information about income taxes. Net interest and nonoperating income/expense increased $61 million in 1998 as compared with the prior year because of lower interest income and higher borrowing costs to acquire Nellcor in August 1997. Net interest and nonoperating income/expense decreased $26 million in 1997 from 1996 because cash proceeds from 1997 divestitures were used to repay debt and were invested in interest bearing securities. 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 $752.8 million, primarily as a result of the acquisition of the outstanding common shares of Nellcor in August 1997. Operations provided $208.4 million of cash, while acquisition and capital spending totaled $1.93 billion. The Company received $308.2 million in proceeds from asset disposals. The catalyst business and Aero Systems division were sold in the fourth quarter for cash proceeds of $210.0 million and $69.7 million, respectively. Debt as a percentage of invested capital was 57.8 percent at June 30, 1998. The current ratio had declined to 0.7:1 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, with the proceeds used to reduce short-term borrowing. See Note 13 of the Notes to Consolidated Financial Statements for additional information. The current ratio improved to 1.0:1 at June 30, 1998. 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 Company completed the acquisition using cash and cash equivalents and borrowed approximately $1.1 billion under a $2.0 billion credit facility established in July 1997, and amended and restated in September 1997. The credit facility consisted of a $400 million term loan, which was repaid in March 1998, and a $1.6 billion five-year revolving credit facility. Under this facility, 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 June 30, 1998. In December 1997, the Company filed a $500 million shelf debt registration statement which has not, as yet, been declared effective. The unused portions of shelf registrations filed in 1995 and 1992 have been canceled. At June 30, 1998, the Company had 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 June 30, 1998, there were $285.8 million commercial paper borrowings outstanding. Non-U.S. lines of credit totaling $141.9 million were also available and borrowings under these lines amounted to $17.2 million at June 30, 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 under these authorizations have totaled 36.8 million shares, including 242 thousand shares during the current year prior to the acquisition of Nellcor. Estimated capital spending for the year ending June 30, 1999 is approximately $185 million. Impact of Year 2000 - ------------------- The Year 2000 issue is the result of date-sensitive devices, systems and computer programs that were deployed using two digits rather than four to define the applicable year. Any such technologies 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 its assessment of its information systems which support business applications and is in the process of modifying or replacing those portions of the software that are required. The assessment of products sold to customers has also been completed and the necessary remediation plans are being developed. The assessment of research and development, manufacturing processes and facility management systems is underway and is expected to be substantially complete by January 1999. The Company is also assessing the readiness of its key suppliers and business partners to be Year 2000 compliant. Information requests have been distributed and replies are being evaluated. If the risk is deemed material, the Company is prepared to perform on-site visits to those businesses to verify the adequacy of the information received. All of these efforts should be substantially complete during the first quarter of calendar 1999, which is prior to any anticipated significant impact on Mallinckrodt's operations. Based upon the accomplishments to date, no contingency plans are expected to be needed and therefore none have been developed. However, because of substantial progress to date and plans that contemplate being substantially complete in the early part of calendar 1999, we believe adequate time will be available to insure alternatives can be developed, assessed and implemented prior to a Year 2000 issue having a material negative impact on the operations of the Company. 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. Both internal and external resources are being used to reprogram or replace non-compliant technologies, and to appropriately test Year 2000 modifications. Such modifications are being funded through operating cash flows. The project to address Year 2000 has been underway since February 1997. The pretax costs incurred to date for this effort were approximately $7 million and $1 million in 1998 and 1997, respectively. The Company anticipates expenses of approximately $13 million will be incurred in 1999 to substantially complete the effort. 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. European Monetary Union (EMU) - ----------------------------- The euro is scheduled to be introduced on January 1, 1999, at which time the eleven participating EMU member countries will establish fixed conversion rates between their existing currencies (legacy currencies) and the euro. The legacy currencies will continue to be used as legal tender through January 1, 2002; thereafter, the legacy currencies will be canceled and euro bills and coins will be used for cash transactions in the participating countries. The Company's European sales offices and various manufacturing and distribution facilities affected by the euro conversion have established plans to address the systems issues raised by the euro currency conversion and are cognizant of the potential business implications of converting to a common currency. The Company is unable to determine the ultimate financial impact of the conversion on its operations, if any, given that the impact will be dependent upon the competitive situations which exist in the various regional markets in which the Company participates and the potential actions which may or may not be taken by the Company's competitors and suppliers. ENVIRONMENTAL MATTERS 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 active investigation or remediation of alleged or acknowledged contamination at 19 currently or previously owned or operated sites and at 16 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. Most of the Company's environmental-related capital expenditures are in response to provisions of the Federal Clean Air Act; Water Pollution Control Act; Resource Conservation and Recovery Act; Comprehensive Environmental Response, Compensation, and Liability Act; and land use, air and water protection regulations of the various localities and states, and their foreign counterparts. Capital expenditures worldwide relating to air emission control, wastewater purification, land reclamation and solid waste disposal totaled approximately $6 million in 1998 and $6 million in 1997. The Company currently estimates that environmental capital expenditures during 1999 and 2000 will be $21 million and $14 million, respectively. During 1996, the Company assumed certain liabilities to remediate various sites in the future and was compensated by the previous owner of the applicable properties for certain remediation costs to be incurred. The Company established additional environmental reserves for discontinued operations. The Company had accruals, included in current accrued liabilities and other noncurrent liabilities and deferred credits, of $126.2 million at June 30, 1998 for costs associated with the study and remediation of Superfund sites and for the Company's current and former operating sites. Any claims for potential recovery from any sources have not been valued against the accrued environmental liabilities. While ongoing litigation may eventually result in recovery of costs expended at certain of the environmental sites, any gain is contingent upon a successful outcome and has not been accrued. The Company has established accruals only for those 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 results of operations or financial position. RISK MANAGEMENT STRATEGIES The Company operates globally, with manufacturing and distribution facilities in various countries throughout the world, and is subject to certain opportunities and risks, including foreign currency fluctuations and government actions. Various operational initiatives are employed to help manage business risks. In the ordinary course of business, Mallinckrodt purchases materials and sells finished products denominated in approximately 25 different currencies. The Company is primarily exposed to changes in exchange rates of the German deutsche mark and other European currencies highly correlated with the German deutsche mark and the Japanese yen. Overall, the Company is a net beneficiary when the U.S. dollar weakens and is adversely affected by a stronger U.S. dollar relative to the major currencies identified. Operations in each country are monitored so that the Company can quickly respond to changing economic and political environments as well as changes in foreign currency exchange rates and interest rates. The Company enters into forward foreign exchange contracts and currency swaps to minimize the exposure on intercompany loans. To minimize the impact of anticipated foreign currency exposures which arise from probable purchases of raw materials or other inventory, collection of accounts receivable, settlement of accounts payable, and periodic debt service by international subsidiaries which occur in the ordinary course of business, the Company hedges a portion of its non-U.S. dollar denominated exposures by purchasing currency options which generally have terms of two years or less, and which have little or no intrinsic value at time of purchase. The Company uses the options with an objective of limiting negative foreign exchange rate effects on overall performance for both budget and prior year comparisons over a rolling 18- to 24-month horizon. The Company seeks to have effective coverage levels over such 18- to 24-month horizon of 50 to 80 percent of currency exposures that subject the Company to risk. The hedges are designed to satisfy the requirements for deferral accounting treatment at inception. Gains and losses in the hedges are expected to be systematically monetized with concurrent reinvestment to replace monetized hedges and maintain overall hedging coverage targets. The net impact of foreign exchange activities on earnings was immaterial for 1998, 1997 and 1996, including conversion of certain currencies into functional currencies and the costs of hedging certain transactions and balance sheet exposures. The foreign currency translation loss included in shareholders' equity, and resulting from the translation of the financial statements of most of the Company's international affiliates into U.S. dollars, increased by $21.1 million in 1998 due to the strengthening of the U.S. dollar against the functional currency of many of the Company's international affiliates. The Company's interest income and expense are most sensitive to changes in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on the Company's cash equivalents and short-term investments as well as interest paid on its short-term debt. To manage the interest rate characteristics of its outstanding debt to a more desirable fixed or variable rate basis or to limit the Company's exposure to rising interest rates, the Company periodically enters into interest rate swaps and option contracts. The Company does not consider the present rate of inflation to have a significant impact on the businesses in which it operates. While future economic events cannot be predicted, the Company believes its current operations and future expansion plans will not result in a significantly different risk profile. ITEM 7A. 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Auditors................................. 32 Responsibility for Financial Reporting......................... 33 Consolidated Statements of Operations.......................... 34 Consolidated Balance Sheets.................................... 35 Consolidated Statements of Cash Flows.......................... 36 Consolidated Statements of Changes in Shareholders' Equity..... 37 Notes to Consolidated Financial Statements..................... 38 Quarterly Results.............................................. 57 REPORT OF INDEPENDENT AUDITORS To the Shareholders and Board of Directors of Mallinckrodt Inc. We have audited the accompanying consolidated balance sheets of Mallinckrodt Inc. as of June 30, 1998 and 1997, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the three years in the period ended June 30, 1998, appearing on pages 34 through 56. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Mallinckrodt Inc. at June 30, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, in the year ended June 30, 1998, the Company adopted Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities." Ernst & Young LLP St. Louis, Missouri August 12, 1998 RESPONSIBILITY FOR FINANCIAL REPORTING The consolidated financial statements included in this report are the responsibility of management. The statements have been prepared in conformity with generally accepted accounting principles and include amounts based on our best estimates and judgments. Financial information appearing elsewhere in this report is consistent with that in the financial statements. Management is also responsible for maintaining systems of internal accounting control with the objectives of providing reasonable assurance at reasonable cost that the Company's assets are safeguarded against material loss from unauthorized use or disposition and that transactions are properly authorized and recorded to permit reliance on the Company's financial data and records. In addition, the Company maintains a program for communicating corporate policy throughout the organization and, as a further safeguard, an internal audit staff monitors compliance with policies and systems of internal accounting control. Mallinckrodt's consolidated financial statements have been audited by Ernst & Young LLP. To express their opinion as to the fairness of the statements in conformity with generally accepted accounting principles, the independent auditors review and evaluate Mallinckrodt's accounting controls and conduct such tests and other procedures as they deem necessary. The Audit Committee of the Board of Directors regularly meets with the independent auditors, without management present, to review financial reporting matters, and audit and control functions. Douglas A. McKinney Vice President and Controller August 12, 1998 Michael A. Rocca Senior Vice President and Chief Financial Officer August 12, 1998 CONSOLIDATED STATEMENTS OF OPERATIONS (In millions, except per share amounts)
Years Ended June 30, --------------------------------- 1998 1997 1996 --------- --------- --------- Net sales............................... $2,367.0 $1,698.1 $1,596.9 Operating costs and expenses: Cost of goods sold.................... 1,368.8 897.9 837.9 Selling, administrative and general expenses..................... 712.5 409.7 403.4 Purchased research and development.... 396.3 Research and development expenses..... 149.0 100.5 80.6 Other operating income, net........... (9.1) (7.5) (4.5) --------- --------- --------- Total operating costs and expenses...... 2,617.5 1,400.6 1,317.4 --------- --------- --------- Operating earnings (loss)............... (250.5) 297.5 279.5 Interest income and other nonoperating income (expense), net.................. 14.8 22.0 (.3) Interest expense........................ (101.8) (48.0) (51.3) --------- --------- --------- Earnings (loss) from continuing operations before income taxes......... (337.5) 271.5 227.9 Income tax provision.................... 18.4 96.3 84.3 --------- --------- --------- Earnings (loss) from continuing operations............................. (355.9) 175.2 143.6 Discontinued operations................. 72.4 14.9 68.3 --------- --------- --------- Earnings (loss) before cumulative effect of accounting change............ (283.5) 190.1 211.9 Cumulative effect of accounting change.. (8.4) --------- --------- --------- Net earnings (loss)..................... (291.9) 190.1 211.9 Preferred stock dividends............... (.4) (.4) (.4) --------- --------- --------- Available for common shareholders....... $ (292.3) $ 189.7 $ 211.5 ========= ========= ========= Basic earnings per common share: Earnings (loss) from continuing operations............................ $ (4.89) $ 2.37 $ 1.90 Discontinued operations................ .99 .20 .91 Cumulative effect of accounting change................................ (.11) --------- --------- --------- Net earnings (loss).................... $ (4.01) $ 2.57 $ 2.81 ========= ========= ========= Earnings per common share - assuming dilution: Earnings (loss) from continuing operations............................ $ (4.89) $ 2.33 $ 1.88 Discontinued operations................ .99 .20 .89 Cumulative effect of accounting change................................ (.11) --------- --------- --------- Net earnings (loss).................... $ (4.01) $ 2.53 $ 2.77 ========= ========= ========= (The accompanying Notes are an integral part of the Consolidated Financial Statements.)
CONSOLIDATED BALANCE SHEETS (In millions, except share and per share amounts)
June 30, ---------------------- 1998 1997 --------- --------- ASSETS Current assets: Cash and cash equivalents........................ $ 55.5 $ 808.3 Trade receivables, less allowances of $16.7 in 1998 and $8.2 in 1997.................. 486.3 335.8 Inventories...................................... 470.0 291.8 Deferred income taxes............................ 95.2 36.8 Other current assets............................. 61.5 99.4 Net current assets of discontinued operations.... 4.8 33.3 --------- --------- Total current assets............................... 1,173.3 1,605.4 Investments and other noncurrent assets, less allowances of $5.8 in 1998 and $8.1 in 1997.. 154.5 145.1 Property, plant and equipment, net................. 894.9 741.3 Goodwill, net...................................... 899.5 222.5 Technology, net.................................... 364.3 24.4 Other intangible assets, net....................... 282.1 144.4 Net noncurrent assets of discontinued operations... 12.4 91.5 Deferred income taxes.............................. 4.6 .8 --------- --------- Total assets $3,785.6 $2,975.4 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt.................................. $ 311.4 $ 11.6 Accounts payable................................. 215.0 162.9 Accrued liabilities.............................. 532.0 391.2 Income taxes payable............................. 122.3 76.4 Deferred income taxes............................ 1.4 .2 --------- --------- Total current liabilities.......................... 1,182.1 642.3 Long-term debt, less current maturities............ 944.5 544.3 Deferred income taxes.............................. 396.2 248.7 Postretirement benefits............................ 169.2 161.9 Other noncurrent liabilities and deferred credits.................................. 175.2 127.0 --------- --------- Total liabilities.................................. 2,867.2 1,724.2 --------- --------- 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................... 315.2 305.9 Reinvested earnings.............................. 952.2 1,292.6 Foreign currency translation..................... (71.1) (50.0) Unrealized gain (loss) on investments............ (1.5) .1 Treasury stock, at cost.......................... (374.5) (395.5) --------- --------- Total shareholders' equity......................... 918.4 1,251.2 --------- --------- Total liabilities and shareholders' equity $3,785.6 $2,975.4 ========= ========= (The accompanying Notes are an integral part of the Consolidated Financial Statements.)
CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions)
Years Ended June 30, ----------------------------------- 1998 1997 1996 --------- --------- --------- CASH FLOWS - OPERATING ACTIVITIES Net earnings (loss)........................ $ (291.9) $ 190.1 $ 211.9 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation............................. 114.3 97.5 109.6 Amortization............................. 72.8 30.2 39.5 Postretirement benefits.................. 6.3 7.9 10.9 Undistributed equity in earnings of joint venture........................... (17.0) (25.0) Gains on asset disposals................. (114.3) (182.5) (55.1) Deferred income taxes.................... (75.8) 144.1 30.5 Write-off of purchased research and development......................... 398.3 Sale of inventory stepped up to fair value at acquisition ................... 75.4 Write-off of pre-operating costs......... 12.5 --------- --------- --------- 197.6 270.3 322.3 Changes in operating assets and liabilities: Trade receivables...................... (15.6) (34.3) (62.5) Inventories............................ (18.1) 17.8 (49.5) Other current assets................... 63.8 (62.0) ( 2.7) Accounts payable, accrued liabilities and income taxes payable, net......... (35.6) 111.6 22.8 Net assets of discontinued operations............................ (.4) 9.8 (68.6) Other noncurrent liabilities and deferred credits...................... 30.6 (4.3) 49.7 Other, net............................. (13.9) (5.1) (41.1) --------- --------- --------- Net cash provided by operating activities.. 208.4 303.8 170.4 --------- --------- --------- CASH FLOWS - INVESTING ACTIVITIES Capital expenditures....................... (142.7) (109.5) (169.2) Acquisition spending....................... (1,790.9) (16.8) (153.9) Proceeds from asset disposals.............. 308.2 412.8 120.5 Other, net................................. 7.0 (6.7) 5.1 --------- --------- --------- Net cash provided (used) by investing activities...................... (1,618.4) 279.8 (197.5) --------- --------- --------- CASH FLOWS - FINANCING ACTIVITIES Increase (decrease) in short-term debt..... 279.5 (103.8) 511.7 Proceeds from long-term debt............... 399.8 1.1 199.5 Payments on long-term debt................. (3.9) (10.2) (103.7) Issuance of Mallinckrodt common stock...... 40.0 39.6 31.0 Acquisition of treasury stock.............. (9.7) (149.9) (130.5) Dividends paid............................. (48.5) (48.2) (45.7) --------- --------- --------- Net cash provided (used) by financing activities................................ 657.2 (271.4) 462.3 --------- --------- --------- Increase (decrease) in cash and cash equivalents.......................... (752.8) 312.2 435.2 Cash and cash equivalents at beginning of year......................... 808.3 496.1 60.9 --------- --------- -------- Cash and cash equivalents at end of year... $ 55.5 $808.3 $496.1 ========= ========= ======== (The accompanying Notes are an integral part of the Consolidated Financial Statements.)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In millions, except per share amounts)
Capital in Preferred Common Excess of Reinvested Treasury Stock Stock Par Value Earnings Other Stock ----- ------ --------- -------- ----- ------- BALANCE, JUNE 30, 1995.. $11.0 $87.1 $274.1 $984.5 $(9.3) $(175.9) Net earnings............ 211.9 Dividends: 4 Percent cumulative preferred stock ($4.00 per share).... (.4) Common stock ($.605 per share).... (45.3) Stock option exercises.. 8.1 21.6 Income tax benefit from stock options exercised ............. 1.3 Acquisition of treasury stock......... (130.5) Translation adjustment.. (7.5) Unrealized gain on investments............ 1.5 ----- ------ ------ ------- ------ ------- BALANCE, JUNE 30, 1996.. 11.0 87.1 283.5 1,150.7 (15.3) (284.8) Net earnings............ 190.1 Dividends: 4 Percent cumulative preferred stock ($4.00 per share).... (.4) Common stock ($.65 per share)..... (47.8) Stock option exercises.. 6.7 27.2 Income tax benefit from stock options exercised.............. 5.7 Acquisition of treasury stock......... (149.9) Issuance of stock related to an acquisition............ 10.0 12.0 Translation adjustment, net of $9.3 translation loss included in discontinued operations............. (35.2) Unrealized gain on investments............ .6 ----- ------ ------ ------- ------ ------- BALANCE, JUNE 30, 1997.. 11.0 87.1 305.9 1,292.6 (49.9) (395.5) Net loss................ (291.9) Dividends: 4 Percent cumulative preferred stock ($4.00 per share)..... (.4) Common stock ($.66 per share)...... (48.1) Stock option exercises.. 1.6 16.5 Income tax benefit from stock options exercised.............. 2.1 Acquisition of treasury stock......... (9.7) Investment plan match... 2.4 7.3 Restricted stock award.. 3.2 6.9 Translation adjustment.. (21.1) Unrealized loss on investments............ (1.6) ----- ------ ------ ------ ------- -------- BALANCE, JUNE 30, 1998.. $11.0 $87.1 $315.2 $952.2 $(72.6) $(374.5) ===== ====== ====== ====== ======= ======== (The accompanying Notes are an integral part of the Consolidated Financial Statements.) (/TABLE> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS All references to years are to fiscal years ended June 30 unless otherwise stated. Certain amounts in prior years have been reclassified to conform to the current year presentation. All earnings per share amounts are calculated on a diluted basis unless otherwise stated. NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION Financial statements of all majority owned subsidiaries are consolidated. Investments in 20 to 50 percent owned affiliates are reported on the equity method. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the revenues and expenses during the reporting period, as well as amounts included in the Notes. While the Company uses its best estimates and judgments, actual results could differ from these estimates. FOREIGN CURRENCY TRANSLATION The financial statements of most of the Company's international affiliates are translated into U.S. dollars using current exchange rates for balance sheets and weighted average rates for income statements. Unrealized translation adjustments are included in shareholders' equity in the Consolidated Balance Sheets. The financial statements of international affiliates that operate in hyperinflationary economies in certain Latin American countries are translated at current and historical exchange rates, as appropriate. Unrealized translation adjustments are included in operating results for these affiliates. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist primarily of certificates of deposit, time deposits and other short-term securities with maturities of three months or less from the date of purchase. INVENTORIES Inventories are valued at the lower of cost or market. Cost for inventories is determined on either an average or first-in, first-out basis. INVESTMENTS The Company's investments in marketable equity securities are classified as "available-for-sale" and are carried at fair market value, with the unrealized gains and losses included, net of income taxes, in shareholders' equity in the Consolidated Balance Sheets. Interest, dividends and realized gains and losses on the sale of such securities are included in interest income and other nonoperating income (expense), net. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Depreciation is based upon estimated useful lives of 10 to 45 years for buildings and 3 to 15 years for machinery and equipment, using principally the straight-line method. The Company recognizes impairment losses for long-lived assets to be held and used whenever events or changes in circumstances indicate that the carrying amount of the assets exceeds the sum of the expected undiscounted future cash flows associated with such assets. The measurement of the impairment losses to be recognized is based on the difference between the fair values and the carrying amounts of the assets. Long-lived assets held for sale are reported at the lower of carrying amount or fair value less cost to sell. INTANGIBLE ASSETS The cost of product line or business acquisitions accounted for using the purchase method is allocated first to identifiable assets and liabilities based on estimated fair values. The excess of cost over identifiable assets and liabilities is recorded as goodwill. Goodwill is amortized on a straight-line basis over 4 to 40 years (weighted average life of 28 years). Technology is amortized on a straight-line basis over 15 to 25 years (weighted average life of 16 years). Other intangible assets, consisting primarily of trademarks, trade names, and manufacturing and distribution agreements, are amortized primarily on a straight-line basis over 3 to 40 years (weighted average life of 20 years). The carrying amounts of intangible assets and goodwill are reviewed if facts and circumstances suggest that they may be impaired. If this review indicates that the carrying amounts of intangible assets and goodwill will not be recoverable, as determined based on the estimated undiscounted cash flows of the entity acquired over the remaining amortization period, the carrying amounts of the intangible assets and goodwill are reduced by the estimated shortfall of cash flows. In addition, intangible assets and goodwill associated with assets acquired in a purchase business combination are included in impairment evaluations when events and circumstances exist that indicate the carrying amount of those assets may not be recoverable. DERIVATIVE FINANCIAL INSTRUMENTS The Company uses interest rate swaps and options to manage the interest rate characteristics of its outstanding debt to a more desirable fixed or variable rate basis or to limit the Company's exposure to rising interest rates; forward foreign exchange agreements and currency swaps to minimize the exposure on intercompany loans; and foreign exchange option contracts to minimize the impact of anticipated foreign currency exposures which arise from probable purchases of raw materials or other inventory, collection of accounts receivable, settlement of accounts payable, and periodic debt service by international subsidiaries which occur in the ordinary course of business. Interest rate differentials to be paid or received as a result of an interest rate swap are accrued and recognized as an adjustment of interest expense related to the designated debt. Interest rate option premiums paid are amortized to interest expense ratably during the life of the agreement. Amounts related to interest rate swaps and the intrinsic value of terminated option agreements are deferred and amortized as an adjustment to interest expense over the original period of interest exposure, provided the designated liability continues to exist or is probable of occurring. The Company uses forward foreign exchange contracts and currency swaps to hedge intercompany financial activity denominated in currencies other than the functional currency of the entity involved. Forward foreign exchange contracts and currency swaps are carried off-balance-sheet with unrealized and realized gains and losses included in the measurement and recording of the hedged transactions. The Company hedges a portion of its anticipated foreign currency exchange exposure using certain derivative financial instruments, primarily purchased options to sell foreign currencies with little or no intrinsic value at time of purchase. These contracts are designated and effective as hedges of the Company's consolidated foreign currency exchange exposures. Gains on option contracts that are designated as hedges (including open, matured and terminated contracts), and which have nominal intrinsic value at the time of purchase, are deferred and recognized in earnings at the time the underlying hedged exposure occurs. Premiums on purchased options are recorded as assets and amortized over the lives of the options. Realized and unrealized gains on options relating to exposures that are no longer probable of occurring are included as foreign exchange gains in the accompanying Consolidated Statements of Operations. REVENUE RECOGNITION AND PRODUCT WARRANTY The Company recognizes revenue at the time of product shipment and provides currently for estimated discounts, rebates and product returns and the cost to repair or replace products under the warranty provisions in effect at the time of sale. STOCK-BASED COMPENSATION The Company accounts for its stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Financial Accounting Standards Board (FASB) Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), requires that companies electing to continue using the intrinsic value method make pro forma disclosures of net earnings and earnings per share as if the fair- value-based method of accounting had been applied. See Note 16 for the fair value disclosures required under SFAS 123. ADVERTISING COSTS All advertising costs are expensed as incurred and included in selling, administrative and general expenses. Advertising expense was $20.1 million, $20.5 million and $19.0 million in 1998, 1997 and 1996, respectively. RECENT ACCOUNTING PRONOUNCEMENTS ADOPTED In April 1998, the American Institute of Certified Public Accountants (AICPA) issued SOP 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5), which requires that costs related to start-up activities be expensed as incurred. Prior to 1998, the Company capitalized its pre-operating costs incurred in connection with opening a new facility. In the fourth quarter of 1998, the Company elected to early adopt the provisions of SOP 98-5 in its consolidated financial statements for the year ended June 30, 1998. The effect of adoption of SOP 98-5 was to record a charge of $8.4 million, net of taxes, for the cumulative effect of an accounting change to expense costs that had previously been capitalized prior to July 1, 1997. In March 1998, the AICPA issued SOP 98-1, "Accounting For the Costs of Computer Software Developed For or Obtained For Internal-Use" (SOP 98-1), which the Company early adopted effective July 1, 1997. SOP 98-1 requires the capitalization of certain costs incurred after the date of adoption in connection with developing or obtaining software for internal-use. The Company previously maintained a policy similar to SOP 98-1 and, therefore, the adoption of SOP 98-1 did not have a material impact on the Company's consolidated results of operations or financial position. In February 1997, the FASB issued Statement No. 128, "Earnings per Share" (SFAS 128), which replaced the calculation of 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 appropriate, restated to conform to the SFAS 128 requirements. See Note 3 for a reconciliation of the numerators and the denominators of the basic and diluted per share computations for earnings from continuing operations. In October 1996, the AICPA issued SOP 96-1, "Environmental Remediation Liabilities" (SOP 96-1), which requires the accrual of environmental remediation liabilities when the criteria of FASB Statement No. 5, "Accounting for Contingencies," are met. SOP 96-1 provides benchmarks to aid in the determination of when environmental remediation liabilities should be recognized and specific guidance as to how they should be measured. The Company adopted SOP 96-1 effective July 1, 1997. SOP 96-1 did not have a material impact on the Company's consolidated results of operations or financial position. YET-TO-BE-ADOPTED In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which is required to be adopted in years beginning after June 15, 1999. The Company has not determined when it will adopt SFAS 133, which may be early adopted as of the beginning of any fiscal quarter after its issuance. SFAS 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivatives are hedges and depending on the nature of the hedges, changes in the fair value of derivatives which offset the change in fair value of the hedged assets, liabilities or firm commitments will either be recorded in earnings or deferred in shareholders' equity until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company has not yet determined what the effect of SFAS 133 will be on the future consolidated results of operations or financial position of the Company. In February 1998, the FASB issued Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" (SFAS 132), which is effective for fiscal years beginning after December 15, 1997. SFAS 132 addresses disclosure issues only and does not change the measurement or recognition provisions for pensions and postretirement benefits other than pensions. Accordingly, the Company's adoption of SFAS 132 in 1999 will have no impact on its consolidated results of operations or financial position. In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information" (SFAS 131), which is effective for fiscal years beginning after December 15, 1997. SFAS 131 changes the method of determining segments from that currently required, and requires the reporting of certain information about such segments. The Company has not determined how its segments will be reported or whether and to what extent segment information will differ from that currently presented. In June 1997, the FASB issued Statement No. 130,"Reporting Comprehensive Income" (SFAS 130), which is effective for fiscal years beginning after December 15, 1997. SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components; however, adoption in 1999 will have no impact on the Company's consolidated results of operations or shareholders' equity. NOTE 2 - CHANGES IN BUSINESS ACQUISITIONS NELLCOR PURITAN BENNETT INCORPORATED On August 28, 1997, the Company acquired Nellcor Puritan Bennett Incorporated (Nellcor) through an agreement to purchase for cash all of 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 manufactures and markets products that monitor, diagnose and treat respiratory impaired patients. The product lines include pulse oximetry monitors and sensors, critical care and portable ventilators, home oxygen therapy products, sleep apnea diagnostic and therapy products, and medical gas products and distribution systems. The Company completed the acquisition using cash and cash equivalents and borrowed approximately $1.1 billion under a $2.0 billion credit facility established in July 1997, and amended and restated in September 1997. The acquisition was accounted for under the purchase method of accounting and, accordingly, the results of operations of Nellcor have been included in the Company's consolidated financial statements since September 1, 1997. The purchase price of the acquisition was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of the net identifiable assets, totaling $724.2 million, was allocated to goodwill and is being amortized on a straight-line basis over 30 years. The Company also recorded a deferred tax liability of $211.0 million, representing the tax effect of timing differences recorded as part of the acquisition. Approximately $925.4 million of the purchase price was allocated to identifiable intangible assets including purchased research and development ($398.3 million), technology ($374.2 million), and trademarks and trade names and assembled work force ($152.9 million). (See Note 1 for amortization periods and methods for intangible assets.) 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 were in various stages of development and had not reached technological feasibility. No alternative future uses were identified prior to reaching technological feasibility because of the uniqueness of the projects. The purchased research and development was valued using the income approach, which includes an analysis of the markets, cash flows and risks associated with achieving such cash flows. This intangible asset, which had no tax benefit, was charged to results of operations during the first quarter of 1998. Of the total charge of $398.3 million, $2.0 million relates to the Aero Systems division which was sold and reclassified to discontinued operations in the fourth quarter of 1998. In connection with the Company's filing of a shelf registration statement for debt securities, Mallinckrodt is engaged in discussions with the staff of the Securities and Exchange Commission regarding the purchase price allocation related to its acquisition of Nellcor. The Company and its auditors, Ernst & Young LLP, believe that the allocation and related amortization charges are in accordance with generally accepted accounting principles. Nevertheless, if there are any significant changes as a result of these discussions to the amounts allocated to purchased research and development or other intangible assets or changes in the lives over which such amounts are amortized, these could have a material impact on the related noncash charges reflected in the 1998 results of operations and could materially affect future results of operations as a result of increased amortization expense. The sale of Nellcor inventories, which were stepped up to fair value in connection with allocation of purchase price, decreased earnings by $75.4 million, $46.7 million net of taxes for 1998. Pretax charges to the Respiratory Group and Aero Systems division, which was divested and reclassified to discontinued operations in the fourth quarter, were $74.4 million and $1.0 million, respectively. 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 1997, after giving effect to certain adjustments, including amortization of goodwill and intangible assets, 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. (In millions, except per share amounts ) 1998 1997 -------- -------- Net sales................................... $2,462.3 $2,436.8 Net earnings from continuing operations..... $112.3 $111.7 Net earnings per share from continuing operations Basic.................................... $1.53 $1.51 Diluted.................................. $1.52 $1.48 The pro forma financial information presented above does not include nonrecurring charges for purchased research and development, the sale of inventory stepped up to fair value at the date of acquisition, and integration activities. These charges are included in the actual results of operations for 1998. 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. Since both companies (Mallinckrodt and Nellcor) had global healthcare operations, senior management, through transition teams, assessed which activities should be consolidated. Management finalized and approved a Nellcor integration plan during the year. Accordingly, the Company recorded additional purchase liabilities of $50.1 million, $30.8 million net of related tax benefit, which were included in the acquisition cost allocation and related goodwill. The principal actions of the plan include the involuntary severance of approximately 450 Nellcor employees as a result of work force reduction primarily in U.S. administrative areas ($37.2 million), relocation of Nellcor employees ($3.8 million), and the elimination of contractual obligations of Nellcor which have no future economic benefit ($9.1 million). Approximately $27.9 million of cash expenditures were incurred through June 30, 1998 and liabilities of $22.2 million related to the Nellcor integration plan remained in accrued liabilities at June 30, 1998. The majority of the remaining cash expenditures will occur in 1999 with the largest single category related to severance for previously terminated employees. These actions are to be completed in 1999 and, although none are expected, reductions in the estimated liability for these integration activities will be offset against the related goodwill. During 1998, the Company recorded a pretax charge to selling, administrative and general expenses of $19.1 million associated with exiting certain activities related to Mallinckrodt operations. The charge included severance costs of $17.1 million related to the involuntary severance of approximately 130 Mallinckrodt employees as a result of work force reduction primarily in the Europe administration function and U.S. sales force, and facility exit costs of $2 million. Payments made during 1998 relating to the above totaled $3.5 million. The majority of the remaining $15.6 million cash expenditures will occur in 1999. Restructuring actions are to be complete in 1999 and no material adjustments to the original reserve are anticipated. The Company recorded a pretax charge to selling, administrative and general expenses of $49.5 million in 1998 related to employee transition bonuses of $16.6 million, increased asset valuation reserves of $12.8 million, and other integration costs of $20.1 million. Charges to the reserve during 1998 were $25.0 million. The remaining reserve of $24.5 million consists primarily of employee transition bonuses to be paid in 1999. OTHERS In November 1996, the Company acquired D.M. Graham Laboratories, Inc., a contract manufacturer of dosage pharmaceuticals and a licensed producer of a variety of medicinal narcotics, for $22 million of the Company's common stock. In January 1996, the Company acquired Liebel-Flarsheim Company, a manufacturer of contrast media power injector systems for diagnostic imaging procedures, x-ray components and specialized equipment for diagnostic urology procedures, for $70.3 million. In December 1995, King Pharmaceuticals' product line of specialty analgesic pharmaceuticals was acquired for $32.4 million. The above acquisitions were accounted for as purchases, and results of operations were included in the consolidated financial statements from their respective acquisition dates. Results of operations for the periods prior to acquisition were not material to Mallinckrodt. DISCONTINUED OPERATIONS The Company sold certain chemical additive product lines in the second quarter of 1998, and recorded a gain on sale, net of taxes, of $8.7 million. In the fourth quarter of 1998, the Company sold its catalyst business and Aero Systems division. The catalyst sale resulted in a gain, net of taxes, of $60.2 million. No gain or loss was recognized on the sale of the Aero Systems division, and there were no earnings from operations. In June 1998, the Company committed to the sale of the remaining chemical additives business of the catalysts and chemical additives division, and closing of the sale occurred on July 31, 1998. Certain liabilities for environmental, litigation and employee benefits remained with the Company, and reserves were established to address these liabilities as deemed appropriate. Earnings, net of taxes, from the catalysts and chemical additives division for 1998, 1997 and 1996 were $11.4 million, $10.5 million and $10.1 million, respectively. On March 31, 1997, the Company disposed of Fries & Fries, Inc., a wholly owned subsidiary which owned the Company's 50 percent interest in Tastemaker, the flavors joint venture with Hercules Incorporated. The Company recorded a gain on divestiture, net of taxes, of $270.6 million. Earnings, net of taxes, from the divested business for 1997 and 1996 were zero and $18.6 million, respectively. The disposition included the assumption of $510 million of debt of Fries & Fries, Inc. by the buyer. Interest expense related to the assumed debt of $22.4 million and $2.5 million for 1997 and 1996, respectively, is included in the above Fries & Fries, Inc. net after-tax results of operations reclassified as discontinued operations. On June 30, 1997, the Company sold the animal health segment for cash plus the assumption of certain liabilities. The Company recorded a loss on sale, including taxes, of $269.4 million. Environmental liabilities, certain facility leases, and certain liabilities for employee benefits, including postretirement benefits, remained with the Company. Reserves were established to address the remaining liabilities. Earnings, net of taxes, from the animal health segment for 1997 and 1996 were $5.8 million and $18.9 million, respectively. Interest expense related to debt assumed by the buyer of $5.6 million and $5.0 million for 1997 and 1996, respectively, was included in the above animal health segment net after-tax results reclassified to discontinued operations. During the third quarter of 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. In October 1995, the Company disposed of its feed ingredients business. The gain on disposition, net of taxes, was $35.4 million and earnings, net of taxes, from the divested business for 1996 were $4.4 million. Discontinued operations for 1997 and 1996 also included other charges, primarily for environmental and litigation costs related to previously divested operations, of $2.6 million and $19.1 million, respectively. The following schedule summarizes the components, net of tax, of discontinued operations presented in the Consolidated Statements of Operations (in millions).
1998 1997 1996 ------ ------ ------ Catalysts and chemical additives division Gain on sale.............................. $ 68.9 Earnings from operations.................. 11.4 $ 10.5 $ 10.1 Fries & Fries, Inc. Gain on divestiture....................... 270.6 Earnings from operations.................. 18.6 Animal health segment Loss on sale.............................. (7.9) (269.4) Earnings from operations.................. 5.8 18.9 Feed ingredients business Gain on divestiture....................... 35.4 Earnings from operations.................. 4.4 Environmental costs/other.................... (2.6) (19.1) ------- ------- ------- Discontinued operations $ 72.4 $ 14.9 $ 68.3 ======= ======= =======
The catalysts and chemical additives and Aero Systems divisions were reclassified to discontinued operations effective June 30, 1998. Fries & Fries, Inc. and the animal health segment were reclassified to discontinued operations effective December 31, 1996 and March 31, 1997, respectively. The feed ingredients business was reclassified to discontinued operations effective September 30, 1995. All prior periods of the Consolidated Statements of Operations and Consolidated Balance Sheets were reclassified to reflect this presentation. Disclosures included in the Notes to Consolidated Financial Statements relate to continuing operations, unless otherwise indicated. NOTE 3 - EARNINGS PER COMMON SHARE The following table sets forth the computation of basic and diluted earnings (loss) from continuing operations per common share (in millions, except share and per share amounts).
1998 1997 1996 -------- ------- ------- Numerator: Earnings (loss) from continuing operations.. $(355.9) $175.2 $143.6 Preferred stock dividends................... (.4) (.4) (.4) -------- ------- ------- Numerator for basic earnings (loss) per share and earnings (loss) per share assuming dilution--income (loss) available to common shareholders........... $(356.3) $174.8 $143.2 ======== ======= ======= Denominator: Denominator for basic earnings per share-- weighted-average shares.................. 72,920,659 73,837,424 75,183,729 Potential dilutive common shares-- employee stock options................... 1,270,405 1,172,234 ---------- ---------- ---------- Denominator for diluted earnings (loss) per share--adjusted weighted-average shares and assumed conversions........... 72,920,659 75,107,829 76,355,963 ========== ========== ========== Basic earnings (loss) from continuing operations per common share............... $(4.89) $2.37 $1.90 ======= ===== ===== Earnings (loss) from continuing operations per common share--assuming dilution....... $(4.89) $2.33 $1.88 ======= ===== =====
The diluted share base for the twelve months ended June 30, 1998 excludes incremental shares of 612,285 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 1998. NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION
(In millions) 1998 1997 1996 -------- ------- ------- Interest paid.................................. $ 83.7 $ 69.1 $ 48.6 Income taxes paid.............................. 73.3 82.2 65.0 Noncash investing and financing activities: Assumption of liabilities related to acquisitions.............................. 465.6 2.3 21.5 Principal amount of debt assumed by buyers in conjunction with divestitures...... 1.0 530.6 Preferred stock received related to a divestiture.................................. 88.9 Issuance of stock related to an acquisition... 22.0
The interest paid and income taxes paid presented above include amounts related to discontinued operations. NOTE 5 - INVENTORIES AT JUNE 30, (in millions) 1998 1997 ------ ------ Raw materials and supplies.................... $208.4 $107.4 Work in process............................... 46.4 39.9 Finished goods................................ 215.2 144.5 ------ ------ $470.0 $291.8 ====== ====== NOTE 6 - INVESTMENTS AND OTHER NONCURRENT ASSETS AT JUNE 30, (in millions) 1998 1997 ------ ------ Preferred stock received related to a divestiture............................. $ 86.1 $ 88.9 Other investments, net........................ 42.9 32.9 Other noncurrent assets, net.................. 25.5 23.3 ------ ------ $154.5 $145.1 ====== ====== NOTE 7 - PROPERTY, PLANT AND EQUIPMENT AT JUNE 30, (in millions) 1998 1997 --------- --------- Land.......................................... $ 69.1 $ 50.6 Buildings and leasehold improvements.......... 354.2 300.1 Machinery and equipment....................... 916.9 778.5 Construction in progress...................... 71.3 59.2 -------- --------- 1,411.5 1,188.4 Accumulated depreciation...................... (516.6) (447.1) --------- --------- $ 894.9 $ 741.3 ========= ========= Capitalized interest costs were $.8 million in 1998, $.7 million in 1997 and $1.6 million in 1996. NOTE 8 - INTANGIBLE ASSETS AT JUNE 30, (in millions) 1998 1997 ------- ------- Goodwill...................................... $989.4 $280.5 Accumulated amortization...................... (89.9) (58.0) ------- ------- Goodwill, net................................. $899.5 $222.5 ======= ======= Technology.................................... $390.4 $ 30.3 Accumulated amortization...................... (26.1) (5.9) ------- ------- Technology, net............................... $364.3 $ 24.4 ======= ====== Other intangible assets....................... $337.4 $187.2 Accumulated amortization...................... (55.3) (42.8) ------- ------- Other intangible assets, net $282.1 $144.4 ======= ======= NOTE 9 - FINANCIAL INSTRUMENTS DERIVATIVE FINANCIAL INSTRUMENTS In the ordinary course of business, Mallinckrodt purchases materials and sells finished products denominated in approximately 25 different currencies. The Company is primarily exposed to changes in exchange rates of the German deutsche mark and other European currencies highly correlated with the German deutsche mark and the Japanese yen. Overall, the Company is a net beneficiary when the U.S. dollar weakens and is adversely affected by a stronger U.S. dollar relative to the major currencies identified. The Company enters into forward foreign exchange contracts and currency swaps to minimize the exposure on intercompany loans. To mitigate the short-term effect of changes in foreign currency exchange rates on the Company's consolidated performance, the Company hedges a portion of its non-U.S. dollar denominated exposures by purchasing currency options which generally have terms of two years or less. The Company uses the currency options with an objective of limiting negative foreign exchange rate effects on overall performance for both budget and prior year comparisons over a rolling 18- to 24-month horizon. The Company seeks to have effective coverage levels over such 18- to 24-month horizon of 50 to 80 percent of currency exposures that subject the Company to risk. There are no hedging gains or losses that are explicitly deferred at June 30, 1998. The Company's interest income and expense are most sensitive to changes in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on the Company's cash equivalents and short-term investments as well as interest paid on its short-term debt. To mitigate the impact of fluctuations in U.S. interest rates, the Company periodically enters into interest rate swaps and option contracts. Information on the duration by expected maturity, notional value, purpose and fair value of instruments outstanding as of June 30, 1998 is provided below (in millions, except average strike price and exchange rate):
Fair Value (Loss) As of 1999 2000 2001 Total 6/30/98 ------ ------ ------ ----- ---------- Purchased option contracts to sell for U.S.$ related to anticipated foreign currency exposures German deutsche mark Notional value.................. $ 28.5 $ 55.0 $ 83.5 $ 3.9 Average strike price............ 1.71 1.75 Japanese yen Notional value.................. $ 10.0 $ 37.5 $ 47.5 $ 6.7 Average strike price............ 114.2 112.8 Forward contracts and currency swaps related to inter-company financial transactions Sale of Canadian dollar Notional value.................. $ 2.4 $ 2.4 $ 0.0 Exchange rate.................... 1.46 Sale of French franc Notional value................... $ 12.0 $ 12.0 $ 0.0 Exchange rate.................... 6.1 Sale of Polish zloty Notional value................... $ 0.4 $ 0.4 $ 0.0 Exchange rate.................... 4.1 Purchase of British pounds Notional value................... $ 5.1 $ 5.1 $ 0.0 Exchange rate.................... 0.6 Swap of Japanese yen Notional value................... $ 12.9 $ 12.9 $ (0.1) Exchange rate.................... 140.0 Interest rate swaps Related to U.S.$ leases, the Company pays fixed (9.9%)/ receives variable (LIBOR + 0.70%) Notional value................... $ 35.6 $ 35.6 $ (2.2) Related to 6.3% debentures, the Company pays variable (LIBOR + .3419%)/receives fixed (6.3%) Notional value................... $200.0 $200.0 $ 0.5
FAIR VALUE OF FINANCIAL INSTRUMENTS Non-derivative financial instruments included in the Consolidated Balance Sheets are cash, short-term investment vehicles, short-term debt and long-term debt. In the aggregate, these instruments were carried at amounts approximating fair value at June 30, 1998 and 1997. The fair value of long-term debt was estimated based on future cash flows discounted at current interest rates available to the Company for debt with similar maturities and characteristics. See Note 13 for the disclosure of fair value of long-term debt. CONCENTRATIONS OF CREDIT RISK Financial instruments which expose Mallinckrodt to credit risk are short-term investments (cash equivalents), trade receivables and derivatives. The Company mitigates the risk that counterparties to short-term investments and derivatives will fail to perform by contracting only with major financial institutions having high credit ratings. Mallinckrodt considers the likelihood of counterparty failure to be remote. Trade receivables stem from the Company's worldwide operations and reflect Mallinckrodt's diverse customer base. The Company periodically assesses the financial strength of its customers and obtains proof of creditworthiness, as necessary, prior to extending credit. Consequently, Mallinckrodt does not have a material concentration of credit risk, either by transaction type, product line or geographic region. NOTE 10 - INCOME TAXES Income taxes included in the Consolidated Statements of Operations were (in millions):
1998 1997 1996 -------- ------- ------- Continuing operations.......................... $ 18.4 $ 96.3 $ 84.3 Discontinued operations: Sale of catalysts and chemical additives division.................................... 45.4 Catalysts and chemical additives division operations.................................. 5.3 6.0 5.7 Divestiture of Fries & Fries, Inc............ 158.9 Fries & Fries, Inc. operations............... (.5) 10.8 Sale of animal health segment................ (4.2) 21.9 Animal health segment operations............. 11.4 11.0 Divestiture of feed ingredients business..... 19.3 Feed ingredients business operations......... 2.2 Other........................................ (8.4) (1.4) (10.3) ------- ------- ------- Total discontinued operations................ 38.1 196.3 38.7 ------- ------- ------- Cumulative effect of accounting change......... (4.1) ------- ------- ------- $ 52.4 $292.6 $123.0 ======= ======= =======
The geographical sources of earnings (loss) from continuing operations before income taxes were (in millions): 1998 1997 1996 -------- ------- ------- U.S........................... $(443.3) $161.7 $123.0 Outside U.S................... 105.8 109.8 104.9 -------- ------- ------- $(337.5) $271.5 $227.9 ======== ======= ======= The components of the income tax provision charged to continuing operations follow (in millions): 1998 1997 1996 -------- ------- ------- Current: U.S. Federal................ $ 53.3 $ 41.5 $ 26.1 U.S. state and local........ 4.4 7.0 4.1 Outside U.S................. 29.5 26.3 27.5 -------- ------ ------ 87.2 74.8 57.7 -------- ------ ------ Deferred: U.S. Federal................ (87.5) 8.8 20.5 U.S. state and local........ 14.2 2.7 2.6 Outside U.S................. 4.5 10.0 3.5 -------- ------ ------ (68.8) 21.5 26.6 -------- ------ ------ $ 18.4 $ 96.3 $ 84.3 ======== ====== ====== The Company had the following deferred tax balances at June 30, 1998 and 1997 (in millions): 1998 1997 ------- ------- Deferred tax assets: Restructuring accruals..................... $ 16.2 $ 21.0 Pensions and deferred compensation......... 20.2 15.4 Net operating losses....................... 11.4 6.4 Environmental accruals..................... 28.2 24.0 Other, net................................. 44.1 ------- ------- Gross deferred tax assets.................... 120.1 66.8 Valuation allowance........................ (30.4) (22.8) ------- ------- Total deferred tax assets.................... 89.7 44.0 ------- ------- Deferred tax liabilities: Property, plant and equipment.............. 133.9 126.6 Receivables................................ 18.8 47.8 Intangible assets.......................... 234.8 55.6 Other, net................................. 25.3 ------- ------- Total deferred tax liabilities............... 387.5 255.3 ------- ------- Net deferred tax liabilities................. $297.8 $211.3 ======= ======= The tax benefit of the Company's net operating loss carryforwards of $11.4 million relates primarily to its non-U.S. operations, and $5.6 million of the tax benefit will expire in years 2000 through 2010. The remaining $5.8 million of the tax benefit relates to net operating loss carryforwards with indefinite carryforward periods. Factors causing the effective tax rate for continuing operations to differ from the U.S. Federal statutory rate were (in millions): 1998 1997 1996 -------- ------- ------- Computed tax at the U.S. Federal statutory rate.......... $(118.1) $ 95.0 $ 79.8 State income taxes, net of Federal benefit................. 12.1 6.6 4.6 Effect of foreign operations..... (14.4) (15.8) (11.6) Purchase accounting 145.6 Other items...................... (6.8) 10.5 11.5 -------- ------- ------- Income tax provision............. $ 18.4 $ 96.3 $ 84.3 ======== ======= ======= Effective tax rate (5.5)% 35.5% 37.0% Undistributed earnings of certain subsidiaries outside the U.S. are considered to be permanently invested. Accordingly, no provision for income taxes was made for undistributed earnings of such subsidiaries, which aggregated $298.1 million at June 30, 1998. NOTE 11 - ACCRUED LIABILITIES AT JUNE 30, (in millions) 1998 1997 ------ ------ Compensation and benefits.................... $118.1 $ 98.0 Environmental liabilities.................... 79.5 73.5 Other........................................ 334.4 219.7 ------ ------ $532.0 $391.2 ====== ====== NOTE 12 - LINES OF CREDIT The Company has a $1.0 billion private placement commercial paper program. The program is backed by a $1.6 billion revolving credit facility expiring September 12, 2002. Under this facility, 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 June 30, 1998. Commercial paper borrowings under this program were $285.8 million as of June 30, 1998. Non-U.S. lines of credit totaling $141.9 million were also available, and borrowings under these lines amounted to $17.2 million at June 30, 1998. These non-U.S. lines are cancelable at any time. NOTE 13 - DEBT The components of short-term debt at June 30, 1998 and 1997 were (in millions): 1998 1997 ------ ------ Notes payable................................ $303.4 $ 5.6 Current maturities of long-term debt......... 8.0 6.0 ------ ------ $311.4 $11.6 ====== ====== The components of long-term debt at June 30, 1998 and 1997 were (in millions):
Fair Value Carrying Amount ---------------- -------------------- 1998 1997 1998 1997 ------- ------- -------- -------- 9.875% debentures with initial payment of $.9 million due 2002 and annual installments of $15.0 million beginning in 2003, with final payment in 2011.............. $150.9 $153.7 $135.1 $135.0 7% debentures due 2013........ 104.1 98.3 98.7 98.7 6.75% notes due 2005.......... 103.8 102.0 99.5 99.4 6.5% notes due 2007.......... 102.0 98.6 98.8 98.6 6.3% debentures due 2011..... 204.6 200.9 6% notes due 2003............ 100.1 98.2 99.6 99.5 5.99% debentures due 2010.... 205.0 203.0 Other........................ 16.9 19.1 16.9 19.1 ------ ------ 952.5 550.3 Less current maturities...... 8.0 6.0 ------ ------ $944.5 $544.3 ====== ======
On August 28, 1997, the Company acquired Nellcor through an agreement to purchase for cash all of 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 Company completed the acquisition using cash and cash equivalents and borrowed approximately $1.1 billion under a $2.0 billion credit facility established in July 1997, and amended and restated in September 1997. The credit facility consisted of a $400 million term loan, which was repaid in March 1998, and a $1.6 billion five-year revolving credit facility. Under this facility, 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 June 30, 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. 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. 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. Maturities of long-term debt for the next five years are: 1999-$8.0 million; 2000-$203.9 million; 2001-$201.7 million; 2002-$1.6 million; and 2003-$118.3 million. The 9.875 percent debentures are redeemable at the option of Mallinckrodt at 100 percent in 2001 and thereafter. The weighted average interest rates on short-term borrowings at June 30, 1998 and 1997 were 5.8 percent and 4.5 percent, respectively. NOTE 14 - PENSION AND INVESTMENT PLANS The Company has defined benefit pension plans covering a majority of its U.S. employees. The majority of these plans provide for retirement benefits based on years of service and the level of compensation for the highest three to five years occurring generally within a period of up to 10 years prior to retirement. Contributions to the U.S. plans meet ERISA minimum funding requirements. The components of net periodic defined benefit pension costs are as follows (in millions): 1998 1997 1996 -------- ------- ------- Service cost...................... $21.1 $24.1 $20.4 Interest cost on projected benefit obligation............... 34.8 35.8 35.3 Earnings on plan assets........... (104.5) (36.4) (64.3) Net amortization and deferral..... 71.0 7.1 35.4 Special termination benefits and curtailment gains/losses, net.... 7.5 8.0 2.2 -------- ------- ------- $29.9 $38.6 $29.0 ======== ======= ======= U.S. pension expense in 1998, 1997 and 1996 was $24.2 million, $34.4 million and $25.8 million, respectively. Assumptions used in determining the actuarial present value of benefit obligations for U.S. pension plans follow: 1998 1997 1996 -------- ------- ------- Discount rate..................... 7.0% 8.0% 7.75% Long-term rate of return on plan assets................... 9.5% 9.5% 9.0% Compensation increase rate........ 4.5% 5.0% 5.0% The plans' assets primarily relate to U.S. plans and consist principally of corporate equities, U.S. government debt securities and units of participation in a collective short-term investment fund. The Company also sponsors seven defined contribution investment plans for U.S. employees. Participation in these plans is voluntary. Substantially all U.S. employees are eligible to participate. Expenses related to the plans consist primarily of Company contributions, which are based on percentages of certain employee contributions, plus discretionary amounts determined on an annual basis. Defined contribution investment plan expense for 1998, 1997 and 1996 was $12.6 million, $12.5 million and $14.0 million, respectively. The funded status of U.S. and significant non-U.S. defined benefit pension plans and amounts recognized in the Consolidated Balance Sheets at June 30, 1998 and 1997 follow (in millions):
1998 1997 ----------------------- ------------------------ Plans with Plans with Plans with Plans with Assets in Accumulated Assets in Accumulated Excess of Benefits Excess of Benefits Accumulated in Excess Accumulated in Excess Benefits of Assets Benefits of Assets ----------- ----------- ----------- ----------- Assets at fair value...... $427.2 $ 9.7 $356.9 $34.5 Actuarial present value of benefit obligation: Vested benefits......... 332.1 43.5 251.0 67.1 Nonvested benefits...... 33.0 10.4 39.3 5.9 ----------- ----------- ----------- ----------- Accumulated benefit obligation............. 365.1 53.9 290.3 73.0 Projected future salary increases....... 96.6 11.7 79.2 11.5 ----------- ----------- ----------- ----------- Projected benefit obligation............. 461.7 65.6 369.5 84.5 ----------- ----------- ----------- ----------- Projected benefit obligation in excess of plan assets........... 34.5 55.9 12.6 50.0 Items not yet recognized in earnings: Unrecognized prior service cost........... (5.4) (2.9) (0.3) (8.9) Unrecognized net gain (loss)............ 5.3 (1.0) 7.5 7.8 Unamortized transition asset (liability)...... 0.9 (3.7) 1.3 (5.6) ----------- ----------- ----------- ----------- Accrued pension liability................ $ 35.3 $48.3 $ 21.1 $43.3 =========== =========== =========== ===========
The pension and investment plan information presented above includes related amounts for the businesses sold in 1998, 1997 and 1996, except for 1997 pension expense, assets and liabilities of non-U.S. animal health segment pension plans that were assumed by the buyer. Mallinckrodt retained all pension assets and liabilities relating to the frozen pension benefits of U.S. employees of the businesses sold in 1998, 1997 and 1996. NOTE 15 - POSTRETIREMENT BENEFITS Mallinckrodt provides certain healthcare benefits for a majority of its U.S. salaried and hourly retired employees through various self- insured and fully-insured programs. Employees may become eligible for healthcare benefits if they retire after attaining specified age and service requirements while working for the Company. The postretirement benefit information presented below includes related amounts for the businesses sold in 1998, 1997 and 1996, except for the accrued postretirement benefit cost of certain active animal health segment employees which was assumed by the buyer. The components of periodic postretirement benefits costs are as follows (in millions): 1998 1997 1996 ------- ------- ------- Service cost for benefits earned during the year........... $ 3.1 $ 5.2 $ 4.8 Interest cost on benefit obligation....................... 10.0 11.6 13.0 Amortization of unrecognized net (gain) loss and prior service cost..................... (1.9) .2 ------- ------- ------- $11.2 $17.0 $17.8 ======= ======= ======= The following table presents the plans' funded status reconciled with amounts recognized in the Company's Consolidated Balance Sheets at June 30, 1998 and 1997 (in millions): 1998 1997 ------ ------ Accumulated postretirement benefit obligation (APBO): Retirees................................... $ 85.5 $ 79.7 Fully eligible active employees............ 10.7 12.5 Other active employees..................... 41.4 33.7 ------ ------ Accumulated postretirement benefit obligation in excess of plan assets......... 137.6 125.9 Unrecognized net gain........................ 16.2 18.1 Unrecognized prior service cost.............. 15.4 17.9 ------ ------ Accrued postretirement benefit cost.......... $169.2 $161.9 ====== ====== The discount rates used in determining the APBO for 1998 and 1997 were 7.0 percent and 8.0 percent, respectively. Changes in plan provisions for both retirees and active employees reduced the APBO by $24.6 million in 1997. The assumed medical plan cost trend rates used in measuring the APBO were 8.0 percent and 8.5 percent for 1998 and 1997, respectively, gradually declining to 4.75 percent in 2006 and thereafter. A one percentage point increase in the healthcare cost trend rate would increase the APBO for 1998 by $11.4 million and the aggregate service and interest cost by $1.2 million. A $1.4 million curtailment gain relating to the sale of the catalyst business in the fourth quarter of 1998 was included in the gain on sale recorded in discontinued operations. A $1.3 million curtailment gain relating to the sale of the animal health segment was included in the loss on sale recorded in discontinued operations in 1997. NOTE 16 - STOCK PLANS The Company authorized a new non-qualified stock option plan in October 1997. This plan provides for granting stock options at prices not less than 100 percent of market price (as defined) at the date of grant. Options are exercisable over nine years beginning one year after the date of grant and are limited for the first and second year of eligibility to 33-1/3 percent and 66-2/3 percent, respectively. Options granted under previous non-qualified stock option plans are exercisable over nine years beginning one year after the date of grant and are limited to 50 percent during the first year of eligibility. The pro forma information regarding net earnings and earnings per share required by SFAS 123 has been determined as if the Company had accounted for its employee stock options under the fair value method. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: 1998 1997 1996 ------ ------ ------ Risk free interest rate............. 5.95% 6.32% 5.46% Expected dividend yield of stock.... 1.58% 1.53% 1.53% Expected volatility of stock........ 23.8% 25.4% 30.0% Expected life of option (years)..... 4.6 4.5 4.1 The weighted average fair values of options granted during 1998, 1997 and 1996 were $9.39, $11.09 and $10.06, respectively. The estimated fair value of the options is amortized to expense over the options' vesting period. Because the SFAS 123 method of accounting has been applied only to grants after June 30, 1995, the following effects on net earnings and EPS may not be representative of the effects on reported net earnings for future years. The Company's pro forma information follows (in millions, except per share amounts): 1998 1997 1996 -------- ------- ------- Net earnings (loss): As reported................. $(291.9) $190.1 $211.9 Pro forma................... (302.8) 183.6 209.9 Earnings (loss) per share: As reported................. $ (4.01) $ 2.53 $ 2.77 Pro forma................... (4.16) 2.44 2.74 A summary of the Company's stock option activity and related information follows: 1998 ----------------------------- Number Weighted Avg. of Options Exercise Price ---------- -------------- Outstanding-beginning of year....... 5,821,316 $32.96 Granted............................. 2,601,227 35.68 Exercised........................... (614,320) 29.40 Canceled............................ (589,997) 35.44 ---------- Outstanding-end of year............. 7,218,226 34.04 ========== Exercisable at end of year.......... 4,394,493 32.64 Reserved for future option grants... 2,768,000 1997 ----------------------------- Number Weighted Avg. of Options Exercise Price ---------- --------------- Outstanding-beginning of year....... 6,262,753 $31.54 Granted............................. 1,118,170 38.54 Exercised........................... (1,143,868) 29.60 Canceled............................ (415,739) 35.77 ---------- Outstanding-end of year............. 5,821,316 32.96 ========== Exercisable at end of year.......... 4,275,547 31.40 Reserved for future option grants... 1,939,615 1996 ------------------------------ Number Weighted Avg. of Options Exercise Price ---------- --------------- Outstanding-beginning of year....... 6,126,649 $30.14 Granted............................. 1,449,622 34.97 Exercised........................... (1,071,373) 27.75 Canceled............................ (242,145) 33.38 ---------- Outstanding-end of year............. 6,262,753 31.54 ========== Exercisable at end of year.......... 4,300,204 30.60 Reserved for future option grants... 2,642,164 Outstanding stock options will expire over a period ending no later than June 15, 2008. The average exercise price of outstanding stock options at June 30, 1998 was based on an aggregate exercise price of about $246 million. The weighted average remaining contractual life of outstanding stock options is 6.9 years. Further breakdown of outstanding stock options by price range follows: Options Currently Outstanding ----------------------------------------------- Number Weighted Avg. Weighted Avg. Price Range of Options Exercise Price Remaining Life - -------------- ----------- -------------- -------------- $13.06 - 29.98 1,396,566 $25.76 4.6 30.13 - 34.79 1,152,298 33.85 6.6 35.01 - 44.47 4,669,362 36.57 7.6 Options Exercisable ---------------------------- Number Weighted Avg. Price Range of Options Exercise Price - -------------- ----------- -------------- $13.06 - 29.98 1,346,766 $25.61 30.13 - 34.79 1,152,298 33.85 35.01 - 44.47 1,895,429 37.05 NOTE 17 - CAPITAL STOCK The Company has authorized and issued 100,000 shares, 98,330 outstanding at June 30, 1998, of par value $100, 4 percent cumulative preferred stock. This stock, with voting rights, is redeemable at the Company's option at $110 a share. During the three years ended June 30, 1998, the number of issued and outstanding shares did not change. The Company has authorized 1,400,000 shares, par value $1, of series preferred stock, none of which was outstanding during the three years ended June 30, 1998. Each outstanding common share includes a non-voting common stock purchase right. If a person or group acquires or has the right to acquire 20 percent or more of the common stock or commences a tender offer for 30 percent or more of the common stock, the rights become exercisable by the holder, who may then purchase $320 worth of common stock for $160 unless, in lieu thereof, the Board of Directors causes the exchange of each outstanding right for one share of common stock (in either case, exclusive of the rights held by the acquiring person or group which are voided). In the event of a merger or sale of 50 percent or more of the Company's assets, the rights may in certain circumstances entitle the holder to purchase $320 worth of stock in the surviving entity for $160. The rights may be redeemed by the Board at a price of 5 cents per right at any time before they become exercisable and, unless exercised, they will expire February 28, 2006. The Company has a long-term incentive award program for executive officers. There are 1,000,000 shares reserved for this plan. Common shares reserved at June 30, 1998 consisted of the following: Exercise of common stock purchase rights..................84,235,877 Exercise of stock options and granting of stock awards....11,061,226 ---------- 95,297,103 ========== 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 under these authorizations have totaled 36.8 million shares. Changes in the number of shares of common stock issued and in treasury were as follows:
1998 1997 1996 ---------- ---------- ---------- Common stock issued.............. 87,116,289 87,116,289 87,116,289 Treasury common stock: Balance, beginning of year..... 14,843,847 12,835,721 10,365,203 Stock options exercised........ (614,320) (1,143,868) (1,071,373) Purchased...................... 241,753 3,654,995 3,540,018 Issuance of stock related to an acquisition............. (503,001) Restricted stock awards........ (252,136) 401(k) supermatch.............. (272,739) Directors' stock award plan.... (4,767) Cancellations of restricted shares........................ 1,873 ---------- ---------- ---------- Balance, end of year 13,941,638 14,843,847 12,835,721 ---------- ---------- ---------- Common stock outstanding, end of year..................... 73,174,651 72,272,442 74,280,568 ========== ========== ==========
NOTE 18 - BUSINESS SEGMENT The Company operates globally primarily in one industry segment - healthcare. Healthcare develops, manufactures and markets healthcare products to hospitals, clinical laboratories, pharmaceutical manufacturers and other customers on a worldwide basis. The Company markets and distributes its products directly through its geographically organized sales force, through various group purchasing organizations, and through distributors in the U.S. and internationally. Healthcare consists of three businesses: Respiratory, Imaging and Pharmaceuticals. The Respiratory business includes products for respiratory care, anesthesiology and blood analysis. Such products include oxygen monitoring, critical care ventilation, continuous core temperature monitoring systems, fluid warming and convective warm air temperature management systems, and airway management products. The Imaging business includes products used in radiology, cardiology and nuclear medicine. Principal products include iodinated contrast media (ionic and nonionic), ultrasound contrast agents and interventional catheters and related supplies, and radiopharmaceuticals used to provide images of numerous body organs' anatomy and function, and to diagnose and treat diseases. Pharmaceuticals products include analgesics such as acetaminophen (APAP); codeine salts, morphine and other opium-based narcotics and synthetic narcotics used to treat pain and coughs; and peptides which are used in many new pharmaceuticals. Other Pharmaceuticals products include laboratory and microelectronic chemicals; Toleron brand of ferrous fumarate which stimulates the formation of red blood cells; magnesium stearate for use as a tableting aid in pharmaceuticals; potassium chloride for use as a potassium supplement in pharmaceuticals and nutritionals; and other salts, chemicals and reagents used in the production of pharmaceutical and food products. In July 1996, Mallinckrodt began supplying Premier, Inc. (Premier) with x-ray contrast media under a five-year contract. Subsequently, Mallinckrodt entered into sole-source agreements to supply Premier member hospitals with tracheostomy tubes, temperature monitoring systems, and radiopharmaceuticals and related products. Effective July 1, 1997, Premier named Mallinckrodt a corporate partner, extending all supply agreements to seven years. Premier's 1,650 member hospitals are provided incentives to use Mallinckrodt products. For 1998 and 1997, net sales to hospitals under the Premier agreement represented approximately 13 percent and 9 percent of net sales, respectively. No individual customer, either through Premier or otherwise, represented more than 10 percent of net sales for any of the three years in the period ended June 30, 1998. NOTE 19 - INTERNATIONAL OPERATIONS Export sales to unaffiliated customers included in U.S. sales were (in millions): 1998 1997 1996 ------- ------ ------ Europe ..................... $ 36.4 $ 23.4 $ 24.9 Asia/Pacific................ 67.2 52.6 46.8 Latin America............... 42.0 26.2 23.0 Canada...................... 2.8 2.1 1.4 ------- ------ ------ Total....................... $148.4 $104.3 $ 96.1 ======= ====== ====== Net sales, earnings (loss) from continuing operations before income taxes, and identifiable assets by geographic areas follow (in millions):
1998 United Asia/ Latin States Europe Pacific America Canada Total -------- ------ ------- ------- ------ -------- Gross sales....... $1,929.2 $607.1 $121.6 $41.3 $116.2 $2,815.4 Intercompany...... 205.6 162.5 2.4 14.1 63.8 448.4 -------- ------ ------- ------- ------- -------- Net sales......... $1,723.6 $444.6 $119.2 $27.2 $ 52.4 $2,367.0 ======== ====== ======= ======= ======= ======== 1997 Gross sales....... $1,305.4 $473.8 $102.2 $37.7 $107.3 $2,026.4 Intercompany...... 117.0 124.4 3.1 10.3 73.5 328.3 -------- ------ ------- ------- ------ -------- Net sales......... $1,188.4 $349.4 $ 99.1 $27.4 $ 33.8 $1,698.1 ======== ====== ======= ======= ====== ======== 1996 Gross sales....... $1,187.8 $445.2 $107.4 $20.7 $ 86.3 $1,847.4 Intercompany...... 87.4 102.8 1.8 2.6 55.9 250.5 -------- ------ ------ ------- ------ -------- Net sales......... $1,100.4 $342.4 $105.6 $18.1 $ 30.4 $1,596.9 ======== ====== ====== ======= ====== ======== EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 1998 1997 1996 --------- ------- --------- United States................................ $(324.3) $215.9 $215.9 Europe....................................... 96.9 84.9 94.4 Asia/Pacific................................. .8 4.7 6.1 Latin America................................ 4.0 4.8 2.7 Canada....................................... 6.4 8.0 6.1 Corporate.................................... (26.6) (24.7) (41.4) Eliminations................................. (7.7) 3.9 (4.3) --------- ------- --------- Operating earnings (loss).................... (250.5) 297.5 279.5 Interest income and other nonoperating income (expense), net....................... 14.8 22.0 (.3) Interest expense............................. (101.8) (48.0) (51.3) --------- ------- --------- Consolidated................................. $(337.5) $271.5 $227.9 ========= ======= ========= ASSETS United States................................ $2,874.9 $1,245.5 $1,228.7 Europe....................................... 539.9 480.0 518.0 Asia/Pacific................................. 58.9 45.3 59.8 Latin America................................ 36.1 33.7 23.4 Canada....................................... 60.6 42.0 51.8 Corporate.................................... 198.0 1,004.1 531.9 Discontinued operations...................... 17.2 124.8 604.0 --------- -------- --------- Consolidated................................. $3,785.6 $2,975.4 $3,017.6 ========= ======== =========
Transfers of products between geographic areas are at prices approximating those charged to unaffiliated customers. All such transfers are fully eliminated. Net foreign exchange translation gains or losses from businesses in hyperinflationary economies were not material in 1998, 1997 and 1996, and have been included in other operating income, net in the Consolidated Statements of Operations. NOTE 20 - COMMITMENTS The Company leases office space, data processing equipment, land, buildings, and machinery and equipment. Rent expense for continuing operations in 1998, 1997 and 1996 related to operating leases was $31.5 million, $20.2 million and $22.4 million, respectively. Minimum rent commitments for continuing operations at June 30, 1998 under operating leases with an initial or remaining noncancelable period exceeding one year follow:
After (In millions) 1999 2000 2001 2002 2003 2003 Total ------ ------ ------ ------ ------ ------ ------- $22.4 $16.6 $13.7 $10.6 $9.8 $45.4 $118.5
NOTE 21 - CONTINGENCIES The Company is subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities. 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 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, the total liability would approximate $22.4 million at June 30, 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. 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. The Company accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Accruals for future expenditures for environmental remediation are not discounted to their present value. Recoveries, of which none exist at June 30, 1998 and 1997, of environmental remediation costs from other parties are recognized as assets when their receipt is deemed probable. At June 30, 1998 and 1997, the Company had accruals, included in current accrued liabilities and other noncurrent liabilities and deferred credits, of $126.2 million and $115.7 million, respectively, for costs associated with the study and remediation of Superfund sites and the Company's current and former operating sites for matters that meet the policy set forth above. Based upon currently available information, the Company has concluded that it is not reasonably possible at this time that additional liabilities will result from the resolution of these matters that would have a material adverse effect on the Company's consolidated results of operations or financial position. QUARTERLY RESULTS (In millions, except per share amounts)
FISCAL 1998 Quarter (Unaudited) ------------------------------------- First Second Third Fourth Year -------- -------- ------- -------- --------- Net sales.................. $ 454.6 $607.3 $649.8 $655.3 $2,367.0 Gross margins.............. 178.8 211.5 305.2 302.7 998.2 Earnings (loss) from continuing operations..... (380.7) (18.6) 32.7 10.7 (355.9) Discontinued operations.... 14.5 (4.0) 61.9 72.4 Cumulative effect of accounting change......... (8.4) (8.4) -------- -------- ------- -------- --------- Net earnings (loss)........ (389.1) (4.1) 28.7 72.6 (291.9) Preferred stock dividends.. (.1) (.1) (.1) (.1) (.4) -------- -------- ------- -------- --------- Available for common shareholders.............. $(389.2) $ (4.2) $ 28.6 $ 72.5 $ (292.3) ======== ======== ======= ======== ========= Basic earnings per common share: Earnings (loss) from continuing operations... $ (5.26) $ (.26) $ .45 $ .14 $ (4.89) Discontinued operations.. .20 (.06) .85 .99 Cumulative effect of accounting change....... (.11) (.11) -------- -------- ------- -------- --------- Net earnings (loss)...... $ (5.37) $ (.06) $ .39 $ .99 $ (4.01) ======== ======== ======= ======== ========= Earnings per common share - assuming dilution: Earnings (loss) from continuing operations... $ (5.26) $ (.26) $ .44 $ .14 $ (4.89) Discontinued operations.. .20 (.05) .85 .99 Cumulative effect of accounting change.... (.11) (.11) -------- -------- ------- -------- --------- Net earnings (loss)...... $ (5.37) $ (.06) $ .39 $ .99 $ (4.01) ======== ======== ======= ======== =========
On August 28, 1997, the Company acquired Nellcor Puritan Bennett Incorporated (Nellcor) through an agreement to purchase for cash all of 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. Approximately $398.3 million of the purchase price was allocated to purchased research and development. This intangible asset, which had no tax benefit, was charged to results of operations during the first quarter of 1998. Of the total charge of $398.3 million, $2.0 million related to the Aero Systems division which was sold and reclassified to discontinued operations in the fourth quarter of 1998. The sale of Nellcor inventories, which were stepped up to fair value in connection with allocation of purchase price, decreased earnings by $75.4 million, $46.7 million net of taxes for 1998. After-tax charges to the Respiratory Group, which are included in earnings (loss) from continuing operations, were $11.5 million and $34.6 million for the first and second quarters, respectively. After-tax charges to discontinued operations related to the Aero Systems division were $.2 million and $.4 million for the first and second quarters, respectively. Costs of exiting certain activities related to Mallinckrodt operations plus integration costs of the combined Mallinckrodt and Nellcor operations were $68.6 million, $46.4 million net of taxes. The after-tax charge increased the loss from continuing operations in the second quarter by $4.3 million, and reduced earnings from continuing operations by $8.3 million and $33.8 million in the third and fourth quarters, respectively. See the Acquisitions section of Note 2 of the Notes to Consolidated Financial Statements for additional disclosure. The Company sold certain chemical additive product lines in the second quarter of 1998, and recorded a gain on sale, net of taxes, of $8.7 million. In the fourth quarter, the Company sold its catalyst business and Aero Systems division. The catalyst sale resulted in a gain, net of taxes, of $60.2 million. No gain or loss was recognized on sale of the Aero Systems division. In June 1998, the Company committed to the sale of the remaining chemical additives business of the catalysts and chemical additives division, and closing of the sale occurred on July 31, 1998. The net gain on sale of these businesses and their results of operations were accounted for as discontinued operations and, accordingly, prior year results have been restated. See the Discontinued Operations section of Note 2 of the Notes to Consolidated Financial Statements for additional disclosure. In the fourth quarter of 1998, the Company elected to early adopt the provisions of AICPA SOP 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5), in its financial statements for the year ended June 30, 1998. The effect of adoption of SOP 98-5 was to record a charge of $8.4 million, net of taxes, for the cumulative effect of an accounting change to expense costs that had previously been capitalized prior to July 1, 1997. The approximate effect of the accounting change for each quarter of the year ended June 30, 1998 was to increase the net loss $7.7 million or 11 cents per share in the quarter ended September 30, 1997; reduce the net loss $.6 million or 1 cent per share in the quarter ended December 31, 1997; increase net earnings $.6 million or 1 cent per share in the quarter ended March 31, 1998; and increase net earnings $.4 million or 1 cent per share in the quarter ended June 30, 1998. Net earnings per share for the four quarters of 1998 were less than full year per share results by four cents due to increases in common shares outstanding during 1998. QUARTERLY RESULTS (continued) (In millions, except per share amounts)
FISCAL 1997 Quarter (Unaudited) ------------------------------------- First Second Third Fourth Year -------- -------- ------- -------- --------- Net sales.................. $404.6 $414.3 $429.6 $449.6 $1,698.1 Gross margins.............. 191.5 195.5 199.2 214.0 800.2 Earnings from continuing operations..... 35.5 37.8 46.2 55.7 175.2 Discontinued operations.... (.1) 5.7 2.4 6.9 14.9 -------- -------- ------- -------- --------- Net earnings............... 35.4 43.5 48.6 62.6 190.1 Preferred stock dividends.. (.1) (.1) (.1) (.1) (.4) -------- -------- ------- -------- --------- Available for common shareholders.............. $ 35.3 $ 43.4 $ 48.5 $ 62.5 $ 189.7 ======== ======== ======= ======== ========= Basic earnings per common share: Earnings from continuing operations.............. $ .48 $ .51 $ .63 $ .76 $ 2.37 Discontinued operations.. .08 .03 09 .20 -------- -------- ------- -------- --------- Net earnings............. $ . 48 $ .59 $ .66 $ .85 $ 2.57 ======== ======== ======= ======== ========= Earnings per common share - assuming dilution: Earnings from continuing operations.............. $ .47 $ .50 $ .61 $ .75 $ 2.33 Discontinued operations.. .07 .04 .09 .20 -------- -------- ------- -------- --------- Net earnings............. $ .47 $ .57 $ .65 $ .84 $ 2.53 ======== ======== ======= ======== =========
During 1998, the Company sold, or committed to sell, its catalysts and chemical additives division. The results of operations for this division were reclassified to discontinued operations in the fourth quarter of 1998 and, accordingly, results of operations for 1997 were also reclassified. See the Discontinued Operations section of Note 2 of the Notes to Consolidated Financial Statements for additional disclosure. On March 31, 1997, the Company disposed of Fries & Fries, Inc., a wholly owned subsidiary which owned the Company's interest in Tastemaker, the flavors joint venture. The Company recorded a net after-tax gain of $270.6 million on the divestiture. Results for the third quarter also included an estimated net after-tax loss of $275.3 million related to the planned sale of the animal health segment. On June 30, 1997, the sale of the animal health segment was completed and the net after-tax loss was adjusted to $269.4 million. The net gain on disposal of these businesses and their results of operations were accounted for as discontinued operations. See the Discontinued Operations section of Note 2 of the Notes to Consolidated Financial Statements for additional disclosure. Earnings from continuing operations for the first quarter included a one-time research and development charge of $6.0 million, $3.8 million after taxes, or 5 cents per share, resulting from a strategic alliance to develop new magnetic resonance imaging technology. Basic net earnings per share for the four quarters of 1997 were more than full year per share results by one cent due to decreases in common shares outstanding during 1997. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT For information concerning directors of the Registrant, see pages 2 through 5, and 11, incorporated herein by reference, of Mallinckrodt's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on October 21, 1998. For information concerning executive officers of the Registrant, see Part I Item 4 of this report and page 11, incorporated herein by reference, of Mallinckrodt's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on October 21, 1998. ITEM 11. EXECUTIVE COMPENSATION For information concerning executive compensation, see pages 6 and 7, 10 and 11, and 14 through 23, incorporated herein by reference, of Mallinckrodt's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on October 21, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT For information concerning security ownership of certain beneficial owners and management, see pages 8 and 9, incorporated herein by reference, of Mallinckrodt's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on October 21, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS For information concerning certain relationships and related transactions, see page 7, incorporated herein by reference, of Mallinckrodt's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on October 21, 1998. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements, Financial Statement Schedules and Exhibits (1)(2) See index on page 65 for a listing of financial statements and financial statement schedules filed with this report. (3) Exhibits filed with this report. Exhibit Number Description - ------- ----------------------------------------------------------- 2.1 Agreement dated February 4, 1997 among Mallinckrodt, Hercules Incorporated, Roche Holdings, Inc. and Givaudan- Roure (International) SA (incorporated herein by reference to Exhibit 2.1 to Form 8-K, dated March 31, 1997) 2.2 First Amendment to Agreement dated March 28, 1997 among Mallinckrodt, Hercules Incorporated, Roche Holdings, Inc. and Givaudan-Roure (International) SA (incorporated herein by reference to Exhibit 2.2 to Form 8-K, dated March 31, 1997) 2.3 Contribution Agreement dated February 4, 1997 among Mallinckrodt, Roche Holdings, Inc. and Givaudan-Roure (United States) Inc. (incorporated herein by reference to Exhibit 2.3 to Form 8-K, dated March 31, 1997) 2.4 Stock Purchase Agreement, dated May 19, 1997, among Mallinckrodt Inc., Mallinckrodt Veterinary, Inc., Mallinckrodt Veterinary International, Inc. and Schering- Plough Corporation (incorporated herein by reference to Exhibit 2.1 to Form 8-K, dated June 30, 1997) 2.5 Amendment No. 1 dated June 30, 1997 to the Stock Purchase Agreement among Mallinckrodt Inc., Mallinckrodt Veterinary, Inc., Mallinckrodt Veterinary International, Inc. and Schering-Plough Corporation, which amendment was also executed for certain purposes by Mallinckrodt Veterinary Holdings, Inc. (incorporated herein by reference to Exhibit 2.2 to Form 8-K, dated June 30, 1997) 2.6 Agreement and Plan of Merger, dated as of July 23, 1997, among Nellcor Puritan Bennett Incorporated ("Nellcor"), Mallinckrodt Inc. and NPB Acquisition Corp. (incorporated herein by reference to Nellcor's Current Report on Form 8-K (File No. 0-14980) filed on August 5, 1997) 3.1(a) Restated Certificate of Incorporation of Mallinckrodt, dated June 22, 1994 (incorporated herein by reference to Exhibit 3.1 to 1994 Form 10-K) 3.1(b) Certificate of Amendment of the Certificate of Incorporation of Mallinckrodt, dated October 16, 1996 (incorporated herein by reference to Exhibit 3.3 to September 30, 1996 Form 10-Q) 3.2 By-Laws of Mallinckrodt as amended through April 15, 1992 (filed with this electronic submission) 4.1 Form 8-A Registration Statement under Section 12 of the Securities Exchange Act of 1934, dated April 10, 1987 defining the rights of holders of Mallinckrodt's 4% Cumulative Preferred Stock and Common Stock (incorporated herein by reference to Exhibit 4.6 to 1989 Form 10-K, Commission File No. 1-483) 4.2(a) Amended and Restated Rights Agreement dated as of February 19, 1996, between the Company and The First National Bank of Chicago, as Rights Agent (incorporated herein by reference to Exhibit 2 to Amendment to Registration Statement on Form 8-A/A dated February 26, 1996) 4.2(b) First Amendment, dated as of August 11, 1998, between the Company and The First National Bank of Chicago, as Rights Agent (incorporated herein by reference to Exhibit 1 to Amendment to Registration Statement on Form 8-A/A dated September 2, 1998) 4.3 Indenture dated as of March 15, 1985, as amended and restated as of February 15, 1995, between Mallinckrodt and First Trust of New York, National Association (incorporated herein by reference to Exhibit 4.1 to Form S-3 Registration Statement No. 33-57821) 4.4 The Company hereby agrees to file on request of the Commission a copy of all instruments not otherwise filed with respect to long-term debt of the Company or any of its subsidiaries for which the total amount of securities authorized under such instruments does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis 10.1 Form of Executive Life Insurance Plan Participation Agreement, as entered into with the Company's executive officers and certain other key employees (1) (incorporated herein by reference to Exhibit 10.24 to 1996 Form 10-K) 10.2 Restated Mallinckrodt Executive Long-Term Disability Plan effective January 1, 1987 (1) (incorporated herein by reference to Exhibit 10.3 to 1989 Form 10-K, Commission File No. 1-483) 10.3(a) Supplemental Benefit Plan for Participants in the Mallinckrodt Retirement Plan as amended and restated effective January 1, 1980 (1) (incorporated herein by reference to Exhibit 10.6(a) to 1989 Form 10-K, Commission File No. 1-483) 10.3(b) Amendment No. 1 dated June 20, 1989 to Supplemental Benefit Plan for Participants in the Retirement Plan for Salaried Employees of Mallinckrodt (1) (incorporated herein by reference to Exhibit 10.6(b) to 1989 Form 10-K, Commission File No. 1-483) 10.3(c) Amendment No. 2 dated April 20, 1990 to Supplemental Benefit Plan for Participants in the Mallinckrodt Retirement Plan (1) (incorporated herein by reference to Exhibit 10.6(c) to 1990 Form 10-K, Commission File No. 1-483) 10.4(a) Mallinckrodt Supplemental Executive Retirement Plan restated effective April 19, 1988 (1) (incorporated herein by reference to Exhibit 10.7(a) to 1989 Form 10-K, Commission File No. 1-483) 10.4(b) Amendment No. 1 effective December 6, 1989, to Supplemental Executive Retirement Plan (1) (incorporated herein by reference to Exhibit 10.7(c) to 1990 Form 10-K, Commission File No. 1-483) 10.4(c) Amendment No. 2 effective April 19, 1996, to Supplemental Executive Retirement Plan (1) (incorporated herein by reference to Exhibit 10.6(c) to 1996 Form 10-K) 10.5 Supplemental Executive Retirement and Supplemental Life Plan of Mallinckrodt Inc. effective July 15, 1984 (1) (incorporated herein by reference to Exhibit 10.20 to 1989 Form 10-K, Commission File No. 1-483) 10.6(a) Mallinckrodt Management Incentive Compensation Program as amended and restated effective July 1, 1991 (1) (incorporated herein by reference to Exhibit 10.9(b) to 1991 Form 10-K, Commission File No. 1-483) 10.6(b) Amendment No. 1 to the Management Incentive Compensation Plan, effective April 19, 1996 (1) (incorporated herein by reference to Exhibit 10.7(b) to 1996 Form 10-K) 10.7(a) Mallinckrodt 1973 Stock Option and Award Plan as amended effective February 21, 1990 (1) (incorporated herein by reference to Post-Effective Amendment No. 1 to Form S-8 Registration Statement No. 33-32109) 10.7(b) Amendment No. 1 to the Mallinckrodt 1973 Stock Option and Award Plan dated June 19, 1991 (1) (incorporated herein by reference to Form S-8 Registration Statement No. 33-43925) 10.8(a) Mallinckrodt 1981 Stock Option Plan as amended through April 19, 1988 (1) (incorporated herein by reference to Post-Effective Amendment No. 3 to Form S-8 Registration Statement No. 2-80553) 10.8(b) Amendment to the 1981 Stock Option Plan effective February 15, 1989 (1) (incorporated herein by reference to Exhibit 10.12(b) to 1989 Form 10-K, Commission File No. 1-483) 10.8(c) Amendment to the 1981 Stock Option Plan effective June 19, 1991 (1) (incorporated herein by reference to Exhibit 10.12(c) to 1991 Form 10-K, Commission File No. 1-483) 10.9(a) Long-Term Incentive Compensation Plan, effective July 1, 1994 (1) (incorporated herein by reference to Exhibit 10.30 to 1994 Form 10-K) 10.9(b) Amendment No. 1 to Long-Term Incentive Plan, effective April 16, 1997 (1) (incorporated herein by reference to Exhibit 10.9(b) to 1997 Form 10-K) 10.10(a) Management Compensation and Benefit Assurance Program (1) (incorporated herein by reference to Exhibit 10.30 to 1988 Form 10-K, Commission File No. 1-483) 10.10(b) Amendments to Management Compensation and Benefit Assurance Program (1) (incorporated herein by reference to Exhibit 10.12(b) to 1996 Form 10-K) 10.11 Agreement of Trust dated August 16, 1996, between Mallinckrodt and Wachovia Bank of North Carolina, N.A., incident to the program described in Exhibits 10.10(a) and 10.10(b) (1) (incorporated herein by reference to Exhibit 10.13 to 1996 Form 10-K) 10.12(a) Corporate Staff Employee Severance and Benefit Assurance Policy (1) (incorporated herein by reference to Exhibit 10.33 to 1988 Form 10-K, Commission File No. 1-483) 10.12(b) Mallinckrodt Inc. Corporate Staff Change in Control Severance Plan (1) (incorporated herein by reference to Exhibit 10.14(b) to 1996 Form 10-K) 10.13 Form of Severance Agreement referenced in Exhibit 10.10(b), as entered into with the Company's executive officers and certain other key employees (1) (incorporated herein by reference to Exhibit 10.23 to 1996 Form 10-K) 10.14(a) Executive Incentive Compensation Agreement with Paul D. Cottone dated as of October 24, 1996 (1) (incorporated herein by reference to Exhibit 10.25 to March 31, 1997 Form 10-Q) 10.14(b) Severance and Separation Agreement with Paul D. Cottone dated as of October 24, 1996 (1) (incorporated herein by reference to Exhibit 10.26 to March 31, 1997 Form 10-Q) 10.15(a) Agreement effective June 30, 1997 with Robert G. Moussa (1) (incorporated herein by reference to Exhibit 10.15(a) to 1997 Form 10-K) 10.15(b) Consulting Agreement effective July 1, 1997 with Robert G. Moussa (1) (incorporated herein by reference to Exhibit 10.15(b) to 1997 Form 10-K) 10.16 Mallinckrodt Directors Retirement Services Plan as amended and restated effective April 21, 1993 (1) (incorporated herein by reference to Exhibit 10.10 to 1993 Form 10-K) 10.17 Mallinckrodt Directors' Stock Option Plan effective October 17, 1990 (1) (incorporated herein by reference to Exhibit 4(a) to Form S-8 Registration Statement No. 33-40246) 10.18(a) Consulting Agreement with Ronald G. Evens, M.D., for the period from January 1, 1987, through December 31, 1989; extended for the calendar years 1990, 1991 and 1992 (1) (incorporated herein by reference to Exhibit 10.27 to Amendment No. 1 to 1992 Form 10-K, Commission File No. 1-483) 10.18(b) Amendment dated December 17, 1992 to Consulting Agreement with Ronald G. Evens, M.D. (1) (incorporated herein by reference to Exhibit 10.26(b) to 1993 Form 10-K) 10.18(c) Amendment dated January 7, 1994 to Consulting Agreement with Ronald G. Evens, M.D., extending Agreement through December 31, 1994 (1) (incorporated herein by reference to Exhibit 10.9 to December 31, 1994 Form 10-Q) 10.18(d) Amendment dated February 1, 1995 to Consulting Agreement with Ronald G. Evens, M.D., extending Agreement through December 31, 1995 (1) (incorporated herein by reference to Exhibit 10.10 to December 31, 1994 Form 10-Q) 10.18(e) Amendment dated January 10, 1996 to Consulting Agreement with Ronald G. Evens, M.D., extending Agreement through December 31, 1996 (1) (incorporated herein by reference to Exhibit 10.2 to December 31, 1995 Form 10-Q) 10.18(f) Amendment dated February 20, 1997 to Consulting Agreement with Ronald G. Evens, M.D., extending Agreement through December 31, 1997 (1) (incorporated herein by reference to Exhibit 10.17(f) to March 31, 1997 Form 10-Q) 10.19(a) Deferral Election Plan for Non-Employee Directors, effective June 30, 1994 (1) (incorporated herein by reference to Exhibit 10.29 to 1994 Form 10-K) 10.19(b) Amendment of Deferral Election Plan for Non-Employee Directors, effective February 15, 1995 (1) (incorporated herein by reference to Exhibit 10.22(b) to 1995 Form 10-K) 10.20 Directors Stock Award Plan of Mallinckrodt Inc., effective October 15, 1997 (1) (incorporated herein by reference to Appendix A to Definitive Proxy Statement (Schedule 14A) for the Company's 1997 Annual Meeting of Stockholders, filed with the Commission on September 12, 1997) 10.21 The Mallinckrodt Inc. Equity Incentive Plan, effective April 16, 1997 (1) (incorporated herein by reference to Appendix B to Definitive Proxy Statement (Schedule 14A) for the Company's 1997 Annual Meeting of Stockholders, filed with the Commission on September 12, 1997) 10.22 Employment Agreement dated September 5, 1997 between the Company and C. Raymond Larkin (1) (filed with this electronic submission) 10.23 Terms of Separation dated December 15, 1997 between the Company and C. Raymond Larkin (1) (filed with this electronic submission) 10.24(a) Credit Agreement dated May 22, 1996, among Mallinckrodt and Morgan Guaranty Trust Company of New York, as Administrative Agent and Citibank, N.A., as Documentation Agent ($550 million facility) (incorporated herein by reference to Exhibit 10.18 to 1996 Form 10-K) 10.24(b) Amendment No. 1 to Credit Agreement, dated as of January 24, 1997 among Mallinckrodt, the Banks listed therein, Morgan Guaranty Trust Company of New York, as Administrative Agent and Citibank, N.A., as Documentation Agent (incorporated herein by reference to Exhibit 10.18-A to March 31, 1997 Form 10-Q) 10.25(a) Credit Agreement dated May 22, 1996 among Fries & Fries, Inc. with Mallinckrodt and Morgan Guaranty Trust Company of New York, as Administrative Agent and Co-Agent and Citibank, N.A., as Documentation Agent ($600 million facility) (incorporated herein by reference to Exhibit 10.19 to 1996 Form 10-K) 10.25(b) Amendment No. 1 to Credit Agreement, dated as of January 24, 1997 among Fries & Fries, Inc. as Borrower, Mallinckrodt as Guarantor, the Banks listed therein, Morgan Guaranty Trust Company of New York, as Administrative Agent and Citibank, N.A., as Documentation Agent (incorporated herein by reference to Exhibit 10.19-A to March 31,1997 Form 10-Q) 10.25(c) Consent and Waiver dated as of March 21, 1997, to the Credit Agreement dated as of May 22, 1996, among Fries & Fries, Inc. as Borrower, Mallinckrodt as Guarantor, the Banks listed therein, Morgan Guaranty Trust Company of New York, as Administrative Agent, and Citibank, N.A., as Documentation Agent (incorporated herein by reference to Exhibit 10.19-B to March 31, 1997 Form 10-Q) 10.26(a) Credit Agreement dated as of January 24, 1997, among Tastemaker as Borrower, Fries & Fries, Inc. and Mallinckrodt as Guarantors, the Banks listed therein, Morgan Guaranty Trust Company of New York, as Administrative Agent, and Citibank, N.A., as Documentation Agent (incorporated herein by reference to Exhibit 10.27(a) to March 31, 1997 Form 10-Q) 10.26(b) Agreement dated as of March 21, 1997, comprising, inter ----- alia, an Amendment and Waiver to the Credit Agreement dated ---- as of January 24, 1997 among Tastemaker as Borrower, Fries & Fries, Inc. and Mallinckrodt as Guarantors, the Banks listed therein, Morgan Guaranty Trust Company of New York as Administrative Agent, and Citibank, N.A., as Documentation Agent (incorporated herein by reference to Exhibit 10.27(b) to March 31,1997 Form 10-Q) 10.27 Amended and Restated Credit Agreement dated as of September 12, 1997, among Mallinckrodt, the Banks listed therein, Morgan Guaranty Trust Company of New York, as Administration Agent, Goldman Sachs Credit Partners L.P. and Citibank, N.A. as Co-Syndication Agents, and Citibank, N.A., Goldman Sachs Credit Partners L.P., and NationsBank, N.A., as Co-Documentation Agents (incorporated herein by reference to Exhibit 10.24 to September 30, 1997 Form 10-Q) 10.28 Offering Memorandum by J.P. Morgan for sale of the commercial paper (CP) notes of Mallinckrodt. The CP program is backed by the credit agreement filed as Exhibit 10.27 (incorporated herein by reference to Exhibit 10.29 to 1993 Form 10-K) 21 Subsidiaries of the Registrant (filed with this electronic submission) 23.1 Consent of Ernst & Young LLP (filed with this electronic submission) 27(a) Financial data schedule for the year ended June 30, 1998 (filed with this electronic submission) 27(b) Financial data schedule for the year ended June 30, 1997 (filed with this electronic submission) 27(c) Financial data schedule for the year ended June 30, 1996 (filed with this electronic submission) - ------------------------------- (1) Management contract or compensatory plan required to be filed pursuant to Item 601 of Regulation S-K. (b) Reports on Form 8-K During the quarter and through the date of this report, the following reports on Form 8-K were filed. - - Report dated 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. - - Report dated May 26, 1998 under Item 5 regarding European approval of OPTISON*. - - Amended report dated June 17, 1998 under Item 5 regarding presentation of Nellcor Puritan Bennett Incorporated financial statements for the three years ended July 7, 1996 and for the three months and nine months ended April 6, 1997 and March 31, 1996 and pro forma statement of operations and balance sheet for the combined results of Mallinckrodt Inc. and Nellcor Puritan Bennett Incorporated. - - Amended report dated June 17, 1998 under Item 5 to provide pro forma statement of operations of the combined results of Mallinckrodt Inc. and Nellcor Puritan Bennett Incorporated for the six months ended December 31, 1997. - - Amended report dated June 17, 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 June 19, 1998 under Item 5 regarding announcement of the new president of Respiratory Group. - - Report dated June 25, 1998 under Item 5 regarding expectations for fiscal year l999. - - Report dated July 6, 1998 under Item 5 regarding the closure of Nellcor Puritan Bennett Incorporated facilities in Lenexa, Kansas. INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page ------ Consolidated Balance Sheets at June 30, 1998 and 1997..... 35 For the years ended June 30, 1998, 1997 and 1996: Consolidated Statements of Operations................... 34 Consolidated Statements of Cash Flows................... 36 Consolidated Statements of Changes in Shareholders' Equity................................... 37 Notes to Consolidated Financial Statements.............. 38-56 Quarterly Results....................................... 57-58 - ----------- All other schedules are omitted as the required information is not present in sufficient amounts or the required information is included in the consolidated financial statements or notes thereto. Financial statements and schedules and summarized financial information of 50 percent or less owned entities are omitted, as none of such entities are individually or in the aggregate significant under the tests specified in Regulation S-X under Article 3-09 of General Instructions as to Financial Statements. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Mallinckrodt Inc. - ---------------------------- Registrant By: MICHAEL A. ROCCA By: DOUGLAS A. MCKINNEY ------------------------- -------------------------- Michael A. Rocca Douglas A. McKinney Senior Vice President and Vice President and Controller Chief Financial Officer Date: September 22, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature Title Date - --------- ----- ---- C. RAY HOLMAN Chief Executive Officer September 22, 1998 - ---------------- and Director C. Ray Holman MACK G.NICHOLS President, Chief Operating September 22, 1998 - ---------------- Officer and Director Mack G. Nichols MICHAEL A. ROCCA Senior Vice President and September 22, 1998 - ------------------ Chief Financial Officer Michael A. Rocca DOUGLAS A. MCKINNEY Vice President and Controller September 22, 1998 - ------------------- (Chief Accounting Officer) Douglas A. McKinney RAYMOND F. BENTELE Director September 22, 1998 - ------------------- Raymond F. Bentele GARETH C. C. CHANG Director September 22, 1998 - ------------------- Gareth C. C. Chang WILLIAM L. DAVIS Director September 22, 1998 - ------------------- William L. Davis RONALD G. EVENS Director September 22, 1998 - ------------------- Ronald G. Evens ROBERTA S. KARMEL Director September 22, 1998 - ------------------- Roberta S. Karmel CLAUDINE B. MALONE Director September 22, 1998 - ------------------- Claudine B. Malone BRIAN M. RUSHTON Director September 22, 1998 - ------------------- Brian M. Rushton DANIEL R. TOLL Director September 22, 1998 - ------------------- Daniel R. Toll ANTHONY VISCUSI - ------------------- Anthony Viscusi Director September 22, 1998 EX-10.22 2 Exhibit 10.22 September 5, 1997 Mr. C. Raymond Larkin Nellcor Puritan Bennett Incorporated 4280 Hacienda Drive Pleasanton, CA 94588 Re: Employment Agreement Dear Mr. Larkin: This letter confirms our agreement regarding the terms of your continued employment with Nellcor Puritan Bennett Incorporated (the "Company"). As you know, the Company, Mallinckrodt Inc. ("Mallinckrodt") and NPB Acquisition Corp. ("Purchaser") have entered into an Agreement and Plan of Merger, dated as of July 23, 1997, (the "Merger Agreement"), which provides that Purchaser will merge (the "Merger") with and into the Company upon completion of the contemplated tender offer. Upon consummation of the Merger, the Company will be a wholly-owned subsidiary of Mallinckrodt. The terms set forth below will become effective on the closing date of the Merger ("Effective Date"). You agree to retain your position as President and Chief Executive Officer of the Company and as Executive Vice President of Mallinckrodt. During the period of your active employment with the Company you agree that you will not engage in any other employment, or business activities directly related to the business in which the Company is now involved or becomes involved, nor will you engage in any activity in conflict with your obligations to the Company. In exchange for your continued services the Company will continue to pay your salary at its current rate. You also remain eligible to participate in the Company's 1998 Bonus Plan (attached hereto as Exhibit A). In addition to the 1998 Bonus Plan you are eligible to receive the following: - retention bonus - if you are actively employed one year from the Effective Date, or the Company terminates your employment without Cause (as defined below) prior to the one year anniversary of the Effective Date, the Company will pay you a lump sum of $250,000 paid on the earlier of the first anniversary of the Effective Date or the date of termination; - individual performance bonus - if the Company and Mallinckrodt achieve cost reduction synergies which will be specified in the plan for the integration of the business of the Company and Mallinckrodt, the company will pay you, within 30 days of the first anniversary of the Effective Date, a bonus of $125,000; - if you succeed in developing the successful strategy, organization and integration of the global medical products, the Company will pay you, within 30 days of the first anniversary of the Effective Date, a bonus of $125,000; and, - stock appreciation award - Company will pay you, within 60 days after the first anniversary of the Effective Date, an amount in cash equal to the result of multiplying 25,000 by the excess of (i) the closing price of one share of common stock of Mallinckrodt on the New York Stock Exchange on the first anniversary of the Effective Date over (ii) the closing price of one share of Mallinckrodt's common stock on the New York Stock Exchange on the Effective Date. In addition, you will receive all benefits provided pursuant to the 1994 Severance Agreement (the "Severance Agreement," attached hereto as Exhibit B). The Severance Agreement provides for benefits upon termination of your employment after a Change of Control by the Company without Cause or by you for Good Reason. The completion of the tender offer of the Merger described above will constitute a Change of Control under the Severance Agreement. As a result of the change in the nature of your responsibilities and position that will result from the Merger, your Severance Agreement is amended, as of the Effective Time of the Merger, to provide that in the event you terminate your employment for any reason at any time after the consummation of the Merger and within twenty-four months following the completion of the tender offer (i) such termination shall be deemed to be for "Good Reason," as defined in your Severance Agreement, and (ii) you will be entitled to all benefits arising under the Severance Agreement applicable to a termination for Good Reason following a Change in Control. If you are still actively employed by the Company on the first anniversary of the Effective Date, the Company will pay you all benefits provided in the Severance Plan as though you had terminated your employment for Good Reason. This payment will be made within 15 days of the first anniversary of the Effective Date. In the event that any payment or benefit received or to be received by you under this Agreement would result in all or a portion of such payment to be subject to the excise tax on "golden parachute payments" under Section 4999 of the Internal Revenue Code of 1986, as amended, then your payment will be increased by the amount of the excise tax. The Company may terminate your employment at any time with or without Cause. If the Company terminates your employment without Cause prior to one year from the Effective Date, the Company will pay you, in addition to all amounts due pursuant to the Severance Plan, a lump sum amount equal to your salary for the remainder of the one year period beginning on the Effective Date, the $250,000 retention bonus, and the Stock Appreciation Award. If the Company terminates your employment for Cause, the Company will pay your salary up to the date of termination. The definition of Cause set forth in Section 2.4 of the Severance Agreement is hereby incorporated by reference and will apply to the terms of this Agreement. By execution of this letter, the Company and Mallinckrodt consent to the terms set forth in this Agreement including all amendments to the Severance Plan. By signing below, you agree to accept the terms set forth in this Agreement. Sincerely, Nellcor Puritan Bennett Incorporated Mallinckrodt Inc. By:/s/ L. De Buono By:/s/ C. R. Holman ------------------------ -------------------- I accept and agree to the terms set forth above. /s/ C. Raymond Larkin, Jr. - --------------------------- C. Raymond Larkin, Jr. Date: September 5, 1997 ---------------------- Exhibit A -- 1998 Bonus Plan Exhibit B -- 1994 Severance Agreement Exhibit A NELLCOR PURITAN BENNETT Performance Incentive Plan Purpose The purpose of the Performance Incentive Plan (PIP) is to reward eligible employees for achieving NPB's business plan goals and provide a means for employees to share in the Company's success. Eligibility All NPB positions at the following levels are eligible for consideration. This includes the following positions: - - Officers - - Senior Directors - - Directors - - Distinguished Engineer/Scientist - - Managers (salary grades E07-E10) - - Individual contributors (salary grades E07-E10) In addition, employees must be employed by NPB for at least six months before they are eligible to participate in the plan. Eligibility to participate does not necessarily guarantee payment, but it guarantees consideration for payment. Part-time employees employed by Nellcor Puritan Bennett for 20 hours or more per week are eligible to participate in the PIP on a pro- rated basis. Employees on a sales or commission plan are not eligible to participate in PIP. Definitions Plan year refers to the Nellcor Puritan Bennett fiscal year. Base salary amount is defined as the amount used to calculate individual PIP awards which will be the participant's annualized base salary on June 1 of the plan year. Bonus Payouts Bonus awards are paid on an annual basis and within 30 days of the end of the plan year. Except for death or disability, a participant must be employed by Nellcor Puritan Bennett on the last day of the fiscal year to receive award payments. All part-time employees, part-year full-time employees, and employees on leaves of absence for longer than 30 days will receive pro-rated awards based on their actual time worked. Participants on leaves of absence of less than 30 days will receive full awards as outlined in the plan. Participants who transfer between divisions during the plan year will receive awards based on the performance results of the division in which the employee spent the most time (6 months or longer). Bonus awards under this plan shall be treated as wages and shall be subject to all applicable withholding taxes at the time received. Employees outside the United Stated will be paid their award amount in local currency and are subject to any country specific regulations. Performance Measures Incentive awards will be based on four annual measures: - - NPB profit - - NPB revenue - - Division profit(1) - - Division revenue(1) Each of the four measures will be weighted according to the following table.
Corporate Corporate Division Division Division Executives Staff EVP/SVP VP Manager/IC's ---------- --------- -------- -------- ------------ NPB profit 75% 75% 56.25% 37.5% 30% NPB revenue 25% 25% 18.75% 12.5% 10% Division profit 18.75% 37.5% 45% Division revenue 6.25% 12.5% 15% 100% 100% 100% 100% 100%
Specific performance goals for each corporate and division measure are established annually. No awards will be paid unless NPB achieves 85% of its annual profit plan. Award Opportunities Award opportunities (stated as a percent of base salary) vary by NPB level as shown in the table below. - ----------------------- (1) Division refers to a participant's immediate business unit
Threshold Target Maximum Performance Performance Performance Award Award Award ----------- ----------- ----------- CEO 30% 60% 120% EVP/Senior VP 25% 50% 100% VP 20% 40% 80% Senior Director 15% 30% 60% Director and Director-equivalent Individual Contributors 10% 20% 40% Manager and Manager-equivalent Individual Contributors 5% 10% 20%
Actual incentives paid are based on corporate and division performance results. Individual incentive awards may be adjusted by up to +/- 25% on individual contributions. Award Calculation Individual PIP awards earned are calculated using a four step process. Step 1 - -------------------------------------------------------------------- Determine the performance adjustment modifier for each measure using the table below: Performance Result Achieved Performance Adjustment (% of Goal Achieved) Modifier --------------------------- ---------------------- 85-89% 0.50 90-94% 0.65 95-99% 0.80 100-104% 1.00 105-109% 1.25 110-114% 1.50 115-119% 1.75 120+% 2.00 Note: Above table is simplified for illustration purposes. Actual performance modifiers are calculated on a straight linear basis vs. the buckets as shown. Step 2 - -------------------------------------------------------------------- Calculate the total performance factor based on results achieved for each performance measure.
NPB Profit Performance Adjustment Modifier x Weight = NPB Profit Factor NPB Revenue Performance Adjustment Modifier x Weight = NPB Revenue Factor Division Profit Performance Adjustment Modifier x Weight = Division Profit Factor Division Revenue Performance Adjustment Modifier x Weight = Division Revenue Factor Total Performance Factor
Step 3 - -------------------------------------------------------------------- Calculate preliminary award amount Total Performance Factor x Target Award Opportunity x Base Salary = Preliminary PIP Award Earned Step 4 - -------------------------------------------------------------------- Adjust PIP award based on individual performance. Preliminary PIP Award Earned x Individual Adjustment* (up to +/-25%) = Actual PIP Award Earned *The sum of individual adjustments at an EVP level may not exceed zero. Illustrative Example The following example illustrates the award calculation for a Division Manager with a base salary of $60,000. Assumed performance results for purposes of this example are shown in the table below. Performance Results (% of goal achieved) NPB Profit 100% NPB revenue 105% Division profit 97% Division revenue 102% Individual adjustment +5% Step 1 - -------------------------------------------------------------------- Determine the performance adjustments modifier for each measure. Measure Performance NPB Profit 1.00 NPB Profit 1.25 Division Profit 0.80 Division Revenue 1.00 Step 2 - -------------------------------------------------------------------- Calculate the total performance factor. NPB Profit 1.00 x 30% = 30% NPB Revenue 1.25 x 10% = 12.5% Division Profit 0.80 x 45% = 36% Division Revenue 1.00 x 15% = 15% Total Performance Factor 93.5% Step 3 - -------------------------------------------------------------------- Calculate the preliminary award amount. 93.5% x 10% x $60,000 = $5,610 Preliminary PIP Award Step 4 - -------------------------------------------------------------------- Adjust PIP award based on individual performance. $5,610 x 1.05 = $5,891 Actual PIP Award Earned Additional Information - - Promotions that occur during the plan year will result in a change target. The higher target will be applied in the calculation as long as the promotion was in effect for 6 or more months during the fiscal year. Otherwise the award calculation will be pro- rated utilizing both targets. - - Promotions into this plan from profit sharing eligibility that are in effect for 6 months or greater will result in a full year calculation under this plan. - - If a participant is demoted out of the plan during the plan year, he or she will not be eligible for an award payment from this plan but will be eligible to receive profit sharing. - - If an employee receives an unsatisfactory performance rating or has been on a formal disciplinary performance improvement plan at any time during the plan year, may not receive a payment under this plan. The decision regarding payment will be made between management and Human Resources. - - Participation in the PIP is not a contract of employment and does not alter the employment-at-will status of any participant. - - Participants receiving bonus awards are not eligible to receive profit sharing. - - Award payments under this plan shall not be considered compensation for the purposes of determining benefits under company benefits programs. - - Management reserves the right to make any changes as necessary or to terminate the plan at any time. Exhibit B SEVERANCE AGREEMENT This Agreement, dated as of December 1, 1994, is entered into between Nellcor Incorporated, a corporation organized under the laws of the State of Delaware ("Nellcor"), and C. Raymond Larkin, Jr. (the "Executive"). WHEREAS, the Board of Directors of the Company (the "Board") recognizes that the possibility of a Change in Control (as hereinafter defined) exists and that the threat or the occurrence of a Change in Control can result in significant distractions to its key management personnel because of the uncertainties inherent in such a situation; WHEREAS, the Board has determined that it is essential and in the best interest of the Company and its stockholders to retain the services of the Executive in the event of a threat or occurrence of a Change in Control and to ensure the Executive's continued dedication and efforts in such event without undue concern for the Executive's personal, financial and employment security; and WHEREAS, in order to induce the Executive to remain in the employ of the Company, particularly in the event of a threat or the occurrence of a Change in Control, the Company desires to enter into this Agreement with the Executive to provide the Executive with certain benefits in the event that the Executive's employment is terminated as a result of, or in connection with, a Change in Control. NOW, THEREFORE, in consideration of the respective agreements of the parties contained herein, it is agreed as follows: 1. Term of Agreement. This Agreement shall commence as of ----------------- December 1, 1994 and shall continue in effect until December 1, 1996; provided, however, that commencing on December 1, 1996 and on each - -------- ------- December 1 thereafter, the term of this Agreement shall automatically be extended for one (1) year unless the Company or the Executive shall have given written notice to the other at least ninety (90) days prior thereto that the term of this Agreement shall not be so extended; and provided, further, however, that notwithstanding any -------- ------- ------- such notice by the Company not to extend, the term of this Agreement shall not expire prior to the expiration of twenty-four (24) months after the occurrence of a Change in Control. 2. Definitions. ----------- 2.1 Accrued Compensation. For purposes of this Agreement, -------------------- "Accrued Compensation" shall mean an amount which shall include all amounts earned or accrued through the "Termination Date" (as hereinafter defined) but not paid as of the Termination Date, including (1) base salary, (ii) reimbursement for reasonable and necessary expenses incurred by the Executive on behalf of the Company during the period ending on the Termination Date, (iii) vacation pay and (iv) bonuses and incentive compensation (other than the "Pro Rata Bonus" (as hereinafter defined). 2.2 Base Amount. For purposes of this Agreement, "Base ----------- Amount" shall mean the greater of the Executive's annual base salary (a) at the rate in effect on the Termination Date or (b) at the highest rate in effect at any time during the ninety (90) day period prior to the Change in Control, and shall include all amounts of base salary that are deferred under the employee benefit plans of the Company or any other agreement or arrangement. 2.3 Bonus Amount. For purposes of this Agreement, "Bonus ------------ Amount" shall mean the greatest of: (a) 100% of the annual bonus payable to the Executive under the Company's cash bonus incentive plan for the fiscal year in which the Termination Date occurs; (b) the annual bonus paid or payable to the Executive under the Company's cash bonus incentive plan for the full fiscal year ended prior to the fiscal year during which the Termination Date occurred; (c) the annual bonus paid or payable to the Executive under the Company's cash bonus incentive plan for the full fiscal year ended prior to the fiscal year during which a Change in Control occurred; (d) the average of the annual bonuses paid or payable to the Executive under the Company's cash bonus incentive plan during the three full fiscal years ended prior to the fiscal year during which the Termination Date occurred; or (e) the average of the annual bonuses paid or payable to the Executive under the Company's cash bonus incentive plan during the three full fiscal years ended prior to the fiscal year during which the Change in Control occurred. 2.4 Cause. For purposes of this Agreement, a termination ----- of employment is for "Cause" if the basis of the termination is fraud, misappropriation, embezzlement or willful engagement by the Executive in misconduct which is demonstrably and materially injurious to the Company and its subsidiaries taken as a whole (no act, or failure to act, on the part of the Executive shall be considered "willful" unless done, or omitted to be done, by the Executive not in good faith and without a reasonable belief that the action or omission was in the best interests of the Company and it subsidiaries); provided, however, that the Executive shall not be -------- ------- deemed to have been terminated for Cause unless and until there shall have been delivered to the Executive a Notice of Termination (as hereinafter defined) and copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of those members of the Company's Board of Directors who are not then employees of the Company at a meeting of the Board called and held for the purpose (after reasonable notice to the Executive and an opportunity for the executive, together with the Executive's counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive was guilty of the conduct set forth in the first sentence of this Section 2.4 and specifying the particulars thereof in detail. 2.5 Change in Control. For purposes of this Agreement, a ----------------- "Change in Control" shall mean any of the following events: (a) An acquisition (other than directly from the Company) of any voting securities of the Company (the "Voting Securities") by any "Person" (as the term is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of twenty five percent (25%) or more of the combined voting power of the Company's then outstanding Voting Securities; provided, however, that in determining whether a Change in Control has occurred, Voting Securities which are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (1) an employee benefit plan (or a trust forming a part thereof) maintained by (A) the Company or (B) any corporation or other Person of which a majority of its voting power or its equity securities or equity interest is owned directly or indirectly by the Company (a "Subsidiary"), (2) the Company or any Subsidiary, (3) any Person in connection with a "Non-Control Transaction" (as hereinafter defined); (b) The individuals who are members of the Board as of the date this Agreement is approved by the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that if the appointment, election or nomination - -------- ------- for election by the Company's stockholders, of any new director is approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered a member of the Incumbent Board; provided, further, -------- ------- however, that no individual shall be considered a member of the - ------- Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the 1934 Act) or actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or (c) Approval by stockholders of the Company of: (1) A merger, consolidation or reorganization involving the Company, unless such merger, consolidation or reorganization satisfies the conditions set forth in (A) or (B) below: (A) (i) the stockholders of the Company immediately before such merger, consolidation or reorganization, own immediately following such merger, consolidation or reorganization, directly or indirectly, at least fifty-one percent (51%) of the combined voting power of the outstanding voting securities of the corporation resulting from such merger or consolidation or reorganization (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization; (ii) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least a majority of the members of the board of directors of the Surviving Corporation; and (iii) no Person (other than the Company, any Subsidiary, any employee benefit plan (or any trust forming a part thereof) maintained by the Company, the Surviving Corporation or any Subsidiary, or any Person who, immediately prior to such merger, consolidation or reorganization, had Beneficial Ownership of twenty five percent (25%) or more of the then outstanding voting Securities) has Beneficial Ownership of twenty five percent (25%) or more of the combined voting power of the Surviving Corporation's then outstanding voting securities; or (B) the entering into of any such transaction shall have been approved by the Incumbent Board prior to or on the date that is 270 calendar days from the effective date of this Agreement and shall have been intended by the Incumbent Board to be accounted for using the "pooling of interests" method of accounting, such intent to be evidenced in the resolutions of the Incumbent Board approving the transaction; A transaction described in subsections (A) and (B) above shall herein be referred to as a "Non-Control Transaction"; (2) A complete liquidation or dissolution of the Company; or (3) An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary). Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the outstanding Voting Securities as a result of the acquisition of Voting Securities by the Company which, by reducing the number of Voting Securities outstanding, increases the proportional number of shares Beneficially Owned by the Subject Person, provided, however, -------- ------- that, if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by the Company, and after such share acquisition by the Company the Subject Person becomes the Beneficial Owner of any additional voting Securities which increases the percentage of the then outstanding Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur. 2.6 Company. For purposes of this Agreement, the "Company" ------- shall mean Nellcor Incorporated and its Subsidiaries and shall include Nellcor's "Successors and Assigns" (as hereinafter defined). 2.7 Disability. For purposes of this Agreement, "Disability" ---------- shall mean a physical or mental infirmity which impairs the Executive's ability to substantially perform the Executive's duties with the Company for a period of one hundred eighty (180) consecutive days and the Executive has not returned to full time employment prior to the Termination Date as stated in the "Notice of Termination". 2.8 Good Reason. ----------- (a) For purposes of this Agreement, "Good Reason" shall mean the occurrence after a Change in Control of any of the events or conditions described in subsections (1) through (8) hereof. (1) a change in the Executive's status, title, position or responsibilities (including reporting responsibilities) which, in the Executive's reasonable judgment, represents an adverse change from the Executive's status, title, position or responsibilities as in effect at any time within ninety (90) days preceding the date of a Change in Control or at any time thereafter; the assignment to the Executive of any duties or responsibilities which, in the Executive's reasonable judgment, are inconsistent with the Executive's status, title, position or responsibilities as in effect at any time within ninety (90) days preceding the date of a Change in Control or at any time thereafter; or any removal of the Executive from or failure to reappoint or reelect the Executive to any of such offices or positions, except in connection with the termination of the Executive's employment for Disability, Cause, as a result of the Executive's death or by the Executive other than for Good Reason; (2) A reduction in the Executive's base salary or any failure to pay the Executive any compensation or benefits to which the Executive is entitled within five (5) days of the date due; (3) the Company's requiring the Executive to be based at any place outside a 60-mile radius from Pleasanton, California, except for reasonably required travel on the Company's business which is not materially greater than such travel requirements prior to the Change in Control; (4) the failure by the Company to (A) continue in effect (without reduction in benefit level and/or reward opportunities) any material compensation or employee benefit plan in which the Executive was participating at any time within ninety (90) days preceding the date of a Change in Control or at any time thereafter, including, but not limited to, the plans listed on Appendix A, unless such plan is replaced with a plan that provides substantially equivalent compensation or benefits to the Executive, or (B) provide the Executive with compensation and benefits, in the aggregate, at least equal (in terms of benefit levels and/or reward opportunities) to those provided for under each other employee benefit plan, program and practice in which the Executive was participating at any time within ninety (90) days preceding the date of a Change in Control or at any time thereafter; (5) the insolvency or the filing (by any party, including the Company) of a petition for bankruptcy of the Company, which petition is not dismissed within sixty (60) days; (6) any material breach by the Company of any provision of this Agreement; (7) any purported termination of the Executive's employment for Cause by the Company which does not comply with the terms of Section 2, 4: or (8) the failure of the Company to obtain an agreement, satisfactory to the Executive, from any Successors and Assigns to assume and agree to perform this Agreement, as contemplated in Section 6 hereof. (b) The Executive's right to terminate the Executive's employment pursuant to this Section 2.8 shall not be affected by the Executive's incapacity due to physical or mental illness. 2.9 Notice of Termination. For the purposes of this Agreement, --------------------- following a Change in Control, "Notice of Termination" shall mean a written notice of termination of the Executive's employment from the Company, which notice indicates the specific termination provision in this Agreement relied upon and which sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. 2.10. Pro Rata Bonus. For purposes of this Agreement, "Pro -------------- Rata Bonus" shall mean an amount equal to the Bonus Amount multiplied by a fraction the numerator of which is the number of days in the fiscal year through the Termination Date and the denominator of which is 365. 2.11. Successors and Assigns. For purposes of this Agreement, ---------------------- "Successors and Assigns" shall mean a corporation or other entity acquiring all or substantially all of the assets and business of the Company (including this Agreement) whether by operation of law or otherwise. 2.12. Termination Date. For purposes of this Agreement, ---------------- "Termination Date" shall mean in, the case of the Executive's death, the Executive's date of death, in the case of Good Reason, the last day of the Executive's employment and, in all other cases, the date specified in the Notice of Termination; provided, however, that if -------- ------- the Executive's employment is terminated by the Company for Cause or due to Disability, the date specified in the Notice of Termination shall be at least 30 days from the date the Notice of Termination is given to the Executive, provided that, in the case of Disability, the Executive shall not have returned to the full-time performance of the Executive's duties during such period of at least 30 days. 3. Termination of Employment. ------------------------- 3.1 If, during the term of this Agreement, the Executive's employment with the Company shall be terminated within twenty-four (24) months following a Change in Control, the Executive shall be entitled to the following compensation and benefits: (a) If the Executive's employment with the Company shall be terminated (1) by the Company for Cause or Disability, (2) by reason of the Executive's death or (3) by the Executive other than for Good Reason, the Company shall pay to the Executive the Accrued Compensation and, if such termination is other than by the Company for Cause, the Company shall also pay the Executive a Pro Rata Bonus. (b) If the Executive's employment with the Company shall be terminated for any reason other than as specified in Section 3.1(a), the Executive shall be entitled to the following: (i) the Company shall pay the Executive all Accrued Compensation and a Pro Rata Bonus; (ii) the Company shall pay the Executive as severance pay and in lieu of any further compensation for periods subsequent to the Termination Date, in a single payment, an amount in cash equal to three times the sum of (A) the Base Amount and (B) the Bonus Amount; (iii) for a number of months equal to thirty six (36) (the "Continuation Period"), the Company shall, at its expense, continue on behalf of the Executive and the Executive's dependents and beneficiaries the life insurance, disability, medical, dental and hospitalization benefits provided (A) to the Executive at any time during the 90-day period prior to the Change in Control or at any time thereafter or (B) to other similarly situated executives who continue in the employ of the Company during the Continuation Period. The coverage and benefits (including deductibles and costs) provided in this Section 3.1(b) (iii) during the Continuation Period shall be no less favorable to the Executive and the Executive's dependents and beneficiaries, than the most favorable of such coverages and benefits during any of the periods referred to in clauses (A) and (B) above. The Company's obligation hereunder with respect to the foregoing benefits shall be limited to the extent that the Executive obtains any such benefits pursuant to a subsequent employer's benefits plans, in which case the Company may reduce the coverage of any benefits it is required to provide the Executive hereunder as long as the aggregate coverages and benefits of the combined benefit plans are no less favorable to the Executive than the coverages and benefits required to be provided hereunder. This subsection (iii) shall not be interpreted so as to limit any benefits to which the Executive or the Executive's dependents or beneficiaries may be entitled under any of the Company's employee benefit plans, programs or practices following the Executive's termination of employment, including without limitation, retiree medical and life insurance benefits; (iv) the restrictions on any outstanding equity incentive awards, including stock options and restricted stock, granted to the Executive under the Company's 1991 Equity Incentive Plan (or any predecessor plans thereto), the Company's 1994 Equity Incentive Plan or under any other incentive plan or arrangement shall lapse end such incentive award shall become 100% vested and, in the case of stock options, immediately exercisable; (v) for the duration of the Continuation Period, the Company shall, at its expense, provide the Executive with out placement and career counseling services of the Executive's choice, provided, however, that the -------- ------- Company's obligation to pay for such services shall in no event exceed an aggregate amount equal to 25% of the Base Amount. (c) The amounts provided for in Sections 3.1(a) and 3.1(b)(i) and (ii) shall be paid in a single lump sum cash payment within forty five (45) days after the Executive's Termination Date (or earlier, if required by applicable law). (d) The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Executive in any subsequent employment except as provided in Section 3.1(b) (iii). 3.2 (a) The severance pay and benefits provided for in this Section 3 shall be in lieu of any other severance or termination pay to which the Executive may be entitled under any Company severance or termination plan, program, practice or arrangement. (b) The Executive's entitlement to any other compensation or benefits shall be determined in accordance with the Company's employee benefit plans (including, the plans listed on Appendix A) and other applicable programs, policies and practices then in effect, 4. Notice of Termination. Following a Change in Control, --------------------- any purported termination of the Executive's employment shall be communicated by Notice of Termination to the Executive. For purposes of this Agreement, no such purported termination shall be effective without such Notice of Termination. 5. Excise Tax Limitation. --------------------- (a) Notwithstanding anything contained in this Agreement, in the event that any payment or benefit (within the meaning of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code")), to the Executive or for the Executive's benefit paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with, or arising out of, the Executive's employment with the Company or a Change in Control (a "Payment" or "Payments") would be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), the Payments shall be reduced (but not below zero) if and to the extent necessary so that no Payment to be made or benefit to be provided to the Executive shall be subject to the Excise Tax (such reduced Payments being hereinafter referred to as the "Limited Payment Amount"). Unless the Executive shall have given prior written notice specifying a different order to the Company to effectuate the Limited Payment Amount, the Company shall reduce or eliminate the Payments by first reducing or eliminating cash payments and then by reducing those payments or benefits which are not payable in cash, in each case in reverse order beginning with payments or benefits which are to be paid the farthest in time from the Determination (as hereinafter defined). Any notice given by the Executive pursuant to the preceding sentence shall take precedence over the provisions of any other plan, arrangement or agreement governing the Executive's rights and entitlements to any benefits or compensation. (b) An initial determination as to whether the Payments shall be reduced to the Limited Payment Amount and the amount of such Limited Payment Amount shall be made, at the Company's expense, by the accounting firm that is the Company's independent accounting firm as of the date of the Change in Control (the "Accounting Firm"). The Accounting Firm shall provide its determination (the "Determination"), together with detailed supporting calculations and documentation, to the Company and the Executive within twenty (20) days of the Termination Date if applicable, or such other time as requested by the Company or by the Executive (provided the Executive reasonably believes that any of the Payments may be subject to the Excise Tax), and if the Accounting Firm determines that there is substantial authority (within the meaning of Section 6662 of the Code) that no Excise Tax is payable by the Executive with respect to a Payment or Payments, it shall furnish the Executive with an opinion reasonably acceptable to the Executive that no Excise Tax will be imposed with respect to any such Payment or Payments. Within ten (10) days of the delivery of the Determination to the Executive, the Executive shall have the right to dispute the Determination (the "Dispute"). If there is no Dispute, the Determination shall be binding, final and conclusive upon the Company and the Executive subject to the application of Section 5(c) below. (c) As a result of the uncertainty in the application of Sections 4999 and 280G of the Code, it is possible that the Payments to be made to, or provided for the benefit of, the Executive either will be greater (an "Excess Payment") or less (an "Underpayment") than the amounts provided for by the limitations contained in Section 5(a). If it is established pursuant to a final determination of a court or an Internal Revenue Service (the "IRS") proceeding which has been finally and conclusively resolved that an Excess Payment has been made, such Excess Payment shall be deemed for all purposes to be a loan to the Executive made on the date the Executive received the Excess Payment and the Executive shall repay the Excess Payment to the Company on demand (but not less than ten (10) days after written notice is received by the Executive) together with interest on the Excess Payment at the "Applicable Federal Rate" (as defined in Section 1274(d) of the Code) from the date of the Executive's receipt of such Excess Payment until the date of such repayment. In the event that it is determined by (i) the Accounting Firm, the Company (which shall include the position taken by the Company, or together with its consolidated group, on its federal income tax return) or the IRS, (ii) pursuant to a determination by a court, or (iii) upon the resolution to the Executive's satisfaction of the Dispute that an Underpayment has occurred, the Company shall pay an amount equal to the Underpayment to the Executive within ten (10) days of such determination or resolution, together with interest on such amount at the Applicable Federal Rate from the date such amount would have been paid to the Executive until the date of payment. 6. Successors: Binding Agreement. ----------------------------- (a) This Agreement shall be binding upon and shall inure to the benefit of the Company, its Successors and Assigns and the Company shall require any Successors and Assigns to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. (b) Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by the Executive or the Executive's beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal personal representative. 7. Fees and Expenses. The Company shall pay all legal fees ----------------- and related expenses (including the costs of experts, evidence and counsel) incurred by the Executive as they become due as a result of (a) the Executive's termination of employment (including all such fees and expenses, if any, incurred in contesting or disputing any such termination of employment), (b) the Executive seeking to obtain or enforce any right or benefit provided by this Agreement (including, but not limited to, any such fees and expenses incurred in connection with the Dispute whether as a result of any applicable government taxing authority proceeding, audit or otherwise) or by any other plan or arrangement maintained by the Company under which the Executive is or may be entitled to receive benefits, and (c) the Executive's hearing before the Board as contemplated in Section 2.4 of this Agreement; provided, however, that the circumstances set -------- ------- forth in clauses (a) and (b) occurred on or after a Change in Control. 8. Notice. For the purposes of this Agreement, notices and ------ all other communications provided for in the Agreement (including the Notice of Termination) shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses last given by each party to the other, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company. All notices and communications shall be denied to have been received on the date of delivery thereof or on the third business day after the mailing thereof, except that notice of change of address shall be effective only upon receipt. 9. Non-exclusivity of Rights. Nothing in this Agreement shall ------------------------- prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company (except for any severance or termination policies, plans, programs or practices) and for which the Executive may qualify, nor shall anything herein limit or reduce such rights as the Executive may have under any other agreements with the Company (except for any severance or termination agreement). Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company shall be payable in accordance with such plan or program, except as explicitly modified by this Agreement. 10. Settlement of Claims. The Company's obligation to make the -------------------- payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against an Executive or others. 11. Miscellaneous. No provision of this Agreement may be ------------- modified, waived or discharged, unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreement or representation, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. 12. Governing Law. This Agreement shall be governed by and ------------- construed and enforced in accordance with the laws of the State of California without giving effect to the conflict of laws principles thereof. Any action brought by any party to this Agreement shall be brought and maintained in a court of competent jurisdiction in Alameda County in the State of California. 13. Severability. The provisions of this Agreement shall be ------------ deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 14. Entire Agreement. This Agreement constitutes the entire ---------------- agreement between the parties hereto and supersedes all prior agreements, if any, understandings and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Executive has executed this Agreement as of the day and year first above written. NELLCOR INCORPORATED EXECUTIVE By: /s/ L. De Buono /s/ C. Raymond Larkin, Jr. ------------------------------- -------------------------- C. Raymond Larkin, Jr. President and Chief Executive Officer Vice-President, Human Resources, Its: General Counsel and Secretary ----------------------------- ATTEST: By: /s/ E. Harris ---------------------------- Its: ---------------------------- EX-10.23 3 Exhibit 10.23 C. R. LARKIN TERMS OF SEPARATION - - Voluntary separation date of March 31, 1998. - - Severance agreement (parachute) as exists. - - My salary will be paid through August 25, 1998. (Paid in a lump sum on March 31, 1998, or I will sign a consultant agreement and my salary can be paid every two weeks, until August 25, 1998.) - - Retention bonus of $250,000 to be paid on March 31, 1998. - - Bonus based on NPB bonus plan on achievement of plan for full fiscal '98 (prorated for 75% of fiscal year) (paid by 8/31/98). - - Waiver of $125,000 bonus for cost reduction synergies - - Waiver of $125,000 bonus for developing successful strategy organization integration of global medical products company - - Waiver of SAR /s/ C. Raymond Larkin, Jr Date: 12/12/97 - --------------------------- ------------------ C. Raymond Larkin, Jr. President and Chief Executive Officer Nellcor Puritan Bennett Executive Vice President Mallinckrodt /s/ C. Raymond Holman Date: 12/15/97 - --------------------------- ----------------- C. Ray Holman Chairman and Chief Executive Officer Mallinckrodt Inc. EX-3.2 4 Exhibit 3.2 BY-LAWS OF MALLINCKRODT GROUP INC. - --------------------------------------------------------------------- (As Amended through April 15, 1992) Article I --------- Meetings of Stockholders Section 1. The Annual meeting of Stockholders of this Corporation for - --------- the election of directors and the transaction of such other business as may properly come before the meeting shall be held on such day in September, October or November of each year and at such place and hour as may be fixed by the Board of Directors prior to the giving of the notice of the date, place and object of such meeting, or if no other date, place and hour has been so fixed, on the third Wednesday in October and in the office of the Corporation, 421 East Hawley Street, Mundelein, Illinois 60060, at 10:00 o'clock a.m. Chicago time. Notice of the time, place and object of such meeting shall be given by mailing at least ten days previous to such meeting, postage prepaid, a copy of such notice addressed to each stockholder at his residence or place of business as the same shall appear on the books of the Corporation. Section 2. Special meetings of the stockholders other than those - --------- regulated by statute may be called at any time by the Chairman of the Board, the President or by a majority of directors. Notice of every special meeting stating the time, place and object thereof, shall be given by mailing, postage prepaid, at least ten days before such meeting, a copy of such notice addressed to each stockholder at his post office address as the same appears on the books of the Corporation. Section 3. At all meetings of stockholders a majority of the capital - --------- stock outstanding, either in person or by proxy, shall constitute a quorum, excepting as may be otherwise provided by law. Section 4. The Board of Directors may fix a date not more than fifty - --------- days prior to the day of holding any meeting of stockholders as the day as of which stockholders entitled to notice of and to vote at such meeting shall be determined. Section 5. At all meetings of stockholders all questions shall be - --------- determined by a majority vote of the stockholders entitled to vote present in person or by proxy, except as otherwise provided by law. Section 6. Except as may otherwise be required by applicable law or - --------- regulation, a stockholder may make a nomination or nominations for director of the Corporation at an annual meeting of stockholders or at a special meeting of stockholders called for the purpose of electing directors or may bring up any other matter for consideration and action by the stockholders at an annual meeting of stockholders only if the provisions of Subsections A, B and C hereto shall have been satisfied. If such provisions shall not have been satisfied, any nomination sought to be made or other business sought to be presented by a stockholder for consideration and action by the stockholders at the meeting shall be deemed not properly brought before the meeting, is and shall be ruled by the chairman of the meeting to be out of order, and shall not be presented or acted upon at the meeting. A. The stockholder must, not less than seventy days and not more than ninety-five days before the day of the meeting, deliver or cause to be delivered a written notice to the Secretary of the Corporation; provided, however, that in the event that less than eighty days' notice or prior public disclosure of the date of the meeting is given or made to the stockholders by the Corporation, notice by the stockholder to the Secretary of the Corporation, to be timely, must be received not later than the close of business on the tenth day following the day on which such notice or prior public disclosure was made. Notice by the Corporation shall be deemed to have been given more than eighty days in advance of the annual meeting if the annual meeting is called for the third Wednesday in October without regard for when the notice or public disclosure thereof is actually given or made. The stockholders' notice shall specify (a) the name and address of the stockholder as they appear on the books of the Corporation; (b) the class and number of shares of the Corporation which are beneficially owned by the stockholder; (c) any interest of the stockholder in the proposed business described in the notice which is in the interest of a business or object other than the business of the Corporation; (d) if such business is a nomination for director, each nomination sought to be made and a statement signed by each proposed nominee indicating his or her willingness so to serve if elected and disclosing the information about him or her that is required by the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder to be disclosed in the proxy materials for the meeting involved if he or she were a nominee of the Corporation for election as one of its directors, and (e) if such business is other than a nomination for director, a brief description of such business and the reasons it is sought to be submitted for a vote of the stockholders. B. Notwithstanding satisfaction of the provisions of Subsection A, the proposed business described in the notice may be deemed not to be properly brought before the meeting if, pursuant to state law or to any rule or regulation of the Securities and Exchange Commission, it was offered as a stockholder proposal and was omitted, or had it been so offered, it could have been omitted, from the notice of, and proxy material for, the meeting (or any supplement thereto) authorized by the Board of Directors. C. In the event such notice is timely given and the business described therein is not disqualified because of Subsection B, such business (a) may nevertheless not be presented or acted upon at a special meeting of stockholders unless in all other respects it is properly before such meeting; and (b) may not be presented except by the stockholder who shall have given the notice required by Subsection A or a representative of such stockholder who is qualified under the law of New York to present the proposal on the stockholder's behalf at the meeting. Article II ---------- Directors Section 1. The number of directors of the Corporation may be - --------- determined from time to time by resolution adopted by a majority of the entire Board of Directors, except that such number shall not be less than ten nor more than sixteen, exclusive of directors, if any, to be elected by the holders of 4% Cumulative Preferred Stock or the holders of one or more of Series Preferred Stock pursuant to the provisions of Article Third of the Certificate of Incorporation of the Corporation. Until the first such resolution is adopted, the Board shall consist of sixteen directors. As provided in the Certificate of Incorporation and subject to the provisions of the ninth sentence of Article Ninth thereof, (i) the directors shall be divided into three classes as nearly equal in number as possible; (ii) at each annual meeting directors to replace those whose terms expire at such annual meeting shall be elected to hold office until the third succeeding annual meeting and until their successors are chosen; (iii) if the number of directors is changed, any newly created directorships or decrease in directorships shall be so apportioned among the classes as to make all classes as nearly equal in number as possible; and (iv) if the number of directors is increased by the Board of Directors and any newly created directorships are filled by the Board, there shall be no classification of the additional directors until the next annual meeting of stockholders. No decrease in the Board shall shorten the term of any incumbent director. As used in these By-Laws, "entire Board of Directors" means the total number of directors which the Corporation would have if there were no vacancies. Vacancies occurring in the Board of Directors may be filled for the unexpired term by a majority vote of the remaining directors. The Board of Directors shall adopt such rules and regulations for the conduct of the meetings and management of the affairs of the Corporation as they may deem proper, not inconsistent with the laws of the State of New York or these By-Laws. This By-Law may be amended only by the affirmative vote of the holders of two-thirds of the shares of all classes of stock of the Corporation entitled to vote in elections of directors, considered for the purposes of this By-Law as one class. Section 2. The directors shall elect one of their members, who may or - --------- may not be an officer of the Corporation, to act as Chairman of the Board. He shall preside, when present, at all meetings of the Board of Directors and stockholders. Section 3. As soon as practicable after the Annual Meeting of - --------- Stockholders, the newly elected Board of Directors shall hold its first meeting for the purpose of organization and the transaction of business. At such organizational meeting the Board of Directors shall elect the officers of the Corporation and shall prepare a schedule fixing the time and place of all regular meetings of the Board of Directors to be held during the next ensuing calendar year. All such regular meetings of the Board of Directors may be held without further notice to any director who shall have attended the organizational meeting. Notice of the time and place fixed for such regular meetings shall be given by personal notice or by mail or telegraph to each director who shall not have attended the organizational meeting at least ten days prior to the first Board of Directors' meeting after such organizational meeting which such director shall be eligible to attend. The Board of Directors shall have authority to change the time and place of any regular meeting previously fixed, provided that the foregoing provisions as to notice thereof shall apply to any such changed regular meeting. The Chairman of the Board of Directors or the President may, and at the request of a majority of the Board of Directors in writing must, call a special meeting of the Board of Directors, not less than twenty-four hours' notice of which must be given by personal notice or by mail, telephone, telegraph, facsimile (FAX), or other form of communication. Nothing herein contained shall prevent a waiver of notice of meeting by directors. Section 4. At all meetings of the Board of Directors one-third of the - --------- entire Board of Directors as from time to time fixed under these By-Laws shall constitute a quorum. Article III ----------- Officers Section 1. The officers of the Corporation shall be a President - --------- (subject to Section 4 of this Article III), one or more Vice Presidents, a Secretary, a Controller, a Treasurer, such Assistant Secretaries, Assistant Controllers and Assistant Treasurers as the Board of Directors may deem necessary, a Chairman of the Board if the Board deems this necessary, and a Vice Chairman of the Board if there is a Chairman and the Board deems a Vice Chairman necessary. Any two offices, excepting those of Chairman of the Board and Secretary, and President and Secretary, may be held by one person. Section 2. The Chairman of the Board or the President, as designated - --------- by the Board of Directors, shall be the Chief Executive Officer of the Corporation and subject to the control and direction of the Board of Directors shall exercise the powers and perform the duties usual to the chief executive officer, have general charge of the affairs of the Corporation, see that all orders and resolutions of the Board are carried into effect, and do and perform such other duties as from time to time may be assigned to him by the Board of Directors or these By-Laws. Section 3. The Chairman of the Board shall preside at all meetings of - --------- the Board of Directors and of the stockholders and perform such other duties as from time to time may be assigned to that office by the Board or, when he is not the Chief Executive Officer, by the Chief Executive Officer, or by these By-Laws. Section 4. The President shall perform such duties as from time to - --------- time may be assigned to him by the Board of Directors, or when he is not the Chief Executive Officer, by the Chief Executive Officer, or by these By-Laws, and if there is no Chairman, or in the absence or disability of the Chairman, the President shall perform the duties of that office. When the Chairman of the Board is the Chief Executive Officer, the Board need not designate a President and the duties of President may be performed by the Chief Executive Officer or in part by such officer and in part by another officer or officers of the Corporation, as specified by the Board. Section 5. The Vice Presidents, one or more of whom may be designated - --------- Executive or Senior Vice Presidents, shall perform such duties in such capacities or as heads of their respective operating units as may be assigned by the Board of Directors, or by the Chief Executive Officer. In the absence or disability of the President, and in the absence or disability of the Chairman when there is no President as such, the duties of the respective office shall be performed by the Vice Presidents in the order of priority established by the Board, and unless and until the Board of Directors shall otherwise direct. Section 6. The Controller shall be the chief accounting officer of - --------- the Corporation and shall be in charge of its books of account, accounting records and accounting and internal auditing procedures. He shall be responsible for the verification of all of the assets of the Corporation and the preparation of all tax returns and other financial reports to governmental agencies by the Corporation and shall have such other duties and powers as shall be designated from time to time by the Board of Directors or the Chairman of the Board. The Controller shall be responsible to and shall report to the Board of Directors, but in the ordinary conduct of the Corporation's business shall be under the supervision of the Chairman of the Board or such other officer as the Board of Directors shall designate. Section 7. The Treasurer, subject to the direction and supervision of - --------- such officer and to such limitations on his authority as the Board of Directors may from time to time designate or prescribe, shall have the care and custody of the funds and securities of the Corporation, sign checks, drafts, notes and orders for the payment of money, pay out and dispose of the funds and securities of the Corporation and in general perform the duties customary to the office of Treasurer. Section 8. The Secretary shall keep the minutes of meetings of the - --------- Board of Directors and the minutes of the stockholders' meetings and have the custody of the seal of the Corporation and affix and attest the same to certificates of stock, contracts and other documents when proper and appropriate. He shall perform all of the other duties usual to that office. Section 9. The Assistant Secretaries, Assistant Controllers and - --------- Assistant Treasurers shall perform such duties as may be assigned by the Board of Directors. Section 10. Each officer elected by the Board of Directors shall hold - ---------- office until the next annual meeting of the Board of Directors and until his successor is elected. Any officer may be removed at any time with or without cause by a vote of a majority of the members of the Board of Directors. A vacancy in any office caused by the death, resignation or removal of the person elected thereto or because of the creation of a new office or for any other reason, may be filled for the unexpired portion of the term by election of the Board of Directors at any meeting. In case of the absence or disability, or refusal to act of any officer of the Corporation, or for any other reason that the Board of Directors shall deem sufficient, the Board may delegate, for the time being, the powers and duties, or any of them of such officer to any other officer or to any director. Article IV ---------- Capital Stock Section 1. Subscriptions to the capital stock must be paid to the - --------- Treasurer at such time or times, and in such installments as the Board of Directors may by resolution require. Section 2. The certificate for shares of the Corporation shall be in - --------- such forms as shall be approved by the Board of Directors and shall be signed by the Chairman of the Board or the President or a Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, and shall be sealed with the seal of the Corporation or a facsimile thereof. The signatures of the officers upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar other than the Corporation itself or its employee. In case any officer has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of issue. Section 3. Registration of transfers of shares shall be made upon the - --------- books of the Corporation by the registered holder in person or by power of attorney, duly executed and filed with the Secretary or other proper officer of the Corporation, and on surrender of the certificate or certificates for such shares, properly assigned for transfer. Article V --------- Committees of the Board Section 1. The Board of Directors may elect from among its members, - --------- by resolution adopted by two-thirds of the entire Board of Directors, an Executive Committee consisting of the Chairman of the Board and three or more other members of the Board. From such Committee members, the Board shall elect a Chairman of such Committee. Section 2. During the intervals between meetings of the Board of - --------- Directors, the Executive Committee shall, subject to any limitations imposed by law or the Board of Directors, possess and may exercise all the powers of the Board of Directors in the management and direction of the Corporation in such manner as the Executive Committee shall deem best for the interests of the Corporation, in all cases in which specific directions shall not have been given by the Board of Directors. Section 3. The Board of Directors may also elect from among its - --------- members, by resolutions adopted by a majority of the entire Board of Directors, such other committee or committees as the Board of Directors shall determine, each such committee to consist of at least three members of the Board. The Board shall elect a Chairman of each such committee, shall fix the number of and elect the other members thereof, and shall establish the duties and authority thereof, subject to such limitations as may be required by law. Section 4. The Board of Directors shall fill any vacancies on any - --------- committee established under this Article, with the objective of keeping the membership of each such committee full at all times. Section 5. All action by any committee of the Board of Directors - --------- shall be referred to the Board of Directors at its meeting next succeeding such action, and shall be subject to revision or alteration by the Board of Directors provided that no rights or acts of third parties shall be affected by any such revision or alteration. Subject to such applicable resolutions as may be adopted by the Board, each committee shall fix its own rules of procedure and shall meet where and as provided in such rules, but in any case the presence of a majority shall be necessary to constitute a quorum. Article VI ---------- Meetings by Consent Section 1. Any action required or permitted to be taken by the Board - --------- of Directors or any committee thereof may be taken without a meeting if all members of the Board or of the committee consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents thereto by the members of the Board or committee shall be filed with the minutes of the proceedings of the Board of committee. Section 2. Any one or more members of the Board or any committee - --------- thereof may participate in a meeting of the Board or such committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. Article VII ----------- Indemnification Section 1. The Company shall, to the fullest extent permitted by - --------- applicable law, indemnify any person who is or was made, or threatened to be made, a party to any action or proceeding, whether civil or criminal, whether involving any actual or alleged breach of duty, neglect or error, any accountability, or any actual or alleged misstatement, misleading statement or other act or omission and whether brought or threatened in any court or administrative or legislative body or agency, including an action by or in the right of the Company to procure a judgment in its favor and an action by or in the right of any other corporation of any type or kind, domestic or foreign, or any partnership, joint venture, trust, employee benefit plan or other enterprise, which any director or officer of the Company is serving or served in any capacity at the request of the Company, by reason of the fact that he, his testator, or intestate, is or was a director or officer of the Company, or is serving or served such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity, against judgments, fines, amounts paid in settlement, and costs, charges and expenses, including attorney's fees, or any appeal therein; provided, however, that no indemnification shall be provided to any such person if a judgment or other final adjudication adverse to the director or officer establishes that (i) his acts were committed in bad faith or were the result of active and deliberate dishonesty and, in either case, were material to the cause of action so adjudicated, or (ii) he personally gained in fact a financial profit or other advantage to which he was not legally entitled. Section 2. The Company may indemnify any other person to whom the - --------- Company is permitted to provide indemnification or the advancement of expenses by applicable law, whether pursuant to rights granted pursuant to, or provided by, the New York Business Corporation Law or other rights created by (i) a resolution of shareholders, (ii) a resolution of directors, or (iii) an agreement providing for such indemnification, it being expressly intended that these by-laws authorize the creation of other rights in any such manner. Section 3. The Company shall, from time to time, reimburse or advance - --------- to any person referred to in Section 1 the funds necessary for payment of expenses, including attorney's fees, incurred in connection with any action or proceeding referred to in Section 1, upon receipt of a written undertaking by or on behalf of such person to repay such amount(s) if a judgment or other final adjudication adverse to the director or officer establishes that (i) his acts were committed in bad faith or were the result of active and deliberate dishonesty and, in either case, were material to the cause of action so adjudicated, or (ii) he personally gained in fact a financial profit or other advantage to which he was not legally entitled. Section 4. Any director or officer of the Company serving (i) another - --------- corporation, of which a majority of the shares entitled to vote in the election of its directors is held by the Company, or (ii) any employee benefit plan of the Company or any corporation referred to in clause (i), in any capacity shall be deemed to be doing so at the request of the Company. Section 5. Any person entitled to be indemnified or to the - --------- reimbursement or advancement of expenses as a matter of right pursuant to this Article may elect to have the right to indemnification (or advancement of expenses) interpreted on the basis of the applicable law in effect at the time of the occurrence of the event or events giving rise to the action or proceeding, to the extent permitted by law, or on the basis of the applicable law in effect at the time indemnification is sought. Section 6. The right to be indemnified or to the reimbursement or - --------- advancement of expenses pursuant to this Article (i) is a contract right pursuant to which the person entitled thereto may bring suit as if the provisions hereof were set forth in a separate written contract between the Company and the director or officer, (ii) is intended to be retroactive and shall be available with respect to events occurring prior to the adoption hereof, and (iii) shall continue to exist after the rescission or restrictive modification hereof with respect to events occurring prior thereto. Section 7. If a request to be indemnified or for the reimbursement or - --------- advancement of expenses pursuant hereto is not paid in full by the Company within thirty days after a written claim has been received by the Company, the claimant may at any time thereafter bring suit against the Company to recover the unpaid amount of the Claim and, if successful in whole or in part, the claimant shall be entitled also to be paid the expenses of prosecuting such claim. Neither the failure of the Company (including its Board of Directors, independent legal counsel, or its shareholders) to have made a determination prior to the commencement of such action that indemnification of or reimbursement or advancement of expenses to the claimant is proper in the circumstances, nor an actual determination by the Company (including its Board of Directors, independent legal counsel, or its shareholders) that the claimant is not entitled to indemnification or to the reimbursement or advancement of expenses, shall be a defense to the action or create a presumption that the claimant is not so entitled. Section 8. A person who has been successful, on the merits or - --------- otherwise, in the defense of a civil or criminal action or proceeding of the character described in Section 1 shall be entitled to indemnification only as provided in Sections 1 and 3, notwithstanding any provision of the New York Business Corporation Law to the contrary. Article VIII ------------ Amendments Section 1. These By-Laws may be amended at any stockholders' meeting - --------- by a majority of the votes cast at such meeting by the holders of shares entitled to vote thereon, represented either in person or by proxy. Section 2. Subject to the limitations, if any, from time to time - --------- prescribed in By-Laws made by stockholders, the Board of Directors at any regular or special meeting, by the vote of a majority of the directors may make, alter, amend and repeal any By-Laws, but any By-Laws made by the Board of Directors may be altered or repealed by the stockholders. EX-21 5 Exhibit 21 Mallinckrodt Inc. 1998 LEGAL ENTITY MASTER FILE LEGAL NAME JURISDICTION - ---------- ------------ Accucomp (Pty.) Ltd. SOUTH AFRICA Accufusion (Pty.) Ltd. SOUTH AFRICA Alton Dean Medical, Inc. UTAH Carnforth Limited BERMUDA Coromandel Fertilisers Ltd. INDIA Creative Solutions Industria e Comercio Ltda. BRAZIL Crow River Industries, Incorporated MINNESOTA Dittander Limited IRELAND Dritte CORSA Verwaltungsgesellschaft mbH GERMANY HemoCue AB SWEDEN IMC Exploration Company MARYLAND IMCERA Ltd. UNITED KINGDOM Infrasonics Technologies, Inc. NEVADA LF International FSC, Inc. BARBADOS Liebel-Flarsheim Company DELAWARE Mallinckrodt Athlone Holdings, Inc. DELAWARE Mallinckrodt Baker B.V. NETHERLANDS Mallinckrodt Baker, Inc. NEW JERSEY Mallinckrodt Baker International, Inc. DELAWARE Mallinckrodt Baker S.A. de C.V. MEXICO Mallinckrodt Chemical Australia Pty. Limited AUSTRALIA Mallinckrodt Chemical Canada Inc. CANADA Mallinckrodt Chemical GmbH GERMANY Mallinckrodt Chemical Holdings GmbH GERMANY Mallinckrodt Chemical Holdings (U.K.) Ltd. UNITED KINGDOM Mallinckrodt Chemical Limited UNITED KINGDOM Mallinckrodt DAR Srl ITALY Mallinckrodt Europe B.V. NETHERLANDS Mallinckrodt FSC Inc. BARBADOS Mallinckrodt Group Inc. DELAWARE Mallinckrodt Holdings B.V. NETHERLANDS Mallinckrodt Holdings Ireland IRELAND Mallinckrodt Iberica S.A. SPAIN Mallinckrodt Inc. DELAWARE Mallinckrodt Inc. NEW YORK Mallinckrodt International Corporation MISSOURI Mallinckrodt International Financial Services Company IRELAND Mallinckrodt Medical IRELAND Mallinckrodt Medical AG SWITZERLAND Mallinckrodt Medical Argentina Limited UNITED KINGDOM Mallinckrodt Medical Asia Pacific Pte. Ltd. SINGAPORE Mallinckrodt Medical B.V. NETHERLANDS Mallinckrodt Medical Caribe, Inc. DELAWARE Mallinckrodt Medical do Brasil, Ltda. BRAZIL Mallinckrodt Medical GmbH GERMANY Mallinckrodt Medical Holdings GmbH GERMANY Mallinckrodt Medical Holdings Ireland IRELAND Mallinckrodt Medical Holdings (U.K.) Limited UNITED KINGDOM Mallinckrodt Medical Imaging - Ireland IRELAND Mallinckrodt Medical, Inc. CANADA Mallinckrodt Medical International Holdings IRELAND Mallinckrodt Medical Isle of Man ISLE OF MAN Mallinckrodt Medical Limitada PORTUGAL Mallinckrodt Medical PMC NEVADA Mallinckrodt Medical Pty. Ltd. AUSTRALIA Mallinckrodt Medical S.A. FRANCE Mallinckrodt Medical S.A. SPAIN Mallinckrodt Medical S.A. de C.V. MEXICO Mallinckrodt Medical S.A./N.V. BELGIUM Mallinckrodt Medical Srl ITALY Mallinckrodt Medical (U.K.) Limited UNITED KINGDOM Mallinckrodt Medical Vertriebs-GmbH AUSTRIA Mallinckrodt Polska Sp.zo.o POLAND Mallinckrodt Services B.V. NETHERLANDS Mallinckrodt TMH NEVADA Mallinckrodt Veterinary, Inc. DELAWARE MMHC, Inc. DELAWARE MMJ S.A. de C.V. MEXICO Mobility Products and Design of Minnetonka, Inc. MINNESOTA MSCH Company DELAWARE National Catheter Corporation NEW YORK Nellcor Foreign Sales Corporation BARBADOS Nellcor Puritan Bennett Australia Pty. Limited AUSTRALIA Nellcor Puritan Bennett Belgium N.V./S.A. BELGIUM Nellcor Puritan Bennett Benelux B.V. NETHERLANDS Nellcor Puritan Bennett Canada Ltd. CANADA Nellcor Puritan Bennett Europe B.V. NETHERLANDS Nellcor Puritan Bennett Export Inc. DELAWARE Nellcor Puritan Bennett Finland Oy FINLAND Nellcor Puritan Bennett France Developpement, S.A. FRANCE Nellcor Puritan Bennett France Holdings SARL FRANCE Nellcor Puritan Bennett France SARL FRANCE Nellcor Puritan Bennett Germany GmbH GERMANY Nellcor Puritan Bennett Hong Kong Limited HONG KONG Nellcor Puritan Bennett Iberia, S.L. SPAIN Nellcor Puritan Bennett Incorporated DELAWARE Nellcor Puritan Bennett International Corporation DELAWARE Nellcor Puritan Bennett Ireland IRELAND Nellcor Puritan Bennett Ireland Holdings IRELAND Nellcor Puritan Bennett Italia S.r.l. ITALY Nellcor Puritan Bennett Japan Incorporated JAPAN Nellcor Puritan Bennett (Melville) Ltd. CANADA Nellcor Puritan Bennett Mexico, S.A. de C.V. MEXICO Nellcor Puritan Bennett U.K. Limited UNITED KINGDOM Puritan-Bennett Corporation DELAWARE Puritan-Bennett Ireland Distribution IRELAND Sterlington Land Co. LOUISIANA Trigate (Pty.) Ltd. SOUTH AFRICA Trigate Umndeni (Pty.) Ltd. SOUTH AFRICA Trinance (Pty.) Ltd. SOUTH AFRICA EX-23 6 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS ------------------------------- We consent to the incorporation by reference in the following registration statements and related prospectuses filed by Mallinckrodt Inc. under the Securities Act of 1933 of our report dated August 12, 1998 with respect to the consolidated financial statements of Mallinckrodt Inc. included in this Annual Report on Form 10-K for the year ended June 30, 1998: Commission File No. ------------------- Form S-8, No. 2-65727 Form S-8, No. 2-80553 Form S-8, No. 2-90910 Form S-8, No. 2-94151 Form S-8, No. 33-10381 Form S-8, No. 33-32109 Form S-8, No. 33-40246 Form S-3, No. 33-43925 Form S-8, No. 333-34489 Form S-8, No. 333-38291 Form S-8, No. 333-38293 Form S-3, No. 333-42325 - ------------------------- Ernst & Young LLP St. Louis, Missouri September 22, 1998 EX-27 7
5 This schedule contains summary financial information extracted from the consolidated balance sheets and consolidated statements of operations of the Company's Form 10-K, and is qualified in its entirety by reference to such financial statements. 1,000,000 YEAR JUN-30-1998 JUN-30-1998 55 0 503 17 470 1173 1412 517 3786 1182 945 0 11 87 820 3786 2367 2367 1369 2618 0 0 102 (338) 18 (356) 72 0 (8) (292) (4.01) (4.01)
EX-27 8
5 This schedule contains restated summary financial information extracted from the consolidated balance sheets and consolidated statements of operations of the Company's Form 10-K for the year ended June 30, 1998, and is qualified in its entirety by reference to such financial statements. 1,000,000 YEAR JUN-30-1997 JUN-30-1997 808 0 344 8 292 1605 1188 447 2975 642 544 0 11 87 1153 2975 1698 1698 898 1401 0 0 48 271 96 175 15 0 0 190 2.57 2.53
EX-27 9
5 Excluding the restated summary balance sheet information, this schedule contains restated summary financial information taken from the consolidated statements of operations of the Company's Form 10-K for the year ended June 30, 1998, and is qualified in its entirety by reference to such financial statements. 1,000,000 YEAR JUN-30-1996 JUN-30-1996 496 0 323 9 313 1200 1130 388 3018 841 557 0 11 87 1134 3018 1597 1597 838 1317 0 0 51 228 84 144 68 0 0 212 2.81 2.77
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