- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) JANUARY 10, 1995,
1-5482
(Commission File Number)
-------------------
TYCO INTERNATIONAL LTD.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2297459
(State of Incorporation) (IRS Employer
Identification Number)
ONE TYCO PARK, EXETER, NEW HAMPSHIRE 03833
(Address of registrant's principal executive office)
603-778-9700
(Registrant's telephone number)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ITEM 5. OTHER EVENTS
On October 19, 1994 a wholly owned subsidiary of Tyco International Ltd.
("Tyco" or the "Company") merged with Kendall International, Inc. ("Kendall").
The supplemental consolidated financial statements filed herewith have been
prepared accounting for this transaction using the pooling of interests method
of accounting. Upon publication of Tyco's financial statements for a period
which includes October 19, 1994, these supplemental consolidated financial
statements will become the historical financial statements of the Company.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
- ------ ----------------------------------------------------------------------------------
<S> <C>
23(A) --Consent of Coopers & Lybrand L.L.P. (Filed herewith).
23(B) --Consent of Price Waterhouse LLP (Filed herewith).
99(1) --Supplemental Consolidated Financial Statements of Tyco International Ltd. at
June 30, 1994 and 1993 and for the three years in the period ended June 30, 1994
and Reports of Independent Accountants thereon (Filed herewith).
99(2) --Schedule VIII--Valuation and Qualifying Accounts for Tyco International Ltd.
(Filed herewith).
99(3) --Report of Coopers & Lybrand L.L.P. on Financial Statement Schedule (Filed
herewith).
99(4) --Report of Price Waterhouse LLP on Financial Statement Schedule (Filed herewith).
</TABLE>
1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TYCO INTERNATIONAL LTD.
By /s/ Terry L. Hall
...................................
Terry L. Hall
Vice President--Chief Financial
Officer
Date: January 10, 1995
2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
- ------ ------------------------------------------------------------------------------------
<S> <C>
23(A) -- Consent of Coopers & Lybrand L.L.P.
23(B) -- Consent of Price Waterhouse LLP
99(1) -- Supplemental Consolidated Financial Statements of Tyco International Ltd. at June
30, 1994 and 1993 and for the three years in the period ended June 30, 1994 and
Reports of Independent Accountants thereon.
99(2) -- Schedule VIII--Valuation and Qualifying Accounts for Tyco International Ltd.
99(3) -- Report of Coopers & Lybrand L.L.P. on Financial Statement Schedule.
99(4) -- Report of Price Waterhouse LLP on Financial Statement Schedule.
</TABLE>
3
EXHIBIT 23(A)
CONSENT OF INDEPENDENT ACCOUNTS
We consent to the incorporation by reference in the Registration Statements
on Forms S-8 (File nos. 2-86758, 2-93570, 33-54127, 33-56075, 33-56077,
33-56081, 33-56083 and 33-56079) of Tyco International Ltd. of our reports dated
December 22, 1994 on our audit of the supplemental consolidated financial
statements and financial statement schedule of Tyco International Ltd. as of and
for the year ended June 30, 1994 which reports are included in this Report on
Form 8-K.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
January 9, 1995
4
EXHIBIT 23(B)
CONSENT OF INDEPENDENT ACCOUNTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (File nos. 2-86758, 2-93570, 33-54127, 33-56075,
33-56077, 33-56081, 33-56083 and 33-56079) of Tyco International Ltd. (formerly
Tyco Laboratories, Inc.) of our report dated August 3, 1993 appearing in
Exhibit 99(1) of this Form 8-K. We also consent to the incorporation by
reference of our report on the Financial Statement Schedule VIII which appears
in Exhibit 99(4) of this Form 8-K.
PRICE WATERHOUSE LLP
Boston, Massachusetts
January 9, 1995
5
EXHIBIT 99(1)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
TYCO INTERNATIONAL LTD.
We have audited the supplemental consolidated balance sheet of Tyco
International Ltd. as of June 30, 1994 and the related supplemental consolidated
statements of income, shareholders' equity and cash flows for the year ended
June 30, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
The supplemental financial statements give retroactive effect to the merger
of Tyco International Ltd. and Kendall International, Inc. on October 19, 1994,
which has been accounted for as a pooling of interests as described in Note 1 to
the supplemental consolidated financial statements. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling of interests method in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation; however, they will
become the historical consolidated financial statements of Tyco International
Ltd. and subsidiaries after financial statements covering the date of
consummation of the business combination are issued.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Tyco
International Ltd. at June 30, 1994, and the consolidated results of operations
and cash flows for the year ended June 30, 1994, in conformity with generally
accepted accounting principles applicable after financial statements are issued
for a period which includes the date of consummation of the business
combination.
We have audited the consolidated balance sheet of Kendall International,
Inc. and subsidiaries as of June 30, 1993 and the related consolidated
statements of income and cash flows for the year ended June 30, 1993, prior to
their restatement for the 1994 pooling of interests. The contribution of Kendall
International, Inc. and subsidiaries to total assets, revenues and net income
before cumulative effect of accounting changes represented 22 percent, 21
percent and 21 percent of the respective restated totals. Separate financial
statements of Tyco International Ltd. included in the 1993 restated consolidated
balance sheet and statements of income and cash flows were audited and reported
on separately by other auditors. In addition, the financial statements of Tyco
International Ltd. for the year ended June 30, 1992, which represents 100% of
the combined restated financial statements for that period, were audited and
reported on by other auditors. We also audited the combination of the
accompanying consolidated balance sheet as of June 30, 1993 and the consolidated
statements of income and cash flows for the year ended June 30, 1993, after
restatement for the 1994 pooling of interests; in our opinion, such consolidated
statements have been properly combined on the basis described in Note 1 of notes
to consolidated financial statements.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
December 22, 1994
6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
TYCO INTERNATIONAL LTD.
(formerly Tyco Laboratories, Inc.)
In our opinion, the consolidated balance sheet and the related consolidated
statements of income, of cash flows and of changes in stockholders' equity (not
presented separately herein) present fairly, in all material respects, the
financial position of Tyco International Ltd., formerly Tyco Laboratories, Inc.,
and its subsidiaries at June 30, 1993 and the results of their operations and
their cash flows for each of the two years in the period ended June 30, 1993
(prior to the retroactive restatement to account for the pooling of interests),
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of Tyco
International Ltd. for any period subsequent to June 30, 1993.
As discussed in Notes 1, 8 and 12, the Company changed its method of
accounting for income taxes and for post-retirement benefits other than pensions
in fiscal 1993.
PRICE WATERHOUSE LLP
Boston, Massachusetts
August 3, 1993
7
<PAGE>
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AT JUNE 30
------------------------
1994 1993
---------- ----------
(IN THOUSANDS EXCEPT
SHARE DATA)
<S> <C> <C>
Current Assets:
Cash and cash equivalents.......................................... $ 75,843 $ 50,041
Receivables, less allowance for doubtful accounts of $29,311 in
1994 and $28,981 in 1993......................................... 515,160 622,178
Contracts in process............................................... 79,475 77,925
Inventories........................................................ 517,068 502,338
Deferred income taxes.............................................. 101,837 82,663
Prepaid expenses................................................... 54,904 54,763
---------- ----------
1,344,287 1,389,908
---------- ----------
Property and Equipment:
Land............................................................... 33,235 34,718
Buildings.......................................................... 257,485 253,645
Machinery and equipment............................................ 647,058 630,479
Leasehold improvements............................................. 15,166 13,037
Construction in progress........................................... 42,648 47,656
Accumulated depreciation........................................... (385,719) (362,537)
---------- ----------
609,873 616,998
---------- ----------
Goodwill and Other Intangible Assets............................... 918,791 868,151
Reorganization Value in Excess of Identifiable Assets.............. 115,201 185,892
Deferred Income Taxes.............................................. 112,691 80,493
Other Assets....................................................... 39,978 23,524
---------- ----------
Total Assets....................................................... $3,140,821 $3,164,966
---------- ----------
---------- ----------
Current Liabilities:
Loans payable and current maturities of long-term debt............. $ 163,164 $ 239,601
Accounts payable................................................... 332,004 290,256
Accrued expenses................................................... 382,576 411,877
Contracts in process--billings in excess of costs.................. 63,324 49,676
Income taxes....................................................... 73,301 57,344
---------- ----------
1,014,369 1,048,754
Deferred Income Taxes.............................................. 13,698 8,032
Long-Term Debt..................................................... 588,491 812,585
Other Liabilities.................................................. 157,237 156,809
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, $1 par value, authorized 2,000,000 shares; none
outstanding........................................................ -- --
Common stock, $.50 par value, authorized 180,000,000 shares;
outstanding 71,084,293 shares in 1994 and 70,924,026 shares
in 1993, net of reacquired shares of 7,600,747 in 1994 and
7,614,092
in 1993.......................................................... 35,542 35,462
Capital in excess of par value, net of deferred compensation of
$9,318 in 1994 and $12,314 in 1993............................... 567,476 558,481
Currency translation adjustment.................................... (40,874) (89,386)
Retained earnings.................................................. 804,882 634,229
---------- ----------
1,367,026.. 1,138,786
---------- ----------
Total Liabilities and Shareholders' Equity......................... $3,140,821 $3,164,966
---------- ----------
---------- ----------
</TABLE>
See notes to supplemental consolidated financial statements.
8
<PAGE>
SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED JUNE 30 (1)
--------------------------------------
1994 1993 1992
---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Sales................................. $4,076,383 $3,919,357 $3,066,485
---------- ---------- ----------
Costs and Expenses:
Cost of sales......................... 3,003,194 2,909,947 2,390,218
Nonrecurring inventory charge......... -- 22,485 --
Selling, general and administrative... 682,568 682,520 446,244
Restructuring and severance charges... -- 39,325 25,612
Interest.............................. 62,431 85,785 63,261
---------- ---------- ----------
3,748,193 3,740,062 2,925,335
---------- ---------- ----------
Income before income taxes,
extraordinary item and cumulative
effect of accounting changes.......... 328,190 179,295 141,150
Income taxes.......................... 138,999 84,837 45,884
---------- ---------- ----------
Net income before extraordinary item
and cumulative effect of accounting
changes............................... 189,191 94,458 95,266
Extraordinary item.................... -- 2,816 --
---------- ---------- ----------
Net income before cumulative effect of
accounting changes.................... 189,191 91,642 95,266
Cumulative effect of accounting
changes............................... -- 71,040 --
---------- ---------- ----------
Net Income............................ $ 189,191 $ 20,602 $ 95,266
---------- ---------- ----------
---------- ---------- ----------
Net Income Per Share:
Before extraordinary item and
cumulative effect of accounting
changes............................... $ 2.56 $ 1.30 $ 2.06
Extraordinary item.................. -- (.04) --
Cumulative effect of accounting
changes............................... -- (.98) --
---------- ---------- ----------
Net Income............................ $ 2.56 $ .28 $ 2.06
---------- ---------- ----------
---------- ---------- ----------
Common equivalent shares.............. 73,770 72,316 46,290
---------- ---------- ----------
---------- ---------- ----------
- ------------
(1) The supplemental consolidated financial statements reflect the combined
results of operations of Tyco and Kendall for the years ended June 30, 1994
and 1993. Results for the year ended June 30, 1992 reflect only the results
of Tyco. See Note 1 to these financial statements.
See notes to supplemental consolidated financial statements.
9
<PAGE>
SUPPLEMENTAL CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE THREE YEARS ENDED JUNE 30, 1994 (1)
----------------------------------------------------
COMMON CAPITAL IN CURRENCY
STOCK, $.50 EXCESS OF TRANSLATION RETAINED
PAR VALUE PAR VALUE ADJUSTMENT EARNINGS
----------- ---------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at June 30, 1991......................... $23,527 $ 370,628 $ (42,351) $553,347
Net income..................................... 95,266
Dividends...................................... (16,934)
Restricted stock grants, cancellations, tax
benefits and other........................... (24) 2,974
Currency translation adjustment................ 50,086
Amortization of deferred compensation.......... 4,032
----------- ---------- ----------- --------
Balance at June 30, 1992......................... 23,503 377,634 7,735 631,679
Effect of Kendall Merger....................... 12,301 190,077
Net income..................................... 20,602
Dividends...................................... (18,052)
Management equity compensation................. 2,126
Restricted stock grants, cancellations, tax
benefits and other........................... (82) 3,015
Purchase of treasury stock..................... (260) (16,705)
Currency translation adjustment................ (97,121)
Amortization of deferred compensation.......... 2,334
----------- ---------- ----------- --------
Balance at June 30, 1993......................... 35,462 558,481 (89,386) 634,229
Net income..................................... 189,191
Dividends...................................... (18,538)
Management equity compensation................. 1,273
Restricted stock grants, cancellations, tax
benefits and other........................... 15 2,409
Warrants, options exercised.................... 65 2,215
Purchase of warrant............................ (600)
Currency translation adjustment................ 48,512
Amortization of deferred compensation.......... 3,698
----------- ---------- ----------- --------
Balance at June 30, 1994......................... $35,542 $ 567,476 $ (40,874) $804,882
----------- ---------- ----------- --------
----------- ---------- ----------- --------
</TABLE>
- ------------
(1) The supplemental consolidated financial statements reflect the combined
equity of Tyco and Kendall for the years ended June 30, 1994 and 1993.
Results for the year ended June 30, 1992 reflect only the equity of Tyco.
See Note 1 to these financial statements.
See notes to supplemental consolidated financial statements.
10
<PAGE>
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 (1)
-----------------------------------
1994 1993 1992
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income................................................ $ 189,191 $ 20,602 $ 95,266
Adjustments to reconcile net income to net cash provided
by operating activities:
Extraordinary item...................................... -- 2,816 --
Cumulative effect of accounting changes................. -- 71,040 --
Depreciation............................................ 83,027 79,076 66,501
Amortization of intangibles............................. 40,621 42,505 28,107
Amortization of debt discount and issue costs........... 1,232 6,768 --
Provision for management equity plans................... 6,325 7,256 --
Non-recurring inventory charge.......................... -- 22,485 --
Deferred income taxes................................... 31,459 (2,547) (13,832)
Provision for losses on accounts receivable and
inventory writedowns.................................. 14,823 12,663 11,809
Changes in assets and liabilities net of effects from
acquisitions:
Decrease (increase) in accounts receivable............ 108,847 (28,040) 27,573
Decrease (increase) in contracts in process........... 12,471 (8,016) 681
(Increase) decrease in inventory...................... (11,766) 1,204 10,461
(Decrease) increase in accounts payable and accrued
expenses............................................ (26,189) 47,277 (48,127)
Increase (decrease) in income taxes payable........... 15,389 (3,588) (5,527)
Other, net............................................ 26,998 8,543 2,067
--------- --------- ---------
Net cash provided by operating activities............... 492,428 280,044 174,979
--------- --------- ---------
Cash Flows From Investing Activities:
Proceeds from sales of acquired assets.................... 18,054 -- 14,289
Capital expenditures...................................... (89,802) (94,399) (67,650)
Purchases of businesses, net of cash acquired............. (72,640) (72,008) (18,835)
--------- --------- ---------
Net cash used in investing activities................... (144,388) (166,407) (72,196)
--------- --------- ---------
Cash Flows From Financing Activities:
Proceeds from long-term debt.............................. 104,628 49,955 199,528
Payments on long-term debt and lines of credit............ (409,692) (126,960) (275,951)
Purchase of warrant and treasury stock.................... (600) (16,965) --
Dividends paid............................................ (18,510) (17,640) (16,934)
Financial restructuring and financing fees paid........... (344) (5,631) --
Issuance of stock and warrants............................ 2,280 -- --
--------- --------- ---------
Net cash used in financing activities................... (322,238) (117,241) (93,357)
--------- --------- ---------
Net change in cash and cash equivalents................... 25,802 (3,604) 9,426
Cash and cash equivalents at beginning of year............ 50,041 32,135 22,709
Kendall cash and cash equivalents at beginning of year.... -- 21,510 --
--------- --------- ---------
Cash and cash equivalents at end of year.................. $ 75,843 $ 50,041 $ 32,135
--------- --------- ---------
Supplementary Cash Flow Disclosure:
Interest paid............................................. $ 72,640 $ 82,952 $ 77,823
--------- --------- ---------
Income taxes paid (net of refunds)........................ $ 73,751 $ 55,112 $ 34,980
--------- --------- ---------
</TABLE>
- ------------
(1) The supplemental consolidated financial statements reflect the combined
cash flows of Tyco and Kendall for the years ended June 30, 1994 and 1993.
Results for the year ended June 30, 1992 reflect only the cash flows of
Tyco. See Note 1 to these financial statements.
See notes to supplemental consolidated financial statements.
11
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation--The supplemental consolidated financial statements
include the accounts of Tyco International Ltd. ("Tyco" or the "Company") and
its subsidiaries. As described more fully in Note 2, on October 19, 1994 a
wholly owned subsidiary of Tyco merged with Kendall International, Inc.
("Kendall"). These supplemental consolidated financial statments have been
prepared following the pooling-of-interests method of accounting and reflect the
combined financial position, operating results and cash flows of Tyco and
Kendall as if they had been combined for all periods presented subsequent to
June 30, 1992, the date on which Kendall undertook a financial restructuring.
Upon publication of Tyco's financial statements for a period which includes
October 19, 1994, these supplemental consolidated financial statements will
become the historical financial statements of the Company.
During the first half of calendar 1992, Kendall undertook a financial
restructuring (the "Restructuring") which reduced its debt and associated
interest expense to a level supportable by its operations. The Restructuring was
consummated through a prepackaged plan of reorganization under Chapter 11 of the
U.S. Bankruptcy Code. For accounting purposes, the Restructuring was effective
as of June 30, 1992, the date Kendall adopted "fresh-start" accounting pursuant
to the American Institute of Certified Public Accountants Statement of Position
No. 90-7 ("SOP 90-7"). At that date, Kendall's assets and liabilities were
adjusted to their reorganization or fair market values, and a new reporting
entity was created with no retained earnings or accumulated deficit.
Accordingly, Kendall's results prior to June 30, 1992 have not been combined
with those of Tyco in these financial statements.
Investments--All highly liquid investments purchased with a maturity of
three months or less are considered to be cash equivalents.
Inventories and Contracts--Inventories are recorded at the lower of cost
(first-in, first-out) or market. The non-recurring inventory charge reflected in
the accompanying supplemental consolidated statment of income for the year ended
June 30, 1993 represents the cost of sales impact of the inventory write-up
required by the asset valuation requirements of fresh-start reporting.
Contract sales for installation of fire protection systems are recorded on
the percentage-of-completion method. Profits recognized on contracts in process
are based upon estimated contract revenue and related cost at completion.
Revisions in cost estimates as contracts progress have the effect of increasing
or decreasing profits in the current period. Provisions for anticipated losses
are made in the period in which they first become determinable. Sales of
underwater cable systems are also recorded on the percentage-of-completion
method. Selling, general and administrative expenditures are expensed as
incurred. Accounts receivable include amounts not yet billed because of
retainage provisions for fire protection contracts. Retention balances of $24.8
million at June 30, 1994 which become due upon contract completion and
acceptance are expected to be substantially collected during fiscal 1995.
Property and Equipment--Property and equipment are principally recorded at
cost, except that in accordance with fresh-start reporting, all property, plant
and equipment of Kendall was restated to reflect reorganization value on June
30, 1992, which approximated fair value on a continued use basis. Maintenance
and repair expenditures are charged to expense when incurred. The straight-line
method of depreciation is used over the estimated useful lives of the related
assets, which range from 3 to 45 years.
Goodwill and Other Intangible Assets--Goodwill is being amortized on a
straight-line basis over 40 years. Accumulated amortization amounted to $112.5
million at June 30, 1994 and $88.9 million at June 30, 1993. Impairment of
goodwill, if any, is measured on the basis of whether anticipated undiscounted
operating cash flows generated by the acquired businesses will recover the
recorded
12
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
goodwill balances over the remaining amortization period. At June 30, 1994 and
1993, no impairment of such assets was indicated.
Other intangible assets include patents, trademarks and other intangibles,
which are being amortized on a straight line basis over lives ranging from 2 to
30 years. At June 30, 1994 and 1993, accumulated amortization amounted to $12.7
million and $6.9 million respectively.
Reorganization Value in Excess of Identifiable Assets--The reorganization
value of Kendall was determined based on the purchase price paid for new Kendall
common stock issued as part of Kendall's Restructuring (See Note 1). Based on
the allocation of reorganization value in conformity with procedures specified
by SOP 90-7, the portion of reorganization value which could not be attributed
to specific tangible or identifiable intangible assets has been reported as
reorganization value in excess of identifiable assets. See Note 8.
Reorganization value is being amortized using the straight line method over
20 years. Accumulated amortization amounted to $17.0 million and $9.7 million at
June 30, 1994 and 1993, respectively.
Research and Development--Company funded research and development
expenditures are expensed when incurred.
Translation of Foreign Currency--Assets and liabilities of the Company's
foreign subsidiaries, other than those operating in highly inflationary
environments, are translated into U.S. dollars using year-end exchange rates.
Revenues and expenses of foreign subsidiaries are translated at the average
exchange rates effective during the year. Foreign currency translation gains and
losses are included as a separate component of shareholders' equity. For
subsidiaries operating in highly inflationary environments, inventories and
property, plant and equipment, including related expenses, are translated at the
rate of exchange in effect on the date the assets were acquired, while other
assets and liabilites are translated at year-end exchange rates. Translation
adjustments for these operations are included in net income.
Gains and losses resulting from foreign currency transactions, the amounts
of which are not significant, are included in net income.
Interest Rate Swaps, Currency Options and Other Contracts--The Company
enters into a variety of interest rate swaps, currency options, and other
contracts in its management of interest costs and foreign currency exposures.
The interest rate swaps, which hedge interest rates on certain indebtedness,
involve the exchange of fixed and floating rate interest payment obligations
over the life of the related agreement without the exchange of the notional
payment obligation. The differential to be paid or received is accrued as
interest rates change and recognized over the life of the agreement as an
adjustment to interest expense.
Foreign currency options, acquired for the purpose of hedging foreign
operating income generally for periods not exceeding twelve months, are marked
to market with any realized and unrealized gains or losses reflected in selling,
general and administrative expense. The Company also enters into forward
exchange contracts to hedge certain foreign currency transactions for periods
consistent with the terms of the underlying transactions. The forward exchange
contracts generally have maturities that do not exceed one year. Gains and
losses on contracts qualifying as hedges are deferred and included in the
measurement of the related foreign currency transaction. Losses are not deferred
if it is estimated that deferral would lead to recognizing losses in a later
period. At June 30, 1994, the total amount of foreign currency transactions
covered by hedging contracts was $26.4 million. Such hedging contracts
approximate fair value.
13
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Income Per Share--Net income per share is calculated on the basis of the
weighted average number of shares outstanding plus common equivalent shares
arising from the effect of stock options and warrants using the treasury stock
method.
Accounting Changes--Effective July 1, 1992 Tyco adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") 109 "Accounting for Income
Taxes" and SFAS 106 "Employers' Accounting for Post-Retirement Benefits Other
Than Pensions" (see Notes 8 and 12, respectively, to the consolidated financial
statements.) At July 1, 1992 the cumulative effect of the accounting changes was
to reduce net income by $71.0 million ($.98 per share). Kendall adopted SFAS 109
and SFAS 106 effective with its Restructuring (See Note 1), and accordingly
there is no cumulative effect reflected in the financial statements
Reclassifications--Certain prior year amounts have been reclassified to
conform with current year presentation.
2. THE MERGER
On October 19, 1994, a wholly owned subsidiary of Tyco merged with Kendall.
Shareholders of Kendall received 1.29485 shares of Tyco common stock for each
share of Kendall common stock. The transaction qualifies for pooling of
interests accounting treatment, which is intended to present as a single
interest, common shareholder interests which were previously independent.
Accordingly, the historical financial statements for periods prior to the
consummation of the combination are restated as though the companies had been
combined during such periods. Financial statements for all periods prior to
Kendall's Restructuring (see Note 1) include only Tyco's results of operations
and cash flows.
All fees and expenses related to the merger and to the integration of the
combined companies will be expensed as required under the pooling of interests
accounting method. These expenses have not been reflected in the supplemental
consolidated statement of income, but will be reflected in the consolidated
statement of income of the Company for the quarter ended December 31, 1994. Such
fees and expenses are presently estimated to be $37.2 million ($31.2 million
after-tax). The charge includes $18.6 million for financial advisory, legal,
accounting and other direct transaction fees, $14.9 million for payments under
severance and employment agreements and other costs associated with certain
compensation plans, and $3.7 million for other acquisition related and
integration costs.
3. ACQUISITIONS
During fiscal 1994, the Company acquired a manufacturer of disposable
medical supplies, three manufacturers and distributors of medical electrodes and
related products, the assets of a flexible packaging business, the assets of a
manufacturer of malleable and cast iron fittings, a manufacturer of pipe
fittings products and a distributor and servicer of fire extinguishers and
related products for an aggregate of $72.6 million in cash and a note payable of
$3.6 million. Also during fiscal 1994, the Company sold certain of its European
fire products manufacturing and distribution businesses for cash proceeds of
$18.1 million and notes receivable of $14.8 million. The effect of these
transactions on the Company's financial position and earnings was not
significant.
During fiscal 1993, the Company acquired three flow control companies for an
aggregate of $67.1 million, and five fire protection companies for an aggregate
of $4.9 million. The effect of these acquisitions on the Company's financial
position and earnings was not significant.
14
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. ACQUISITIONS--(CONTINUED)
The acquisitions were accounted for by the purchase method, and the results
of operations have been consolidated with the Company's results from their
respective acquisition dates.
4. RESTRUCTURING AND SEVERANCE CHARGES
During fiscal 1993 and fiscal 1992, the Company recorded restructuring and
severance charges of $39.3 million ($27.3 million after-tax) and $25.6 million
($14.9 million after-tax), respectively. These charges include severance costs,
facilities consolidation costs, writedown of assets to net realizable value, and
professional fees and other costs associated with the restructurings. The fiscal
1993 charges were principally for personnel reductions in the European and
Australian fire protection contracting businesses, as well as severance and
excess facilities costs associated with the reorganization of Grinnell flow
control distribution operations into regional distribution centers in the United
States to reduce inventory levels, lower operating costs and improve customer
service. Fiscal 1993 charges also included a loss provision associated with the
Company's determination to dispose of a U.S. flow control pipe manufacturing
facility and severance and other costs associated with the shutdown of a printed
circuit board facility. The fiscal 1992 charges were principally for costs
associated with the temporary shutdown of a U.S. flow control pipe manufacturing
facility and personnel reductions at a European fire products manufacturing
facility. Fiscal 1992 charges also included personnel reductions in North
American fire protection operations and corporate headquarters and the
reorganization of certain North American Grinnell flow control distribution
operations. At June 30, 1994, $10.3 million of the fiscal 1993 restructuring
charge is accrued. This relates primarily to the reorganization of Grinnell flow
control distribution operations, European facilities rationalization and
remaining severance payments. The Company will complete the reorganization
process in fiscal 1995.
5. INDEBTEDNESS
Long-term debt is as follows:
JUNE 30
----------------------
1994 1993
-------- ----------
(IN THOUSANDS)
----------------------
Credit agreements................................... $ 94,447 $ 181,395
Uncommitted lines of credit......................... 22,000 164,000
Accounts receivable facility........................ -- 83,000
Insurance company notes............................. 135,000 240,000
8.25% subordinated debt due 2003.................... 100,000 100,000
6.375% public debentures due 2004................... 104,644 --
9.5% public debentures due 2022..................... 199,559 199,543
8% public debentures due 2023....................... 49,957 49,955
Other............................................... 46,048 34,293
-------- ----------
Total debt.......................................... 751,655 1,052,186
Less current portion................................ 163,164 239,601
-------- ----------
Long-term debt...................................... $588,491 $ 812,585
-------- ----------
-------- ----------
Under Tyco's credit agreement with a group of commercial banks, Tyco had the
right until July 1997 to borrow $200 million or a portion thereof for its
general corporate purposes. Interest payable on borrowings was variable based
upon Tyco's option of selecting a certificate of deposit rate plus 0.5%, a
Eurodollar rate plus 0.375% or a base rate, as defined. Kendall had a $100
million revolving credit facility which was available through December 1998.
Interest was variable based upon the option of
15
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. INDEBTEDNESS:--(CONTINUED)
selecting LIBOR plus 1.75% or a bank rate, as defined, plus 0.5%. Kendall's
borrowings under the facility were collateralized by substantially all of its
assets. In October 1994, the Company replaced those agreements with a new credit
agreement which gives the Company the right to borrow $300 million or a portion
thereof until October 1999. The principal amount then outstanding will be due
and payable at that time. Interest payable on borrowings is variable based upon
the Company's option of selecting a Eurodollar rate plus 0.325%, a certificate
of deposit rate plus 0.45% or a base rate, as defined.
The Company's uncommitted lines of credit are borrowings from commercial
banks on an "as offered" basis. The borrowings and repayments occur daily and
contain no specific terms other than due dates and interest rates. The due dates
generally range from overnight to 90 days and interest rates approximate those
available under the Company's credit agreement.
The Company had an accounts receivable facility which expired in August
1993. Interest was variable based upon a defined commercial paper market rate
plus a facility fee of 0.5%. The facility was repaid with borrowings from
uncommitted lines of credit.
The insurance company notes consist of $80 million due in January 1995 and
$55 million due in June 1996, and bear interest at rates of 8.98% and 8.90%,
respectively.
In November 1994, the Company issued $145 million principal amount of 8.125%
debentures due 1999. The net proceeds from the sale of the notes were used, in
part, to refinance $100 million principal amount of Kendall's subordinated notes
due 2003. The balance will be used to refinance, in part, the $80 million
insurance company note due January 1995. Pending repayment of these notes, the
proceeds will be used to repay outstanding borrowings under various uncommitted
lines of credit.
In connection with the refinancing of Kendall's notes, unamortized bank fees
and a call premium related to the refinanced debt of approximately $4.5 million
will be reported, net of a $1.8 million tax benefit, as an extraordinary loss
for the Company's quarter ended December 31, 1994.
In January 1994, the Company issued $105 million principal amount of 6.375%
debentures due 2004. The net proceeds of the issuance were used to repay
insurance company notes of $105 million due in January 1994.
In April 1992, the Company issued $200 million principal amount of 9.5%
debentures due 2022. In March 1993, the Company issued $50 million principal
amount of 8% debentures due 2023. The net proceeds of the issuances were used to
refinance existing debt.
At June 30, 1994, the Company had interest rate swap agreements with a
number of financial institutions, having a total notional amount of $355
million, which effectively convert fixed rate debt to variable rate debt. Under
these agreements, the Company will receive payments at an average fixed rate of
6.09% and will make payments based on six month LIBOR which, at June 30, 1994,
was 5.25%. These agreements expire in the amounts of $100 million in each of
April 1995 and April 1997, $55 million in February 1996, $50 million in April
1996 and $50 million in March 1998. The impact of the Company's hedging
activities on its weighted average borrowing rate was a decrease of 1.1%, 0.8%
and an increase of 0.2% for fiscal 1994, 1993 and 1992, respectively. The impact
on reported interest was income of $7.0 million, $6.1 million and expense of
$1.7 million for fiscal 1994, 1993 and 1992, respectively.
16
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. INDEBTEDNESS:--(CONTINUED)
During fiscal 1993, Kendall refinanced certain notes and borrowings
outstanding under its bank facilities. Unamortized bank fees and original issue
discount related to the refinanced debt of approximately $4.6 million were
written off and reported, net of a $1.8 million tax benefit, as an extraordinary
loss.
Under its various loan and credit agreements the Company is required to meet
certain covenants, none of which is considered restrictive to the operations of
the Company.
The aggregate amounts of total debt maturing during the next five fiscal
years are as follows (in thousands):
1995.............................................................. $163,164
1996.............................................................. 87,271
1997.............................................................. 27,352
1998.............................................................. 16,473
1999.............................................................. 636
6. SALE OF ACCOUNTS RECEIVABLE
On November 1, 1993, the Company entered into an agreement pursuant to which
it sold a percentage ownership interest in a defined pool of the Company's trade
receivables. As collections reduce accounts receivable included in the pool, the
Company sells participating interests in new receivables to bring the amount
sold up to the $150 million maximum permitted by the related agreement. Under
terms of the agreement the Company has retained substantially the same risk of
credit loss as if the receivables had not been sold and, accordingly, the full
amount of the allowance for doubtful accounts has been retained. Proceeds of
$150 million from the sale were used to reduce borrowings under uncommitted
lines of credit and are reported as operating cash flows in the Company's
consolidated statement of cash flows and a reduction of receivables in the
Company's consolidated balance sheet. The proceeds of sale are less than the
face amount of accounts receivable sold by an amount which approximates the
purchaser's financing cost of issuing its own commercial paper backed by these
accounts receivable. The discount from the face amount was $4.1 million during
the year ended June 30, 1994, and has been included in selling, general and
administrative expense in the Company's consolidated statement of income. The
Company, as agent for the purchaser, retains collection and administrative
responsibilities for the participating interests of the defined pool.
7. FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash in banks,
temporary investments, accounts receivable and debt. In addition, the Company
has foreign currency options that hedge its exposure on net foreign income, as
well as interest rate swaps that effectively convert fixed rate debt to variable
rate debt. At June 30, 1994 the fair value of interest rate swaps was a $2.1
million liability, and the fair value of long-term debt was approximately $598
million, based on current interest rates. The fair value of financial
instruments in working capital approximated book value.
None of the Company's financial instruments represent a concentration of
credit risk as the Company deals with a variety of major banks worldwide and its
accounts receivable are spread among a number of major industries, customers and
geographic areas. None of the Company's off-balance sheet financial instruments
would result in a significant loss to the Company if the counterparty failed to
perform according to the terms of its agreement.
17
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. FINANCIAL INSTRUMENTS--(CONTINUED)
In May 1993, the Financial Accounting Standards Board issued SFAS 114,
"Accounting by Creditors for Impairment of a Loan." This new standard must be
adopted no later than fiscal 1996. Adoption of this standard is not expected to
have a material effect on the Company's financial position or results of
operations.
8. INCOME TAXES
Provision for federal income taxes and differences between the provision at
the statutory rate and the amounts provided are as follows:
YEAR ENDED JUNE 30
----------------------------------
1994 1993 1992
-------- --------- ---------
(IN THOUSANDS)
Provision at statutory rate............... $114,866 $ 60,961 $ 47,991
State taxes............................... 11,511 5,783 6,377
Depreciation and amortization under
purchase accounting....................... 10,787 11,281 10,879
Foreign earnings taxed at different
rates..................................... 6,723 4,202 1,250
Revision of certain tax estimates......... -- (6,739) (16,904)
Effect of rate changes.................... (3,649) 7,752 --
Completed contract deferred tax
adjustment................................ -- -- (5,133)
Research and Development and Foreign Sales
Corporation benefits...................... (2,710) (500) (500)
Other..................................... 1,471 2,097 1,924
-------- --------- ---------
Provision for income taxes on earnings
before cumulative effect of accounting
changes................................... 138,999 84,837 45,884
Benefit of cumulative effect of accounting
changes................................... -- (12,273) --
-------- --------- ---------
Provision for income taxes................ 138,999 72,564 45,884
Deferred provision........................ (21,113) (7,011) 13,832
-------- --------- ---------
Current provision......................... $117,886 $ 65,553 $ 59,716
-------- --------- ---------
-------- --------- ---------
The provisions for fiscal 1994, 1993 and 1992 include $23.9 million, $14.3
million and $8.3 million, respectively, for foreign income taxes. The foreign
component of income (loss) before income taxes was $35.7 million, $(1.9)
million, and $10.7 million for fiscal 1994, 1993 and 1992, respectively.
Generally, no provision has been made for U.S. or additional foreign income
taxes on the undistributed earnings of foreign subsidiaries as such earnings are
expected to be permanently reinvested. A liability has been recorded for U.S.
taxes attributable to certain undistributed earnings in selected jurisdictions
where repatriation to the U.S. may be desirable. It is not practicable to
estimate the additional taxes related to the permanently reinvested earnings.
During fiscal 1993 and 1992, the Company resolved various tax issues and,
accordingly, revised certain tax estimates which resulted in reductions in tax
expense of $6.7 million and $16.9 million, respectively.
During fiscal 1993, the Company recorded additional nonrecurring tax expense
of $7.8 million due to tax rate decreases in certain foreign jurisdictions. The
expense results principally from reducing the carrying value of deferred tax
assets.
18
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. INCOME TAXES--(CONTINUED)
The completed contract deferred tax adjustment results from the completion
during fiscal 1992 of all contracts on the completed contract method for United
States tax purposes. Accordingly, the provision for fiscal 1992 reflects the
non-recurring reversal of the related deferred taxes originally provided at
higher rates.
Effective July 1, 1992 Tyco adopted the provisions of SFAS 109. At July 1,
1992 the cumulative effect of adopting this standard was to reduce net income by
$16.1 million ($0.22 per share). The impact on fiscal 1993's results was to
reduce net income by $3.5 million ($0.05 per share). Kendall had adopted the
provisions of SFAS 109 effective with its Restructuring (See Note 1) and,
accordingly, there is no cumulative impact reflected in the financial
statements.
The deferred income tax balance sheet accounts result from temporary
differences between the amount of assets and liabilities recognized for
financial reporting and tax purposes. The components of the net deferred income
tax asset at June 30, 1994 and 1993 are as follows:
1994 1993
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Accrued liabilities and reserves.................... $122,382 $125,529
Accrued post-retirement benefit obligation.......... 35,248 34,084
Tax loss carryforwards.............................. 188,142 146,716
Other............................................... 3,142 1,473
Deferred tax liabilities:
Property, plant and equipment....................... (72,954) (80,206)
Contracts........................................... (9,027) (12,207)
Accrued liabilities and reserves.................... (6,793) (10,069)
Accrued interest.................................... -- (10,547)
Other............................................... (7,960) (2,378)
-------- --------
Net deferred income tax asset before valuation
allowance............................................. 252,180 192,395
Valuation allowance................................... (51,350) (37,271)
-------- --------
Net deferred income tax asset......................... $200,830 $155,124
-------- --------
-------- --------
During fiscal 1994, Kendall recorded certain adjustments to its deferred tax
assets for the valuation of underlying tax attributes as of the effective date
of its Restructuring, primarily net operating loss carryforwards. These
adjustments resulted in an increase to the deferred tax asset accounts of
approximately $63.6 million, with a corresponding reduction in reorganization
value in excess of net identifiable assets.
As of June 30, 1994 the Company had approximately $185.9 million of net
operating loss carryforwards in certain foreign jurisdictions. Of these, $165.4
million have no expiration, with the remaining $20.5 million expiring between
fiscal year 1995 and 2002. Domestic operating loss carryforwards at June 30,
1994 were approximately $266.3 and will expire in the years 2003 to 2007. A
valuation allowance has been provided for operating loss carryforwards which are
not expected to be utilized.
Under the previous method of accounting for income taxes, the deferred
income tax provision resulted primarily from timing differences between
financial and income tax reporting. The significant components of the deferred
tax provision in fiscal 1992 were $5.1 million for completed contracts, $8.9
million for revision of tax estimates and $7.9 million for restructuring and
severance charges. No other additional component of the deferred tax provision
was material in fiscal 1992.
19
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. KEY EMPLOYEE LOAN PROGRAMS
Loans are made to employees under the 1981 and 1983 Key Employee Loan
Programs for the payment of taxes upon the vesting of shares granted under the
Company's Restricted Stock Ownership Plans. The loans are unsecured and
principally bear interest, payable annually, at prime rate except for loans
prior to September 1987 under the 1981 Employee Loan Program which bear interest
at 2%. Loans are generally repayable in ten years, except that earlier payments
are required under certain circumstances. Loans under these programs were $6.4
million and $5.7 million at June 30, 1994 and 1993, respectively.
10. CAPITAL STOCK
In July 1994, the Company's Board of Directors authorized the repurchase of
up to 2.9 million of its common shares.
In June 1994, the Company repurchased for $600,000 a warrant which entitled
the holder, Tyco Investments (Australia) Limited, formerly Wormald International
Limited, to purchase five million Tyco shares at a price of $70 per share.
In August 1992, the Company repurchased 520,000 shares of its common stock
at $32.625 per share from its former Chairman of the Board for an aggregate
purchase price of $17.0 million. The total cost of reacquired shares at June 30,
1994 and 1993 was $70.0 million and $70.1 million, respectively.
The Company's 1978 Restricted Stock Ownership Plan (the "1978 Plan")
provided for the award of 2,400,000 shares of common stock to key employees
through November 30, 1988. Under the 1978 Plan, 2,392,000 shares were granted,
net of surrenders. The 1983 Restricted Stock Ownership Plan (the "1983 Plan")
provided for the award of 3,400,000 shares of common stock to key employees
through October 18, 1993. Under the 1983 Plan, 2,918,533 shares were awarded,
net of surrenders. The Company's 1994 Restricted Stock Ownership Plan provides
for the award of 462,542 shares of common stock, all of which were reserved for
issuance as of June 30, 1994. Common stock is awarded subject to certain
restrictions with vesting varying over periods of one to ten years.
The fair market value of the shares at the time of the grant is amortized
(net of tax benefit for the deduction of such value) to expense over the period
of vesting. The unamortized portion of deferred compensation expense is recorded
as a reduction of shareholders' equity. Recipients of the restricted shares have
the right to vote such shares and receive dividends. Income tax benefits
resulting from compensation for the vesting of restricted shares, including a
deduction for the excess, if any, of the fair market value of restricted shares
at the time of vesting over their fair market value at the time of the grant and
from the payment of dividends on unvested shares are credited to capital in
excess of par value.
In connection with the Restructuring, Kendall issued to holders of old
equity securities, warrants to purchase common stock at per share exercise
prices of $15.46 (the "A Warrants") and $20.62 (the "B Warrants" and together
with the A Warrants, the "Warrants). As a result of the Merger, these Warrants
became exercisable for the Company's stock at per share prices of $11.94 and
$15.92, respectively. The Warrants expire on July 7, 1999. During fiscal 1994,
25,336 A Warrants and 26,475 B Warrants were exercised. As of June 30, 1994
1,378,527 A Warrants and 1,414,321 B Warrants were issued and outstanding.
Kendall maintains a number of stock incentive plans under which officers,
directors and key employees have been granted options and other awards to
purchase common stock, generally, at prices
20
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. CAPITAL STOCK--(CONTINUED)
equal to at least 100% of the market price on the date of grant. As a result of
the Merger, these options became exercisable for the Company's stock.
Transactions under these plans during fiscal 1994 and 1993 were as follows:
1994 1993
--------- ---------
Outstanding at beginning of period................... 1,336,933 1,285,139
Awards exercised..................................... (78,986) --
Awards granted....................................... 329,539 51,794
Awards cancelled..................................... (31,076) --
--------- ---------
Outstanding at June 30............................... 1,556,410 1,336,933
--------- ---------
--------- ---------
Exercisable at June 30............................... 252,496 --
--------- ---------
--------- ---------
The exercise prices per share of the Company's common stock for options
outstanding at June 30, 1994 ranged in price from $7.96 to $39.19 per share.
Kendall has a restricted stock grant agreement which provides for the
issuance of up to 1,000,000 shares of common stock to a key executive. As a
result of the Merger, up to 1,294,850 shares of the Company's common stock
became issuable under the agreement. Rights under the grant agreement fully vest
on July 7, 2002, subject to accelerated vesting if Kendall achieves certain
annual financial operating targets, as specified in the grant agreement. As of
June 30, 1994 rights for 1,294,850 shares were outstanding under the grant
agreement. As of December 31, 1994 1,035,880 shares under the grant agreement
had vested. Compensation expense of $1.3 million and $2.1 million was recorded
for the grant during fiscal 1994 and 1993, respectively. Unamortized
compensation expense was $0.7 million at June 30, 1994.
Tyco paid cash dividends of $0.40, $0.38 and $0.36 per share in fiscal 1994,
1993 and 1992, respectively. Kendall did not pay dividends to its shareholders.
11. COMMITMENTS AND CONTINGENCIES
The Company occupies certain facilities under leases which expire at various
dates through the year 2021. Rental expense under these leases and leases for
equipment was $60.4 million, $63.7 million, and $47.6 million for fiscal 1994,
1993 and 1992, respectively. At June 30, 1994 the minimum lease payments under
noncancellable leases were as follows (in thousands):
1995............................................................... $52,300
1996............................................................... 40,299
1997............................................................... 30,931
1998............................................................... 23,780
1999............................................................... 16,643
2000-2021.......................................................... 85,574
In the normal course of business, the Company is liable for contract
completion and product performance. In the opinion of management, such
obligations will not significantly affect the Company's financial position or
results of operations.
The Company is involved in various stages of investigation and cleanup
related to environmental remediation matters. The ultimate cost of site cleanup
is difficult to predict given the uncertainties regarding the extent of the
required cleanup, the interpretation of applicable laws and regulations and
21
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
alternative cleanup methods. Based upon the Company's experience with the
foregoing environmental matters, the Company has concluded that there is at
least a reasonable possibility that remedial costs will be incurred with respect
to these sites in the aggregate amount in a range of $14.0 million to $50.5
million. At June 30, 1994, the Company has concluded that the most probable
amount which will be incurred within this range is $25.5 million, and such
amount is included in the caption accrued expenses in the accompanying
consolidated balance sheet. Based upon information available to the Company, at
those sites where there has been an allocation of the share of cleanup and such
liability could be joint and several, management believes it is probable that
other responsible parties will fully pay the cost apportioned to them, except
with respect to one site for which the Company has assumed that one of the
identified responsible parties will be unable to pay the cost apportioned to it
and that such party's cost will be reapportioned among the remaining responsible
parties. In view of the Company's financial position and reserves for
environmental matters of $25.5 million, the Company has concluded that its
payment of such estimated amounts will not have a material adverse effect on its
financial position or results of operations.
12. RETIREMENT PLANS
The Company has a number of noncontributory defined benefit retirement plans
covering certain of its domestic and foreign employees. The Company's funding
policy is to make annual contributions to the extent such contributions are tax
deductible as actuarially determined. The benefits under the defined benefit
plans are based on years of service and compensation.
The net periodic pension cost for all defined benefit pension plans include
the following components:
YEAR ENDED JUNE 30
----------------------------------
1994 1993 1992
--------- --------- --------
(IN THOUSANDS)
Service cost.............................. $ 12,523 $ 11,451 $ 7,478
Interest.................................. 26,747 26,426 16,437
Actual return on assets................... (7,717) (50,675) (9,358)
Net amortization and deferral............. (19,454) 24,467 (4,990)
--------- --------- --------
Net periodic pension cost................. $ 12,099 $ 11,669 $ 9,567
--------- --------- --------
--------- --------- --------
22
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. RETIREMENT PLANS--(CONTINUED)
Accrued (prepaid) pension cost at June 30, 1994 for defined benefit plans is
as follows:
<TABLE>
<CAPTION>
ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS TOTAL
------------- ------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Actuarial present value of accumulated
benefit obligations:
Vested............................... $ 87,847 $ 223,462 $311,309
Non-vested........................... 4,012 13,039 17,051
------------- ------------- --------
Total.............................. 91,859 236,501 328,360
Effect of future salary increases...... 7,214 11,831 19,045
------------- ------------- --------
Projected benefit obligations.......... 99,073 248,332 347,405
Plan assets at fair value.............. 113,597 185,976 299,573
------------- ------------- --------
Plan assets (in excess of) less than
projected benefit obligations.......... (14,524) 62,356 47,832
Unrecognized transition asset
(liability)............................ 292 (1,096) (804)
Unrecognized prior service cost........ (617) (7,583) (8,200)
Additional minimum liability........... -- 15,545 15,545
Unrecognized net loss.................. (14,953) (17,115) (32,068)
------------- ------------- --------
Accrued (prepaid) pension cost......... $ (29,802) $ 52,107 $ 22,305
------------- ------------- --------
------------- ------------- --------
</TABLE>
Accrued (prepaid) pension cost at June 30, 1993 for defined benefit plans is
as follows:
<TABLE>
<CAPTION>
ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS TOTAL
------------- ------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Actuarial present value of accumulated
benefit obligations:
Vested............................... $ 209,528 $ 101,959 $311,487
Non-vested........................... 7,665 8,021 15,686
------------- ------------- --------
Total.............................. 217,193 109,980 327,173
Effect of future salary increases...... 15,232 4,812 20,044
------------- ------------- --------
Projected benefit obligations.......... 232,425 114,792 347,217
Plan assets at fair value.............. 253,139 61,503 314,642
------------- ------------- --------
Plan assets (in excess of) less than
projected benefit obligations.......... (20,714) 53,289 32,575
Unrecognized transition asset
(liability)............................ 341 (1,209) (868)
Unrecognized prior service cost........ (628) (6,389) (7,017)
Additional minimum liability........... -- 12,400 12,400
Unrecognized net loss.................. (13,603) (6,138) (19,741)
------------- ------------- --------
Accrued (prepaid) pension cost......... $ (34,604) $ 51,953 $ 17,349
------------- ------------- --------
------------- ------------- --------
</TABLE>
The Company has terminated certain defined benefit pension plans and is in
the process of distributing the plans' assets to the participants. Also, in
connection with the sale of the European fire products businesses as described
in Note 3, there was a settlement of a pension plan in Germany. Gains and losses
resulting from the above were not material.
23
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. RETIREMENT PLANS--(CONTINUED)
Of the total plan obligations, 59% relate to domestic plans and 41% relate
to foreign plans. The average discount rate used in determining the actuarial
present value of the projected benefit obligation, weighted in relation to plan
obligations, was 8.5% and 8.2%, respectively, at June 30, 1994 and 1993. The
average rate of increase in future compensation levels was 5.7% at both June 30,
1994 and 1993. The weighted average long-term rate of return on assets was 9.4%
and 10.0%, respectively, at June 30, 1994 and 1993. Plan assets are invested
principally in equity and fixed income instruments.
The Company also has several defined contribution plans. Pension expense for
the defined contribution plans is computed as a percentage of participants'
compensation and was $15.6 million, $14.7 million and $10.9 million for fiscal
1994, 1993 and 1992, respectively. The Company also participates in a number of
multi-employer defined benefit plans on behalf of certain employees. Pension
expense related to multi-employer plans was $6.7 million, $6.9 million, and $6.6
million for fiscal 1994, 1993 and 1992, respectively.
Effective July 1, 1992 the Company adopted the provisions of SFAS 106. SFAS
106 requires the accrual method of accounting for post-retirement health care
and life insurance benefits based on actuarially determined costs. The Company
generally does not provide post-retirement benefits other than pensions for its
employees. Certain of the Company's acquired operations provide these benefits
to employees who were eligible at the date of acquisition. As of July 1, 1992
the Company recognized the full amount of its estimated accumulated
post-retirement benefit obligation. The effect on the date of adoption was to
reduce fiscal 1993 earnings by $54.9 million ($84.5 pre-tax) or $0.76 per share.
The charge has been reflected as a cumulative effect of an accounting change.
Net periodic post-retirement benefit cost for the years ended June 30, 1994
and 1993 reflects the following components:
1994 1993
-------- ------
(IN THOUSANDS)
Cost attributable to service during the period.......... $ 372 $ 389
Interest cost on accumulated post-retirement benefit
obligation.............................................. 5,822 7,635
Net amortization and deferral........................... (1,275) --
-------- ------
Net periodic post-retirement benefit cost............... $ 4,919 $8,024
-------- ------
-------- ------
For measurement purposes, in fiscal 1994 a 12% composite annual rate of
increase in the per capita cost of covered health care benefits was assumed,
which approximates the Company's current experience. The rate was assumed to
decrease gradually to 6% by the year 2008 and remains at that level thereafter.
The health care cost trend rate assumption may have a significant effect on the
amounts reported. To illustrate, increasing the assumed health care cost trend
rates by a percentage point would increase the accumulated post-retirement
benefit obligation as of June 30, 1994 by $6.3 million and the aggregate of the
service and interest cost component of net periodic post-retirement benefit cost
for the year then ended by $0.6 million. The weighted average discount rate used
in determining the accumulated post-retirement benefit obligation was 8.3% at
June 30, 1994 and 7.3% at June 30, 1993.
The incremental cost in fiscal 1993 of accounting for post-retirement health
and life insurance benefits under the new accounting method amounted to $2.3
million pre-tax. Under the previous accounting method, expense for benefits
aggregated $4.3 million pre-tax in fiscal 1992.
24
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. RETIREMENT PLANS--(CONTINUED)
Presented below are the components of the accrued post-retirement benefit
obligation, all of which are unfunded:
JUNE 30
-------------------
1994 1993
------- --------
(IN THOUSANDS)
Accumulated post-retirement benefit obligation:
Retirees............................................. $46,347 $ 82,300
Fully eligible active plan participants.............. 10,986 14,926
Other active plan participants....................... 5,905 7,692
------- --------
63,238 104,918
Unrecognized prior service benefit..................... 25,648 --
Unrecognized net gain (loss)........................... 10,715 (4,719)
------- --------
Accrued post-retirement benefit cost................... $99,601 $100,199
------- --------
------- --------
In fiscal 1994 the Company amended certain of its post-retirement health
care programs, principally to adjust the cost-sharing provisions. The amendment
resulted in a reduction of the Company's accumulated post-retirement benefit
obligation of $27.8 million, which created an unrecognized prior service
benefit. The unrecognized prior service benefit is being amortized over
approximately 16 years.
In November 1992, the Financial Accounting Standards Board issued SFAS 112
"Employers' Accounting for Post-Employment Benefits." The Company is required to
adopt SFAS 112 in fiscal 1995. Adoption of this standard is not expected to have
a material effect on the Company's financial position or results of operations.
25
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. CONSOLIDATED SEGMENT DATA
Selected information by industry segment is presented below.
YEAR ENDED JUNE 30
------------------------------------------
1994 1993 1992
---------- ---------- ----------
(IN THOUSANDS)
Sales:
Fire Protection............. $1,525,906 $1,526,079 $1,615,723
Flow Control Products....... 914,430 806,915 721,338
Electrical and Electronic
Components.................... 436,884 413,300 392,283
Disposable and Specialty
Products...................... 1,199,163 1,173,063 337,141
---------- ---------- ----------
$4,076,383 $3,919,357 $3,066,485
---------- ---------- ----------
---------- ---------- ----------
Income before income taxes,
extraordinary item and
cumulative effect of
accounting changes:
Fire Protection............. $ 70,171 $ 43,190(2) $ 85,189(4)
Flow Control Products....... 74,125 44,638(2) 37,704(4)
Electrical and Electronic
Components.................... 72,510 68,401(2) 54,093
Disposable and Specialty
Products...................... 191,669 126,280(3) 43,432
---------- ---------- ----------
Income from operations........ 408,475 282,509 220,418
Interest expense............ (62,431) (85,785) (63,261)
Corporate and other
amounts....................... (17,854)(1) (17,429)(2) (16,007)(4)
---------- ---------- ----------
$ 328,190 $ 179,295 $ 141,150
---------- ---------- ----------
---------- ---------- ----------
Total assets:
Fire Protection............. $1,135,128 $1,180,123 $1,337,690
Flow Control Products....... 861,362 890,134 749,746
Electrical and Electronic
Components.................... 178,336 192,919 187,048
Disposable and Specialty
Products...................... 886,759 863,197 149,898
Corporate assets, including
cash.......................... 79,236 38,593 27,155
---------- ---------- ----------
$3,140,821 $3,164,966 $2,451,537
---------- ---------- ----------
---------- ---------- ----------
Depreciation and amortization:
Fire Protection............. $ 29,513 $ 30,975 $ 37,612
Flow Control Products....... 39,409 34,225 31,846
Electrical and Electronic
Components.................... 11,313 10,889 11,810
Disposable and Specialty
Products...................... 40,618 48,278 8,990
Corporate................... 4,027 3,982 4,350
---------- ---------- ----------
$ 124,880 $ 128,349 $ 94,608
---------- ---------- ----------
---------- ---------- ----------
26
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. CONSOLIDATED SEGMENT DATA--(CONTINUED)
YEAR ENDED JUNE 30
------------------------------------------
1994 1993 1992
---------- ---------- ----------
(IN THOUSANDS)
Capital expenditures:
Fire Protection............. $ 17,445 $ 24,931 $ 22,582
Flow Control Products....... 33,941 37,667 25,580
Electrical and Electronic
Components.................... 11,728 9,278 13,340
Disposable and Specialty
Products...................... 26,341 22,281 6,112
Corporate................... 347 242 36
---------- ---------- ----------
$ 89,802 $ 94,399 $ 67,650
---------- ---------- ----------
---------- ---------- ----------
- ------------
(1) Fiscal 1994 includes expense of $4.1 million related to the accounts
receivable program, which cost would have been reflected as interest expense
under previous financing arrangements. See Note 6.
(2) Fiscal 1993 includes restructuring and severance charges of $16.0 million,
$19.0 million, $0.7 million, and $3.6 million, for Fire Protection, Flow
Control Products, Electrical and Electronic Components and Corporate,
respectively. See Note 4.
(3) Fiscal 1993 includes a non-recurring inventory charge of $22.5 million
related to the asset valuation requirements of fresh-start reporting. See
Note 1.
(4) Fiscal 1992 includes restructuring and severance charges of $10.0 million,
$13.4 million and $2.2 million for Fire Protection, Flow Control Products
and Corporate, respectively. See Note 4.
27
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. CONSOLIDATED GEOGRAPHIC DATA
Selected information by geographic area for the three years in the period
ended June 30, 1994 are presented below. Fiscal 1993 income from operations
includes restructuring and severance charges of $20.9 million, $8.5 million and
$6.3 million for North America, Europe and Asia-Pacific, respectively. Fiscal
1992 income from operations includes restructuring and severance charges of
$14.4 million and $9.0 million for North America and Europe, respectively.
YEAR ENDED JUNE 30
--------------------------------------
1994 1993 1992
---------- ---------- ----------
(IN THOUSANDS)
Sales:
North America....................... $3,011,678 $2,878,686 $2,102,299
Europe.............................. 705,240 714,536 651,118
Asia-Pacific........................ 359,465 326,135 313,068
---------- ---------- ----------
$4,076,383 $3,919,357 $3,066,485
---------- ---------- ----------
---------- ---------- ----------
Income From Operations:
North America....................... $ 362,764 $ 256,940 $ 173,111
Europe.............................. 34,519 24,620 34,108
Asia-Pacific........................ 11,192 949 13,199
---------- ---------- ----------
$ 408,475 $ 282,509 $ 220,418
---------- ---------- ----------
---------- ---------- ----------
Total Assets:
North America....................... $2,106,391 $2,232,463 $1,591,141
Europe.............................. 684,508 664,859 600,353
Asia-Pacific........................ 270,686 229,051 232,888
Corporate assets, including cash.... 79,236 38,593 27,155
---------- ---------- ----------
$3,140,821 $3,164,966 $2,451,537
---------- ---------- ----------
---------- ---------- ----------
15. SUPPLEMENTARY BALANCE SHEET INFORMATION
JUNE 30
--------------------
1994 1993
-------- --------
(IN THOUSANDS)
Inventories:
Purchased materials and manufactured parts............ $145,965 $128,510
Work in process....................................... 92,786 87,865
Finished goods........................................ 278,317 285,963
-------- --------
$517,068 $502,338
-------- --------
-------- --------
Accrued salaries and vacations........................ $ 57,246 $ 55,328
-------- --------
-------- --------
28
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. SUPPLEMENTARY INCOME STATEMENT INFORMATION
YEAR ENDED JUNE 30
-----------------------------
1994 1993 1992
------- ------- -------
(IN THOUSANDS)
Maintenance and repairs....................... $71,498 $71,388 $52,017
------- ------- -------
------- ------- -------
Research and development...................... $32,170 $30,268 $15,805
------- ------- -------
------- ------- -------
17. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1994
------------------------------------------------
1ST 2ND 3RD 4TH
-------- -------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales..................................... $999,598 $998,073 $1,003,730 $1,074,982
-------- -------- ---------- ----------
-------- -------- ---------- ----------
Gross profit.................................. $259,133 $259,687 $ 260,327 $ 294,042
-------- -------- ---------- ----------
-------- -------- ---------- ----------
Net income.................................... $ 42,068 $ 43,402 $ 49,516 $ 54,205
-------- -------- ---------- ----------
-------- -------- ---------- ----------
Net Income Per Share.......................... $ .57 $ .59 $ .67 $ .73
-------- -------- ---------- ----------
-------- -------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1993
------------------------------------------------
1ST(1) 2ND(1) 3RD(1) 4TH(2)
---------- -------- -------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales..................................... $1,009,195 $958,018 $946,387 $1,005,757
---------- -------- -------- ----------
---------- -------- -------- ----------
Gross profit.................................. $ 257,289 $245,973 $245,050 $ 261,098
---------- -------- -------- ----------
---------- -------- -------- ----------
Income Before Extraordinary Item and
Cumulative Effect of Accounting Changes....... $ 17,308 $ 31,359 $ 36,468 $ 9,323
---------- -------- -------- ----------
---------- -------- -------- ----------
Income Per Share Before Extraordinary Item and
Cumulative Effect of Accounting Changes....... $ .24 $ .43 $ .50 $ .13
---------- -------- -------- ----------
---------- -------- -------- ----------
Net Income Per Share.......................... $ (.75) $ .43 $ .50 $ .09
---------- -------- -------- ----------
---------- -------- -------- ----------
</TABLE>
Income per share amounts are calculated independently for each of the
quarters presented. The sum of the quarters may not equal the full year earnings
per share amounts.
- ------------
(1) During the fourth quarter of fiscal 1993, the Company changed its method of
accounting for income taxes and post-retirement benefits other than
pensions, effective as of July 1, 1992 (the Company's first quarter). The
results presented for the first three quarters of fiscal 1993 have been
restated for the impact of the new accounting methods. The impact on income
per share before extraordinary item and cumulative effect of accounting
changes for the first three quarters was not material.
(2) Included in the fourth quarter of fiscal 1993 are after-tax restructuring
and severance charges of $27.3 million and a special pension charge of $1.2
million.
29
EXHIBIT 99(2)
SCHEDULE VIII
TYCO INTERNATIONAL LTD.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING CHARGED TO BALANCE AT
DESCRIPTION OF YEAR INCOME OTHER DEDUCTIONS END OF YEAR
- ----------------------------------------- ---------- ---------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1992:
Allowances for doubtful accounts......... $ 35,686 $9,722 $1,800 $ 19,064 $28,144
Product warranty......................... 8,014 5,790 1,740 3,779 11,765
Year ended June 30, 1993:
Allowances for doubtful accounts......... 30,591(1) 11,140 (1,744) 11,006 28,981
Product warranty......................... 11,765 4,540 (2,395) 3,442 10,468
Year ended June 30, 1994:
Allowances for doubtful accounts......... 28,981 7,884 (1,163) 6,391 29,311
Product warranty......................... 10,468 1,725 (671) 1,810 9,712
</TABLE>
- ------------
(1) Opening balance has been adjusted to include Kendall.
30
EXHIBIT 99(3)
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
and Shareholders of
TYCO INTERNATIONAL LTD.
Our report on the consolidated supplemental financial statements of Tyco
International Ltd. for the year ended June 30, 1994 is included in this Form
8-K. In connection with our audit of such supplemental financial statements, we
have also audited the related consolidated financial statement schedule for the
year ended June 30, 1994.
In our opinion, the financial statement schedule for the year ended June 30,
1994 referred to above, when considered in relation to the basic supplemental
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.
We have also audited the component of the financial statement schedule of
Kendall International Inc. ("Kendall") for the year ended June 30, 1993. The
contribution of Kendall to total valuation and qualifying accounts is 6 percent
of the 1993 total. The financial statement schedule data of Tyco International
Ltd. included in the June 30, 1993 financial statement schedule was audited and
reported on separately by other auditors. In addition, the financial statement
schedule for the year ended June 30, 1992, which represents 100% of the combined
financial statement schedule for that period, was audited and reported on by
other auditors. We also audited the combination of the accompanying financial
statement schedule for the year ended June 30, 1993 after restatement for the
1994 pooling of interests. In our opinion, such financial statement schedule has
been properly combined on the basis described in Note 1 of notes to the related
supplemental consolidated financial statements.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
December 22, 1994
31
EXHIBIT 99(4)
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of
TYCO INTERNATIONAL LTD.
(formerly Tyco Laboratories, Inc.)
Our audits of the consolidated financial statements referred to in our
report dated August 3, 1993 appearing in Exhibit 99(1) of this Current Report
on Form 8-K also included an audit of the Financial Statement Schedule VIII
prior to the retroactive restatement to account for the pooling of interests
(not presented separately herein.) In our opinion, this Financial Statement
Schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. We have not audited the consolidated financial statements of Tyco
International Ltd. for any period subsequent to June 30, 1993.
PRICE WATERHOUSE LLP
Boston, Massachusetts
August 3, 1993
32
