<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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) March 28, 1997
1-5482
(Commission File Number)
------------------------
TYCO INTERNATIONAL LTD.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MASSACHUSETTS 04-2297459
(State of Incorporation) IRS Employer
Identification Number)
</TABLE>
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 March 17, 1997, Tyco International Ltd. ("Tyco") entered into an Agreement
and Plan of Merger (the "Merger Agreement") by and among ADT Limited, a Bermuda
company restricted by shares ("ADT"), Limited Apache, Inc., a Massachusetts
corporation and wholly-owned subsidiary of ADT ("Merger Sub"), and Tyco,
pursuant to which Merger Sub will be merged (the "Merger") with and into Tyco.
The audited consolidated balance sheets of ADT as of December 31, 1996 and 1995
and the related consolidated statements of income, cash flows and changes in
shareholders' equity for each of the three years in the period ended December
31, 1996 and the unaudited pro forma combined financial information giving
effect to the Merger as of, and for the three year period ending, December 31,
1996 (ADT's fiscal year-end) are attached hereto as Exhibits.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(c) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NUMBER TITLE
- ----------------- -------------------------------------------------------------------------------------------------
<S> <C>
23 Consent of Coopers & Lybrand
99.1 Audited consolidated balance sheets of ADT Limited as of December 31, 1996 and 1995 and the
related consolidated statements of income, cash flows and changes in shareholders' equity for
each of the three years in the period ended December 31, 1996.
99.2 Unaudited pro forma combined financial information giving effect to the Merger as of, and for the
three year period ending, December 31, 1996.
</TABLE>
<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/ Mark. H. Swartz
----------------------------------
Mark H. Swartz
Vice President--Chief Financial
Officer
Date: March 28, 1997
2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER TITLE PAGE
- ----------------- ------------------------------------------------------------------------------------------ ---------
<C> <S> <C>
23 Consent of Coopers & Lybrand
99.1 Audited consolidated balance sheets of ADT Limited as of December 31, 1996 and 1995 and
the related consolidated statements of income, cash flows and changes in shareholders'
equity for each of the three years in the period ended December 31, 1996.
99.2 Unaudited pro forma combined financial information giving effect to the Merger as of, and
for the three year period ending, December 31, 1996.
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Current Report on Form 8-K and to the
incorporation be reference in the Registration Statement on Form S-3 (File No.
333-20741) filed by Tyco International Ltd., of our report dated March 26, 1997,
on our audits of the consolidated financial statements and the consolidated
financial statement schedules of ADT Limited as at December 31, 1996 and 1995,
and for the years ended December 31, 1996, 1995 and 1994, which report is
included in the Annual Report of ADT Limited on Form 10-K.
Coopers & Lybrand
Hamilton, Bermuda
March 28, 1997
<PAGE>
EXHIBIT 99.1
ADT LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Consolidated Financial Statements
Report of Independent Accountants.......................................................................... F-2
Consolidated Statements of Income
for the years ended December 31, 1996, 1995 and 1994..................................................... F-3
Consolidated Balance Sheets at December 31, 1996 and 1995.................................................. F-4
Consolidated Statements of Cash Flows
for the years ended December 31, 1996, 1995 and 1994..................................................... F-5
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994..................................................... F-8
Notes to Consolidated Financial Statements................................................................. F-10
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts............................................................. F-78
</TABLE>
The consolidated financial statements and consolidated financial statement
schedules were approved by the Board of Directors of ADT Limited on March 26,
1997.
F-1
<PAGE>
ADT LIMITED
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of ADT Limited
We have audited the consolidated financial statements and the consolidated
financial statement schedules of ADT Limited listed in the index on page F-1.
These consolidated financial statements and consolidated financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
consolidated financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated 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 ADT
Limited as at December 31, 1996 and 1995, and the consolidated results of its
operations and cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles in
the United States. In addition, in our opinion, the consolidated financial
statement schedules referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information required to be included therein.
As discussed in note 6 to the consolidated financial statements, effective
January 1, 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of".
COOPERS & LYBRAND
Hamilton, Bermuda
March 26, 1997
F-2
<PAGE>
ADT LIMITED
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1996 1995 1994
YEAR ENDED DECEMBER 31 NOTES $M $M $M
<S> <C> <C> <C> <C>
NET SALES.................................................................. 4 1,704.0 1,783.8 1,629.4
Cost of sales.............................................................. (920.0) (990.4) (913.4)
Selling, general and administrative expenses............................... (567.5) (558.4) (505.5)
Restructuring and other non-recurring charges.............................. 5 (237.3) (34.2) (4.5)
Charge for the impairment of long-lived assets............................. 6 (744.7) -- --
--------- --------- ---------
OPERATING (LOSS) INCOME.................................................... 4 (765.5) 200.8 206.0
Interest income............................................................ 27.5 16.2 15.2
Interest expense........................................................... (101.0) (116.3) (99.3)
Gain (loss) on disposal of businesses...................................... 7,34 1.7 (36.6) (0.3)
Other income less expenses................................................. 8 128.8 (5.0) (4.1)
--------- --------- ---------
(LOSS) INCOME BEFORE INCOME TAXES.......................................... (708.5) 59.1 117.5
Income taxes............................................................... 9 21.8 (28.1) (34.9)
--------- --------- ---------
(LOSS) INCOME FROM CONTINUING OPERATIONS................................... (686.7) 31.0 82.6
Loss from discontinued operations.......................................... 10 -- -- (3.3)
--------- --------- ---------
(LOSS) INCOME BEFORE EXTRAORDINARY ITEMS................................... (686.7) 31.0 79.3
Extraordinary items (net of income taxes).................................. 11 (8.4) (9.8) --
--------- --------- ---------
NET (LOSS) INCOME.......................................................... (695.1) 21.2 79.3
Dividends on preference shares............................................. 28 (0.3) (0.3) (13.3)
--------- --------- ---------
NET (LOSS) INCOME AVAILABLE TO COMMON SHAREHOLDERS......................... (695.4) 20.9 66.0
--------- --------- ---------
--------- --------- ---------
PRIMARY AND FULLY DILUTED (LOSS) EARNINGS PER COMMON SHARE................. 12 $ $ $
(Loss) income from continuing operations................................... (5.01) 0.22 0.51
Loss from discontinued operations.......................................... -- -- (0.03)
Extraordinary items........................................................ (0.06) (0.07) --
--------- --------- ---------
NET (LOSS) INCOME PER COMMON SHARE......................................... (5.07) 0.15 0.48
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
ADT LIMITED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995
NOTES $M $M
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ 215.9 350.9
Accounts receivable--net......................................................... 13 210.7 196.4
Inventories...................................................................... 14 39.2 38.0
Prepaid expenses and other current assets........................................ 15 117.0 34.5
--------- ---------
Total current assets............................................................. 582.8 619.8
Property, plant and equipment--net............................................... 16 1,513.6 1,571.3
Goodwill and other intangibles--net.............................................. 17 458.0 1,053.6
Investment in and loans to associate............................................. 18,34 -- 88.8
Long-term investments............................................................ 19 100.6 2.0
Other long-term assets........................................................... 20 75.4 84.2
--------- ---------
Total assets..................................................................... 2,730.4 3,419.7
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt.................................................................. 21 209.2 44.9
Accounts payable................................................................. 138.0 112.0
Other current liabilities........................................................ 22 293.6 227.2
--------- ---------
Total current liabilities........................................................ 640.8 384.1
Long-term debt................................................................... 23 910.1 1,174.8
Deferred revenue................................................................. 24 146.1 137.4
Deferred income taxes............................................................ 25 91.5 142.4
Other long-term liabilities...................................................... 26 182.1 135.2
Minority interests............................................................... 27 -- 15.6
--------- ---------
Total liabilities................................................................ 1,970.6 1,989.5
--------- ---------
Commitments and contingencies.................................................... 32
Convertible redeemable preference shares......................................... 28 -- 4.9
Shareholders' equity:
Common shares.................................................................... 30 14.1 13.9
Additional paid-in capital
Share premium.................................................................. 882.5 858.0
Contributed surplus............................................................ 1,563.1 1,563.1
Treasury shares.................................................................. 31 (79.7) (79.7)
Accumulated deficit.............................................................. (1,598.8) (903.4)
Cumulative currency translation adjustments...................................... (21.4) (26.6)
--------- ---------
Total shareholders' equity....................................................... 759.8 1,425.3
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....................................... 2,730.4 3,419.7
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
ADT LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
$M $M $M
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income..................................................................... (695.1) 21.2 79.3
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Charge for the impairment of long-lived assets........................................ 744.7 -- --
Depreciation.......................................................................... 206.2 209.0 189.0
Goodwill and other intangibles amortization........................................... 18.6 38.9 37.7
Restructuring and other non-recurring charges......................................... 217.4 32.7 4.5
Interest on ITS Vendor Note........................................................... (8.9) -- --
Liquid Yield Option Notes discount amortization....................................... 20.3 9.4 --
Yield maintenance amortization--senior notes--ASH..................................... 1.5 1.1 0.6
Refinancing costs amortization........................................................ 3.7 5.3 5.7
Deferred income taxes................................................................. (39.5) 18.4 24.9
Extraordinary items................................................................... 8.4 9.8 --
Gain on disposal of property, plant and equipment..................................... (2.4) (1.7) (3.1)
(Gain) loss on disposal of businesses................................................. (1.7) 36.6 0.3
(Gain) loss on disposal of investment in associates................................... (1.2) 5.1 (4.2)
Gain arising from the ownership of investments........................................ (53.2) (0.1) (17.3)
Write off in value of associate....................................................... -- -- 30.7
Settlement gain....................................................................... (69.7) -- --
Gain on currency transactions......................................................... (9.7) (0.9) (2.1)
Loss on disposal of discontinued operations........................................... -- -- 3.7
Other................................................................................. 2.0 1.1 (2.6)
Changes in assets and liabilities:
Accounts receivable................................................................... (11.9) (36.3) (14.3)
Inventories........................................................................... (3.3) 0.6 (3.9)
Other assets.......................................................................... (11.7) (5.7) 3.6
Accounts payable...................................................................... 11.3 6.1 16.5
Deferred revenue...................................................................... 4.3 2.7 8.0
Other liabilities..................................................................... (21.4) (16.3) 6.1
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................................. 308.7 337.0 363.1
--------- --------- ---------
Cash flows from investing activities
Purchase of property, plant and equipment............................................. (344.4) (325.8) (282.6)
Disposal of property, plant and equipment............................................. 10.0 8.0 13.5
Acquisition of businesses............................................................. (25.5) (68.3) (14.8)
Purchase of customer contracts........................................................ (34.6) (0.5) (2.3)
Purchase of other investments......................................................... (6.8) (0.4) (6.1)
Disposal of businesses................................................................ 3.0 254.8 10.0
Disposal of discontinued operations................................................... -- -- 4.6
Disposal of investment in and loans to associates..................................... 15.4 7.8 40.2
Disposal of other investments......................................................... 54.1 0.2 72.5
Other................................................................................. 0.4 5.6 (6.6)
--------- --------- ---------
NET CASH UTILIZED BY INVESTING ACTIVITIES............................................. (328.4) (118.6) (171.6)
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
ADT LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBEER 31
1996 1995 1994
$M $M $M
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net receipt (repayments) of short-term debt........................................... 10.9 (103.9) (26.2)
Repayments of long-term debt.......................................................... (209.9) (216.9) (1.3)
Repayment of long-term acquisition debt............................................... -- (39.6) --
Proceeds from long-term debt.......................................................... 86.8 314.0 240.6
Debt refinancing costs................................................................ -- (12.0) (1.0)
Purchase of senior subordinated notes................................................. (24.0) (33.7) --
Proceeds from issue of common shares.................................................. 24.7 7.0 7.3
Redemption of convertible redeemable preference shares................................ (4.9) -- (420.2)
Dividends paid by ADT................................................................. (0.3) (0.3) (18.1)
Dividends paid by ASH................................................................. -- (4.5) (3.3)
Other................................................................................. -- (0.3) (11.7)
--------- --------- ---------
NET CASH UTILIZED BY FINANCING ACTIVITIES............................................. (116.7) (90.2) (233.9)
--------- --------- ---------
EFFECT OF CURRENCY TRANSLATION ON CASH AND CASH EQUIVALENTS........................... 1.4 0.8 2.1
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.................................. (135.0) 129.0 (40.3)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........................................ 350.9 221.9 262.2
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR.............................................. 215.9 350.9 221.9
--------- --------- ---------
--------- --------- ---------
CASH PAYMENTS DURING THE YEAR FOR
Interest.............................................................................. 77.3 103.5 86.0
Income taxes.......................................................................... 8.9 15.0 10.3
NON-CASH INVESTING AND FINANCING ACTIVITIES
Exchange of Liquid Yield Option Notes................................................. 0.4 -- --
Conversion of convertible redeemable preference shares................................ -- 0.1 --
Exchange of non-voting exchangeable shares............................................ -- -- 9.7
IN CONJUNCTION WITH THE ACQUISITION OF BUSINESSES,
NET (ASSETS) LIABILITIES WERE ASSUMED AS FOLLOWS
Goodwill and other intangibles........................................................ 10.3 123.0 12.7
Cash paid (net of cash assumed)....................................................... (25.5) (68.3) (14.8)
--------- --------- ---------
Net (assets) liabilities assumed...................................................... (15.2) 54.7 (2.1)
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
ADT LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
$M $M $M
<S> <C> <C> <C>
IN CONJUNCTION WITH THE DISPOSAL OF BUSINESSES,
NET ASSETS WERE DISPOSED AS FOLLOWS
Cash received (net of cash disposed).................................................. 3.0 254.8 10.0
Notes received........................................................................ -- 87.9 10.5
Ordinary shares received.............................................................. -- 0.9 --
Deferred consideration................................................................ -- 5.6 --
Currency translation adjustments transferred on disposal of businesses................ -- (22.2) --
(Gain) loss on disposal of businesses (including net unamortized goodwill and other
intangibles and cumulative currency translation adjustments)........................ (1.7) 36.6 0.3
--------- --------- ---------
Net assets disposed................................................................... 1.3 363.6 20.8
--------- --------- ---------
--------- --------- ---------
IN CONJUNCTION WITH THE DISPOSAL OF DISCONTINUED OPERATIONS, NET ASSETS WERE DISPOSED
AS FOLLOWS
Cash received (net of cash disposed).................................................. -- -- 4.6
Loss on disposal of discontinued operations (including net unamortized goodwill and
other intangibles).................................................................. -- -- 3.7
--------- --------- ---------
Net assets disposed................................................................... -- -- 8.3
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE>
ADT LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CUMULATIVE
ACCUM- CURRENCY
COMMON SHARE CONTRIBUTED TREASURY ULATED TRANSLATION
SHARES PREMIUM SURPLUS SHARES DEFICIT ADJUSTMENTS
$M $M $M $M $M $M
<S> <C> <C> <C> <C> <C> <C>
At January 1, 1994 -as previously reported... 13.0 710.8 1,442.7 (102.9) (1,060.9) (45.4)
Pooling of interests with ASH (note 3)....... 0.7 133.1 126.5 -- 77.1 (29.9)
--- ----- ----------- ----------- --------- -----
At January 1, 1994 -as restated.............. 13.7 843.9 1,569.2 (102.9) (983.8) (75.3)
Common shares issued......................... 0.1 7.2 -- -- -- --
Exchange of non-voting exchangeable shares... -- -- (8.1) 23.1 -- --
Reversal of redemption premium on convertible
preference shares.......................... -- -- 1.8 -- -- --
Net income................................... -- -- -- -- 79.3 --
Dividends on ADT preference shares........... -- -- -- -- (13.3) --
Dividends on ASH preference shares (i)....... -- -- -- -- (4.3) --
Currency translation adjustments............. -- -- -- -- -- 25.9
--- ----- ----------- ----------- --------- -----
At December 31, 1994......................... 13.8 851.1 1,562.9 (79.8) (922.1) (49.4)
Common shares issued......................... 0.1 6.9 -- -- -- --
Conversion of convertible preference
shares..................................... -- -- 0.3 -- -- --
Exchange of non-voting exchangeable shares... -- -- (0.1) 0.1 -- --
Net income................................... -- -- -- -- 21.2 --
Dividends on ADT preference shares........... -- -- -- -- (0.3) --
Dividends on ASH preference shares (i)....... -- -- -- -- (2.2) --
Currency translation adjustments............. -- -- -- -- -- (0.5)
Currency translation adjustments transferred
on disposal of businesses and associates... -- -- -- -- -- 23.3
--- ----- ----------- ----------- --------- -----
At December 31, 1995......................... 13.9 858.0 1,563.1 (79.7) (903.4) (26.6)
Common shares issued......................... 0.2 24.5 -- -- --
Exchange of Liquid Yield Option Notes........ -- -- 0.3 -- -- --
Net loss..................................... -- -- -- -- (695.1) --
Dividends on ADT preference shares........... -- -- -- -- (0.3) --
Currency translation and other adjustments... -- -- (0.3) -- -- 5.2
--- ----- ----------- ----------- --------- -----
At December 31, 1996......................... 14.1 882.5 1,563.1 (79.7) (1,598.8) (21.4)
--- ----- ----------- ----------- --------- -----
--- ----- ----------- ----------- --------- -----
<CAPTION>
TOTAL
$M
<S> <C>
At January 1, 1994 -as previously reported... 957.3
Pooling of interests with ASH (note 3)....... 307.5
---------
At January 1, 1994 -as restated.............. 1,264.8
Common shares issued......................... 7.3
Exchange of non-voting exchangeable shares... 15.0
Reversal of redemption premium on convertible
preference shares.......................... 1.8
Net income................................... 79.3
Dividends on ADT preference shares........... (13.3)
Dividends on ASH preference shares (i)....... (4.3)
Currency translation adjustments............. 25.9
---------
At December 31, 1994......................... 1,376.5
Common shares issued......................... 7.0
Conversion of convertible preference
shares..................................... 0.3
Exchange of non-voting exchangeable shares... --
Net income................................... 21.2
Dividends on ADT preference shares........... (0.3)
Dividends on ASH preference shares (i)....... (2.2)
Currency translation adjustments............. (0.5)
Currency translation adjustments transferred
on disposal of businesses and associates... 23.3
---------
At December 31, 1995......................... 1,425.3
Common shares issued......................... 24.7
Exchange of Liquid Yield Option Notes........ 0.3
Net loss..................................... (695.1)
Dividends on ADT preference shares........... (0.3)
Currency translation and other adjustments... 4.9
---------
At December 31, 1996......................... 759.8
---------
---------
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
ADT LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)
(i) Prior to the Company's merger with Automated Security (Holdings) PLC ("ASH")
in September 1996 (note 3), ASH had issued and outstanding two classes of
convertible cumulative redeemable preference shares. The dividends on these
preference shares have been charged to the accumulated deficit account during
the relevant periods. Given the terms and conditions of the preference shares
and that the holders of these preference shares received ADT common shares at
the time of the Company's merger with ASH, the dividends have not been included
in the calculation of earnings per common share in any period presented. See
notes to consolidated financial statements.
F-9
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements have been prepared in United States
dollars in accordance with generally accepted accounting principles in the
United States and as described in notes 2 and 3. The preparation of consolidated
financial statements in accordance with generally accepted accounting principles
in the United States requires management to make extensive use of estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. These management estimates include an allowance for
doubtful receivables, estimates of future cash flows associated with assets,
asset impairments, and useful lives for depreciation and amortization, loss
contingencies, income taxes and valuation allowances for deferred tax assets,
and the determination of discount and other rate assumptions for pension and
post-retirement employee benefit expenses. Actual results could differ from
those estimates. Certain figures at December 31, 1995 and for the years ended
December 31, 1995 and 1994 have been reclassified to conform to the 1996
presentation.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements incorporate the financial statements of
ADT Limited ("ADT"), a company incorporated in Bermuda, and its subsidiaries
(the "Company"). ADT is a holding company with no independent business
operations or assets other than its investment in its subsidiaries, intercompany
balances and holdings of cash and cash equivalents. ADT's businesses are
conducted through its subsidiaries. The Company consolidates companies in which
it owns or controls more than fifty per cent of the voting shares unless control
is likely to be temporary. The results of subsidiary companies acquired or
disposed of during the financial year are included in the consolidated financial
statements from the effective date of acquisition or up to the date of disposal
except in the case of pooling of interests (note 3). All significant
intercompany balances and transactions have been eliminated in consolidation.
ASSOCIATES
For investments in which the Company owns or controls more than twenty per cent
of the voting shares, or over which it exerts significant influence over
operating and financial policies, the equity method of accounting is used in the
consolidated financial statements. The investment in associates is shown in the
consolidated balance sheets as the Company's proportion of the underlying net
assets of these companies plus any goodwill attributable to the acquisitions
less any write off required for a permanent diminution in value. The
consolidated statements of income include the Company's share of net income of
associates less applicable goodwill amortization.
CURRENCY TRANSLATION
The results of subsidiaries and associates located outside the United States
which account in a functional currency other than United States dollars are
translated into United States dollars at the average rate of exchange for the
year. The assets and liabilities of subsidiaries and associates located outside
the United States which account in a functional currency other than United
States dollars are translated into United States dollars at the rate ruling at
the balance sheet date. Currency translation adjustments arising from the use of
differing exchange rates from period to period are included as a separate
component in shareholders' equity.
The gains and losses arising from currency transactions are included in the
consolidated statements of income.
F-10
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, demand deposits and highly
liquid instruments, with an original maturity of three months or less. As a
result of the short-term maturity of these financial instruments their carrying
value is approximately equal to their fair market value.
INVENTORIES
Inventories are carried at the lower of cost or net realizable value. Cost
includes an addition for production overheads where appropriate and is
determined on a first-in first-out basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost less accumulated depreciation.
Depreciation is provided to write off the cost of the assets over their
estimated useful lives, using the straight line method, at the following annual
rates:
<TABLE>
<S> <C>
Owned property and related improvements...... 2% to 4%
Leased property and related improvements..... term of lease
Subscriber systems........................... shorter of actual contract duration or 7%,
and 10%
Other plant and equipment.................... 7% to 40%
</TABLE>
Repairs and maintenance costs are expensed as incurred. Gains and losses arising
on the disposal of property, plant and equipment are included in the
consolidated statements of income.
GOODWILL AND OTHER INTANGIBLES
The goodwill that arises where the acquisition cost of subsidiaries and
associates exceeds the fair values attributable to the underlying net assets is
capitalized and is being amortized on a straight line basis over its estimated
useful life, covering periods not exceeding forty years. Goodwill arising on the
acquisition of associates is included in investment in associates. Costs
attributable to the acquisition, including the costs of any reorganization
arrangements, less related income, are treated as reducing the value of the net
assets acquired. The carrying value of goodwill is evaluated periodically in
relation to the operating performance and future undiscounted cash flows of the
underlying businesses. Where, in the opinion of the Company, a permanent
diminution in the value of goodwill has occurred, the amount of the diminution
is included in the consolidated statements of income. Other intangibles
principally comprise customer contracts which are being amortized on a straight
line basis over periods not exceeding ten years.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the expected future tax
consequences of events that have been included in the consolidated financial
statements or tax returns. Deferred tax liabilities and assets are determined
based on the differences between the consolidated financial statements and tax
bases of assets and liabilities, using tax rates in effect for the years in
which the differences are expected to reverse.
F-11
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SHARE PREMIUM AND CONTRIBUTED SURPLUS
In accordance with the Bermuda Companies Act 1981, when ADT issues shares for
cash at a premium to their par value, the resulting premium is credited to a
share premium account, a non-distributable reserve. When ADT issues shares in
exchange for shares of another company, the excess of the fair value of the
shares acquired over the par value of the shares issued by ADT is credited,
where applicable, to contributed surplus which is, subject to certain
conditions, a distributable reserve.
NET SALES
Net sales represent the invoiced value of goods and services to outside
customers net of sales-related taxes.
REVENUE RECOGNITION
Revenue from services or products is recognized in the consolidated statements
of income as services are rendered or deliveries made. Service charges, which
consist of subscriber billings for services not yet rendered, are deferred and
taken into income as earned and the deferred element is all included in long-
term liabilities. Revenue from the installation of electronic security systems
is recognized when installations are completed.
PENSIONS AND POST-RETIREMENT BENEFITS
The Company operates various pension and post-retirement benefit plans designed
in accordance with conditions and practices in the countries concerned.
Contributions or accruals for costs are based on periodic actuarial valuations
and are charged to the consolidated statements of income on a systematic basis
over the expected average remaining service lives of current employees.
NOTE 3--MERGER WITH AUTOMATED SECURITY (HOLDINGS) PLC
In September 1996 ADT merged with and acquired the whole of the issued capital
of ASH, a United Kingdom quoted company. ASH is engaged in the provision of
electronic security services in North America and Europe. Under the terms of the
transaction, ASH shareholders received 3 ADT common shares for every 92 ASH
ordinary shares, 2 ADT common shares for every 31 ASH 5 per cent convertible
cumulative redeemable preference shares and 2 ADT common shares for every 31 ASH
6 per cent convertible cumulative redeemable preference shares. The total
consideration in respect of the whole of the issued capital of ASH consisted of
the issue of 7,034,940 ADT common shares (note 30(i)).
The merger with and acquisition of ASH by ADT has been accounted for by means of
the pooling of interests method of accounting pursuant to Accounting Principles
Board Opinion No. 16. The pooling of interests method of accounting assumes that
the combining companies have been merged since their inception, and the
historical consolidated financial statements for periods prior to consummation
of the merger are restated as though the companies have been combined since
their inception. Accordingly, the consolidated financial statements give effect
to the transaction by means of the pooling of interests and have been restated.
F-12
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--MERGER WITH AUTOMATED SECURITY (HOLDINGS) PLC (CONTINUED)
The consolidated financial statements of ASH have previously been presented in
pounds sterling, ASH's functional currency. For the purposes of these
consolidated financial statements, ASH's consolidated financial statements have
been translated into United States dollars at the appropriate exchange rates. In
addition, ASH's financial year end is November 30, with appropriate quarterly
period ends of February 28, May 31, and August 31. These periods have not yet
been amended in order to facilitate timely reporting. It is these periods which
have been used to give effect to the pooling of interests with ADT. Certain
figures of ASH for all periods presented have been reclassified to conform to
the ADT presentation.
Combined and separate results of ADT and ASH for the periods preceding the
merger were as follows:
<TABLE>
<CAPTION>
ADT GROUP ASH GROUP ADJUSTMENTS COMBINED
$M $M $M $M
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Six months ended June 30, 1996 (unaudited)
Net sales..................................................... 715.6 118.1 -- 833.7
Extraordinary items........................................... (1.2) -- -- (1.2)
Net loss...................................................... (347.7) (328.9) 0.5(i) (676.1)
----------- ----------- ------ -----------
Year ended December 31, 1995
Net sales..................................................... 1,525.4 258.4 -- 1,783.8
Extraordinary items........................................... (9.8) -- -- (9.8)
Net income (loss)............................................. 41.5 (18.7) (1.6)(ii) 21.2
----------- ----------- ------ -----------
Year ended December 31, 1994
Net sales..................................................... 1,375.9 253.5 -- 1,629.4
Net income (loss)............................................. 111.0 (31.7) -- 79.3
----------- ----------- ------ -----------
</TABLE>
- ------------------------
(i) Income tax adjustment arising on preference share dividends accrued
by the ASH group but not payable following merger.
(ii) Income tax adjustment of $0.6 million credit referred to in (i)
above, and a $2.2 million charge relating to cumulative currency translation
adjustments on the disposal of businesses and associates by the ASH group whose
consolidated financial statements were prepared in pounds sterling--its
functional currency.
F-13
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--SEGMENT INFORMATION
The Company is engaged in two service businesses, electronic security services
in North America and Europe and vehicle auction and related services in the
United States. The Company's principal activities in the electronic security
services business are the electronic monitoring and maintenance of its installed
base of security systems and the installation of new, monitored security systems
to add to its installed base. The Company's vehicle auction services business
operates a network of large auction centers which provide a range of vehicle
redistribution services and an organized wholesale marketplace for the sale and
purchase of used vehicles.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
<S> <C> <C> <C>
$M $M $M
NET SALES
Electronic security services (i)................................................... 1,406.2 1,350.9 1,253.3
Vehicle auction services (ii)...................................................... 297.8 432.9 376.1
--------- --------- ---------
1,704.0 1,783.8 1,629.4
--------- --------- ---------
--------- --------- ---------
OPERATING (LOSS) INCOME
Electronic security services (i)................................................... (756.5) 172.4 182.1
Vehicle auction services (ii)...................................................... 27.1 70.2 62.7
Corporate (iii).................................................................... (36.1) (41.8) (38.8)
--------- --------- ---------
(765.5) 200.8 206.0
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(i) In 1996 electronic security services operating income was stated
after a charge of $232.5 million (1995--$21.4 million) relating to restructuring
and other non-recurring items (note 5(i)) and after a charge for the impairment
of long-lived assets of $731.7 million (note 6(i)).
During 1996 the Company disposed of a European electronic security services
business operated by the ASH group. The net gain on disposal of $1.7 million was
included in the gain on disposal of businesses (note 7(iii)).
In November 1995 the Company disposed of its entire European electronic article
surveillance business. The net gain on disposal of $31.4 million was included in
the loss on disposal of businesses (note 7(ii)).
During 1995 the Company disposed of certain of the European electronic security
services operations and businesses operated by the ASH group. The net loss on
disposal of $2.2 million was included in the loss on disposal of businesses
(note 7(iii)).
During 1994 the Company disposed of its entire Australasian electronic security
service businesses, and also disposed of certain of the North American
electronic security services operations of the ADT group and the ASH group. The
net loss on disposal of $0.3 million was included in the loss on disposal of
businesses (note 7(iii)).
F-14
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--SEGMENT INFORMATION (CONTINUED)
The following information represents the amounts included in the electronic
security services business segment information above which related to the
businesses and operations disposed of.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
<S> <C> <C> <C>
$M $M $M
Net sales.................................................................................... 0.7 62.7 97.4
Operating loss............................................................................... (0.9) (5.3) (1.0)
</TABLE>
(ii) In 1996 vehicle auction services operating income was stated after a
charge for the impairment of long-lived assets of $13.0 million (note 6(ii)).
In December 1995 the Company disposed of an interest in its United Kingdom and
Continental European vehicle auction services businesses ("European Auctions")
(notes 18 and 34). The net loss on disposal of $65.8 million was included in the
loss on disposal of businesses (note 7(i)).
The following information represents the amounts included in the vehicle auction
services business segment information above which related to the businesses
disposed of.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
<S> <C> <C> <C>
$M $M $M
Net sales................................................................................. -- 163.1 122.8
Operating income.......................................................................... -- 35.9 29.0
</TABLE>
(iii) Corporate expenses comprise administrative, legal and general
corporate expenses net of other income. In 1996 corporate expenses were stated
after a charge of $4.8 million (1995--$12.8 million; 1994--$4.5 million)
relating to restructuring and other non-recurring items (note 5(ii)).
In 1996 corporate expenses included $11.3 million related to professional and
other transaction costs arising in connection with the merger of ADT and ASH and
the terminated merger with Republic Industries, Inc. ("Republic"), together with
various refinancing costs incurred by the ASH group prior to the merger with ADT
of $1.6 million (1995--$5.0 million).
(iv) The costs incurred in producing and communicating advertising are
generally expensed when incurred. The total amount of advertising expense for
the year included in the consolidated statements of income amounted to $65.7
million (1995--$58.9 million; 1994--$47.1 million).
F-15
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
<S> <C> <C> <C>
$M $M $M
DEPRECIATION AND AMORTIZATION
Electronic security services....................................................... 209.2 221.9 202.5
Vehicle auction services........................................................... 15.0 25.4 23.5
Corporate.......................................................................... 0.6 0.6 0.7
--------- --------- ---------
224.8 247.9 226.7
--------- --------- ---------
--------- --------- ---------
CAPITAL EXPENDITURES
Electronic security services....................................................... 314.2 292.4 259.2
Vehicle auction services........................................................... 25.7 31.8 23.1
Corporate.......................................................................... 4.5 1.6 0.3
--------- --------- ---------
344.4 325.8 282.6
--------- --------- ---------
--------- --------- ---------
IDENTIFIABLE ASSETS
Electronic security services....................................................... 1,898.0 2,514.9 2,337.8
Vehicle auction services........................................................... 465.1 438.1 809.8
Corporate.......................................................................... 367.3 466.7 264.7
--------- --------- ---------
2,730.4 3,419.7 3,412.3
--------- --------- ---------
--------- --------- ---------
NET SALES
North America...................................................................... 1,358.6 1,228.5 1,121.8
Europe............................................................................. 345.4 555.3 490.9
Australasia........................................................................ -- -- 16.7
--------- --------- ---------
1,704.0 1,783.8 1,629.4
--------- --------- ---------
--------- --------- ---------
OPERATING (LOSS) INCOME
North America...................................................................... (483.6) 153.0 156.8
Europe............................................................................. (281.9) 47.8 49.0
Australasia........................................................................ -- -- 0.2
--------- --------- ---------
(765.5) 200.8 206.0
--------- --------- ---------
--------- --------- ---------
IDENTIFIABLE ASSETS
North America...................................................................... 2,300.5 2,563.8 2,295.7
Europe............................................................................. 429.9 855.9 1,116.6
--------- --------- ---------
2,730.4 3,419.7 3,412.3
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-16
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--RESTRUCTURING AND OTHER NON-RECURRING CHARGES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
<S> <C> <C> <C>
$M $M $M
Electronic security services (i).......................................................... (232.5) (21.4) --
Corporate (ii)............................................................................ (4.8) (12.8) (4.5)
--------- --------- ---
(237.3) (34.2) (4.5)
--------- --------- ---
--------- --------- ---
</TABLE>
During 1995 the Company commenced a strategic review of its business operations
and its corporate organizational structure with a view to developing a business
strategy which would place the Company in a stronger position to deal with the
changing business environment and challenges facing its core service businesses
in the late 1990s. During 1996 this strategic review process continued and was
extended to include a significantly expanded agenda.
(i) As part of the strategic review the Company commenced an evaluation
of the administrative, accounting, management information systems and
technological infrastructures of its United States electronic security services
division (the "Re-Engineering Project"). The Re-Engineering Project, which is
on-going, is intended to modify and improve the entire structure of the business
operations. As a consequence of the Re-Engineering Project, and incorporating
the effects of the acquisition of Alert Centre, Inc. ("Alert"), in each of the
fourth quarters of 1996 and 1995 senior executive management approved a
restructuring plan which resulted in a charge for restructuring and other
non-recurring items in the United States electronic security services division
of $131.6 million and $19.4 million, respectively.
The United States electronic security services division restructuring charge in
1996 was principally attributable to planned technological infrastructure
enhancements to facilitate further consolidation of the Company's entire
customer monitoring center network together with all related operations, which
it is expected will be substantially completed by December 1997. The
restructuring charge included the write off of certain property, plant and
equipment of $82.6 million, provision for idle property leases of $18.9 million,
the termination of certain contractual obligations and other settlement costs of
$9.4 million, and other integration and restructuring costs of $20.7 million.
The amounts paid and charged in 1996 against the provisions for the termination
of certain contractual obligations and other settlement costs, and against other
integration and restructuring costs, amounted to $4.8 million and $4.3 million,
respectively.
The United States electronic security services division restructuring charge in
1995 was principally attributable to the closure of the Parsippany, New Jersey
and associated corporate offices, which will be substantially completed by March
1997. Full implementation of the restructuring plan will result in the
termination of approximately 250 employees of which approximately 180 employees
had been terminated by December 31, 1996. Employee severance and other
associated costs included in the restructuring charge amounted to $13.6 million,
the write off of certain property, plant and equipment amounted to $1.9 million,
and other integration and restructuring costs amounted to $3.9 million. The
amounts paid and charged in 1996 against the provisions for employee severance
and other associated costs, and against other integration and restructuring
costs, amounted to $7.1 million and $3.5 million, respectively.
F-17
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--RESTRUCTURING AND OTHER NON-RECURRING CHARGES (CONTINUED)
During the fourth quarter of 1996, the Company commenced a strategic and
detailed review of the electronic security services businesses acquired as part
of the acquisition of ASH in September 1996. In December 1996 senior executive
management approved a restructuring plan which is intended to merge and
integrate fully the ASH group into the ADT group by December 1997, and which
resulted in a charge for restructuring and other non-recurring items in the
United Kingdom and the United States electronic security services divisions of
$68.6 million and $29.2 million, respectively.
The restructuring charge included the write off of certain property, plant and
equipment of $13.2 million, provision for idle property leases of $22.5 million,
the termination of certain contractual obligations and other settlement costs of
$35.2 million, and other integration and restructuring costs of $26.9 million.
The amounts paid and charged in 1996 against the provisions for the termination
of certain contractual obligations and other settlement costs, and against other
integration and restructuring costs, amounted to $7.2 million and $1.0 million,
respectively.
As part of the strategic review, in 1996 the Company also commenced an
evaluation of the customer monitoring center network in its Canadian electronic
security services division which resulted in a charge for restructuring and
other non-recurring items of $3.1 million. The restructuring charge included the
write off of certain property, plant and equipment of $1.3 million and provision
for idle property leases of $1.8 million, of which $0.2 million was paid and
charged in 1996.
As part of the strategic review, in 1995 the Company also commenced an
evaluation of the management information systems of its United Kingdom
electronic security services division which resulted in a charge for
restructuring and other non-recurring items in 1995 of $2.0 million principally
relating to the write off of certain property, plant and equipment.
(ii) The effects of the Re-Engineering Project and the merger of the ASH
group into the ADT group resulted in a charge for restructuring and other
non-recurring items at the corporate level in 1996 of $4.8 million, comprising
other integration and restructuring costs, of which $3.0 million was paid and
charged in 1996.
During 1995 the Company also evaluated its group corporate structure, in
particular in the United Kingdom. As a result, in the fourth quarter of 1995,
senior executive management approved a restructuring plan, which was
substantially completed by December 1996, which resulted in a charge for
restructuring and other non-recurring items at the corporate level of $12.8
million.
The corporate restructuring charge included the provision for idle property
leases of $5.6 million, the termination of certain contractual obligations and
other settlement costs of $4.8 million, and employee severance for four
executives, all of whom were terminated during 1996, and other associated costs,
of $2.4 million. The amounts paid and charged in 1996 against the provisions in
the aforementioned categories were $0.6 million, $4.8 million and $1.8 million,
respectively.
The corporate restructuring charge in 1994 of $4.5 million was principally
attributable to the Company's corporate administration in the United Kingdom and
related to a provision for idle property leases.
F-18
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--CHARGE FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
<S> <C> <C> <C>
$M $M $M
Electronic security services (i)..................................................... (731.7) -- --
Vehicle auction services (ii)........................................................ (13.0) -- --
--------- --------- ---------
(744.7) -- --
--------- --------- ---------
--------- --------- ---------
</TABLE>
Effective January 1, 1996, the Company was required to adopt Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121").
SFAS 121 prescribes a methodology for assessing and measuring an impairment loss
that is significantly different from previous guidelines and procedures.
SFAS 121 requires the recoverability of the carrying value of long-lived assets,
primarily property, plant and equipment, and related goodwill, and other
intangible assets, to be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. Under SFAS 121 it is necessary to evaluate for and calculate an
impairment loss at the lowest level of asset grouping for which there are
identifiable cash flows. Under SFAS 121, if an asset being tested for
recoverability was acquired in a business combination accounted for using the
purchase method, the goodwill that arose in the transaction is included in the
impairment evaluation of that asset.
SFAS 121 requires that an impairment loss is recognized when the carrying amount
of an asset exceeds the sum of the estimated undiscounted future cash flows of
the asset. Under SFAS 121 an impairment loss is calculated as the difference
between the carrying amount of the asset, including the related goodwill, and
its estimated fair value. The carrying amount of the related goodwill is
eliminated before making any reduction in the carrying amount of any other
impaired long-lived asset.
Prior to the adoption of SFAS 121, the Company's policy was to evaluate for
impairment of long-lived assets, including goodwill, on an aggregate basis for
each business segment. Management has determined that within the electronic
security services division the lowest level of asset grouping referred to above
can be determined on a country by country basis and, with effect from the first
quarter of 1996, further split principally in terms of commercial and
residential sectors. The assets principally comprise subscriber systems
installed at customers' premises, which are included in property, plant and
equipment, and the related goodwill, and other intangible assets. Within the
vehicle auction services division the lowest level of asset grouping can be
determined principally on an individual auction center basis, and the assets
principally comprise land and real estate, which are included in property, plant
and equipment, and the related goodwill. Management has estimated the fair
values referred to above by using an analysis of estimated discounted future
cash flows as the best available estimate of fair value. The basis of the
calculation was the Company's business strategy, plans and financial
projections, and an appropriate discount factor based on the Company's estimated
cost of capital.
F-19
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--CHARGE FOR THE IMPAIRMENT OF LONG-LIVED ASSETS (CONTINUED)
Following the adoption of SFAS 121, in particular the change in methodology
requiring the Company to evaluate assets at the lowest level of asset grouping,
rather than on an aggregate basis, in the first quarter of 1996 the Company
recorded an aggregate non-cash charge for the impairment of long-lived assets of
$744.7 million, as a separate line item in the consolidated statements of
income, with a consequential tax credit of $10.8 million. The $744.7 million
impairment charge comprised $731.7 million relating to the electronic security
services division and $13.0 million relating to the vehicle auction services
division.
(i) The $731.7 million impairment charge in the electronic security
services division comprised $397.1 million related to the ADT group and $334.6
million related to the ASH group.
The $397.1 million impairment charge in the electronic security services
division of the ADT group related to an impairment in the carrying value of
subscriber systems principally in the commercial sector, including related
goodwill which principally arose on the acquisition of ADT Security Services in
1987 of $395.3 million and other assets of $1.8 million. Since 1989 the
Company's electronic security services operations in the residential sector have
developed at a very rapid rate based principally on internally generated growth.
As a consequence, the Company's operations in the commercial sector, which were
acquired principally in 1987, have now been complemented by a significant
residential electronic security services operation. This was a major factor in
the Company's decision to commence the Re-Engineering Project in 1995, which is
on-going. In the context of the Re-Engineering Project and changes in the
electronic security services business environment, the electronic security
services operations have now been reorganized along separate commercial and
residential business lines, rather than on an aggregate geographic basis, with
effect from the first quarter of 1996, and which is fully supported by
management and financial reporting systems that now record the results and cash
flows of each sector separately. When the financial projections and estimated
future cash flows of the commercial sector were analyzed separately, they
indicated that the carrying amount of the related assets may not be fully
recoverable. This is reflective of increased competition and other pricing
factors as well as changes in the business environment. Accordingly, upon
adoption of SFAS 121 the Company evaluated the commercial sector assets for
impairment with a resultant charge being recorded. In the United States the
impairment charge amounted to $303.4 million. In Canada, where the business
performance has continued to be disappointing, the impairment charge amounted to
$56.7 million. In Europe, the impairment charge amounted to $37.0 million,
principally due to the business performance of certain countries not meeting
previous expectations.
The $334.6 million impairment charge in the electronic security services
division of the ASH group related to an impairment in the carrying value of
subscriber systems of $121.0 million, and the carrying value of related goodwill
and other intangibles of $213.6 million which principally arose on the
acquisition of certain of the businesses of Modern Security Systems in 1989 and
1990, API Security in 1989 and the Sonitrol Group in 1992. The impairment charge
amounted to $211.2 million and $123.4 million in the United Kingdom and the
United States, respectively. In both the United Kingdom and the United States,
the adoption of SFAS 121 coincided with a reorganization of both the commercial
and residential business sectors to address, in part, changes in the electronic
security services business environment and performance similar to those being
addressed by the ADT group. In addition, the aggregate fair value of ADT common
shares issued to ASH shareholders on merger was significantly less than ASH's
consolidated net asset value. It was for all these reasons that the Company
reviewed the assets for impairment upon adoption of SFAS 121.
(ii) The $13.0 million impairment charge in the vehicle auction services
division related to an impairment in the carrying value of property and related
improvements, including related goodwill which principally arose on the
acquisition of ADT Automotive in 1987.
F-20
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--GAIN (LOSS) ON DISPOSAL OF BUSINESSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
<S> <C> <C> <C>
$M $M $M
United Kingdom and Continental European vehicle auction services businesses (i)............. -- (65.8) --
European electronic article surveillance business (ii)...................................... -- 31.4 --
Other (iii)................................................................................. 1.7 (2.2) (0.3)
-- ------- ----
1.7 (36.6) (0.3)
-- ------- ----
-- ------- ----
</TABLE>
(i) In December 1995 the Company disposed of an interest in European
Auctions (note 34) for an aggregate consideration of $334.9 million (note 18).
The net loss on disposal of $65.8 million included $136.5 million relating to
the write off of net unamortized goodwill and other intangibles (note 17(ii))
and a $23.2 million charge related to cumulative currency translation
adjustments.
(ii) In November 1995 the Company disposed of its entire European
electronic article surveillance business for an aggregate consideration of $54.0
million, comprising cash of $48.6 million and deferred consideration of $5.4
million. The net gain on disposal of $31.4 million included a $2.1 million gain
relating to cumulative currency translation adjustments.
(iii) During 1996 the Company disposed of a European electronic security
services business operated by the ASH group for an aggregate cash consideration
of $3.0 million. The net gain on disposal amounted to $1.7 million.
During 1995 the Company disposed of certain of the European electronic security
services operations and businesses operated by the ASH group for an aggregate
consideration of $6.1 million, comprising cash of $5.9 million and deferred
consideration of $0.2 million. The net loss on disposal of $2.2 million included
$2.8 million relating to the write off of net unamortized goodwill and other
intangibles (note 17(ii)) and a $1.1 million charge relating to cumulative
currency translation adjustments.
During 1994 the Company disposed of its entire Australasian electronic security
services businesses, and also disposed of certain of the North American
electronic security services operations of the ADT group and the ASH group. The
aggregate consideration on these disposals amounted to $21.6 million, comprising
cash of $11.1 million and notes receivable of $10.5 million, and the net loss on
disposal of $0.3 million included $10.7 million relating to the write off of net
unamortized goodwill and other intangibles.
F-21
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--OTHER INCOME LESS EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
<S> <C> <C> <C>
$M $M $M
Gains and losses arising from the ownership of:
Short-term investments................................................................. -- -- 3.0
Long-term investments (i).............................................................. 54.4 (5.0) 18.5
Write off in value of associate (ii)................................................... -- -- (30.7)
Settlement gain (iii).................................................................. 65.0 -- --
Gains and losses on currency transactions.............................................. 9.7 0.9 2.1
Other income less expenses--net........................................................ (0.3) (0.9) 3.0
--------- --- ---------
128.8 (5.0) (4.1)
--------- --- ---------
--------- --- ---------
</TABLE>
(i) Realized gains and losses arising from the ownership of short-term
and long-term investments are principally stated before carrying costs of
interest, administrative and other expenses. During 1996 gains arising from the
ownership of long-term investments comprised a net gain of $53.4 million
relating to the disposal in November 1996 of the Company's entire investment in
Limelight Group plc, a United Kingdom quoted company, which was previously
valued and accounted for by the Company at a nominal amount, a net gain of $1.2
million relating to the disposal of the Company's equity investment in
Integrated Transport Systems Limited (notes 18 and 34) and other net losses of
$0.2 million principally arising from the disposal of other non-core
investments.
During 1995 losses arising from the ownership of long-term investments comprised
$5.1 million relating to the disposal, principally during the second quarter of
1995, of the Company's entire equity investments in Compagnie Generale de
Protection et Securite SA ("CGPS") and Microtech Security (UK) Limited
("Microtech") which were held by the ASH group (note 18), and other net gains of
$0.1 million principally arising from the disposal of other non-core
investments. The net loss on disposal of $5.0 million included $7.3 million
relating to the write off of net unamortized goodwill and other intangibles and
a $1.1 million charge relating to cumulative currency translation adjustments.
During 1994 gains arising from the ownership of long-term investments comprised
$4.2 million relating to the disposal of the Company's entire equity investment
in Nu-Swift plc, a United Kingdom quoted company, and other net gains of $14.3
million principally arising from the disposal of other non-core investments.
(ii) The write off in value of associate in 1994 related to the Company's
entire equity investment in Arius, Inc. ("Arius"), a United States unquoted
company, which was held by the ASH group. A detailed assessment of the
investment in Arius was carried out during 1994 and as a result a net write off
of $30.7 million was recorded, of which $26.5 million related to the write off
of net unamortized goodwill and other intangibles and $2.9 million related to
other provisions. During 1995 Arius went into voluntary liquidation.
F-22
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--OTHER INCOME LESS EXPENSES (CONTINUED)
(iii) During 1991 a lengthy review and evaluation of the businesses and
assets acquired in 1990 in respect of Britannia Security Group PLC ("Britannia")
was undertaken by the Company. This review revealed that, at the time of the
acquisition of Britannia by ADT certain assets, particularly subscriber systems
installed at customer premises, had been included in the consolidated financial
statements of Britannia at values materially in excess of their net realizable
value. During 1992 ADT commenced legal proceedings against Britannia's auditors
at the time of acquisition, BDO Binder Hamlyn ("BDO"), to seek recovery of the
damages suffered. In December 1995 the High Court of Justice in England awarded
damages of approximately $160 million (including interest) against BDO, plus the
reimbursement of certain legal costs incurred in connection with the litigation.
BDO then appealed against the judgment. At December 31, 1995 ADT did not
recognize the award of any damages in its consolidated statements of income and
had deferred certain legal costs incurred in connection with the litigation
amounting to $11.1 million in order to match these costs with the award when
recognized. These deferred costs were included in other long-term assets (note
20).
In December 1996 ADT and BDO entered into a settlement agreement, subject to
completion of certain additional documentation which was signed in February
1997, which included the payment to ADT of $77.5 million in cash (included in
other current assets (note 15)) together with a further deferred payment of $8.6
million, in full and final settlement of the aforementioned proceedings,
including the judgment, accrued interest and costs. As a result of the
settlement BDO have withdrawn their appeal. The net gain arising on this
settlement amounted to $69.7 million, of which $65.0 million was included in
other income less expenses and $4.7 million was included in interest income.
NOTE 9--INCOME TAXES
(i) The provision for income taxes in the consolidated statements of
income was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
<S> <C> <C> <C>
$M $M $M
Current income taxes: US.................................................................. (6.5) (3.1) (4.6)
Non US.................................................................................... (11.2) (6.6) (5.4)
--------- --------- ---------
(17.7) (9.7) (10.0)
--------- --------- ---------
Deferred income taxes: (note 25)
US (principally federal income taxes)..................................................... 20.9 (18.0) (22.6)
Non US.................................................................................... 18.6 (0.4) (2.3)
--------- --------- ---------
39.5 (18.4) (24.9)
--------- --------- ---------
21.8 (28.1) (34.9)
--------- --------- ---------
--------- --------- ---------
</TABLE>
US current income taxes in 1996 comprise federal and state income taxes, and in
1995 and 1994 principally comprise state income taxes.
F-23
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--INCOME TAXES (CONTINUED)
(ii) (Loss) income before income taxes included the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
<S> <C> <C> <C>
$M $M $M
US (loss) income......................................................................... (485.6) 59.5 53.8
Non US (loss) income..................................................................... (222.9) (0.4) 63.7
--------- --- ---------
(Loss) income before income taxes........................................................ (708.5) 59.1 117.5
--------- --- ---------
--------- --- ---------
</TABLE>
(iii) The reconciliation between notional US federal income taxes at the
statutory rate on consolidated (loss) income before income taxes and the
Company's income tax provision was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
<S> <C> <C> <C>
$M $M $M
Notional US federal income taxes at the statutory rate.................................. 248.0 (20.7) (41.1)
Adjustments to reconcile to the Company's income tax provision:
US state income tax provisions, net..................................................... (3.1) (2.7) (3.2)
Non US net (losses) earnings............................................................ (70.6) (7.1) 14.6
SFAS 121 impairment..................................................................... (150.2) -- --
Utilization and/or recognition of tax loss carryforwards and other items................ (2.3) 2.4 (5.2)
--------- --------- ---------
Income tax provision.................................................................... 21.8 (28.1) (34.9)
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 10--LOSS FROM DISCONTINUED OPERATIONS
During 1994 the Company disposed of all its remaining non-core businesses,
principally the Insight Travel Group. The Company no longer has any interests in
non-core businesses. The aggregate cash consideration on these disposals
amounted to $11.2 million and the net loss amounted to $3.7 million, which
included $19.1 million relating to the write off of net unamortized goodwill and
other intangibles. The net income from operations for 1994 amounted to $0.4
million on net sales of $80.6 million.
NOTE 11--EXTRAORDINARY ITEMS
During 1996 and 1995 the Company reacquired in the market certain of its senior
subordinated notes (note 23(ii)), which was financed from cash on hand.
Extraordinary items included the loss arising on reacquisition of $0.9 million
(1995--$0.9 million) and the write off of net unamortized deferred refinancing
costs of $0.5 million (1995 - $0.8 million) relating to the early extinguishment
of certain amounts outstanding under the senior subordinated notes, and were
stated net of applicable income taxes of $0.2 million (1995--$0.2 million).
F-24
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--EXTRAORDINARY ITEMS (CONTINUED)
In September 1996 the Company repaid in full all amounts owed by the ASH group
under its senior notes and bank credit agreement (note 23(vi)), which were
subsequently cancelled, and which was financed from cash on hand and loans drawn
under the revolving bank credit agreement. Extraordinary items included the loss
arising on repayment of $4.2 million and the write off of net unamortized
deferred refinancing costs of $0.4 million relating to the early extinguishment
of all amounts outstanding under the senior notes and bank credit agreement owed
by the ASH group, with no consequential tax effect.
In December 1996 the Company gave notice to all convertible capital bond holders
that all of the outstanding capital bonds owed by the ASH group would be fully
redeemed by the Company, and subsequently cancelled (note 23(v)), and which was
financed from cash on hand and amounts drawn down under the sterling denominated
bank credit facility (note 23(vii)). Extraordinary items included the write off
of net unamortized deferred refinancing costs of $1.6 million relating to the
early extinguishment of all amounts outstanding under the convertible capital
bonds owed by the ASH group, with no consequential tax effect.
In December 1996 the Company entered into a new bank credit agreement, subject
to completion of certain additional documentation which was signed in January
1997, which replaced in full its previous bank credit agreement and which was
subsequently cancelled (note 23(iv)). Extraordinary items included the write off
of net unamortized deferred refinancing costs of $1.5 million relating to the
early extinguishment of all amounts outstanding under the bank credit agreement
owed by the ADT group, and were stated net of applicable income taxes of $0.5
million.
In July 1995 the Company repaid in full all amounts owed by the ADT group under
its previous bank credit agreement, which was subsequently cancelled. The
Company funded the repayment from the net proceeds of the issue of its Liquid
Yield Option Notes (note 23(iii)). Extraordinary items included the write off of
net unamortized deferred refinancing costs of $12.8 million relating to the
early extinguishment of all amounts outstanding under the previous bank credit
agreement owed by the ADT group, and were stated net of applicable income taxes
of $4.5 million.
NOTE 12--(LOSS) EARNINGS PER COMMON SHARE
The calculation of primary (loss) earnings per common share was based on the
weighted average of 137,114,415 (1995--138,283,458; 1994 -136,148,361) common
shares in issue during the year which in 1996 did not allow for the allotment of
common shares under executive share option schemes, which are considered common
stock equivalents, because their effect was anti-dilutive as a consequence of
the net loss for the year. Common stock equivalents included in the weighted
average number of common shares in issue during 1995 and 1994 were 2,921,286 and
2,503,059, respectively. Primary (loss) earnings per common share from
continuing operations was based on adjusted net loss from continuing operations
available to common shareholders of $687.0 million (1995 - $30.7 million net
income; 1994--$69.3 million net income).
F-25
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--ACCOUNTS RECEIVABLE--NET
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995
<S> <C> <C>
$M $M
Trade accounts receivable........................................................................ 229.2 213.4
Less: allowance for doubtful receivables......................................................... (18.5) (17.0)
--------- ---------
210.7 196.4
--------- ---------
--------- ---------
</TABLE>
NOTE 14--INVENTORIES
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995
<S> <C> <C>
$M $M
Raw materials and consumables................................................................. 8.6 8.8
Work in process............................................................................... 18.9 14.1
Finished goods................................................................................ 11.7 15.1
--- ---
39.2 38.0
--- ---
--- ---
</TABLE>
NOTE 15--PREPAID EXPENSES AND OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995
<S> <C> <C>
$M $M
Prepaid expenses............................................................................ 10.9 11.6
Other current assets........................................................................ 106.1 22.9
--------- ---
117.0 34.5
--------- ---
--------- ---
</TABLE>
At December 31, 1996 other current assets included $77.5 million of settlement
gain proceeds (note 8(iii)).
F-26
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--PROPERTY, PLANT AND EQUIPMENT--NET
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995
<S> <C> <C>
$M $M
Cost:
Property and related improvements............................................................ 290.7 271.6
Subscriber systems........................................................................... 1,977.5 1,874.0
Other plant and equipment.................................................................... 214.8 199.0
--------- ---------
Total cost................................................................................... 2,483.0 2,344.6
--------- ---------
Accumulated depreciation:
Property and related improvements............................................................ 56.0 41.5
Subscriber systems........................................................................... 762.0 614.2
Other plant and equipment.................................................................... 151.4 117.6
--------- ---------
Total accumulated depreciation............................................................... 969.4 773.3
--------- ---------
Net book values.............................................................................. 1,513.6 1,571.3
--------- ---------
--------- ---------
</TABLE>
NOTE 17--GOODWILL AND OTHER INTANGIBLES--NET
<TABLE>
<CAPTION>
1996 1995
$M $M
<S> <C> <C>
Cost:
At January 1................................................................................. 1,290.6 1,345.2
SFAS 121 impairment (note 6)................................................................. (825.6) --
Acquisitions (i)............................................................................. 44.9 123.0
Disposals (ii)............................................................................... -- (174.1)
Currency translation adjustments............................................................. -- (3.5)
--------- ---------
At December 31............................................................................... 509.9 1,290.6
--------- ---------
Accumulated amortization:
At January 1................................................................................. 237.0 233.7
SFAS 121 impairment (note 6)................................................................. (203.7) --
Charge for the year.......................................................................... 18.6 38.9
Disposals (ii)............................................................................... -- (34.8)
Currency translation adjustments............................................................. -- (0.8)
--------- ---------
At December 31............................................................................... 51.9 237.0
--------- ---------
Net book values:
At December 31............................................................................... 458.0 1,053.6
--------- ---------
--------- ---------
</TABLE>
(i) In February 1996 the Company acquired the remaining 24.0 per cent of
the outstanding voting share capital of Alert, an electronic security services
company in the United States, not already owned by the Company, for an aggregate
cash consideration of $25.5 million, which was financed from cash on hand. The
amount of goodwill arising from this acquisition was $10.3 million. During 1996
the Company purchased other intangibles, principally customer contracts, in
North America and Europe for an aggregate cash consideration of $34.6 million
which was financed from cash on hand.
F-27
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--GOODWILL AND OTHER INTANGIBLES--NET (CONTINUED)
In December 1995 the Company acquired 76.0 per cent of the outstanding voting
share capital of Alert, for an aggregate cash consideration of $69.0 million,
which was financed from cash on hand. The amount of goodwill and other
intangibles arising from this acquisition was $80.1 million and $40.0 million,
respectively. In January 1995 the Company acquired a vehicle auction services
business in Belgium for an aggregate cash consideration of $4.2 million, which
was disposed of in December 1995 as part of the disposal by the Company of an
interest in European Auctions (note 17(ii)). During 1995 the Company also
acquired several small electronic security services businesses in the United
States and Europe for an aggregate cash consideration of $1.0 million.
These acquisitions have been accounted for using the purchase method.
Accordingly, the respective purchase prices have been allocated to assets
acquired and liabilities assumed based on their preliminary estimated fair
values. These allocations resulted in goodwill and other intangibles of $44.9
million arising during the year (1995--$123.0 million).
(ii) In December 1995 the Company disposed of an interest in European
auctions (notes 18 and 34). Net unamortized goodwill and other intangibles on
disposal of $136.5 million was included in the loss on disposal of businesses
(note 7(i)). During 1995 the Company disposed of certain of the European
electronic security services operations and businesses operated by the ASH
group. The net unamortized goodwill and other intangibles on disposal of $2.8
million was included in the gain on disposal of businesses (note 7(iii)).
(iii) The accumulated cost, accumulated amortization and net book values
of the goodwill balance included within goodwill and other intangibles at
December 31, 1996 amounted to $421.0 million, $43.0 million and $378.0 million,
respectively (1995--$1,120.1 million, $206.9 million and $913.2 million,
respectively).
NOTE 18--INVESTMENT IN AND LOANS TO ASSOCIATE
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995
<S> <C> <C>
$M $M
Vendor Note......................................................................................... -- 83.9
Shareholder Loan Notes.............................................................................. -- 13.9
--- ---
-- 97.8
--- ---
Less: unamortized discount.......................................................................... -- (9.9)
--- ---
-- 87.9
--- ---
Investment in ordinary share capital................................................................ -- 0.9
--- ---
-- 88.8
--- ---
--- ---
</TABLE>
In December 1995 the Company disposed of an interest in European Auctions to
Integrated Transport Systems Limited ("ITS") (note 34) for an aggregate
consideration of $334.9 million.
F-28
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18--INVESTMENT IN AND LOANS TO ASSOCIATE (CONTINUED)
The aggregate consideration received by the Company on closing was comprised of
cash of $235.1 million, $187.6 million aggregate principal amount at maturity of
a subordinated deep discount zero coupon loan note issued by ITS maturing in
March 2004 ("Vendor Note"), $31.1 million aggregate principal amount at maturity
of subordinated deep discount zero coupon loan notes issued by ITS maturing in
March 2004 ("Shareholder Loan Notes"), and a 43.1 per cent interest in the
ordinary share capital of ITS at an issue price of $2.0 million.
The Vendor Note is a sterling loan note with an issue price of $83.9 million,
reflecting a yield to maturity of 10.0 per cent per annum, and was valued by the
Company at $74.6 million. There are no periodic payments of interest. The Vendor
Note is a subordinated, non-collateralized obligation of ITS and is
transferrable, under certain conditions, after December 1998. The discount on
the Vendor Note of $9.3 million will be amortized on a basis linked to the yield
to maturity over the life of the loan note as a credit to interest income, and
represents the difference between the stated yield to maturity and the
prevailing market yield to maturity of approximately 11.5 per cent per annum,
for similar types of loan notes at the time the Vendor Note was issued in
December 1995. The interest yield and discount amortization for 1996 amounted to
$8.6 million and $0.3 million, respectively.
The Shareholder Loan Notes are transferrable sterling loan notes with an issue
price of $13.9 million, reflecting a yield to maturity of 10.0 per cent per
annum, and were valued by the Company at $13.3 million. There are no periodic
payments of interest. The Shareholder Loan Notes are subordinated, non-
collateralized obligations of ITS and are also subordinated to the Vendor Note.
The aggregate fair market value of the Vendor Note and Shareholder Loan Notes at
December 31, 1995 amounted to $87.9 million, and was based on discounting the
loan notes at estimated current sterling interest rates on similar term
financial instruments.
The 43.1 per cent interest in the ordinary share capital of ITS was valued and
accounted for by the Company at $0.9 million.
In February 1996 the Company disposed of its entire interest in Shareholder Loan
Notes with an issue price of $13.9 million and valued by the Company at $13.3
million (net of unamortized discount of $0.6 million), and 33.1 per cent of the
ordinary share capital of ITS valued by the Company at $0.9 million, for an
aggregate cash consideration of $15.4 million. The net gain arising on the
transaction amounted to $1.2 million which was included in other income less
expenses (note 8(i)).
As a result of the above transaction, the Company now holds a 10.0 per cent
interest in the ordinary share capital of ITS, valued and accounted for by the
Company at a nominal amount, together with the Vendor Note, which at December
31, 1996 is disclosed as a long-term investment (note 19) and has been accounted
for at its amortized cost.
F-29
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18--INVESTMENT IN AND LOANS TO ASSOCIATE (CONTINUED)
The movement in the carrying value of investment in and loans to associate since
January 1, 1995 has been as follows:
<TABLE>
<CAPTION>
1996 1995
$M $M
<S> <C> <C>
At January 1...................................................................................... 88.8 12.6
Acquisitions...................................................................................... -- 88.8
Disposals......................................................................................... (14.2) (12.6)
Reclassifications................................................................................. (74.6) --
--------- ---------
At December 31.................................................................................... -- 88.8
--------- ---------
--------- ---------
</TABLE>
During 1995 the Company disposed of its entire equity investments in CGPS, a
French unquoted company, and Microtech, a United Kingdom unquoted company, for
an aggregate consideration of $8.6 million comprising cash of $7.8 million and
notes receivable of $0.8 million. The net loss on disposal of $5.1 million,
including $7.3 million relating to the write off of net unamortized goodwill and
other intangibles and a $1.1 million charge relating to cumulative currency
translation adjustments, was included in other income less expenses (note 8(i)).
NOTE 19--LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995
<S> <C> <C>
$M $M
Vendor Note (note 18)............................................................................ 102.0 --
Less: unamortized discount....................................................................... (10.0) --
--------- ---------
92.0 --
Other long-term investments...................................................................... 8.6 2.0
--------- ---------
100.6 2.0
--------- ---------
--------- ---------
</TABLE>
The fair market value of the Vendor Note at December 31, 1996 amounted to $89.7
million, and is based on discounting the loan note at estimated current sterling
interest rates on similar term financial instruments. The aggregate fair market
value of other long-term investments at December 31, 1996 amounted to $8.6
million (1995--$2.0 million) and is based on estimates made by the Company.
F-30
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20--OTHER LONG-TERM ASSETS
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995
<S> <C> <C>
$M $M
Deferred refinancing costs.......................................................................... 19.4 27.1
Other long-term assets.............................................................................. 56.0 57.1
--- ---
75.4 84.2
--- ---
--- ---
</TABLE>
In connection with the refinancing of certain long-term debt obligations of the
Company certain fees and expenses were incurred. These refinancing costs are
being amortized as interest expense through the consolidated statements of
income on a straight line basis over the terms of the respective lives of the
Company's various long-term debt obligations. The refinancing costs amortization
for the year amounted to $3.7 million (1995--$5.3 million; 1994--$5.7 million).
During the year $4.0 million (1995--$13.6 million; 1994--nil) of net unamortized
deferred refinancing costs, relating to the early extinguishment of certain
amounts outstanding under the Company's long-term debt obligations, were written
off as extraordinary items in the consolidated statements of income (note 11).
NOTE 21--SHORT-TERM DEBT
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995
<S> <C> <C>
$M $M
Bank and acceptance facilities.................................................................... 50.6 39.4
Current portion of long-term debt (note 23)....................................................... 158.6 5.5
--------- ---
209.2 44.9
--------- ---
--------- ---
</TABLE>
The average rate of interest on short-term debt outstanding at December 31, 1996
was 7.8 per cent (1995-- 7.9 per cent). Short-term debt is generally repayable
on demand or at an interest payment date, and is non-collateralized except for
$0.5 million of bank and acceptance facilities in 1995, and $5.5 million of the
current portion of long-term debt in 1995.
F-31
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22--OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995
<S> <C> <C>
$M $M
Accruals................................................................................... 70.6 78.5
Payroll and employee benefits.............................................................. 58.1 53.5
Payments received on account............................................................... 17.1 10.1
Income taxes............................................................................... 15.6 12.0
Interest payable........................................................................... 23.7 25.4
Short-term restructuring, disposition and other provisions................................. 95.6 37.4
Other current liabilities.................................................................. 12.9 10.3
--------- ---------
293.6 227.2
--------- ---------
--------- ---------
</TABLE>
NOTE 23--LONG-TERM DEBT
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995
<S> <C> <C>
$M $M
Senior notes (i)....................................................................... 250.0 250.0
Senior subordinated notes (ii)......................................................... 294.1 317.2
Liquid Yield Option Notes (iii)........................................................ 326.8 306.8
Revolving bank credit agreement (iv)................................................... 83.0 15.0
Convertible capital bonds (v).......................................................... 75.6 68.7
Bank credit agreement--ASH (vi)........................................................ -- 126.2
Senior notes--ASH (vi)................................................................. -- 56.8
Other (vii)............................................................................ 39.2 39.6
--------- ---------
1,068.7 1,180.3
Less: current portion (note 21)........................................................ (158.6) (5.5)
--------- ---------
910.1 1,174.8
--------- ---------
--------- ---------
</TABLE>
(i) The $250.0 million 8.25 per cent senior notes due August 2000 were
issued in August 1993, through a public offering, by ADT Operations, Inc., a
company incorporated in the United States and an indirect wholly owned
subsidiary of ADT, and are guaranteed on a senior basis by ADT and certain
subsidiaries of ADT Operations, Inc. The senior notes are not redeemable prior
to maturity and interest is payable semi-annually. The indentures governing the
senior notes contain certain covenants including limitations on indebtedness,
limitations on certain payments, including dividends on the Company's common
shares, and compliance with various financial and operating covenants and
prohibitions, and certain change in control provisions. The senior notes are
non-collateralized senior obligations of ADT Operations, Inc. ranking pari passu
in right of payment with all other existing and future senior indebtedness of
ADT Operations, Inc. including indebtedness under the revolving bank credit
agreement referred to in (iv) below.
F-32
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23--LONG-TERM DEBT (CONTINUED)
(ii) The $350.0 million 9.25 per cent senior subordinated notes due
August 2003 were issued in August 1993, through a public offering, by ADT
Operations, Inc., and are guaranteed on a senior subordinated basis by ADT. The
senior subordinated notes are redeemable in whole or in part, at the option of
ADT Operations, Inc., at any time after August 1998 at the following redemption
prices: during the twelve month period beginning (a) August 1998 at 103.75 per
cent (b) August 1999 at 102.50 per cent (c) August 2000 at 101.25 per cent, and
thereafter at 100.00 per cent of the principal amount. Interest is payable
semi-annually. The indentures governing the senior subordinated notes contain
certain covenants as set out for the senior notes in (i) above. The senior
subordinated notes are non-collateralized, senior subordinated obligations of
ADT Operations, Inc. ranking pari passu with, or senior in right of payment to,
all other existing and future indebtedness of ADT Operations, Inc. that is
expressly subordinated to senior indebtedness of ADT Operations, Inc. During
1996 the Company reacquired in the market $23.1 million (1995--$32.8 million)
face value of the senior subordinated notes at a purchase cost of $24.0 million
(1995--$33.7 million) which was financed from cash on hand. The loss arising on
reacquisition of $0.9 million (1995--$0.9 million), and related costs of $0.5
million (1995--$0.8 million), was included in extraordinary items (note 11).
(iii) In July 1995 ADT Operations, Inc. issued $776,250,000 aggregate
principal amount at maturity of its zero coupon subordinated Liquid Yield Option
Notes ("Notes") maturing July 2010. The net proceeds of the issue amounted to
$287.4 million which was used to repay in full all amounts outstanding under ADT
Operations, Inc.'s previous bank credit agreement, which was subsequently
cancelled. The issue price per Note was $383.09, being 38.309 per cent of the
principal amount of $1,000 per Note at maturity, reflecting a yield to maturity
of 6.5 per cent per annum (computed on a semi-annual bond equivalent basis).
There are no periodic payments of interest. The discount amortization on the
Notes is being charged as interest expense through the consolidated statements
of income on a basis linked to the yield to maturity. The Notes discount
amortization for 1996 amounted to $20.3 million (1995--$9.4 million). Each Note
is exchangeable for common shares of ADT at the option of the holder at any time
prior to maturity, unless previously redeemed or otherwise purchased by ADT
Operations, Inc., at an exchange rate of 28.23 common shares per Note. During
1996 619 Notes with a carrying value of $0.3 million were exchanged, at the
option of the holders, for 17,472 ADT common shares (note 30). Any Note will be
purchased by ADT Operations, Inc. at the option of the holder as of July 2002
for a purchase price per Note of $599.46. At this time, if the holder exercises
the option, ADT has the right to deliver all or a portion of the purchase price
in the form of common shares of ADT. Beginning July 2002 the Notes are
redeemable for cash at any time at the option of ADT Operations, Inc., in whole
or in part, at redemption prices equal to the issue price plus accrued original
issue discount to the date of redemption. The Notes are guaranteed on a
subordinated basis by ADT. If, on or prior to maturity, there is a change in
control, the holder has the right to require ADT Operations, Inc. to purchase
the Notes at the change in control purchase price.
(iv) In August 1995 ADT Operations, Inc. entered into a new $300 million
revolving bank credit agreement which replaced in full its previous bank credit
agreement. The new agreement has a term of five years and is guaranteed on a
senior basis by ADT and certain subsidiaries of ADT Operations, Inc. Amounts
available under this facility are available for borrowing and reborrowing (or
issuance and reissuance in the case of letters of credit up to a maximum of $100
million), subject to certain conditions at that time, until June 2000 at which
time all amounts are repayable in full. At December 31, 1996 $83.0 million (1995
- -$15.0 million) was drawn down under the agreement, which has been classified in
the current portion of long-term debt, plus letters of credit amounting to $81.1
million (1995--$81.0 million) which have been issued and have terms of less than
one year. The Company utilizes letters of credit to back certain financing
arrangements and insurance policies as well as for trade purposes. The letters
of credit approximately reflect fair value as a condition of their underlying
purpose. The Company expects the counterparties to fully perform under the terms
of the agreements.
F-33
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23--LONG-TERM DEBT (CONTINUED)
Amounts drawn down under the revolving bank credit agreement bear interest at a
floating rate equal, at the option of ADT Operations, Inc., to either the
alternative base rate plus a margin or the reserve adjusted LIBO rate plus a
margin. The average rate of interest at December 31, 1996 was 6.5 per cent
(1995--7.6 per cent).
The revolving bank credit agreement contains certain financial and operating
covenants, including restrictions on the Company's ability to incur additional
indebtedness, limitations on certain payments, including dividends on the common
shares of ADT and ADT Operations, Inc., and certain other financial covenants,
including a minimum cash flow coverage ratio, a minimum debt to total
capitalization ratio and a minimum level of shareholders' equity, and certain
change in control provisions.
In December 1996 ADT Operations, Inc. entered into a new $200 million revolving
bank credit agreement, subject to completion of certain additional documentation
which was signed in January 1997, which replaced in full its previous bank
credit agreement, and which was subsequently cancelled. The new agreement has a
term of one year and is guaranteed on a senior basis by ADT and certain
subsidiaries of ADT Operations, Inc. Amounts available under this new facility
are available for borrowing and reborrowing (or issuance and reissuance in the
case of letters of credit up to a maximum of $100 million), subject to certain
conditions at that time, until January 1998 at which time all amounts are
repayable in full. The interest rates and financial and operating covenants in
place under the new facility are substantially the same as those referred to
above for the previous bank credit agreement.
(v) The 9.5 per cent sterling denominated convertible capital bonds due
July 2006 were issued by ASH Capital Finance (Jersey) Limited, a company
incorporated in Jersey and an indirect wholly owned subsidiary of ADT, and are
unconditionally and irrevocably guaranteed on a non-collateralized and
subordinated basis by ADT. Interest is payable semi-annually. The capital bonds
are convertible, at the option of the holder, into fully paid 2.0 per cent
(fixed cumulative dividend) exchangeable redeemable preference shares in ASH
Capital Finance (Jersey) Limited with a nominal value of one pence each. The
preference shares are unconditionally and irrevocably guaranteed on a
non-collateralized and subordinated basis by ADT. The preference shares are
redeemable at their paid up value of L1 each and they are also exchangeable, at
the option of the holder, for fully paid common shares of ADT at a price of
L76.66 per common share, the price of which is subject to adjustment under
certain circumstances. The capital bonds are unconditionally and irrevocably
guaranteed on a non-collateralized and subordinated basis by ASH, and were
formerly convertible into ordinary shares of ASH. Under the terms of the issue,
ADT can require conversion of any outstanding capital bond if 85 per cent of the
issue has been previously converted or purchased and cancelled, in which case
the bond holders may elect for redemption in lieu of conversion. On or after
June 1, 1996, ADT may exercise a call option at 100 per cent of the aggregate
paid up amounts of the capital bonds outstanding.
In December 1996 ASH Capital Finance (Jersey) Limited gave notice to all bond
holders that in January 1997 it would redeem all of the capital bonds then
outstanding at a price equating to the denomination of each capital bond
together with all accrued interest due. Accordingly, in January 1997 the capital
bonds were fully redeemed at their carrying amount, which was financed from cash
on hand and amounts drawn down under the sterling denominated bank credit
facility, as set out in (vii) below, and at December 31, 1996 have been
classified in the current portion of long-term debt.
(vi) In September 1996 the Company repaid in full all amounts owed by the
ASH group under its senior notes and bank credit agreement, which were
subsequently cancelled, and which was financed from cash on hand and loans drawn
under the revolving bank credit agreement. The loss arising on repayment of $4.2
million, and related costs of $0.4 million, was included in extraordinary items
(note 11).
F-34
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23--LONG-TERM DEBT (CONTINUED)
During 1994 ASH issued $60.7 million of its 8.28 per cent senior notes due
January 1998 of which $5.6 million was in respect of yield maintenance. The
senior notes were collateralized obligations of the ASH group. The yield
maintenance amortization on the senior notes has been charged as interest
expense through the consolidated statements of income. The yield maintenance
amortization for 1996 amounted to $1.5 million (1995--$1.1 million; 1994--$0.6
million). The effective rate of interest including yield maintenance was 10.7
per cent.
During 1995 ASH entered into a bank credit agreement totalling approximately
$134 million with a maturity date in January 1998. The amounts drawn under the
agreement were collateralized obligations of the ASH group and bore interest
principally at LIBO rate plus a margin.
(vii) Other long-term debt principally represents revolving facilities
with various banks falling due for repayment in 1999 bearing interest at a
floating rate equal, at the option of the Company, to either the alternative
base rate plus a margin or the reserve adjusted LIBO rate plus a margin. The
average rate of interest at December 31, 1996 was 7.5 per cent (1995--6.9 per
cent). In addition, at December 31, 1996 $0.6 million (1995--$2.0 million) in
letters of credit have been issued under certain of these facilities and have
terms of less than one year.
In January 1997 the Company entered into a sterling denominated bank credit
facility which is repayable on demand. The amount drawn down under the facility
amounted to $26 million which was used to repay, in part, the amounts owed under
the convertible capital bonds in (v) above. The facility is guaranteed by ADT
and certain of its subsidiaries. Interest is payable at LIBO rate plus a margin.
In March 1997 the Company entered into a new $154 million sterling denominated
bank credit facility of which $146 million is a term loan facility and $8
million is a revolving credit facility. The term loan facility was fully drawn
down and, in part, was used to repay in full the $26 million drawn down under
the sterling denominated bank credit facility referred to above. The new
facility has a term of five years and is guaranteed by ADT and certain of its
subsidiaries. Interest is payable at LIBO rate plus a margin.
The average rate of interest on all long-term debt during the year was 8.0 per
cent (1995--8.2 per cent; 1994--8.4 per cent).
Based on estimated interest rates currently available to the Company for
long-term debt with similar terms and average maturities, the fair value of all
long-term debt at December 31, 1996 amounted to approximately $1,119 million
(1995--approximately $1,241 million).
F-35
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23--LONG-TERM DEBT (CONTINUED)
The maturities and installments with respect to long-term debt outstanding at
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
$M
<S> <C> <C>
Year ending December 31 1997 158.6
1998 0.9
1999 34.5
2000 251.7
2001 0.9
Thereafter 622.1
---------
1,068.7
---------
---------
</TABLE>
NOTE 24--DEFERRED REVENUE
Deferred revenue is comprised of all subscriber billings for services not yet
rendered.
NOTE 25--DEFERRED INCOME TAXES
The movement in deferred income taxes since January 1, 1994 has been as follows:
<TABLE>
<CAPTION>
1996 1995 1994
$M $M $M
<S> <C> <C> <C>
At January 1............................................................................. 142.4 123.5 95.3
(Credit) charge for the year (note 9(i))................................................. (39.5) 18.4 24.9
Extraordinary items (note 11)............................................................ (0.7) (4.7) --
Eliminated on disposals.................................................................. -- (3.3) --
Currency translation adjustments......................................................... (0.7) 0.7 (0.2)
Reclassifications........................................................................ (10.0) 7.8 3.5
--------- --------- ---------
At December 31........................................................................... 91.5 142.4 123.5
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-36
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 25--DEFERRED INCOME TAXES (CONTINUED)
The significant temporary timing differences and tax loss carryforwards that
gave rise to the deferred income tax balance at December 31, 1996 were as
follows:
<TABLE>
<CAPTION>
US NON US TOTAL
$M $M $M
<S> <C> <C> <C>
Liabilities:
Depreciation........................................................................ 864.8 72.6 937.4
Other............................................................................... 6.9 15.2 22.1
--------- ----------- ---------
871.7 87.8 959.5
--------- ----------- ---------
Assets:
Tax operating loss carryforwards.................................................... 436.6 99.2 535.8
Provisions for estimated costs and expenses......................................... 143.7 57.2 200.9
Interest expense.................................................................... 147.9 -- 147.9
Post-retirement benefit obligations................................................. 78.6 -- 78.6
Depreciation........................................................................ -- 66.2 66.2
--------- ----------- ---------
806.8 222.6 1,029.4
Valuation allowance................................................................. (163.6) (155.8) (319.4)
--------- ----------- ---------
643.2 66.8 710.0
--------- ----------- ---------
Gross deferred income tax liability................................................. 228.5 21.0 249.5
--------- ----------- ---------
Deferred income tax liability at statutory tax rates................................ 80.0 11.5 91.5
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
The US tax operating loss carryforwards at December 31, 1996 expire as follows:
<TABLE>
<CAPTION>
$M
<S> <C> <C>
Year ending December 31.......................................................................... 1999 6.8
2000 4.1
2001 24.2
2002 18.3
2003 7.5
2004 86.4
2005 144.4
2006 107.2
2007 24.7
2008 13.0
---------
436.6
---------
---------
</TABLE>
No provision has been made for deferred income taxes on undistributed earnings
of subsidiaries ($655.9 million at December 31, 1996) which are required to
finance their continuing operations.
F-37
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 25--DEFERRED INCOME TAXES (CONTINUED)
The significant temporary timing differences and tax loss carryforwards that
gave rise to the deferred income tax balance at December 31, 1995 were as
follows:
<TABLE>
<CAPTION>
US NON US TOTAL
$M $M $M
<S> <C> <C> <C>
Liabilities:
Depreciation........................................................................ 857.9 124.4 982.3
Other............................................................................... 5.2 14.5 19.7
--------- ----- ---------
863.1 138.9 1,002.0
--------- ----- ---------
Assets:
Tax operating loss carryforwards.................................................... 428.9 94.5 523.4
Provisions for estimated costs and expenses......................................... 69.2 12.5 81.7
Interest expense.................................................................... 99.6 -- 99.6
Post-retirement benefit obligations................................................. 66.5 -- 66.5
--------- ----- ---------
664.2 107.0 771.2
Valuation allowance................................................................. (120.0) (49.3) (169.3)
--------- ----- ---------
544.2 57.7 601.9
--------- ----- ---------
Gross deferred income tax liability................................................. 318.9 81.2 400.1
--------- ----- ---------
Deferred income tax liability at statutory tax rates................................ 111.6 30.8 142.4
--------- ----- ---------
--------- ----- ---------
</TABLE>
NOTE 26--OTHER LONG-TERM LIABILITIES
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995
<S> <C> <C>
$M $M
Pensions (note 33(i))...................................................................... 28.4 20.6
Post-retirement benefits other than pensions (note 33(iv))................................. 48.2 47.8
Long-term restructuring, disposition and other provisions.................................. 74.6 41.3
Other long-term liabilities................................................................ 30.9 25.5
--------- ---------
182.1 135.2
--------- ---------
--------- ---------
</TABLE>
NOTE 27--MINORITY INTERESTS
At December 31, 1995 minority interests represent the 24.0 per cent interest in
the outstanding voting share capital of Alert held by the minority shareholders
of Alert and not owned by the Company. The value is based on the consolidated
net assets of Alert on a historical cost basis.
F-38
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 27--MINORITY INTERESTS (CONTINUED)
In February 1996, following approval by Alert's shareholders, Alert was merged
into the Company and, as a result, those shares then held by the minority
shareholders and not owned by the Company were converted into the right to
receive in cash the price paid per share by the Company in the initial tender
offer. Accordingly, the minority interest outstanding at December 31, 1995 has
been eliminated.
NOTE 28--CONVERTIBLE REDEEMABLE PREFERENCE SHARES
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995 1994
<S> <C> <C> <C>
$M $M $M
Authorized:
225,000 5 3/4% convertible cumulative redeemable preference shares 2002 of $1 each
(1995--225,000; 1994--225,000)(i)...................................................... 0.2 0.2 0.2
500,000 6% convertible cumulative redeemable preference shares 2002 of $1 each
(1995--500,000; 1994--500,000) (ii).................................................... 0.5 0.5 0.5
125,000,000 convertible cumulative redeemable preference shares of $1 each
(1995--125,000,000; 1994--125,000,000) (iii)........................................... 125.0 125.0 125.0
--------- --------- ---------
125.7 125.7 125.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
The movement in convertible redeemable preference shares since January 1, 1994
has been as follows:
<TABLE>
<CAPTION>
5 3/4% SHARES 6% SHARES
<S> <C> <C> <C> <C>
NUMBER $M NUMBER $M
Issued and outstanding:
At January 1, 1994........................................................ 29,738 35.5 283,030 391.7
Reacquired in the market at purchase cost................................. (25) -- -- --
Redeemed.................................................................. (28,957) (34.6) (278,625) (385.6)
Reversal of redemption premium on shares not redeemed..................... -- (0.1) -- (1.7)
--------- --------- ---------- ---------
At December 31, 1994...................................................... 756 0.8 4,405 4.4
Converted into common shares (note 30).................................... -- -- (225) (0.3)
--------- --------- ---------- ---------
At December 31, 1995...................................................... 756 0.8 4,180 4.1
Redeemed.................................................................. (756) (0.8) (4,180) (4.1)
--------- --------- ---------- ---------
At December 31, 1996...................................................... -- -- -- --
--------- --------- ---------- ---------
--------- --------- ---------- ---------
</TABLE>
In January 1994 ADT redeemed 28,957 of its 5 3/4% convertible redeemable
preference shares for an aggregate consideration, including redemption premium,
of $34.6 million. The Company funded the redemption from cash on hand.
F-39
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 28--CONVERTIBLE REDEEMABLE PREFERENCE SHARES (CONTINUED)
In October 1994 ADT redeemed 278,625 of its 6% convertible redeemable preference
shares for an aggregate consideration, including redemption premium, of $385.6
million. The Company funded the redemption through the drawdown of $231.6
million under its previous bank credit agreement and $154.0 million from cash on
hand.
In November 1996 ADT redeemed 756 of its 5 3/4% convertible redeemable
preference shares and 4,180 of its 6% convertible redeemable preference shares
for an aggregate consideration of $4.9 million. The Company funded the
redemption from cash on hand.
Dividends on convertible redeemable preference shares amounted to:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
<S> <C> <C> <C>
$M $M $M
5 3/4% convertible redeemable preference shares.............................................. -- -- --
6% convertible redeemable preference shares.................................................. 0.3 0.3 13.3
-- -- --
0.3 0.3 13.3
-- -- --
-- -- --
--- ---
--- ---
</TABLE>
F-40
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 28--CONVERTIBLE REDEEMABLE PREFERENCE SHARES (CONTINUED)
(i) 5 3/4% convertible cumulative redeemable preference shares 2002 (par
value $1 each)
In April 1987 175,000 of these mandatorily redeemable preference shares were
issued for cash at a price of $1,000 each, and during the period to December 31,
1996 139,262 of these preference shares were converted into ADT common shares.
The holders of these preference shares were entitled to a fixed cumulative
preferential dividend at the rate of 5 3/4 per cent per annum. These preference
shares were subject to redemption, at the option of the holders, in January 1994
at 119.625 per cent of their issue amount. ADT had the right to require
redemption or conversion of the preference shares in certain circumstances. This
right was exercised in November 1996 and all remaining preference shares were
redeemed at their carrying amount.
(ii) 6% convertible cumulative redeemable preference shares 2002 (par
value $1 each)
In September 1987 400,000 of these mandatorily redeemable preference shares were
issued for cash at a price of $1,000 each, and during the period to December 31,
1996 225 of these preference shares were converted into ADT common shares. The
holders of these preference shares were entitled to a fixed cumulative
preferential dividend at the rate of 6 per cent per annum. These preference
shares were subject to redemption, at the option of the holders, in October 1994
at 138.375 per cent of their issue amount. ADT had the right to require
redemption or conversion of the preference shares in certain circumstances. This
right was exercised in November 1996 and all remaining preference shares were
redeemed at their carrying amount.
(iii) Convertible cumulative redeemable preference shares (par value $1
each)
In November 1996 the board of directors of ADT determined that 2.5 million of
the 125 million authorized convertible cumulative redeemable preference shares
of $1 each be classified as Series A First Preference Shares Purchase Rights,
pursuant to the Shareholders Rights Plan referred to below, which have been
reserved for issuance upon exercise of the said Rights.
The rights attaching to the balance of 122.5 million convertible cumulative
redeemable preference shares of $1 each, none of which are issued and
outstanding, as to dividends, return of capital, redemption, conversion, voting
and otherwise may be determined by ADT on or before the time of allotment.
In November 1996 the board of directors of ADT adopted a Shareholder Rights Plan
("the Plan"). Under the Plan each ADT common shareholder received a distribution
of one right for each ADT common share held. Each right entitles the holder to
purchase from ADT shares of a new series of first preference shares at an
initial purchase price of $90 per one hundredth of a first preference share. The
rights will become exercisable and will detach from the common shares a
specified period of time after any person becomes the beneficial owner of 15 per
cent or more of ADT's common shares, or commences a tender or exchange offer
which, if consummated, would result in any person becoming the beneficial owner
of 15 per cent or more of ADT's common shares. The rights did not become
exercisable on account of any person being the beneficial owner of 15 per cent
or more of ADT's common shares when the Plan was adopted, but become exercisable
if such a person increases their beneficial ownership after that time (note
32(iv)).
F-41
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 28--CONVERTIBLE REDEEMABLE PREFERENCE SHARES (CONTINUED)
If any person becomes the beneficial owner of 15 per cent or more of ADT's
common shares, or if any person who was already the beneficial owner of 15 per
cent or more of ADT's common shares when the Plan was adopted increases their
beneficial ownership, each right will enable the holder, other than the
acquiring person, to purchase, for the rights purchase price, ADT common shares
having a market value of twice the rights purchase price.
If, following an acquisition of 15 per cent or more of ADT's common shares, ADT
is involved in any mergers or other business combinations or sells or transfers
more than 50 per cent of its assets or earnings power, each right will entitle
the holder to purchase, for the rights purchase price, common shares, of the
other party to such transaction, having a market value of twice the rights
purchase price.
ADT may redeem the rights at a price of $0.01 per right at any time prior to the
specified period of time after a person has become the beneficial owner of 15
per cent or more of ADT's common shares. The rights will expire in November 2005
unless exercised or redeemed earlier.
In the event of liquidation of ADT, the holders of all of ADT's convertible
redeemable preference shares are together entitled to payment to them of the
amount for which the preference shares were subscribed and any unpaid dividends,
prior to any payment to the common shareholders.
NOTE 29--NON-VOTING EXCHANGEABLE SHARES
The movement in non-voting exchangeable shares since January 1, 1994 has been as
follows:
<TABLE>
<CAPTION>
NUMBER $M
<S> <C> <C>
At January 1, 1994............................................................................ 925,537 15.0
Exchanged into common shares held as treasury shares (note 31)................................ (922,628) (15.0)
---------- ---------
At December 31, 1994.......................................................................... 2,909 --
Exchanged into common shares held as treasury shares (note 31)................................ (2,909) --
---------- ---------
At December 31, 1995 and December 31, 1996.................................................... -- --
---------- ---------
---------- ---------
</TABLE>
In March 1991 ADT Finance Inc., an indirect wholly owned Canadian subsidiary of
ADT, issued 1,000,000 non-voting exchangeable shares exchangeable for common
shares of ADT at the option of the holder, at any time, on a one for one basis.
Holders of non-voting exchangeable shares were entitled only to dividends
equivalent to dividends declared and paid on common shares of ADT.
F-42
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 30--COMMON SHARES
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995 1994
<S> <C> <C> <C>
$M $M $M
Authorized:
220,000,000 shares of $0.10 each
(1995--220,000,000; 1994--220,000,000).................................................... 22.0 22.0 22.0
--- --- ---
--- --- ---
Issued and outstanding: 141,382,697 shares of $0.10 each
(1995--138,885,405; 1994--138,097,754).................................................... 14.1 13.9 13.8
--- --- ---
--- --- ---
</TABLE>
The movement in common shares since January 1, 1994 has been as follows:
<TABLE>
<CAPTION>
1996 1995 1994
NUMBER NUMBER NUMBER
<S> <C> <C> <C>
At January 1 (i).................................................... 138,885,405 138,097,754 137,364,915
Exercise of executive share options (ii)............................ 2,479,820 780,366 35,000
Exchange of Liquid Yield Option Notes (note 23(iii))................ 17,472 -- --
Conversion of convertible preference shares (note 28)............... -- 7,285 --
Exercise of warrants (iii).......................................... -- -- 697,839
------------- ------------- -------------
At December 31...................................................... 141,382,697 138,885,405 138,097,754
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
(i) The number of common shares at January 1, 1994 has been restated for
the pooling of interests with ASH (note 3).
<TABLE>
<CAPTION>
NUMBER
<S> <C>
At January 1, 1994--as previously reported......................................................... 130,329,975
Pooling of interests with ASH (note 3)............................................................. 7,034,940
-------------
At January 1, 1994--as restated.................................................................... 137,364,915
-------------
-------------
</TABLE>
(ii) ADT has granted employee share options which are issued under five
fixed share option plans and schemes which reserve common shares for issuance to
the Company's executives and managers. The majority of options have been granted
under the ADT 1993 Long-Term Incentive Plan ("the Incentive Plan"). The
Incentive Plan was originally approved by shareholders of ADT in October 1993
and certain subsequent amendments to the Incentive Plan were approved by
shareholders of ADT in April 1996. The Incentive Plan is administered by the
remuneration committee of the board of directors of ADT, which consists
exclusively of independent non-executive directors of ADT. Options are generally
granted to purchase ADT common shares at prices which equate to or are above the
market price of the common shares on the date the option is granted. Conditions
of vesting are determined at the time of grant. Certain options have been
granted in which participants were required to pay a subscription price as a
condition of vesting. Options which have been granted under the Incentive Plan
to date have generally vested and become exercisable in installments over a
three year period from the date of grant and have a maximum term of ten years.
F-43
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 30--COMMON SHARES (CONTINUED)
The movement in executive share options outstanding since January 1, 1994 has
been as follows:
<TABLE>
<CAPTION>
1996 1995 1994
NUMBER NUMBER NUMBER
<S> <C> <C> <C>
At January 1............................................................ 13,491,185 12,180,778 10,410,425
Granted................................................................. 6,448,333 3,000,000 1,975,000
Exercised............................................................... (2,479,820) (780,366) (35,000)
Cancelled on purchase (note 34)......................................... -- (657,832) --
Lapsed/surrendered...................................................... (207,298) (251,395) (169,647)
------------ ------------ ------------
At December 31.......................................................... 17,252,400 13,491,185 12,180,778
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The number of executive share options exercisable and available for future grant
at December 31 was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
NUMBER NUMBER NUMBER
<S> <C> <C> <C>
Exercisable............................................................... 12,787,060 5,423,423 3,454,935
Available for future grant................................................ 2,593,335 401,668 3,385,000
------------ ---------- ----------
</TABLE>
The weighted average executive share options exercise price information since
January 1, 1994 has been as follows:
<TABLE>
<CAPTION>
1996 1995 1994
$ $ $
<S> <C> <C> <C>
Outstanding at January 1................................................................. 11.52 11.08 11.32
Granted.................................................................................. 15.32 11.97 9.24
Exercised................................................................................ 9.98 8.84 8.93
Cancelled on purchase (note 34).......................................................... -- 9.10 --
Lapsed/surrendered....................................................................... 17.24 12.68 15.85
Outstanding at December 31............................................................... 13.06 11.52 11.08
Exercisable at December 31............................................................... 13.21 12.38 12.59
--------- --------- ---------
</TABLE>
The estimated weighted average fair value of executive share options granted
during 1996 was $4.33 on the date of grant using the option-pricing model and
assumptions referred to below.
F-44
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 30--COMMON SHARES (CONTINUED)
The following table summarizes information about outstanding and exercisable
executive share options at December 31, 1996.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -----------------------------
RANGE OF WEIGHTED AVERAGE WEIGHTED
EXERCISE AVERAGE REMAINING AVERAGE
PRICES NUMBER EXERCISE PRICE CONTRACTUAL NUMBER EXERCISE PRICE
$ OUTSTANDING $ LIFE-YEARS EXERCISABLE $
- ------------------------------------------- ------------ --------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
8.01 to 10.00............................. 4,292,250 8.91 6.9 3,607,748 8.87
10.01 to 13.00............................. 2,997,250 11.68 5.6 503,080 11.52
13.01 to 15.00............................. 8,690,400 14.95 6.8 8,523,732 14.97
15.01 to 20.00............................. 1,163,000 16.48 9.1 43,000 15.94
20.01 to 30.00............................. 109,500 26.43 2.5 109,500 26.43
------------ ----- ------------ -----
17,252,400 13.06 12,787,060 13.21
------------ ----- ------------ -----
------------ ----- ------------ -----
</TABLE>
During 1996 the Company was required to adopt Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS
123 allows companies to measure compensation cost in connection with executive
share option plans and schemes using a fair value based method, or to continue
to use an intrinsic value based method which generally does not result in a
compensation cost. The Company has decided to continue to use the intrinsic
value based method and no compensation cost has been recorded. Had the fair
value based method been adopted consistent with the provisions of SFAS 123, the
Company's proforma net (loss) income and proforma net (loss) income per common
share for the years ended December 31, 1996 and 1995 would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995
<S> <C> <C>
Net (loss) income-proforma................................................................. ($ 717.1m) $ 17.8m
---------- ---------
Net (loss) income per common share-proforma................................................ ($ 5.23) $ 0.13
---------- ---------
</TABLE>
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions.
<TABLE>
<S> <C>
Expected stock price volatility................................................ 28 per cent
Risk free interest rate........................................................ 5.9 per
cent
Expected dividend yield........................................................ nil per
cent
Expected life of options....................................................... 3.7 years
</TABLE>
The effects of applying SFAS 123 in this proforma disclosure are not indicative
of future amounts. SFAS 123 does not apply to awards prior to 1995 and
additional awards in future years are anticipated.
F-45
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 30--COMMON SHARES (CONTINUED)
(iii) In April 1992 an issue was made to common shareholders of warrants
to subscribe for ADT common shares on the basis of one warrant for every six
common shares then held. Each warrant gave the holder the right to subscribe for
one common share at $10.00 per common share during the period from July 1, 1992
to June 30, 1994. All warrants not exercised at June 30, 1994 have lapsed in
accordance with the terms of the warrants. The movement in warrants since
January 1, 1994 has been as follows:
<TABLE>
<CAPTION>
NUMBER
<S> <C>
At January 1, 1994................................................................................. 18,254,318
Exercised.......................................................................................... (697,839)
Lapsed............................................................................................. (17,556,479)
-------------
At December 31, 1994, December 31, 1995 and December 31, 1996...................................... --
-------------
-------------
</TABLE>
(iv) In July 1996, as part of the then agreement to combine with
Republic, ADT granted to Republic a warrant to acquire 15 million common shares
of ADT at an exercise price of $20 per common share. Following termination of
the agreement to combine with Republic, the warrant vested and was exercisable
by Republic in the six month period commencing September 27, 1996 (note 32(iv)).
In March 1997 the warrant was exercised by Republic and the Company received
$300 million in cash.
(v) In March 1997 the Company announced that it had entered into a
definitive merger agreement, subject to shareholder approval and other customary
matters, with Tyco International Ltd. ("Tyco"), a United States quoted company
engaged in the manufacture of industrial and commercial products. Tyco
shareholders will receive one common share in the combined company for each Tyco
common share and ADT shareholders, through a reverse stock split, will receive
0.48133 common shares in the combined company for each ADT common share.
NOTE 31--TREASURY SHARES
The movement in treasury common shares held by a subsidiary of ADT at purchase
cost since January 1, 1994 has been as follows:
<TABLE>
<CAPTION>
NUMBER $M
<S> <C> <C>
At January 1, 1994........................................................................... 4,109,324 102.9
Exchange of non-voting exchangeable shares (note 29)......................................... (922,628) (23.1)
---------- ---------
At December 31, 1994......................................................................... 3,186,696 79.8
Exchange of non-voting exchangeable shares (note 29)......................................... (2,909) (0.1)
Treasury shares given as employee remuneration............................................... (1,000) --
---------- ---------
At December 31, 1995 and December 31, 1996................................................... 3,182,787 79.7
---------- ---------
---------- ---------
</TABLE>
F-46
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 32--COMMITMENTS AND CONTINGENCIES
(i) The Company leases land, buildings, motor vehicles and other
equipment under various contracts. The future total minimum rental payments
required under operating leases that have remaining noncancelable lease terms in
excess of one year at December 31, 1996 are as follows:
<TABLE>
<S> <C> <C>
$m
Year ending December 31 1997 67.3
1998 54.4
1999 39.0
2000 28.3
2001 18.9
Thereafter 41.6
---------
249.5
---------
---------
</TABLE>
The net operating lease rental charge for the year included in the consolidated
statements of income amounted to $77.2 million (1995--$75.3 million; 1994--$68.6
million).
(ii) Financial instruments which potentially subject the Company to
concentrations of credit risk principally consist of cash and cash equivalents
and trade receivables. The Company places its cash and cash equivalents with
high credit quality financial institutions throughout the world and, by policy,
limits the amount of credit exposure to any one financial institution. The
Company's trade receivables primarily result from its electronic security
services and vehicle auction services businesses and reflects a broad
international customer base. Credit limits, ongoing credit evaluation and
account monitoring procedures are utilized to minimize the risk of loss. As a
consequence, concentrations of credit risk are limited. In addition, the Vendor
Note (note 19) also subjects the Company to credit risk in the event of non-
performance by ITS. However, the Company currently expects that ITS will meet
its liabilities to the Company under the terms of the Vendor Note.
(iii) At December 31, 1996 the Company had issued guarantor surety bonds
of $10.0 million (1995--$10.0 million) to back insurance policies. These surety
bonds have unlimited duration.
(iv) In December 1996 Westar Capital, Inc. ("WCI"), a wholly owned
subsidiary of Western Resources, Inc. and a 24 per cent shareholder of ADT,
filed a complaint (as subsequently amended) in the US Courts against ADT and its
directors, among others. The complaint alleges, among other things, that ADT and
its directors breached their fiduciary duties to WCI and ADT's other
shareholders (a) by adopting the Plan (note 28(iii)), and (b) by issuing to
Republic the warrant (note 30(iv)). The complaint seeks a court order (a)
directing ADT to redeem the Plan, and (b) declaring the warrant issued to
Republic null and void or preventing ADT and Republic from exercising their
rights under the warrant or preventing Republic from selling or transferring any
of the warrant shares it currently owns. The complaint also seeks unspecified
damages, attorneys' fees and costs. Accordingly, an estimate of any potential
loss or range of possible losses, if any, cannot be made. ADT and its board of
directors believe that the allegations in WCI's complaint against ADT and its
directors are without merit and intend to vigorously defend against them.
F-47
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 32--COMMITMENTS AND CONTINGENCIES (CONTINUED)
In December 1996 Mr. C. Gachot filed a complaint in the US Courts against ADT
and certain of its directors, among others. The complaint was brought on behalf
of a class of all shareholders of ADT and alleges, among other things, that the
Plan (note 28(iii)) and the warrant issued to Republic (note 30(iv)) are
improper. The complaint seeks unspecified monetary relief. Accordingly, an
estimate of any potential loss or range of possible losses, if any, cannot be
made. ADT and its board of directors believe that the allegations in Mr.
Gachot's complaint against ADT and certain of its directors are without merit
and intend to vigorously defend against them.
In March 1997 Crandon Capital Partners ("CCP") filed a complaint in the US
Courts against ADT and certain of its current and former directors, among
others. The complaint was brought by CCP in a derivative capacity on behalf of
ADT. The complaint alleges, among other things, that ADT's directors breached
their fiduciary duties and wasted corporate assets in connection with (a) the
granting of options to certain officers of ADT in 1996, (b) the implementation
of the Plan (note 28(iii)), and (c) the issuance to Republic of the warrant
(note 30(iv)). The complaint seeks a court order directing ADT's directors to
establish a system of internal controls to prevent repetition of the alleged
breaches of fiduciary duty and corporate waste, and an unspecified amount of
damages. Accordingly, an estimate of any potential loss or range of possible
losses, if any, cannot be made. ADT and its directors believe that the
allegations in CCP's complaint against ADT and certain of its directors are
without merit and intend to vigorously defend against them.
The Company is a defendant in a number of other pending legal proceedings
incidental to present and former operations, acquisitions and dispositions. The
Company does not expect the outcome of these proceedings either individually or
in the aggregate to have a material adverse effect on the consolidated results
of operations and cash flows or the consolidated financial position of the
Company.
NOTE 33--PENSION AND OTHER PLANS
The Company operates various defined benefit pension plans designed in
accordance with conditions and practices in the countries concerned.
Contributions are based on periodic actuarial valuations which use the projected
unit credit method of calculation and are charged to the consolidated statements
of income on a systematic basis over the expected average remaining service
lives of current employees. The net pension expense is assessed in accordance
with the advice of professionally qualified actuaries in the countries concerned
or is based on subsequent formal reviews for this purpose.
The Company's United States electronic security services operation has a
non-contributory, funded, defined benefit pension plan covering substantially
all of its employees.
The Company has two contributory, funded, defined benefit pension plans in the
United Kingdom covering substantially all salaried and non-salaried employees.
F-48
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 33--PENSION AND OTHER PLANS (CONTINUED)
Details of the most recent independent actuarial valuations or formal reviews
are set out below:
(i) United States plan
The net pension expense for the United States plan included the following
components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
<S> <C> <C> <C>
$M $M $M
Service cost-benefits earned during year.................................................. 6.5 5.1 6.1
Interest cost on projected benefit obligations............................................ 13.3 12.9 11.9
Return on assets.......................................................................... (17.1) (16.3) (16.1)
Net amortization and deferral............................................................. 4.9 (0.8) 0.1
--------- --------- ---------
Net pension expense....................................................................... 7.6 0.9 2.0
--------- --------- ---------
--------- --------- ---------
</TABLE>
As a result of an early retirement plan implemented during 1996, a curtailment
loss of $4.8 million is included in the net amortization and deferral component
of net pension expense for the year ended December 31, 1996.
The following table sets forth the actuarial present value of accumulated
benefit obligations and funded status for the Company's United States plan:
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995
<S> <C> <C>
$M $M
Accumulated benefit obligations, including vested benefits of $155.4 million (1995-- $157.8
million)....................................................................................... 169.5 164.4
--------- ---------
--------- ---------
Total projected benefit obligations.............................................................. 193.5 189.4
--------- ---------
Plan assets at fair value, primarily stocks, bonds and money market funds........................ 192.6 183.5
Less: Unrecognized net gain...................................................................... (28.1) (15.4)
Plus: Unrecognized prior service costs........................................................... 0.6 0.7
--------- ---------
165.1 168.8
--------- ---------
Net pension liability (note 26).................................................................. 28.4 20.6
--------- ---------
--------- ---------
Benefit cover.................................................................................... 99% 97%
--------- ---------
--------- ---------
</TABLE>
The actuarial assumptions for the expected long-term rate of return on plan
assets, weighted average discount rate, and rate of increase of future
compensation levels used in determining the actuarial present value of
accumulated benefit obligations for 1996 were 10.0 per cent, 7.5 per cent and
4.0 per cent, respectively (1995--10.0 per cent, 7.0 per cent and 4.0 per cent,
respectively). The actuarial valuations of the United States plan were carried
out by Kwasha Lipton in 1996 and by Buck Consultants in 1995 and 1994.
F-49
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 33--PENSION AND OTHER PLANS (CONTINUED)
(ii) United Kingdom plans
The aggregate net pension (income) expense for the United Kingdom plans included
the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
<S> <C> <C> <C>
$M $M $M
Service cost-benefits earned during year................................................... 3.6 3.9 5.0
Interest cost on projected benefit obligations............................................. 7.1 8.8 7.0
Return on assets........................................................................... (11.5) (17.3) --
Net amortization and deferral.............................................................. (2.2) 6.8 (9.7)
--------- --------- ---
Net pension (income) expense............................................................... (3.0) 2.2 2.3
--------- --------- ---
--------- --------- ---
</TABLE>
As a result of the disposal of an interest in European Auctions (notes 7(i) and
34) a curtailment gain of $2.7 million is included in the net amortization and
deferral component of net pension income for the year ended December 31, 1996.
The following table sets forth the aggregate actuarial present value of
accumulated benefit obligations and funded status for the Company's United
Kingdom plans:
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995
<S> <C> <C>
$M $M
Accumulated benefit obligations, including vested
benefits of $92.8 million (1995--$82.4 million)............................................. 92.8 82.4
--------- ---------
--------- ---------
Total projected benefit obligations........................................................... 101.4 91.6
--------- ---------
Plan assets at fair value, primarily stocks, bonds and money market funds..................... 133.3 116.7
Less: Unamortized net assets.................................................................. (13.0) (6.1)
Less: Unrecognized net gain................................................................... (12.1) (21.1)
Plus: Unrecognized prior service costs........................................................ -- 2.1
--------- ---------
108.2 91.6
--------- ---------
Net pension asset............................................................................. 6.8 --
--------- ---------
--------- ---------
Benefit cover................................................................................. 131% 127%
--------- ---------
</TABLE>
The actuarial assumptions for the expected long-term rate of return on plan
assets, weighted average discount rate, and rate of increase of future
compensation levels used in determining the actuarial present value of
accumulated benefit obligations for 1996 were 9.5 per cent, 8.5 per cent and 7.0
per cent, respectively (1995--9.0 per cent, 8.3 per cent and 6.5 per cent,
respectively). The actuarial valuations of the United Kingdom plans were
principally carried out by William M. Mercer and by Friends Provident. The net
pension asset at December 31, 1996 is included in other long-term assets (note
20).
F-50
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 33--PENSION AND OTHER PLANS (CONTINUED)
(iii) The aggregate net pension expense for the year in respect of the
United States and United Kingdom plans amounted to $4.6 million (1995 -$3.1
million; 1994--$4.3 million).
(iv) The Company's United States electronic security services operation
sponsors an unfunded defined benefit post-retirement plan which covers both
salaried and non-salaried employees and which provides medical and other
benefits. This post-retirement health care plan is contributory, with retiree
contributions adjusted annually.
The net post-retirement benefit expense included the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
<S> <C> <C> <C>
$M $M $M
Service cost................................................................................. 0.7 0.5 0.6
Interest cost................................................................................ 2.5 2.4 2.3
Net amortization and deferral................................................................ (1.2) (1.3) (1.3)
--- --- ---
Net post-retirement benefit expense.......................................................... 2.0 1.6 1.6
--- --- ---
--- --- ---
</TABLE>
The following table sets forth the components of the plan's accumulated
post-retirement benefit obligations and benefit liability:
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995
<S> <C> <C>
$M $M
Retirees............................................................................................ 27.6 22.8
Fully eligible active plan participants............................................................. 5.0 7.7
Other active plan participants...................................................................... 6.4 4.8
--- ---
Accumulated post-retirement benefit obligations..................................................... 39.0 35.3
Less: Unrecognized net loss......................................................................... (5.3) (3.3)
Plus: Unrecognized prior service credit............................................................. 14.5 15.8
--- ---
Post-retirement benefit liability (note 26)......................................................... 48.2 47.8
--- ---
--- ---
</TABLE>
During 1992 the Company adopted amendments to the plan that reduced benefits
attributable to prior service. These amendments resulted in approximately a $20
million decrease in the obligation for benefits attributable to prior service.
This decrease is being amortized as a reduction of plan costs on an actuarially
calculated basis over a period of approximately twenty years beginning January
1992. Effective January 1995 the Company implemented a defined dollar benefit
cap for all current and future retirees, regardless of age.
F-51
<PAGE>
`
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 33--PENSION AND OTHER PLANS (CONTINUED)
The weighted average discount rate used in determining the accumulated
post-retirement benefit obligations was 7.5 per cent (1995--7.0 per cent). The
actuarial valuations of the plan were carried out by Kwasha Lipton in 1996 and
by Buck Consultants in 1995 and 1994.
NOTE 34--RELATED PARTY TRANSACTIONS
In December 1995 the Company entered into an agreement with Integrated Transport
Systems Limited ("ITS"), a United Kingdom unquoted company, and its wholly owned
subsidiaries Loanoption Limited and ITS Finance Limited, under which the Company
disposed of an interest in European Auctions.
The aggregate consideration received by the Company on closing was comprised of
cash of $235.1 million, $187.6 million Vendor Note (note 18) with an issue price
of $83.9 million and valued by the Company at $74.6 million, $31.1 million
Shareholder Loan Notes (note 18) with an issue price of $13.9 million and valued
by the Company at $13.3 million, and a 43.1 per cent interest in the ordinary
share capital of ITS at an issue price of $2.0 million and valued by the Company
at $0.9 million.
In February 1996 the Company disposed of its entire interest in Shareholder Loan
Notes and 33.1 per cent of the ordinary share capital of ITS for an aggregate
cash consideration of $15.4 million (note 18). As a result, the Company now
holds a 10.0 per cent interest in the ordinary share capital of ITS, valued and
accounted for by the Company at a nominal amount, together with the Vendor Note
which has been accounted for at its amortized cost.
Mr. D.B. Hammond and Mr. T.J. Gibson are both directors of ITS. Mr. Hammond was,
until April 1996, Deputy Chairman of ADT and Mr. Gibson was the Chief Executive
Officer of ADT Auction Group Limited.
Mr. Hammond and Mr. Gibson subscribed $10.4 million and $0.8 million, in total,
respectively, to the capital of ITS and, as a result, were interested in
Shareholder Loan Notes with issue prices of $9.4 million and $0.7 million,
respectively, and 22.3 per cent and 1.7 per cent, respectively, of the ordinary
share capital of ITS. Other senior management and employees of European Auctions
subscribed $3.7 million to the capital of ITS and, as a group, were interested
in Shareholder Loan Notes with an issue price of $3.3 million and 8.0 per cent
of the ordinary share capital of ITS. In addition, at closing, Mr. M.A.
Ashcroft, Chairman and Chief Executive Officer of ADT, subscribed $7.0 million
to the capital of ITS and, as a result, was interested in Shareholder Loan Notes
with an issue price of $6.3 million and 15.0 per cent of the ordinary share
capital of ITS, which interest he continues to hold. Mr. Ashcroft is not an
officer or director of ITS or any of its subsidiaries and has no involvement in
the day to day management of ITS or any of its subsidiaries.
Upon the disposal by the Company of an interest in European Auctions, ADT share
options held by directors and employees of European Auctions became immediately
exercisable. ADT entered into arrangements with Mr. Gibson under which share
options held by him at the time of the disposal by the Company of an interest in
European Auctions were purchased by ADT for an aggregate economic value
totalling $1.2 million, based on ADT's common share price on December 19, 1995,
of which Mr. Gibson invested $0.8 million in the capital of ITS, referred to
above. ADT also entered into similar arrangements with other senior management
and employees of European Auctions under which ADT purchased share options held
by them for an aggregate economic value totalling $0.6 million, in order to
enable them to invest in the capital of ITS. In addition, in order to further
enable Mr. Hammond to invest in the capital of ITS, ADT purchased from him share
options with an aggregate economic value totalling $1.1 million, based on ADT's
common share price on December 19, 1995, which would otherwise have been
exercisable in March 1996.
F-52
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 34--RELATED PARTY TRANSACTIONS (CONTINUED)
Upon the disposal by the Company of an interest in European Auctions, Mr. Gibson
received a severance payment of $0.3 million and other senior management and
employees of European Auctions, as a group, received severance payments
totalling $0.4 million.
A company controlled by Mr. Ashcroft made non-collateralized loans to Mr.
Hammond, or companies controlled by him, of an aggregate of $7.8 million, solely
for the purpose of enabling Mr. Hammond or these companies to invest in the
capital of ITS.
The cash consideration paid to the Company on closing was obtained by the ITS
group through the subscription of $26.5 million in the capital of ITS and
approximately $209.7 million through the drawdown of sterling term loans under a
bank credit agreement entered into between the ITS group and a group of banks.
The bank credit agreement has a term of seven years and obligations thereunder
are guaranteed and collateralized by a first priority pledge of the shares and
assets of all the companies comprising European Auctions and the ITS group.
At closing, the Company entered into an agreement with the ITS group whereby the
Company granted to ITS and its subsidiaries permission to use the ADT name and
certain trademarks for a period of up to three years for a total cash
consideration, paid at closing, of $0.6 million.
At closing, the Company entered into an option agreement with Mr. Ashcroft
which, if exercised, would have required Mr. Ashcroft to purchase from the
Company, for cash fifty days after closing, Shareholder Loan Notes with an issue
price of up to $8.2 million and up to 19.6 per cent of the ordinary share
capital of ITS. In addition, at closing, ITS entered into an agreement with the
Company and Mr. Ashcroft under which ITS agreed to use its reasonable efforts,
for a forty-five day period after closing, to find unrelated third party
investors to purchase Shareholder Loan Notes and ordinary share capital of ITS
from the Company and Mr. Ashcroft, and under which the Company and Mr. Ashcroft
agreed to certain voting restrictions in respect of their holdings of the
ordinary share capital of ITS as described below. In February 1996 the Company
and Mr. Ashcroft agreed that the mutual obligations under the option agreement
be released.
At December 31, 1995 the Company's investment in the ordinary share capital of
ITS was accounted for as an unconsolidated subsidiary under temporary control,
due to an agreement between ITS, the Company and Mr. Ashcroft limiting the
voting rights of each of the Company and Mr. Ashcroft to 15.0 per cent of the
voting rights of ITS and due to the fact that Mr. Hammond did not be seek
re-election to the board of directors of ADT at the 1996 annual general meeting.
Accordingly, at December 31, 1995 the equity method of accounting was used in
the consolidated financial statements, and the Vendor Note and Shareholder Loan
Notes were accounted for at their amortized cost.
An opinion regarding the fair value of the transactions described above was
provided to the independent non-executive directors of ADT by a leading European
investment banking firm and the transactions were approved unanimously by the
independent non-executive directors of ADT.
F-53
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 35--QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1996 1996 1996 1996
FIRST SECOND THIRD FOURTH 1996
QUARTER QUARTER QUARTER QUARTER YEAR
$M $M $M $M $M
<S> <C> <C> <C> <C> <C>
Net sales:
Electronic security services.................................... 336.7 347.1 355.0 367.4 1,406.2
Vehicle auction services........................................ 74.6 75.3 72.9 75.0 297.8
----------- ----- ----- ----------- ---------
Net sales....................................................... 411.3 422.4 427.9 442.4 1,704.0
----------- ----- ----- ----------- ---------
----------- ----- ----- ----------- ---------
Operating (loss) income:
Electronic security services (i)................................ (679.2) 54.1 52.5 (183.9) (756.5)
Vehicle auction services (ii)................................... (2.2) 12.9 9.7 6.7 27.1
Corporate (iii)................................................. (5.4) (7.2) (15.1) (8.4) (36.1)
----------- ----- ----- ----------- ---------
Operating (loss) income......................................... (686.8) 59.8 47.1 (185.6) (765.5)
Interest income................................................. 6.5 6.3 5.4 9.3 27.5
Interest expense................................................ (27.4) (26.7) (24.5) (22.4) (101.0)
Gain on disposal of businesses.................................. -- -- 1.7 -- 1.7
Other income less expenses (iv)................................. (0.3) 1.0 0.7 127.4 128.8
----------- ----- ----- ----------- ---------
(Loss) income before income taxes............................... (708.0) 40.4 30.4 (71.3) (708.5)
Income taxes.................................................... 2.4 (9.7) (7.2) 36.3 21.8
----------- ----- ----- ----------- ---------
(Loss) income before extraordinary items........................ (705.6) 30.7 23.2 (35.0) (686.7)
Extraordinary items (v)......................................... -- (1.2) (4.6) (2.6) (8.4)
----------- ----- ----- ----------- ---------
Net (loss) income............................................... (705.6) 29.5 18.6 (37.6) (695.1)
Dividends on preference shares.................................. (0.1) (0.1) -- (0.1) (0.3)
----------- ----- ----- ----------- ---------
Net (loss) income available to common shareholders.............. (705.7) 29.4 18.6 (37.7) (695.4)
----------- ----- ----- ----------- ---------
----------- ----- ----- ----------- ---------
Primary (loss) earnings per common share (vi)................... $ $ $ $ $
(Loss) income before extraordinary items........................ (5.20) 0.22 0.16 (0.25) (5.01)
Extraordinary items............................................. -- (0.01) (0.03) (0.02) (0.06)
----------- ----- ----- ----------- ---------
Net (loss) income per common share.............................. (5.20) 0.21 0.13 (0.27) (5.07)
----------- ----- ----- ----------- ---------
----------- ----- ----- ----------- ---------
</TABLE>
F-54
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 35--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
Notes:
(i) In the first quarter of 1996 electronic security services operating
income was stated after a charge for the impairment of long-lived assets of
$731.7 million (note 6(i)). In the fourth quarter of 1996 electronic security
services operating income was stated after a charge of $232.5 million relating
to restructuring and other non-recurring items (note 5(i)).
(ii) In the first quarter of 1996 vehicle auction services operating
income was stated after a charge for the impairment of long-lived assets of
$13.0 million (note 6(ii)).
(iii) In the second and third quarters of 1996 corporate expenses
included $0.4 million and $10.9 million, respectively, related to professional
and other transaction costs arising in connection with the merger of ADT and ASH
and the terminated merger with Republic (note 4(iii)). In the fourth quarter of
1996 corporate expenses were stated after a charge of $4.8 million relating to
restructuring and other non-recurring items (note 5(ii)).
(iv) Other income less expenses principally comprised a net gain arising
from the disposal of the Company's entire investment in Limelight Group plc, a
net settlement gain with BDO, and gains and losses on currency transactions
(note 8).
(v) Extraordinary items principally were comprised of losses on repayment
and the write off of net unamortized deferred refinancing costs relating to the
early extinguishment of debt (note 11).
(vi) Primary (loss) earnings per common share equalled fully diluted
(loss) earnings per common share in all periods except for the second quarter of
1996. In the second quarter of 1996 fully diluted earnings per common share from
income before extraordinary items, extraordinary items and net income were
$0.21, $0.01 (loss) and $0.20, respectively.
F-55
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 35--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
1995 1995 1995 1995
FIRST SECOND THIRD FOURTH 1995
QUARTER QUARTER QUARTER QUARTER YEAR
$M $M $M $M $M
<S> <C> <C> <C> <C> <C>
Net sales:
Electronic security services.................................... 321.1 337.7 337.5 354.6 1,350.9
Vehicle auction services........................................ 112.3 110.7 106.5 103.4 432.9
----- ----- ----- ----- ---------
Net sales....................................................... 433.4 448.4 444.0 458.0 1,783.8
----- ----- ----- ----- ---------
----- ----- ----- ----- ---------
Operating income:
Electronic security services (i)................................ 42.6 46.4 50.0 33.4 172.4
Vehicle auction services........................................ 22.7 20.3 17.2 10.0 70.2
Corporate (ii).................................................. (7.5) (7.3) (6.7) (20.3) (41.8)
----- ----- ----- ----- ---------
Operating income................................................ 57.8 59.4 60.5 23.1 200.8
Interest income................................................. 3.7 3.9 4.7 3.9 16.2
Interest expense................................................ (28.3) (30.5) (30.4) (27.1) (116.3)
Loss on disposal of businesses (iii)............................ -- (4.9) (0.5) (31.2) (36.6)
Other income less expenses (iv)................................. 1.1 (6.9) 0.9 (0.1) (5.0)
----- ----- ----- ----- ---------
Income (loss) before income taxes............................... 34.3 21.0 35.2 (31.4) 59.1
Income taxes.................................................... (9.7) (10.7) (9.2) 1.5 (28.1)
----- ----- ----- ----- ---------
Income (loss) before extraordinary items........................ 24.6 10.3 26.0 (29.9) 31.0
Extraordinary items (v)......................................... -- -- (8.0) (1.8) (9.8)
----- ----- ----- ----- ---------
Net income (loss)............................................... 24.6 10.3 18.0 (31.7) 21.2
Dividends on preference shares.................................. (0.1) (0.1) (0.1) -- (0.3)
----- ----- ----- ----- ---------
Net income (loss) available to common shareholders.............. 24.5 10.2 17.9 (31.7) 20.9
----- ----- ----- ----- ---------
----- ----- ----- ----- ---------
Primary earnings (loss) per common share (vi)................... $ $ $ $ $
Income (loss) before extraordinary items........................ 0.18 0.07 0.19 (0.22) 0.22
Extraordinary items............................................. -- -- (0.06) (0.01) (0.07)
----- ----- ----- ----- ---------
Net income (loss) per common share.............................. 0.18 0.07 0.13 (0.23) 0.15
----- ----- ----- ----- ---------
----- ----- ----- ----- ---------
</TABLE>
F-56
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 35--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
Notes:
(i) In the fourth quarter of 1995 electronic security services operating
income was stated after a charge of $21.4 million relating to restructuring and
other non-recurring items (note 5(i)).
(ii) In the fourth quarter of 1995 corporate expenses were stated after a
charge of $12.8 million relating to restructuring and other non-recurring items
(note 5(ii)).
(iii) In the fourth quarter of 1995 loss on disposal of businesses
principally comprised a net loss of $65.8 million arising on the disposal by the
Company of an interest in European Auctions and a net gain of $31.4 million
arising on the disposal of its entire European electronic article surveillance
business (notes 7(i) and 7(ii)).
(iv) Other income less expenses principally comprised net losses arising
from the disposal of the Company's entire equity investments in CGPS and
Microtech which were held by the ASH group (note 8(i)).
(v) Extraordinary items principally were comprised of the write off of
net unamortized deferred refinancing costs relating to the early extinguishment
of debt (note 11).
(vi) Primary earnings (loss) per common share equalled fully diluted
earnings (loss) per common share in all periods except for the third quarter of
1995. In the third quarter of 1995 fully diluted earnings per common share from
income before extraordinary items, extraordinary items and net income were
$0.18, $0.05 (loss) and $0.13, respectively.
F-57
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 36--ADT OPERATIONS, INC.
ADT Operations, Inc., a company incorporated in the State of Delaware, United
States, is an indirect wholly owned subsidiary of ADT. ADT Operations, Inc. is a
holding company that, through its subsidiaries, conducts a substantial
proportion of the Company's electronic security services businesses in the
United States and all of the Company's vehicle auction services businesses in
the United States. ADT Operations, Inc. has no independent business operations
or assets other than its investment in its subsidiaries, intercompany balances
and holdings of cash and cash equivalents.
The consolidated financial statements presented below incorporate the financial
statements of ADT Operations, Inc. and its subsidiaries ("ADT Operations"). The
basis upon which the consolidated financial statements of ADT Operations has
been prepared and the summary of significant accounting policies applied are as
described in notes 1 and 2. The consolidated financial statements of ADT
Operations have been prepared assuming that ADT Operations will continue as a
going concern. This assumption is based on the subordinated and
non-collateralized debt position of ADT Operations, its financing structure
within the ADT group of companies and ADT Operations' financial plans and
projections. In the consolidated financial statements of ADT Operations,
"affiliates" refers to certain direct and indirect wholly owned subsidiaries of
ADT which are not within the ADT Operations group of companies.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
<S> <C> <C> <C> <C>
NOTES $M $M $M
Net sales................................................................. (i) 1,212.0 1,094.3 986.3
Cost of sales............................................................. (605.2) (537.5) (491.0)
Selling, general and administrative expenses.............................. (421.9) (369.3) (331.4)
Restructuring and other non-recurring charges............................. (ii) (132.1) (19.4) --
Charge for the impairment of long-lived assets............................ (iii) (316.4) -- --
--------- --------- ---------
Operating (loss) income................................................... (i) (263.6) 168.1 163.9
Interest income--affiliates............................................... 1.3 -- 29.7
Interest income--non-affiliates........................................... 2.4 3.1 2.6
Interest expense--affiliates.............................................. (32.4) (22.5) (49.1)
Interest expense--non-affiliates.......................................... (75.1) (79.9) (66.4)
Gain on disposal of businesses to affiliates.............................. (iv) 2.0 -- --
Loss on disposal of businesses to non-affiliates.......................... (v) -- -- (0.4)
Other income less expenses................................................ (vi) 8.5 (6.7) (0.3)
--------- --------- ---------
(Loss) income before income taxes......................................... (356.9) 62.1 80.0
Income taxes.............................................................. (vii) 1.4 (19.0) (25.5)
--------- --------- ---------
(Loss) income before extraordinary items.................................. (355.5) 43.1 54.5
Extraordinary items (net of income taxes)................................. (viii) (1.3) (8.9) --
--------- --------- ---------
Net (loss) income......................................................... (356.8) 34.2 54.5
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-58
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 36--ADT OPERATIONS, INC. (CONTINUED)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995
<S> <C> <C> <C>
NOTES $M $M
ASSETS
Current assets:
Cash and cash equivalents........................................................ 82.9 54.0
Accounts receivable--net--affiliates............................................. 44.4 28.9
Accounts receivable--net--non-affiliates......................................... (ix) 149.4 132.8
Inventories...................................................................... (x) 21.6 17.2
Prepaid expenses and other current assets........................................ (xi) 22.9 6.9
--------- ---------
Total current assets............................................................. 321.2 239.8
Property, plant and equipment--net............................................... (xii) 1,131.3 1,049.1
Goodwill and other intangibles]net............................................... (xiii) 351.1 698.4
Long-term notes receivable--affiliates........................................... (xiv) 51.3 --
Other long-term assets........................................................... (xv) 31.2 28.9
--------- ---------
Total assets..................................................................... 1,886.1 2,016.2
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Short-term debt--non-affiliates.................................................. (xvi) 129.8 36.3
Accounts payable--affiliates..................................................... 14.5 9.6
Accounts payable--non-affiliates................................................. 91.8 75.2
Other current liabilities--non-affiliates........................................ (xvii) 143.5 127.5
--------- ---------
Total current liabilities........................................................ 379.6 248.6
Long-term debt--affiliates....................................................... (xviii) 690.1 130.2
Long-term debt--non-affiliates................................................... (xix) 877.2 895.4
Deferred revenue (note 24)....................................................... 72.4 67.3
Deferred income taxes............................................................ (xx) 78.9 92.9
Other long-term liabilities--affiliates.......................................... (xxi) 117.4 129.8
Other long-term liabilities--non-affiliates...................................... (xxii) 119.4 96.3
Minority interests (note 27)..................................................... -- 15.6
--------- ---------
Total liabilities................................................................ 2,335.0 1,676.1
--------- ---------
Commitments and contingencies.................................................... (xxiv)
Shareholder's equity:
Common shares.................................................................... (xxiii) -- --
Contributed surplus.............................................................. 858.5 858.5
Accumulated deficit.............................................................. (1,307.4) (518.4)
--------- ---------
Total shareholder's equity....................................................... (448.9) 340.1
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY....................................... 1,886.1 2,016.2
--------- ---------
--------- ---------
</TABLE>
F-59
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 36--ADT OPERATIONS, INC. (CONTINUED)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
<S> <C> <C> <C>
$M $M $M
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income.................................................................. (356.8) 34.2 54.5
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Charge for the impairment of long-lived assets..................................... 316.4 -- --
Depreciation....................................................................... 144.0 120.2 104.6
Goodwill and other intangibles amortization........................................ 11.7 18.2 18.5
Restructuring and other non-recurring charges...................................... 122.0 18.4 --
Interest on long-term notes receivable--affiliates................................. (1.3) -- --
Liquid Yield Option Notes discount amortization.................................... 20.3 9.4 --
Refinancing costs amortization..................................................... 3.2 4.9 5.3
Deferred income taxes.............................................................. (4.3) 16.5 22.0
Extraordinary items................................................................ 1.3 8.9 --
Gain on disposal of property, plant and equipment.................................. (2.2) (1.2) (0.8)
Gain on disposal of businesses to affiliates....................................... (2.0) -- --
Loss on disposal of businesses to non-affiliates................................... -- -- 0.4
Gain on customer contract transactions--affiliates................................. (18.1) -- --
Gain arising from the ownership of investments..................................... -- -- (3.2)
Other.............................................................................. 3.2 2.3 --
Changes in assets and liabilities:
Accounts receivable--affiliates.................................................... (7.5) (14.6) (0.4)
Accounts receivable--non-affiliates................................................ (10.5) (29.3) (3.9)
Inventories........................................................................ (3.5) 3.6 (4.3)
Other assets....................................................................... (11.0) (0.4) 1.1
Accounts payable--affiliates....................................................... (7.5) (5.2) (7.4)
Accounts payable--non-affiliates................................................... 14.7 16.6 7.7
Deferred revenue................................................................... 3.1 2.7 0.9
Other liabilities.................................................................. (5.6) (8.8) 3.5
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES.......................................... 209.6 196.4 198.5
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment.......................................... (293.2) (221.4) (175.8)
Disposal of property, plant and equipment.......................................... 6.9 3.9 5.4
Long-term notes receivable--affiliates............................................. (50.0) -- 318.8
Acquisition of businesses from non-affiliates...................................... (25.5) (64.0) --
Purchase of customer contracts..................................................... (4.1) -- --
Disposal of businesses to non-affiliates........................................... -- -- 10.2
Disposal of assets to affiliates................................................... 73.2 -- --
Disposal of other investments to non-affiliates.................................... -- -- 19.7
Disposal of trademarks to affiliates............................................... -- -- 150.0
Other.............................................................................. (1.7) (1.6) (5.2)
--------- --------- ---------
NET CASH (UTILIZED) PROVIDED BY INVESTING ACTIVITIES............................... (294.4) (283.1) 323.1
--------- --------- ---------
</TABLE>
F-60
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 36--ADT OPERATIONS, INC. (CONTINUED)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
<S> <C> <C> <C>
$M $M $M
CASH FLOWS FROM FINANCING ACTIVITIES
Net receipt (repayments) of short-term debt--affiliates............................ -- -- (145.3)
Net repayments of short-term debt--non-affiliates.................................. 11.4 (19.6) (25.9)
Repayments of long-term debt--affiliates........................................... -- -- (430.4)
Proceeds from long-term debt--affiliates........................................... 34.3 33.0 199.9
Repayments of long-term debt--non-affiliates....................................... (15.0) (209.6) (0.2)
Repayment of long-term acquisition debt............................................ -- (39.6) --
Proceeds from long-term debt--non-affiliates....................................... 83.0 312.4 231.6
Debt refinancing costs............................................................. -- (12.0) (1.0)
Dividends paid..................................................................... -- -- (352.5)
Other.............................................................................. -- (2.2) (3.7)
--------- --------- ---------
NET CASH PROVIDED (UTILIZED) BY FINANCING ACTIVITIES............................... 113.7 62.4 (527.5)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................... 28.9 (24.3) (5.9)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..................................... 54.0 78.3 84.2
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR........................................... 82.9 54.0 78.3
--------- --------- ---------
--------- --------- ---------
CASH PAYMENTS DURING THE YEAR FOR
Interest--affiliates............................................................... 31.3 21.7 49.3
Interest--non-affiliates........................................................... 52.0 66.5 57.7
Income taxes....................................................................... 2.6 2.3 4.0
IN CONJUNCTION WITH THE ACQUISITION OF BUSINESSES FROM
AFFILIATES, NET ASSETS WERE ASSUMED AS FOLLOWS
Goodwill and other intangibles..................................................... 5.4 -- --
Notes issued....................................................................... (70.0) -- --
--------- --------- ---------
Net assets assumed................................................................. (64.6) -- --
--------- --------- ---------
--------- --------- ---------
IN CONJUNCTION WITH THE ACQUISITION OF BUSINESSES FROM
NON-AFFILIATES, NET (ASSETS) LIABILITIES WERE ASSUMED AS FOLLOWS
Goodwill and other intangibles..................................................... 10.3 121.0 --
Cash paid (net of cash assumed).................................................... (25.5) (64.0) --
--------- --------- ---------
Net (assets) liabilities assumed................................................... (15.2) 57.0 --
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-61
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 36--ADT OPERATIONS, INC. (CONTINUED)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
<S> <C> <C> <C>
$M $M $M
IN CONJUNCTION WITH THE DISPOSAL OF BUSINESSES TO AFFILIATES, NET ASSETS WERE
DISPOSED AS FOLLOWS
Short-term receivable.............................................................. 8.0 -- --
Gain on disposal of businesses (including net unamortized goodwill and other
intangibles)..................................................................... (2.0) -- --
--------- --------- ---------
Net assets disposed................................................................ 6.0 -- --
--------- --------- ---------
--------- --------- ---------
IN CONJUNCTION WITH THE DISPOSAL OF BUSINESSES TO NON-AFFILIATES, NET ASSETS WERE
DISPOSED AS FOLLOWS
Cash received (net of cash disposed)............................................... -- -- 10.2
Loss on disposal of businesses (including net unamortized goodwill and other
intangibles)..................................................................... -- -- 0.4
--------- --------- ---------
Net assets disposed................................................................ -- -- 10.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON CONTRIBUTED ACCUMULATED
SHARES SURPLUS DEFICIT TOTAL
$M $M $M $M
<S> <C> <C> <C> <C>
At January 1, 1994................................................ -- 858.5 (254.6) 603.9
Net income........................................................ -- -- 54.5 54.5
Cash dividends.................................................... -- -- (352.5) (352.5)
--
----- ------------ ---------
At December 31, 1994.............................................. -- 858.5 (552.6) 305.9
Net income........................................................ -- -- 34.2 34.2
--
----- ------------ ---------
At December 31, 1995.............................................. -- 858.5 (518.4) 340.1
Net loss.......................................................... -- -- (356.8) (356.8)
Dividends (a)..................................................... -- -- (432.2) (432.2)
--
----- ------------ ---------
At December 31, 1996.............................................. -- 858.5 (1,307.4) (448.9)
--
--
-- ----- ------------ ---------
-- ----- ------------ ---------
</TABLE>
(a) A dividend of $432.2 million was paid by ADT Operations, Inc. in
December 1996 and the consideration was the assignment to ADT Operations Inc.'s
immediate parent of a loan note owed to ADT Operations, Inc. by a subsidiary
(note (xviii)).
F-62
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 36--ADT OPERATIONS, INC. (CONTINUED)
NOTE (I)--SEGMENT INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
<S> <C> <C> <C>
$M $M $M
NET SALES
Electronic security services (a)...................................................... 914.2 824.5 733.0
Vehicle auction services.............................................................. 297.8 269.8 253.3
--------- --------- ---------
1,212.0 1,094.3 986.3
--------- --------- ---------
--------- --------- ---------
OPERATING (LOSS) INCOME
Electronic security services (a)...................................................... (289.9) 135.2 135.6
Vehicle auction services (b).......................................................... 27.1 34.3 33.7
Corporate (c)......................................................................... (0.8) (1.4) (5.4)
--------- --------- ---------
(263.6) 168.1 163.9
--------- --------- ---------
--------- --------- ---------
</TABLE>
(a) In 1996 electronic security services operating income was stated
after a charge of $131.6 million (1995--$19.4 million) relating to restructuring
and other non-recurring items (note (ii)) and after a charge for the impairment
of long-lived assets of $303.4 million (note (iii)).
In December 1996 ADT Operations disposed of certain of its electronic security
services operations (Sonitrol franchises) to an affiliate. The net gain on
disposal of $2.0 million was included in the gain on disposal of businesses to
affiliates (note (iv)).
During 1994 ADT Operations disposed of certain of its electronic security
services operations (Puerto Rico and US Virgin Islands). The net loss on
disposal of $0.4 million was included in the loss on disposal of businesses to
non-affiliates (note (v)).
The following information represents the amounts included in the electronic
security services business segment information above which related to the
operations disposed of.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
<S> <C> <C> <C>
$M $M $M
Net sales.................................................................................... 6.1 6.1 12.7
Operating income............................................................................. 0.2 0.4 2.5
</TABLE>
(b) In 1996 vehicle auction services operating income was stated after a
charge for the impairment of long-lived assets of $13.0 million (note (iii)).
(c) Corporate expenses comprise administrative, legal and general
corporate expenses net of other income. In 1996 corporate expenses were stated
after a charge of $0.5 million relating to restructuring and other non-recurring
items (note (ii)).
F-63
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 36--ADT OPERATIONS, INC. (CONTINUED)
NOTE (I)--SEGMENT INFORMATION (CONTINUED)
(d) The costs incurred in producing and communicating advertising are
generally expensed when incurred. The total amount of advertising expense for
the year included in the consolidated statements of income amounted to $58.3
million (1995--$49.7 million; 1994--$38.1 million).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
<S> <C> <C> <C>
$M $M $M
DEPRECIATION AND AMORTIZATION
Electronic security services....................................................... 140.5 123.6 108.8
Vehicle auction services........................................................... 15.0 14.7 14.2
Corporate.......................................................................... 0.2 0.1 0.1
--------- --------- ---------
155.7 138.4 123.1
--------- --------- ---------
--------- --------- ---------
CAPITAL EXPENDITURES
Electronic security services....................................................... 264.7 201.1 161.8
Vehicle auction services........................................................... 25.7 18.9 14.0
Corporate.......................................................................... 2.8 1.4 --
--------- --------- ---------
293.2 221.4 175.8
--------- --------- ---------
--------- --------- ---------
IDENTIFIABLE ASSETS
Electronic security services....................................................... 1,289.0 1,513.4 1,284.6
Vehicle auction services........................................................... 467.7 440.3 425.3
Corporate.......................................................................... 129.4 62.5 90.3
--------- --------- ---------
1,886.1 2,016.2 1,800.2
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE (II)--RESTRUCTURING AND OTHER NON-RECURRING CHARGES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
<S> <C> <C> <C>
$M $M $M
Electronic security services....................................................... (131.6) (19.4) --
Corporate.......................................................................... (0.5) -- --
--------- --------- ---------
(132.1) (19.4) --
--------- --------- ---------
--------- --------- ---------
</TABLE>
As a consequence of the Re-Engineering Project, and incorporating the effects of
the acquisition of Alert, in each of the fourth quarters of 1996 and 1995 senior
executive management approved a restructuring plan which resulted in a charge
for restructuring and other non-recurring items of $131.6 million and $19.4
million, respectively (note 5(i)). The effects of the Re-Engineering Project
resulted in a charge for restructuring and other non-recurring items at the
corporate level in 1996 of $0.5 million (note 5(ii)).
F-64
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 36--ADT OPERATIONS, INC. (CONTINUED)
NOTE (III)--CHARGE FOR THE IMPAIRMENT OF LONG LIVED ASSETS
Effective January 1, 1996, ADT Operations was required to adopt SFAS 121.
Following the adoption of SFAS 121, in the first quarter of 1996 ADT Operations
recorded an aggregate non-cash charge for the impairment of long-lived assets of
$316.4 million, as a separate line item in the consolidated statements of
income, with no consequential tax effect (note 6). The $303.4 million impairment
charge in the electronic security services division comprised $302.4 million
relating to goodwill and other intangibles and $1.0 million relating to other
assets. The $13.0 million impairment charge in the vehicle auction services
division related to goodwill and other intangibles.
NOTE (IV)--GAIN ON DISPOSAL OF BUSINESSES TO AFFILIATES
In December 1996 ADT Operations disposed of certain of its electronic security
services operations (Sonitrol franchises) to an affiliate. The aggregate
consideration on disposal amounted to $8.0 million, which was financed through a
short-term receivable from an affiliate, and the net gain on disposal of $2.0
million included $1.8 million relating to the write off of net unamortized
goodwill and other intangibles (note (xiii)).
NOTE (V)--LOSS ON DISPOSAL OF BUSINESSES TO NON-AFFILIATES
During 1994 ADT Operations disposed of certain of its electronic security
services operations (Puerto Rico and US Virgin Islands). The aggregate cash
consideration on disposal amounted to $10.6 million and the net loss on disposal
of $0.4 million included $4.8 million relating to the write off of net
unamortized goodwill and other intangibles.
NOTE (VI)--OTHER INCOME LESS EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
<S> <C> <C> <C>
$M $M $M
Net gain arising on customer contract transactions--affiliates............................... 18.1 -- --
Management fees--net--affiliates............................................................. (9.6) (6.7) (3.5)
Gains and losses arising from the ownership of long-term investments......................... -- -- 3.2
--- --- ---
8.5 (6.7) (0.3)
--- --- ---
--- --- ---
</TABLE>
F-65
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 36--ADT OPERATIONS, INC. (CONTINUED)
NOTE (VII)--INCOME TAXES
(a) The provision for income taxes in the consolidated statements of
income was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
<S> <C> <C> <C>
$M $M $M
Current income taxes:
US (principally state income taxes)..................................................... (2.9) (2.5) (3.5)
Deferred income taxes: (note (xx))
US (principally federal income taxes)................................................... 4.3 (16.5) (22.0)
--- --------- ---------
1.4 (19.0) (25.5)
--- --------- ---------
--- --------- ---------
</TABLE>
(b) The reconciliation between notional US federal income taxes at the
statutory rate on consolidated (loss) income before income taxes and ADT
Operations' income tax provision was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
<S> <C> <C> <C>
$M $M $M
Notional US federal income taxes at the statutory rate.................................. 124.9 (21.7) (28.0)
Adjustments to reconcile to ADT Operations' income tax provision:
US state income tax provisions, net..................................................... (2.9) (2.5) (3.2)
SFAS 121 impairment..................................................................... (110.7) -- --
Utilization and/or recognition of tax loss carryforwards and other items................ (9.9) 5.2 5.7
--------- --------- ---------
Income tax provision.................................................................... 1.4 (19.0) (25.5)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-66
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 36--ADT OPERATIONS, INC. (CONTINUED)
NOTE (VIII)--EXTRAORDINARY ITEMS
During 1996 and 1995 affiliates of ADT Operations reacquired in the market
certain of ADT Operations, Inc.'s senior subordinated notes (note (xix)(a)),
which was financed from cash on hand. Extraordinary items included the write off
of net unamortized deferred refinancing costs of $0.5 million (1995--$0.8
million), and were stated net of applicable income taxes of $0.2 million
(1995--$0.2 million).
In December 1996 ADT Operations, Inc. entered into a new bank credit agreement,
subject to completion of certain additional documentation which was signed in
January 1997, which replaced in full its previous bank credit agreement and
which was subsequently cancelled (note (xix)(c)). Extraordinary items included
the write off of net unamortized deferred refinancing costs of $1.5 million
relating to the early extinguishment of all amounts outstanding under the
revolving bank credit agreement, and were stated net of applicable income taxes
of $0.5 million.
In July 1995 ADT Operations, Inc. repaid in full all amounts owed under its
previous bank credit agreement, which was subsequently cancelled. ADT
Operations, Inc. funded the repayment from the net proceeds of the issue of its
Liquid Yield Option Notes (note (xix)(b)). Extraordinary items included the
write off of net unamortized deferred refinancing costs of $12.8 million
relating to the early extinguishment of all amounts outstanding under the
previous bank credit agreement, and were stated net of applicable income taxes
of $4.5 million.
NOTE (IX)--ACCOUNTS RECEIVABLE--NET--NON-AFFILIATES
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995
<S> <C> <C>
$M $M
Trade accounts receivable....................................................................... 160.2 144.7
Less: allowance for doubtful receivables........................................................ (10.8) (11.9)
--------- ---------
149.4 132.8
--------- ---------
--------- ---------
</TABLE>
NOTE (X)--INVENTORIES
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995
<S> <C> <C>
$M $M
Raw materials and consumables.................................................................... 6.0 6.5
Work in process.................................................................................. 11.4 7.4
Finished goods................................................................................... 4.2 3.3
--- ---
21.6 17.2
--- ---
--- ---
</TABLE>
F-67
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 36--ADT OPERATIONS, INC. (CONTINUED)
NOTE (XI)--PREPAID EXPENSES AND OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995
<S> <C> <C>
$M $M
Prepaid expenses................................................................................. 4.5 4.1
Other current assets............................................................................. 18.4 2.8
--
---
22.9 6.9
--
--
---
---
</TABLE>
NOTE (XII)--PROPERTY, PLANT AND EQUIPMENT--NET
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995
<S> <C> <C>
$M $M
Cost:
Property and related improvements......................................................... 278.5 254.0
Subscriber systems........................................................................ 1,336.9 1,098.1
Other plant and equipment................................................................. 156.7 136.1
--------- ---------
Total cost................................................................................ 1,772.1 1,488.2
--------- ---------
Accumulated depreciation:
Property and related improvements......................................................... 50.3 35.9
Subscriber systems........................................................................ 480.6 330.8
Other plant and equipment................................................................. 109.9 72.4
--------- ---------
Total accumulated depreciation............................................................ 640.8 439.1
--------- ---------
Net book values........................................................................... 1,131.3 1,049.1
--------- ---------
--------- ---------
</TABLE>
F-68
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 36--ADT OPERATIONS, INC. (CONTINUED)
NOTE (XIII)--GOODWILL AND OTHER INTANGIBLES--NET
<TABLE>
<CAPTION>
1996 1995
$M $M
<S> <C> <C>
Cost:
At January 1.................................................................................... 841.2 720.2
SFAS 121 impairment (note (iii))................................................................ (429.1) --
Acquisitions (a)................................................................................ 19.8 121.0
Disposals (b)................................................................................... (41.1) --
--------- ---------
At December 31.................................................................................. 390.8 841.2
--------- ---------
Accumulated amortization:
At January 1.................................................................................... 142.8 124.6
SFAS 121 impairment (note (iii))................................................................ (113.7) --
Charge for the year............................................................................. 11.7 18.2
Disposals (b)................................................................................... (1.1) --
--------- ---------
At December 31.................................................................................. 39.7 142.8
--------- ---------
Net book values:
At December 31.................................................................................. 351.1 698.4
--------- ---------
--------- ---------
</TABLE>
(a) In February 1996 ADT Operations acquired the remaining 24.0 per cent
of the outstanding voting share capital of Alert, an electronic security
services company, not already owned by ADT Operations, for an aggregate cash
consideration of $25.5 million, which was financed from cash on hand. The amount
of goodwill arising from this acquisition was $10.3 million. During 1996 ADT
Operations purchased other intangibles, principally customer contracts, for an
aggregate cash consideration of $4.1 million which was financed from cash on
hand. In December 1996 ADT Operations acquired the electronic security services
business and net assets of an affiliate for an aggregate consideration of $70.0
million which was financed through a long-term loan from an affiliate. The
amount of goodwill arising from this acquisition was $5.4 million.
In December 1995 ADT Operations acquired 76.0 per cent of the outstanding voting
share capital of Alert, for an aggregate cash consideration of $69.0 million,
which was financed from $54.0 million of cash on hand and through a long-term
loan from affiliates of $15.0 million. The amount of goodwill and other
intangibles arising from this acquisition was $80.1 million and $40.0 million,
respectively. During 1995 ADT Operations also acquired several small electronic
security services businesses for an aggregate cash consideration of $0.9
million.
These acquisitions have been accounted for using the purchase method.
Accordingly, the respective purchase prices have been allocated to assets
acquired and liabilities assumed based on their preliminary estimated fair
values. These allocations resulted in goodwill and other intangibles of $19.8
million arising during the year (1995--$121.0 million).
F-69
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 36--ADT OPERATIONS, INC. (CONTINUED)
(b) During 1996, ADT Operations disposed of certain of its customer
contracts to an affiliate. The aggregate cash consideration on disposal amounted
to $74.5 million and the net gain on disposal of $36.3 million was included in
other income less expenses (note (vi)). In December 1996 ADT Operations disposed
of certain of its electronic security services operations (Sonitrol franchises)
to an affiliate. The net unamortized goodwill and other intangibles on disposal
of $1.8 million was included in the gain on disposal of businesses to affiliates
(note (iv)).
(c) The accumulated cost, accumulated amortization and net book values of
the goodwill balance included within goodwill and other intangibles at December
31, 1996 amounted to $385.7 million, $39.1 million and $346.6 million,
respectively (1995--$801.2 million, $142.8 million and $658.4 million,
respectively).
NOTE (XIV)--LONG-TERM NOTES RECEIVABLE--AFFILIATES
In September 1996 ADT Operations subscribed for $73.8 million aggregate
principal amount at maturity of subordinated deep discount zero coupon loan
notes issued by an affiliate maturing in September 2001. There are no periodic
payments of interest. The notes were issued at a price of $50.0 million,
reflecting a yield to maturity of 7.9 per cent per annum. ADT Operations funded
the subscription through loans drawn down under the revolving bank credit
agreement. The interest yield for 1996 amounted to $1.3 million.
NOTE (XV)--OTHER LONG-TERM ASSETS
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995
<S> <C> <C>
$M $M
Deferred refinancing costs....................................................................... 19.5 24.7
Other long-term assets........................................................................... 11.7 4.2
--- ---
31.2 28.9
--- ---
--- ---
</TABLE>
In connection with the refinancing of certain long-term debt obligations of ADT
Operations certain fees and expenses were incurred. These refinancing costs are
being amortized as interest expense through the consolidated statements of
income on a straight line basis over the terms of the respective lives of ADT
Operations various long-term debt obligations. The refinancing costs
amortization for the year amounted to $3.2 million (1995--$4.9 million;
1994--$5.3 million). During the year $2.0 million (1995--$13.6 million;
1994--nil) of net unamortized deferred refinancing costs, relating to the early
extinguishment of certain amounts outstanding under ADT Operations long-term
debt obligations, were written off as extraordinary items in the consolidated
statements of income (note (viii)).
F-70
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 36--ADT OPERATIONS, INC. (CONTINUED)
NOTE (XVI)--SHORT-TERM DEBT--NON-AFFILIATES
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995
<S> <C> <C>
$M $M
Bank and acceptance facilities................................................................. 46.8 36.1
Current portion of long-term debt (note (xix))................................................. 83.0 0.2
--------- ---
129.8 36.3
--------- ---
--------- ---
</TABLE>
The average rate of interest on short-term debt--non-affiliates outstanding at
December 31, 1996 was 6.8 per cent (1995--7.9 per cent). Short-term
debt--non-affiliates is generally repayable on demand or at an interest payment
date, and is non-collateralized except for $0.2 million of the current portion
of long-term debt in 1995.
NOTE (XVII)--OTHER CURRENT LIABILITIES--NON-AFFILIATES
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995
<S> <C> <C>
$M $M
Accruals...................................................................................... 23.3 24.1
Payroll and employee benefits................................................................. 40.9 41.7
Payments received on account.................................................................. 12.5 8.9
Income taxes.................................................................................. 2.3 2.0
Interest payable.............................................................................. 20.9 21.3
Short-term restructuring, disposition and other provisions.................................... 37.9 25.3
Other current liabilities..................................................................... 5.7 4.2
--------- ---------
143.5 127.5
--------- ---------
--------- ---------
</TABLE>
NOTE (XVIII)--LONG-TERM DEBT--AFFILIATES
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995
<S> <C> <C>
$M $M
Interest bearing, non-collateralized, subordinated loan notes................................. 634.2 97.4
Senior subordinated notes held by affiliates (note (xix)(a)).................................. 55.9 32.8
--------- ---------
690.1 130.2
--------- ---------
--------- ---------
</TABLE>
The average rate of interest on the non-collateralized, subordinated notes at
December 31, 1996 was 10.8 per cent (1995--10.8 per cent). The average rate of
interest on the non-collateralized, subordinated loan notes during the year was
10.6 per cent (1995--11.1 per cent; 1994--9.4 per cent). The loan notes are
repayable in December 1999 ($132.0 million), in December 2001 ($70.0 million)
and in August 2003 ($432.2 million).
F-71
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 36--ADT OPERATIONS, INC. (CONTINUED)
NOTE (XIX)--LONG-TERM DEBT--NON-AFFILIATES
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995
<S> <C> <C>
$M $M
Senior notes (a).............................................................................. 250.0 250.0
Senior subordinated notes (a)................................................................. 294.1 317.2
Liquid Yield Option Notes (b)................................................................. 326.8 306.8
Revolving bank credit agreement (c)........................................................... 83.0 15.0
Other......................................................................................... 6.3 6.6
--------- ---------
960.2 895.6
Less: current portion (note (xvi))............................................................ (83.0) (0.2)
--------- ---------
877.2 895.4
--------- ---------
--------- ---------
</TABLE>
(a) In August 1993 ADT Operations, Inc. issued, through a public
offering, $250.0 million of its 8.25 per cent senior notes due August 2000
guaranteed on a senior basis by ADT and certain subsidiaries of ADT Operations,
Inc. (note 23(i)) and $350.0 million of its 9.25 per cent senior subordinated
notes due August 2003 guaranteed on a senior subordinated basis by ADT (note
23(ii)). During 1996 affiliates of ADT Operations reacquired in the market $23.1
million (1995 - $32.8 million) face value of the senior subordinated notes and
these notes are all classified under long-term debt--affiliates (note (xviii)).
(b) In July 1995 ADT Operations, Inc. issued $776,250,000 aggregate
principal amount at maturity of its zero coupon subordinated Liquid Yield Option
Notes maturing July 2010 (note 23(iii)). The net proceeds of the issue amounted
to $287.4 million which was used to repay in full all amounts outstanding under
ADT Operations, Inc.'s previous bank credit agreement, which was subsequently
cancelled. The Notes discount amortization for 1996 amounted to $20.3 million
(1995--$9.4 million). During 1996 619 Notes with a carrying value of $0.3
million were exchanged, at the option of the holders, for 17,472 ADT common
shares (note 30).
(c) In August 1995 ADT Operations, Inc. entered into a new $300 million
revolving bank credit agreement which replaced in full its previous bank credit
agreement. The new agreement has a term of five years and is guaranteed on a
senior basis by ADT and certain subsidiaries of ADT Operations, Inc. (note
23(iv)). At December 31, 1996 $83.0 million (1995--$15.0 million) was drawn down
under the agreement, which has been classified in the current portion of
long-term debt, plus letters of credit amounting to $81.1 million (1995--$81.0
million) which have been issued and have terms of less than one year. The
average rate of interest at December 31, 1996 was 6.5 per cent (1995--7.6 per
cent).
In December 1996 ADT Operations, Inc. entered into a new $200 million revolving
bank credit agreement, subject to completion of certain additional documentation
which was signed in January 1997, which replaced in full its previous bank
credit agreement (note 23(iv)).
The average rate of interest on all long-term debt--non-affiliates during the
year was 7.9 per cent (1995-- 8.2 per cent; 1994--8.7 per cent).
F-72
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 36--ADT OPERATIONS, INC. (CONTINUED)
Based on estimated interest rates currently available to ADT Operations for
long-term debt--non-affiliates with similar terms and average maturities, the
fair value of all long-term debt--non-affiliates at December 31, 1996 amounted
to approximately $1,010 million (1995 -approximately $960 million).
The maturities and installments with respect to long-term debt--non-affiliates
outstanding at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
$M
<S> <C> <C>
Year ending December 31.............................................................. 1997 83.0
1998 0.9
1999 1.6
2000 251.7
2001 0.9
Thereafter 622.1
---------
960.2
---------
---------
</TABLE>
Under the terms of the indenture governing the senior subordinated notes a
payment blockage prevents ADT Operations, Inc. and its guarantor subsidiaries
and ADT from making any payment of principal, interest or premium on the senior
subordinated notes and from purchasing, redeeming or otherwise acquiring any
senior subordinated notes during the continuance of any payment blockage period.
No payment blockage is currently in effect.
At December 31, 1996, ADT Operations, Inc. had $414.1 million of Senior
Indebtedness comprised of $83.0 million of Senior Indebtedness related to loans
under the revolving bank credit agreement, $81.1 million of Senior Indebtedness
related to letters of credit issued under the terms of the revolving bank credit
agreement and $250.0 million of Senior Indebtedness related to the Senior Notes,
(in each case as defined in the Senior Subordinated Note Indenture).
At December 31, 1996, ADT had no Guarantor Senior Indebtedness (as defined in
the Senior Note Indenture, but excluding Indebtedness in respect of guarantees
issued by ADT of debt of ADT Operations, Inc. or its subsidiaries). At December
31, 1996, the subsidiary guarantors had $53.2 million of Guarantor Senior
Indebtedness (as defined in the Senior Note Indenture), in each case ranking
PARI PASSU in right of payment with the Senior Note Guarantees.
All of the subsidiary guarantors under the senior notes and the revolving bank
credit agreement are direct or indirect, wholly owned subsidiaries of ADT
Operations, Inc. Separate financial statements and other disclosures for the
subsidiary guarantors are not included herein because the subsidiary guarantors
have guaranteed the senior notes on a joint and several basis, the aggregate
assets, liabilities, earnings and equity of the subsidiary guarantors are
substantially equivalent to the assets, liabilities, earnings and equity of ADT
Operations, Inc. on a consolidated basis and such separate financial statements
and other disclosures are not considered material to investors.
F-73
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 36--ADT OPERATIONS, INC. (CONTINUED)
NOTE (XX)--DEFERRED INCOME TAXES
The movement in deferred income taxes since January 1, 1994 has been as follows:
<TABLE>
<CAPTION>
1996 1995 1994
$M $M $M
<S> <C> <C> <C>
At January 1................................................................................ 92.9 74.5 52.5
(Credit) charge for the year (note (vii)(a))................................................ (4.3) 16.5 22.0
Extraordinary items (note (viii))........................................................... (0.7) (4.7) --
Assumed on acquisitions--affiliates......................................................... (9.0) -- --
Reclassifications........................................................................... -- 6.6 --
--- --- ---
At December 31.............................................................................. 78.9 92.9 74.5
--- --- ---
--- --- ---
</TABLE>
The significant temporary timing differences and tax loss carryforwards that
gave rise to the deferred income tax balance were as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995
<S> <C> <C>
$M $M
Liabilities:
Depreciation................................................................................. 861.0 733.9
Other........................................................................................ 6.9 5.2
--------- ---------
867.9 739.1
--------- ---------
--------- ---------
Assets:
Tax operating loss carryforwards............................................................. 406.7 331.3
Provisions for estimated costs and expenses.................................................. 121.0 59.4
Interest expense............................................................................. 147.9 99.6
Post-retirement benefit obligations.......................................................... 78.6 66.5
--------- ---------
754.2 556.8
Valuation allowance.......................................................................... (111.8) (83.2)
--------- ---------
642.4 473.6
--------- ---------
Gross deferred income tax liability.......................................................... 225.5 265.5
--------- ---------
Deferred income tax liability at statutory tax rate.......................................... 78.9 92.9
--------- ---------
--------- ---------
</TABLE>
F-74
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 36--ADT OPERATIONS, INC. (CONTINUED)
NOTE (XX)--DEFERRED INCOME TAXES (CONTINUED)
The tax operating loss carryforwards at December 31, 1996 expire as follows:
<TABLE>
<CAPTION>
$M
---------
<S> <C> <C>
Year ending December 31.......................................................................... 1999 6.8
2000 4.1
2001 24.2
2002 18.3
2003 7.5
2004 80.2
2005 123.2
2006 107.2
2007 23.1
2008 12.1
---------
406.7
---------
---------
</TABLE>
NOTE (XXI)--OTHER LONG-TERM LIABILITIES--AFFILIATES
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995
<S> <C> <C>
$M $M
Deferred gain................................................................................. 117.4 129.8
--------- ---------
--------- ---------
</TABLE>
During 1994 ADT Operations assigned its interest in its trademarks, service
marks and associated goodwill to an affiliate for an aggregate consideration of
$150.0 million. In view of the fact that the assignment was to an affiliate, and
taking into account the terms of the transaction, the net gain of $141.7 million
arising on the assignment was deferred. During 1996 $12.4 million (1995 - $11.9
million) of this deferred gain was credited to the consolidated statements of
income to offset license fee payments made by ADT Operations to the affiliate,
calculated as a fixed percentage of net sales, for use of the trademarks and
service marks referred to above.
F-75
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 36--ADT OPERATIONS, INC. (CONTINUED)
NOTE (XXII)--OTHER LONG-TERM LIABILITIES--NON-AFFILIATES
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995
<S> <C> <C>
$M $M
Pensions (note 33(i)).......................................................................... 28.4 20.6
Post-retirement benefits other than pensions (note 33(iv))..................................... 48.2 47.8
Long-term restructuring, disposition and other provisions...................................... 27.8 15.0
Other long-term liabilities.................................................................... 15.0 12.9
--------- ---
119.4 96.3
--------- ---
--------- ---
</TABLE>
NOTE (XXIII)--COMMON SHARES
<TABLE>
<CAPTION>
AT DECEMBER 31 1996 1995 1994
<S> <C> <C> <C>
NUMBER NUMBER NUMBER
Authorized:
Common shares of $0.10 each......................................................... 10,000 10,000 10,000
----------- ----------- -----------
----------- ----------- -----------
Issued and outstanding:
Common shares of $0.10 each......................................................... 1,820 1,820 1,820
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
There has been no movement in authorized, issued and outstanding common shares
since January 1, 1994.
NOTE (XXIV)--COMMITMENTS AND CONTINGENCIES
(a) ADT Operations leases land, buildings, motor vehicles and other
equipment under various contracts. The future total minimum rental payments
required under operating leases that have remaining noncancelable lease terms in
excess of one year at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
$M
<S> <C> <C>
Year ending December 31.................................................................... 1997 37.5
1998 35.2
1999 28.3
2000 20.3
2001 12.7
Thereafter 12.2
---------
146.2
---------
---------
</TABLE>
The net operating lease rental charge for the year included in the consolidated
statements of income amounted to $43.4 million (1995--$44.1 million; 1994--$37.8
million).
F-76
<PAGE>
ADT LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 36--ADT OPERATIONS, INC. (CONTINUED)
(b) Financial instruments which potentially subject ADT Operations to
concentrations of credit risk principally consist of cash and cash equivalents
and trade receivables. ADT Operations places its cash and cash equivalents with
high credit quality financial institutions and, by policy, limits the amount of
credit exposure to any one financial institution. ADT Operations' trade
receivables primarily result from its electronic security services and vehicle
auction services businesses and reflects a broad customer base. Credit limits,
ongoing credit evaluation and account monitoring procedures are utilized to
minimize the risk of loss. As a consequence, concentrations of credit risk are
limited.
(c) ADT Operations is a defendant in a number of pending legal
proceedings incidental to present and former operations, acquisitions and
dispositions. ADT Operations does not expect the outcome of these proceedings
either individually or in the aggregate to have a material adverse effect on the
consolidated results of operations and cash flows or the consolidated financial
position of ADT Operations.
NOTE (XXV)--PENSION AND OTHER PLANS
(a) ADT Operations' United States electronic security services operation
has a non-contributory, funded, defined benefit pension plan covering
substantially all of its employees. Details of this pension plan are provided in
note 33(i).
(b) ADT Operations' United States electronic security services operation
sponsors an unfunded defined benefit post-retirement plan which covers both
salaried and non-salaried employees and which provides medical and other
benefits. Details of this post-retirement plan are provided in note 33(iv).
F-77
<PAGE>
ADT LIMITED
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT SUBSIDIARIES ADDITIONS DEDUCTIONS- BALANCE
BEGINNING ACQUIRED CHARGED TO PRIMARILY AT END
OF PERIOD (DISPOSED OF) INCOME WRITE-OFFS OF PERIOD
$M $M $M $M $M
<S> <C> <C> <C> <C> <C>
Allowance for doubtful receivables:
Year ended December 31, 1994....................... 22.1 (0.6) 4.0 (8.6) 16.9
--- --- --- --- ---
--- --- --- --- ---
Year ended December 31, 1995....................... 16.9 (1.1) 6.6 (5.4) 17.0
--- --- --- --- ---
--- --- --- --- ---
Year ended December 31, 1996....................... 17.0 -- 10.6 (9.1) 18.5
--- --- --- --- ---
--- --- --- --- ---
</TABLE>
F-78
<PAGE>
ADT OPERATIONS, INC.
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT SUBSIDIARIES ADDITIONS DEDUCTIONS- BALANCE
BEGINNING ACQUIRED CHARGED TO PRIMARILY AT END
OF PERIOD (DISPOSED OF) INCOME WRITE-OFFS OF PERIOD
$M $M $M $M $M
<S> <C> <C> <C> <C> <C>
Allowance for doubtful receivables:
Year ended December 31, 1994....................... 8.4 -- 1.9 (2.3) 8.0
-- --
-- --
--- --- ---
--- --- ---
Year ended December 31, 1995....................... 8.0 1.5 4.4 (2.0) 11.9
-- --
-- --
--- --- ---
--- --- ---
Year ended December 31, 1996....................... 11.9 -- 4.8 (5.9) 10.8
-- --
-- --
--- --- ---
--- --- ---
</TABLE>
F-79
<PAGE>
EXHIBIT 99.2
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The Merger is to be accounted for in accordance with the pooling of interests
method of accounting pursuant to APB Opinion No. 16. The pooling of interests
method of accounting assumes that ADT and Tyco have been merged since their
inception, and the historical consolidated financial statements for periods
prior to consummation of the Merger are restated as though the companies have
been combined since their inception. Accordingly, the accompanying unaudited pro
forma combined financial information gives effect to the transaction by means of
the pooling of interests. Pursuant to Rule 11-02 of Regulation S-X the unaudited
pro forma combined financial information excludes the results of operations
associated with discontinued operations and extraordinary items.
The unaudited pro forma combined financial information should be read in
conjunction with (i) ADT's consolidated financial statements, including the
accounting policies and notes thereto, included in the annual report on Form
10-K for the year ended December 31, 1996, (ii) Tyco's consolidated financial
statements, including the accounting policies and notes thereto, included in the
annual report on Form 10-K for the year ended June 30, 1996, and (iii) Tyco's
consolidated financial statements and notes thereto included in the quarterly
reports on Form 10-Q for the quarterly periods ended September 30, 1996 and
December 31, 1996.
The unaudited pro forma combined financial information has been prepared in
United States dollars in accordance with generally accepted accounting
principles in the United States (U.S. GAAP). These principles require management
to make extensive use of estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates. The unaudited pro forma combined
results of operations are not necessarily indicative of future operating
results.
Tyco's financial year-end is currently June 30, while ADT's is December 31. For
the purposes of the unaudited pro forma combined results of operations, Tyco's
results have been adjusted to a calendar year basis to conform with that of ADT.
Certain figures for the years ended December 31, 1995 and 1994 have been
reclassified to conform to the 1996 presentation. In addition, certain figures
of ADT and Tyco at December 31, 1996 and for the years ended December 31, 1996,
1995 and 1994 have been reclassified to conform to the combined presentation.
The unaudited pro forma combined condensed balance sheet gives effect to the
Merger as if it had occurred on December 31, 1996, combining the balance sheets
of ADT and Tyco at December 31, 1996. The unaudited pro forma combined
statements of income give effect to the Merger as if it had occurred on January
1, 1994, combining the results of ADT and Tyco for each of the three years in
the period ended December 31, 1996.
1
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS, EXCEPT SHARE NUMBER AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADT TYCO ADJUSTMENTS COMBINED
------------ --------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales..................................................... $ 1,704.0 $ 5,721.8 $ $ 7,425.8
Cost of sales................................................. (920.0) (4,132.3) (5,052.3)
Selling, general and administrative expenses.................. (567.5) (926.9) (1,494.4)
Restructuring and other non-recurring charges................. (237.3) -- (237.3)
Charge for the impairment of long-lived assets................ (744.7) -- (744.7)
------------ --------- ----------- -----------
Operating (loss) income....................................... (765.5) 662.6 (102.9)
Interest income............................................... 27.5 -- 3.0 30.5
Interest expense.............................................. (101.0) (81.3) (3.0) (185.3)
Gain (loss) on disposal of businesses......................... 1.7 -- 1.7
Other income less expenses.................................... 128.8 -- 128.8
------------ --------- ----------- -----------
(Loss) income from continuing operations before income
taxes....................................................... (708.5) 581.3 (127.2)
Income taxes.................................................. 21.8 (233.2) (211.4)
------------ --------- ----------- -----------
(Loss) income from continuing operations...................... $ (686.7) $ 348.1 $ (338.6)
------------ --------- ----------- -----------
------------ --------- ----------- -----------
Primary earnings per common share
(Loss) income from continuing operations...................... $ (5.01) $ 2.25 $ -- $ (1.53)
------------ --------- ----------- -----------
------------ --------- ----------- -----------
Weighted average number of common shares (in thousands)....... 137,114 154,468 220,465
------------ --------- ----------- -----------
</TABLE>
See accompanying notes to unaudited pro forma combined financial information.
2
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN MILLIONS, EXCEPT SHARE NUMBER AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADT TYCO ADJUSTMENTS COMBINED
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales........................................................ $ 1,783.8 $ 4,842.8 $ $ 6,626.6
Cost of sales.................................................... (990.4) (3,546.3) (4,536.7)
Selling, general and administrative expenses..................... (558.4) (772.7) (1,331.1)
Restructuring and other non-recurring charges.................... (34.2) -- (34.2)
--------- --------- ----------- -----------
Operating (loss) income.......................................... 200.8 523.8 724.6
Interest income.................................................. 16.2 -- 1.1 17.3
Interest expense................................................. (116.3) (62.0) (1.1) (179.4)
Gain (loss) on disposal of businesses............................ (36.6) -- (36.6)
Other income less expenses....................................... (5.0) -- (5.0)
--------- --------- ----------- -----------
(Loss) income from continuing operation before income taxes...... 59.1 461.8 520.9
Income taxes..................................................... (28.1) (188.8) (216.9)
--------- --------- ----------- -----------
(Loss) income from continuing operations......................... $ 31.0 $ 273.0 $ 304.0
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Primary earnings per common share
(Loss) income from continuing operations......................... $ 0.22 $ 1.79 $ -- $ 1.39
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Weighted average number of common shares (in thousands).......... 138,283 152,655 219,215
--------- --------- ----------- -----------
</TABLE>
See accompanying notes to unaudited pro forma combined financial information.
3
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN MILLIONS, EXCEPT SHARE NUMBER AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADT TYCO ADJUSTMENTS COMBINED
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales........................................................ $ 1,629.4 $ 4,230.6 $ $ 5,860.0
Cost of sales.................................................... (913.4) (3,097.0) (4,010.4)
Selling, general and administrative expenses..................... (505.5) (700.5) (1,206.0)
Restructuring and other non-recurring charges.................... (4.5) (37.2) (41.7)
--------- --------- ----------- -----------
Operating (loss) income.......................................... 206.0 395.9 601.9
Interest income.................................................. 15.2 -- 1.3 16.5
Interest expense................................................. (99.3) (60.8) (1.3) (161.4)
Gain (loss) on disposal of businesses............................ (0.3) -- (0.3)
Other income less expenses....................................... (4.1) -- (4.1)
--------- --------- ----------- -----------
(Loss) income from continuing operations before income taxes..... 117.5 335.1 452.6
Income taxes..................................................... (34.9) (151.4) (186.3)
--------- --------- ----------- -----------
(Loss) income from continuing operations......................... $ 82.6 $ 183.7 $ 266.3
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Primary earnings per common share
(Loss) income from continuing operations......................... $ 0.51 $ 1.24 $ -- $ 1.18
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Weighted average number of common shares (in thousands).......... 136,148 148,668 214,200
--------- --------- ----------- -----------
</TABLE>
See accompanying notes to unaudited pro forma combined financial information.
4
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEETS
AT DECEMBER 31, 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADT TYCO ADJUSTMENT COMBINED
--------- --------- ------------ -----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................... $ 215.9 $ 83.5 $ $ 299.4
Accounts receivable, net...................................... 210.7 914.8 1,125.5
Contracts in process.......................................... -- 131.6 131.6
Inventories................................................... 39.2 765.2 804.4
Deferred income taxes......................................... -- 144.9 144.9
Prepaid expenses and other current assets..................... 117.0 94.1 211.1
--------- --------- ------------ -----------
Total current assets.......................................... 582.8 2,134.1 2,716.9
Property, plant and equipment, net............................ 1,513.6 924.2 2,437.8
Goodwill and other intangibles, net........................... 458.0 1,837.3 2,295.3
Reorganization value in excess of identifiable assets......... -- 99.4 99.4
Deferred income taxes......................................... -- 67.2 67.2
Long-term investments......................................... 100.6 -- 100.6
Other long-term assets........................................ 75.4 135.9 211.3
--------- --------- ------------ -----------
Total assets.................................................. $ 2,730.4 $ 5,198.1 $ $ 7,928.5
--------- --------- ------------ -----------
--------- --------- ------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt............................................... $ 209.2 $ 362.8 $ 572.0
Accounts payable.............................................. 138.0 562.1 (18.6) 681.5
Other current liabilities..................................... 293.6 636.8 3.0 933.4
Contracts in process -- billings in excess of cost............ -- 153.3 153.3
Income taxes.................................................. -- 101.1 15.6 116.7
Deferred income taxes......................................... -- 12.9 12.9
--------- --------- ------------ -----------
Total current liabilities..................................... 640.8 1,829.0 2,469.8
Long-term debt................................................ 910.1 893.7 1,803.8
Deferred revenue.............................................. 146.1 -- 146.1
Deferred income taxes......................................... 91.5 29.0 120.5
Other long-term liabilities................................... 182.1 218.4 400.5
--------- --------- ------------ -----------
Total liabilities............................................. 1,970.6 2,970.1 4,940.7
--------- --------- ------------ -----------
Total shareholders' equity.................................... 759.8 2,228.0 2,987.8
--------- --------- ------------ -----------
Total liabilities and shareholders' equity.................... $ 2,730.4 $ 5,198.1 $ $ 7,928.5
--------- --------- ------------ -----------
--------- --------- ------------ -----------
</TABLE>
See accompanying notes to unaudited pro forma combined financial information.
5
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(1) The pro forma combined per share amounts are based on the combined weighted
average of ADT Common Shares and Tyco Common Shares for all periods
presented based on ADT shareholders, through a reverse stock split,
receiving 0.48133 Combined Company Common Shares for each ADT Common Share
and Tyco shareholders receiving one Combined Company Common Share for each
Tyco Common Share.
(2) Certain reclassifications, none of which affects income from continuing
operations, have been made to the Tyco statements of income in the pro forma
combined statements of income to conform classifications of interest income.
The pro forma adjustments to the balance sheet were required to classify on
a consistent basis income taxes payable and employee payroll withholdings.
(3) Primary (loss) earnings per common share from continuing operations for ADT
was based on adjusted net (loss) income from continuing operations available
to common shareholders, after deducting dividends on ADT convertible
preference shares, of ($687.0) million in 1996, $30.7 million in 1995 and
$69.3 million in 1994.
(4) There were no material transactions between ADT and Tyco during any of the
periods presented.
(5) Total transaction costs to be incurred by ADT and Tyco in connection with
the Merger are estimated to be approximately $75 million. These costs,
related to legal, printing, accounting, financial advisory services and
other related expense, will be charged against income upon consummation of
the Merger. A restructuring charge to operations by the combined company is
expected to occur subsequent to the Merger to reflect the combination of the
two companies. Such charges may include amounts with respect to the
elimination of excess facilities, the write-off of certain goodwill and
fixed assets and severance costs. The effects of these costs have not been
reflected in this pro forma combined financial information.
(6) The Tyco share and per share amounts for 1995 and 1994 have been restated to
reflect a two-for-one stock split effected in the form of a stock dividend
which was distributed on November 14, 1995.
(7) In 1996 ADT recorded certain non-recurring items including (i) a non-cash
charge relating to the write-down of specific assets to their estimated fair
values in accordance with Statement of Financial Accounting Standards No.
121, (ii) a charge principally relating to costs associated with integrating
the businesses of ASH in the United Kingdom and the United States into ADT,
together with the costs of administrative, accounting, management
information and technological infrastructure enhancements currently being
implemented in the United States electronic security services division,
(iii) a gain arising on the sale of ADT's entire interest in Limelight Group
plc, which was recorded in the balance sheet at a nominal value, and (iv) a
gain represented by cash receivable as a result of the settlement of ADT's
litigation against BDO Binder Hamlyn. ADT's historical net income before
these non-recurring items amounted to $140.3 million, or $0.98 per share
($0.93 per share on a fully diluted basis). On a pro forma combined basis,
net income before these charges is $488.4 million, or $2.19 per share ($2.14
per share on a fully diluted basis).
6
