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) April 1, 1997
WESTERN RESOURCES, INC.
(Exact Name of Registrant as Specified in Its Charter)
KANSAS 1-3523 48-0290150
(State or Other Jurisdiction of (Commission (Employer
Incorporation or Organization File Number) Identification No.)
818 KANSAS AVENUE, TOPEKA, KANSAS 66612
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number Including Area Code (913) 575-6300
<PAGE>
WESTERN RESOURCES, INC.
Item 5. Other Events
Western Resources, Inc. herein files the following:
Exhibit 23 - Consent of Independent Public Accountants
Exhibit 99.1 - Unaudited Pro Forma Combined Financial Information of Western
Resources, Inc.
Exhibit 99.2 - December 31, 1996 Annual Report on Form 10-K for Kansas City
Power & Light Company
Exhibit 99.3 - December 31, 1996 Annual Report on Form 10-K for ADT, Limited
Exhibit 99.4 - Schedule 14A dated March 3, 1997 as filed by ADT, Limited
AVAILABLE INFORMATION
The reader's attention is directed to additional filings of Western
Resources, Inc. (Western Resources), ADT Limited (ADT), and Kansas City Power
& Light Company (KCPL).
Western Resources, ADT and KCPL are subject to the informational
requirements of the Exchange Act, and in accordance therewith file reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by Western Resources, ADT and KCPL with the Commission may be inspected
and copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and
at the public reference facilities in the Commission's Regional Offices at Seven
World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
information may be obtained from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Because
Western Resources, ADT and KCPL each file certain documents electronically with
the Commission, reports, proxy and information statements and other information
regarding Western Resources, ADT and KCPL may also be obtained at prescribed
rates from the Commission at the Commission's Web site, http//:www.sec.gov. The
Western Resources Common Stock, the ADT Common Stock and the KCPL Common Stock
are listed and traded on the NYSE. ADT Common Stock is also listed and traded on
the London Stock Exchange, the Frankfurt Stock Exchange and the Bermuda Stock
Exchange and the KCPL Common Stock is also listed on the Chicago Stock Exchange.
Reports, proxy statements and other information filed by Western Resources, ADT
and KCPL with the Commission may be inspected at the offices of the NYSE, 20
Broad Street, New York, New York 10005 and, concerning KCPL only, at the offices
of the CSE, 440 South LaSalle Street, Chicago, Illinois 60605.
INFORMATION ON ADT AND KCPL INCLUDED IN UNAUDITED PRO FORMA FINANCIAL
INFORMATION
2
<PAGE>
On February 7, 1997, KCPL and Western Resources entered into an
agreement whereby KCPL would be merged with and into Western Resources.
On March 14, 1997, Western Resources commenced an offer to exchange
$22.50 of Western Resources Common Stock and cash for each outstanding common
share of ADT not already owned by Western Resources or its subsidiaries (ADT
Offer). ADT shareowners would receive $10 cash plus 0.41494 of a share of
Western Resources Common Stock for each share of ADT tendered not already owned
by Western Resources, based on the closing price of Western Resources Common
Stock on March 13, 1997. ADT shareowners would not, however, receive more than
0.42017 shares of Western Resources Common Stock for each ADT common share.
Effective March 17, 1997 Tyco International Ltd. (Tyco) announced that
they had entered into a definitive merger agreement with ADT in a stock-for-
stock transaction. Based upon Tyco's closing stock price on April 1, 1997 of
$54.875, the terms of the agreement would result in a value of approximately $26
per share to ADT shareholders. Western is currently reviewing the Tyco offer as
well as considering its alternatives to such offer and assessing its rights as
an ADT shareholder. At this date, the impact the Tyco offer will have on the ADT
Offer and Tyco's ability to consummate this transaction in accordance with the
specified terms is not known.
While Western Resources has included in Exhibit 99.1 filed beneath
information concerning ADT and KCPL insofar as it is known or reasonably
available to Western Resources, Western Resources is not affiliated with either
ADT or KCPL. ADT has not to date permitted access by Western Resources to ADT's
books and records for the purpose of preparing this document. In addition,
Western Resources has not examined KCPL's books and records for the purpose of
preparing this document. Therefore, information concerning ADT and KCPL which
has not been made public was not available to Western Resources for the purpose
of preparing this document. Although Western Resources has no knowledge that
would indicate that statements relating to ADT or KCPL contained or incorporated
by reference in Exhibit 99.1 in reliance upon publicly available information are
inaccurate or incomplete, Western Resources was not involved in the preparation
of such information and statements and, for the foregoing reasons, is not in a
position to verify any such information or statements. In addition, Western
Resources was not involved in the preparation of Exhibits 99.2, 99.3 or 99.4 and
therefore is not in a position to verify any of the information contained
therein.
Pursuant to Rule 409 promulgated under the Securities Act of 1933,
Western Resources has requested that Coopers & Lybrand L.L.P., provide to
Western Resources the information required for complete disclosure concerning
the business, operations, financial condition and management of ADT. Neither ADT
nor Coopers & Lybrand L.L.P. has yet provided any information in response to
such request.
3
<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.
Western Resources, Inc.
Date April 1, 1997 By /s/ Jerry D. Courington
-------------------------- -----------------------------
Jerry D. Courington
Controller
4
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this report on Form 8-K
of our report dated February 14, 1997, on our audit of the consolidated
financial statements of Kansas City Power & Light Company and Subsidiary as of
December 31, 1996 and 1995, and for the years ended December 31, 1996, 1995 and
1994, which report is included in the Kansas City Power & Light Company and
Subsidiary's Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Kansas City, Missouri
April 1, 1997
<PAGE>
Exhibit 99.1
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
On February 7, 1997, Kansas City Power and Light Company (KCPL) and Western
Resources, Inc. (Western Resources) entered into an agreement whereby KCPL would
be merged with and into Western Resources (Merger).
On March 14, 1997, Western Resources commenced an offer to exchange $22.50 of
Western Resources Common Stock and cash for each outstanding share of ADT
Limited (ADT) Common Stock not already owned by Western Resources or its
subsidiaries (ADT Offer). ADT shareowners would receive $10 cash plus 0.41494 of
a share of Western Resources Common Stock for each share of ADT Common Stock
tendered not already owned by Western Resources, based on the closing price of
Western Resources Common Stock on March 13, 1997. ADT shareowners would not,
however, receive more than 0.42017 shares of Western Resources Common Stock for
each share of ADT Common Stock.
Effective March 17, 1997 Tyco International Ltd. (Tyco) announced that they
had entered into a definitive merger agreement with ADT in a stock-for-stock
transaction. Based upon Tyco's closing stock price on April 1, 1997 of $54.875,
the terms of the agreement would result in a value of approximately $26 per
share to ADT shareholders. Western is currently reviewing the Tyco offer as well
as considering its alternatives to such offer and assessing its rights as an ADT
shareholder. At this date, the impact the Tyco offer will have on the ADT Offer
and Tyco's ability to consummate this transaction in accordance with the
specified terms is not known.
The purpose of the ADT Offer is to enable Western Resources to acquire
control of ADT. Western Resources presently intends, following consummation of
the ADT Offer, to propose and seek to have ADT effect the Amalgamation, pursuant
to which a newly created subsidiary of Western Resources incorporated under the
laws of Bermuda will amalgamate with and into ADT, with the amalgamated company
operating under the name of ADT (the Amalgamation).
The following unaudited pro forma combined financial information presents
the consolidated balance sheets and statements of income for the following: (i)
Western Resources and KCPL, assuming the Merger is accounted for as a pooling of
interests; and (ii) Western Resources, KCPL and ADT, assuming the Merger is
accounted for as a pooling of interests and the Amalgamation is accounted for as
a purchase.
ADT's results of operations and financial position have been presented for
the year ended December 31, 1996, as if the purchase was consummated on December
31, 1996. The unaudited pro forma combined statement of income adjusts the
historical amounts to reflect the Amalgamation as if it had occurred at the
beginning of 1996. The unaudited combined operating results of Western Resources
and KCPL have been presented for each of the last three fiscal years, because
the Merger will be accounted for as a pooling of interests. Pro Forma combined
information which includes ADT is presented for the most recent year ended since
the Amalgamation would be accounted for as a purchase.
<PAGE>
The unaudited pro forma combined financial statements were prepared
utilizing the historical audited financial statements, including the notes
thereto, of Western Resources, KCPL and ADT. The information shown below should
be read in conjunction with the consolidated historical financial statements of
Western Resources, KCPL and ADT, as filed with the Securities and Exchange
Commission (SEC). The following information is being presented for illustrative
purposes only and is not necessarily indicative of the financial position or
operating results that would have occurred had the Amalgamation and the Merger
been consummated at the beginning of the periods for which the Merger and the
Amalgamation are being given effect, nor is it necessarily indicative of future
operating results or financial position.
The Merger
The Merger Agreement provides that each share of KCPL Common Stock will be
exchanged for $32.00 of Western Resources Common Stock, subject to certain
limitations. Pro forma shares outstanding and related earnings and dividends per
share information have been calculated assuming a Conversion Ratio of 1.05785
based on a closing price of $30.250 per share of Western Resources Common Stock
on February 28, 1997. The actual Conversion Ratio will be based on a 20 day
average of the Closing price of Western Resources Common Stock calculated for a
period beginning on the 29th business day prior to Closing and ending on the
tenth business day prior to Closing.
The Merger is assumed to generate substantial cost savings. The assumed
cost savings have not been reflected in the pro forma combined balance sheets
and statements of income. Transaction costs associated with the Merger including
fees for advisors, attorneys and other consultants and incremental direct costs
of completing the Merger are estimated to approximate $60 million.
There are no anticipated changes in either Western Resources' or KCPL's
accounting policies as a result of the Merger. Both companies accrue unbilled
revenue for energy delivered at the end of each reporting period, use composite
depreciation methods at group rates specified pursuant to regulation and have
certain other accounting policies which differ from each other as well as from
other commercial enterprises due to the nature of how regulators have allowed
certain costs to be recovered from customers.
Western Resources has joint interests with KCPL in the LaCygne Station and
Wolf Creek electric generating facilities. These generating facilities represent
approximately 23% of Western Resources' total generating capacity, 39% of KCPL's
total generating capacity and 29% of the combined company's total generating
capacity.
The Amalgamation
Western Resources currently owns approximately 38.3 million shares of ADT
Common Stock, or approximately 25% of the outstanding shares of ADT Common Stock
after giving effect to the exercise of the Republic Warrant. This represents a
$589.4 million investment, at cost, in ADT. Western Resources proposes to
acquire the remaining common equity interest of ADT for $22.50 per share of ADT
Common Stock, subject to adjustment, and account for such
<PAGE>
acquisition as a purchase. ADT's shareholders would receive $12.50 of value in
Western Resources Common Stock, subject to certain limitations, and the balance
of the purchase price ($10.00 per share of ADT Common Stock) would be paid in
cash. The pro forma combined balance sheet assumes the recorded amounts of ADT's
assets and liabilities approximate their fair values. The preliminary purchase
price allocation was made using only publicly available information for ADT and
is subject to change. The pro forma combined financial statements do not give
effect to any anticipated cost savings or revenue enhancements that may result
from the Amalgamation.
During the first quarter of 1996, ADT recorded a non-cash charge of
approximately $744.7 million to recognize the impairment of certain long-lived
assets. The impairment charge was largely attributable to reducing the amount of
recorded goodwill and had no significant tax effect.
In September 1996, ADT acquired the entire equity interest in Automated
Security (Holdings) PLC, a United Kingdom company ("ASH")(the ASH Transaction).
ASH is engaged in the provision of electronic security services in North America
and Europe. The ASH Transaction was accounted for by ADT as a pooling of
interests. In connection with the ASH Transaction, ADT exchanged 7,034,940
shares of ADT Common Stock for the entire equity interest in ASH.
In November 1996, ADT's Chairman announced a plan to sell ADT's auto
auction business. Consistent with ADT's announcement, Western Resources also
plans to sell this business following the consummation of the Amalgamation since
it does not fit into Western Resources' long-term strategic plans and such sale
will allow management to focus on the delivery of security and energy services.
According to ADT's 1996 Annual Report on Form 10-K, the auto auction business of
ADT operates approximately 27 auction centers in the United States.
Substantially all of the vehicles sold at ADT auction centers are passenger cars
and light trucks. Heavy trucks and industrial vehicles comprise the balance of
its sales. Western Resources estimates the sale of the auto auction business
should generate after-tax proceeds of approximately $450 million based on an
estimated sales price of approximately $500 million. In March 1997, ADT's
Chairman announced that ADT had rescinded its prior plan to sell the auto
auction business. Western Resources, however, will continue its plan to dispose
of this business of ADT following consummation of the Amalgamation.
This cash sale is assumed to be completed at or near the closing of the
Amalgamation. The estimated fair value of the net proceeds to be received as a
result of this sale have been presented as property held for sale on the
unaudited pro forma combined balance sheet and a pro forma adjustment to
eliminate the operating results of the auto auction business is reflected in the
unaudited pro forma combined statement of income. Estimated amounts have been
disclosed based on Western Resources' expectation of value. Actual amounts could
differ substantially from these estimates.
Other Transactions
In December 1996 Western Resources and ONEOK announced the formation of a
proposed strategic alliance. Under the terms of the agreement, Western
<PAGE>
Resources and ONEOK will each contribute essentially all of their natural gas
assets to a new company controlled by ONEOK. Following the completion of the
transaction, Western Resources will have a 45% equity interest in the combined
new company. The new natural gas assets and earnings from this business unit
will be replaced by equity investments, equity earnings and preferred dividends
after this transaction closes. The cash flows from the strategic alliance are
expected to exceed the cash flows historically provided to Western Resources by
these assets. The proposed transaction is expected to close following approval
by ONEOK's shareholders and appropriate regulatory approvals in the second half
of 1997.
On December 31, 1996 Western Resources purchased the assets of Westinghouse
Security Systems, Inc. Western Resources paid approximately $358 million,
subject to adjustment, and assumed certain liabilities in connection with this
purchase. This acquisition significantly expands the scope of Western Resources'
security operations. Based on a preliminary estimate of the purchase price
allocation approximately $275 million of goodwill has been recorded. Since the
transaction closed on December 31, 1996, no operating results have been included
on the accompanying pro forma combined statement of income for the year ended
December 31, 1996.
<TABLE>
WESTERN RESOURCES AND KCPL
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
December 31, 1996
(in thousands)
ASSETS
<CAPTION>
Pro Forma
Western KCPL Total
(Historical) (Historical) Adjustments Combined
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents . . . . . . . . . .$ 3,724 $ 23,571 $ - $ 27,295
Accounts receivable and unbilled
revenues (net). . . . . . . . . . . . . . . 318,966 63,206 - 382,172
Other current assets. . . . . . . . . . . . . 171,758 74,203 - 245,961
---------- ---------- -------- ----------
Total current assets . . . . . . . . . . 494,448 160,980 - 655,428
---------- ---------- -------- ----------
Property, Plant and Equipment, net . . . . . . . . 4,356,518 2,343,494 - 6,700,012
---------- ---------- -------- ----------
Deferred Charges and Other Assets:
Goodwill, net . . . . . . . . . . . . . . . . 306,960 - - 306,960
Regulatory asset-recoverable taxes. . . . . . 217,257 126,000 - 343,257
Regulatory assets . . . . . . . . . . . . . . 241,039 37,747 - 278,786
Other assets. . . . . . . . . . . . . . . . . 1,031,559 246,291 (30,000)(k) 1,247,850
---------- ---------- -------- ----------
Total deferred charges and other
assets . . . . . . . . . . . . . . . . 1,796,815 410,038 (30,000) 2,176,853
---------- ---------- -------- ----------
Total Assets . . . . . . . . . . . . . .$6,647,781 $2,914,512 $(30,000) $9,532,293
========== ========== ======== ==========
LIABILITIES AND CAPITALIZATION
Pro Forma
Western KCPL Total
(Historical) (Historical) Adjustments Combined
Current Liabilities:
Short-term debt . . . . . . . . . . . . . . .$ 980,740 $ - $ - $ 980,740
Long-term debt due within one year. . . . . . - 26,591 - 26,591
Accounts payable. . . . . . . . . . . . . . . 180,540 55,618 - 236,158
Other current liabilities . . . . . . . . . . 190,812 84,216 30,000(k) 305,028
---------- ---------- -------- ----------
Total current liabilities. . . . . . . . 1,352,092 166,425 30,000 1,548,517
---------- ---------- -------- ----------
Other Liabilities and Deferred Credits:
Deferred income taxes . . . . . . . . . . . . 1,110,372 643,189 - 1,753,561
Deferred investment tax credits . . . . . . . 125,528 67,107 - 192,635
Other . . . . . . . . . . . . . . . . . . . . 458,668 94,144 - 552,812
---------- ---------- -------- ----------
Total other liabilities and deferred
credits. . . . . . . . . . . . . . . . 1,694,568 804,440 - 2,499,008
---------- ---------- -------- ----------
Capitalization:
Long-term debt, net . . . . . . . . . . . . . 1,681,583 944,136 - 2,625,719
Company-obligated mandatorily redeemable
preferred securities. . . . . . . . . . . . 220,000 - - 220,000
Preferred and preference stock. . . . . . . . 74,858 89,062 - 163,920
Common equity . . . . . . . . . . . . . . . . 1,624,680 910,449 (60,000)(k) 2,475,129
---------- ---------- -------- ----------
Total capitalization . . . . . . . . . . 3,601,121 1,943,647 ( 60,000) 5,484,768
---------- ---------- -------- ----------
Total Liabilities and Capitalization . .$6,647,781 $2,914,512 $(30,000) $9,532,293
========== =========== ======== ==========
The accompanying Notes to Unaudited Pro Forma Combined
Financial Information are an integral part of this statement
and should be read in their entirety.
</TABLE>
<PAGE>
<TABLE>
WESTERN RESOURCES AND KCPL
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
December 31, 1995
(in thousands)
ASSETS
<CAPTION>
Pro Forma
Western KCPL Total
(Historical) (Historical) Adjustments Combined
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents . . . . . . . . . .$ 2,414 $ 28,390 $ - $ 30,804
Accounts receivable and unbilled
revenues (net). . . . . . . . . . . . . . . 257,292 64,668 - 321,960
Other current assets. . . . . . . . . . . . . 161,270 80,404 - 241,674
---------- ---------- -------- ----------
Total current assets . . . . . . . . . . 420,976 173,462 - 594,438
---------- ---------- -------- ----------
Property, Plant and Equipment, net . . . . . . . . 4,356,350 2,359,461 - 6,715,811
---------- ---------- -------- ----------
Deferred Charges and Other Assets:
Regulatory asset-recoverable taxes. . . . . . 282,476 123,000 - 405,476
Regulatory assets . . . . . . . . . . . . . . 262,393 38,342 - 300,735
Other assets. . . . . . . . . . . . . . . . . 168,482 188,241 - 356,723
---------- ---------- -------- ----------
Total deferred charges and other
assets . . . . . . . . . . . . . . . . 713,351 349,583 - 1,062,934
---------- ---------- -------- ----------
Total Assets . . . . . . . . . . . . . .$5,490,677 $2,882,506 $ - $8,373,183
========== ========== ======== ==========
LIABILITIES AND CAPITALIZATION
Pro Forma
Western KCPL Total
(Historical) (Historical) Adjustments Combined
Current Liabilities:
Short-term debt . . . . . . . . . . . . . . .$ 203,450 $ 19,000 $ - $ 222,450
Long-term debt due within one year. . . . . . 16,000 73,803 - 89,803
Accounts payable. . . . . . . . . . . . . . . 149,194 52,506 - 201,700
Other current liabilities . . . . . . . . . . 170,992 104,746 - 275,738
---------- ---------- -------- ----------
Total current liabilities. . . . . . . . 539,636 250,055 - 789,691
---------- ---------- -------- ----------
Other Liabilities and Deferred Credits:
Deferred income taxes . . . . . . . . . . . . 1,167,470 648,374 - 1,815,844
Deferred investment tax credits . . . . . . . 132,286 71,270 - 203,556
Other . . . . . . . . . . . . . . . . . . . . 432,054 88,720 - 520,774
---------- ---------- -------- ----------
Total other liabilities and deferred
credits. . . . . . . . . . . . . . . . 1,731,810 808,364 - 2,540,174
---------- ---------- -------- ----------
Capitalization:
Long-term debt, net . . . . . . . . . . . . . 1,391,263 835,713 - 2,226,976
Company-obligated mandatorily redeemable
preferred securities. . . . . . . . . . . . 100,000 - - 100,000
Preferred and preference stock. . . . . . . . 174,858 90,436 - 265,294
Common equity . . . . . . . . . . . . . . . . 1,553,110 897,938 - 2,451,048
---------- ---------- -------- ----------
Total capitalization . . . . . . . . . . 3,219,231 1,824,087 - 5,043,318
---------- ---------- -------- ----------
Total Liabilities and Capitalization . .$5,490,677 $2,882,506 $ - $8,373,183
========== =========== ======== ==========
The accompanying Notes to Unaudited Pro Forma Combined
Financial Information are an integral part of this statement
and should be read in their entirety.
</TABLE>
<PAGE>
<TABLE>
WESTERN RESOURCES AND KCPL
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
For the Year Ended December 31, 1996
(in thousands except per share data)
<CAPTION>
Pro Forma
Western KCPL Total
(Historical) (Historical) Adjustments Combined
<S> <C> <C> <C> <C>
Operating Revenues:
Electric. . . . . . . . . . . . . . . . . . .$1,197,433 $903,919 $ - $2,101,352
Natural gas . . . . . . . . . . . . . . . . . 849,386 - - 849,386
---------- -------- ------ ----------
Total operating revenues . . . . . . . . 2,046,819 903,919 - 2,950,738
Operating Expenses:
Cost of sales . . . . . . . . . . . . . . . . 648,299 192,960 - 841,259
Operations, administrative and selling. . . . 804,169 349,462 - 1,153,631
Depreciation and amortization . . . . . . . . 201,266 115,529 - 316,795
---------- -------- ------ ---------
Operating Income . . . . . . . . . . . . . . . . . 393,085 245,968 - 639,053
---------- -------- ------ ---------
Interest Expense . . . . . . . . . . . . . . . . . 149,326 58,083 - 207,409
Other Income (Expenses). . . . . . . . . . . . . . 11,293 (47,961) - (36,668)
---------- -------- ------ ----------
Income Before Income Taxes . . . . . . . . . . . . 255,052 139,924 - 394,976
Income Taxes . . . . . . . . . . . . . . . . . . . 86,102 31,753 - 117,855
---------- -------- ------ ----------
Net Income . . . . . . . . . . . . . . . . . . . . 168,950 108,171 - 277,121
Preferred and Preference Dividends . . . . . . . . 14,839 3,790 - 18,629
---------- -------- ------ ----------
Earnings Applicable to Common Stock. . . . . . . .$ 154,111 $104,381 $ - $ 258,492
========== ======== ====== ==========
Average Common Shares Outstanding. . . . . . . . . 63,834 61,902 3,581(i) 129,317
Earnings Per Average Common Share. . . . . . . . .$ 2.41 $ 1.69 $ 2.00
The accompanying Notes to Unaudited Pro Forma Combined
Financial Information are an integral part of this statement
and should be read in their entirety.
</TABLE>
<PAGE>
<TABLE>
WESTERN RESOURCES AND KCPL
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
For the Year Ended December 31, 1995
(in thousands except per share data)
<CAPTION>
Pro Forma
Western KCPL Total
(Historical) (Historical) Adjustments Combined
<S> <C> <C> <C> <C>
Operating Revenues:
Electric. . . . . . . . . . . . . . . . . . .$1,145,895 $885,955 $ - $2,031,850
Natural gas . . . . . . . . . . . . . . . . . 597,405 - - 597,405
---------- -------- ------ ----------
Total operating revenues . . . . . . . . 1,743,300 885,955 - 2,629,255
Operating Expenses:
Cost of sales . . . . . . . . . . . . . . . . 510,948 178,154 - 689,102
Operations, administrative and selling. . . . 684,616 353,859 - 1,038,475
Depreciation and amortization . . . . . . . . 177,830 109,832 - 287,662
--------- -------- ------ ----------
Operating Income . . . . . . . . . . . . . . . . . 369,906 244,110 - 614,016
--------- -------- ------ ----------
Interest Expense . . . . . . . . . . . . . . . . . 122,095 54,522 - 176,617
Other Income (Expenses). . . . . . . . . . . . . . 17,257 (199) - 17,058
--------- -------- ------ ----------
Income Before Income Taxes . . . . . . . . . . . . 265,068 189,389 - 454,457
Income Taxes . . . . . . . . . . . . . . . . . . . 83,392 66,803 - 150,195
--------- -------- ------ ----------
Net Income . . . . . . . . . . . . . . . . . . . . 181,676 122,586 - 304,262
Preferred and Preference Dividends . . . . . . . . 13,419 4,011 - 17,430
--------- -------- ------ ----------
Earnings Applicable to Common Stock. . . . . . . . $ 168,257 $118,575 $ - $ 286,832
========= ======== ====== ==========
Average Common Shares Outstanding. . . . . . . . . 62,157 61,902 3,581(i) 127,640
Earnings Per Average Common Share. . . . . . . . . $ 2.71 $ 1.92 $ 2.25
The accompanying Notes to Unaudited Pro Forma Combined
Financial Information are an integral part of this statement
and should be read in their entirety.
</TABLE>
<PAGE>
<TABLE>
WESTERN RESOURCES AND KCPL
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
For the Year Ended December 31, 1994
(in thousands except per share data)
<CAPTION>
Pro Forma
Western KCPL Total
(Historical) (Historical) Adjustments Combined
<S> <C> <C> <C> <C>
Operating Revenues:
Electric. . . . . . . . . . . . . . . . . . .$1,121,781 $868,272 $ - $1,990,053
Natural gas . . . . . . . . . . . . . . . . . 642,988 - - 642,988
---------- -------- ------ ----------
Total operating revenues . . . . . . . . 1,764,769 868,272 - 2,633,041
Operating Expenses:
Cost of sales . . . . . . . . . . . . . . . . 562,342 169,035 - 731,377
Operations, administrative and selling. . . . 656,813 371,134 - 1,027,947
Depreciation and amortization . . . . . . . . 174,942 107,463 - 282,405
--------- -------- ------ ----------
Operating Income . . . . . . . . . . . . . . . . . 370,672 220,640 - 591,312
--------- -------- ------ ----------
Interest Expense . . . . . . . . . . . . . . . . . 118,917 47,416 - 166,333
Other Income (Expenses). . . . . . . . . . . . . . 35,643 (2,072) - 33,571
--------- -------- ------ ----------
Income Before Income Taxes . . . . . . . . . . . . 287,398 171,152 - 458,550
Income Taxes . . . . . . . . . . . . . . . . . . . 99,951 66,377 - 166,328
--------- -------- ------ ----------
Net Income . . . . . . . . . . . . . . . . . . . . 187,447 104,775 - 292,222
Preferred and Preference Dividends . . . . . . . . 13,418 3,457 - 16,875
--------- -------- ------ ----------
Earnings Applicable to Common Stock. . . . . . . . $ 174,029 $101,318 $ - $ 275,347
========= ======== ====== ==========
Average Common Shares Outstanding. . . . . . . . . 61,618 61,903 3,581(i) 127,102
Earnings Per Average Common Share. . . . . . . . . $ 2.82 $ 1.64 $ 2.17
The accompanying Notes to Unaudited Pro Forma Combined
Financial Information are an integral part of this statement
and should be read in their entirety.
</TABLE>
<PAGE>
<TABLE>
WESTERN RESOURCES, KCPL AND ADT
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
December 31, 1996
(in thousands)
ASSETS
<CAPTION>
Pro Forma
Western KCPL ADT Total
(Historical) (Historical) (Historical) Adjustments Combined
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents . . . .$ 3,724 $ 23,571 $ 215,900 $ 165,120(a)(j)(k)(o) $ 408,315
Accounts receivable and unbilled
revenues (net). . . . . . . . . 318,966 63,206 210,700 (78,200)(o) 514,672
Other current assets. . . . . . . 171,758 74,203 156,200 (4,800)(o) _ 397,361
---------- ---------- --------- --------- ----------
Total current assets . . . . 494,448 160,980 582,800 82,120 _ 1,320,348
---------- ---------- --------- --------- ----------
Property, Plant and Equipment, net
Utility plant . . . . . . . . . . 4,356,518 2,343,494 - - 6,700,012
Subscriber systems(n) . . . . . . - - 1,215,500 - 1,215,500
Other . . . . . . . . . . . . . . - - 298,100 (227,900)(o) _ 70,200
---------- ---------- --------- -------- ----------
Total property, plant and
equipment, net . . . . . . 4,356,518 2,343,494 1,513,600 (227,900) _ 7,985,712
---------- ---------- --------- -------- ----------
Deferred Charges and Other Assets:
Goodwill, net . . . . . . . . . . 306,960 - 458,000 2,214,700(b) 2,979,660
Regulatory asset-recoverable
taxes . . . . . . . . . . . . . 217,257 126,000 - - 343,257
Regulatory assets . . . . . . . . 241,039 37,747 - - 278,786
Property held for sale. . . . . . - - - 450,000(o) 450,000
Other assets. . . . . . . . . . . 1,031,559 246,291 176,000 (622,998)(h)(k)(o) 830,852
---------- ---------- ---------- ---------- -----------
Total deferred charges and
other assets . . . . . . . 1,796,815 410,038 634,000 2,041,702 4,882,555
---------- ---------- ---------- ---------- -----------
Total Assets . . . . . . . .$6,647,781 $2,914,512 $2,730,400 $1,895,922 $14,188,615
========== ========== ========== ========== ===========
LIABILITIES AND CAPITALIZATION
Pro Forma
Western KCPL ADT Total
(Historical) (Historical) (Historical) Adjustments Combined
Current Liabilities:
Short-term debt . . . . . . . . .$ 980,740 $ - $ 209,200 $(622,700)(h)(o) $ 567,240
Long-term debt due within
one year. . . . . . . . . . . . - 26,591 - - 26,591
Accounts payable. . . . . . . . . 180,540 55,618 138,000 (60,300)(o) 313,858
Other current liabilities . . . . 190,812 84,216 293,600 15,000(k)(o) 583,628
--------- --------- ---------- --------- ----------
Total current liabilities. . .1,352,092 166,425 640,800 (668,000) 1,491,317
--------- --------- ---------- --------- ----------
Other Liabilities and Deferred
Credits:
Deferred income taxes. . . . . . .1,110,372 643,189 91,500 97,933 (f)(o) 1,942,994
Deferred investment tax
credits . . . . . . . . . . . . 125,528 67,107 - - 192,635
Other. . . . . . . . . . . . . . . 458,668 94,144 328,200 (6,200)(o) 874,812
--------- --------- ---------- --------- ----------
Total other liabilities
and deferred credits . . . .1,694,568 804,440 419,700 91,733 3,010,441
--------- --------- ---------- --------- ----------
Capitalization:
Long-term debt, net. . . . . . . .1,681,583 944,136 910,100 1,737,200(c)(o) 5,273,019
Company-obligated mandatorily
redeemable preferred
securities. . . . . . . . . . . 220,000 - - - 220,000
Preferred and preference stock . . 74,858 89,062 - - 163,920
Common equity. . . . . . . . . . .1,624,680 910,449 759,800 734,989(g)(j)(k)(o) 4,029,918
--------- ---------- ---------- ---------- -----------
Total capitalization . . . . .3,601,121 1,943,647 1,669,900 2,472,189 9,686,857
--------- ---------- ---------- ---------- -----------
Total Liabilities and
Capitalization . . . . . . $6,647,781 $2,914,512 $2,730,400 $1,895,922 $14,188,615
========== ========== ========== ========== ===========
The accompanying Notes to Unaudited Pro Forma Combined
Financial Information are an integral part of this statement
and should be read in their entirety.
</TABLE>
<PAGE>
<TABLE>
WESTERN RESOURCES, KCPL AND ADT
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
For the Year Ended December 31, 1996
(in thousands except per share data)
<CAPTION>
Pro Forma
Western KCPL ADT Total
(Historical) (Historical) (Historical) Adjustments Combined
<S> <C> <C> <C> <C> <C>
Operating Revenues:
Electric. . . . . . . . . . . . .$1,197,433 $903,919 $ - $ - $2,101,352
Natural gas . . . . . . . . . . . 849,386 - - - 849,386
Security and other. . . . . . . . - - 1,704,000 (297,800)(o) 1,406,200
---------- -------- ---------- ---------- ----------
Total operating revenues . . . 2,046,819 903,919 1,704,000 (297,800) 4,356,938
Operating Expenses:
Cost of sales . . . . . . . . . . 648,299 192,960 920,000 (157,200)(o) 1,604,059
Operations, administrative and
selling . . . . . . . . . . . . 804,169 349,462 342,700 (102,400)(o) 1,393,931
Depreciation and amortization . . 201,266 115,529 224,800 43,400(d) 584,995
Restructuring and other
non-recurring charges . . . . . - - 982,000 (13,000)(o) 969,000
-------- -------- --------- -------- ---------
Operating Income (Loss) . . . . . . 393,085 245,968 (765,500) (68,600) (195,047)
-------- -------- --------- -------- --------
Interest Expense. . . . . . . . . . 149,326 58,083 73,500 70,080(e)(o) 350,989
Other Income (Expenses) . . . . . . 11,293 (47,961) 130,500 (7,198)(h) 86,634
-------- -------- --------- -------- ---------
Income (Loss) Before Income Taxes . 255,052 139,924 (708,500) (145,878) (459,402)
Income Taxes. . . . . . . . . . . . 86,102 31,753 (21,800) 88,433(f)(o) 184,488
-------- -------- --------- --------
Net Income (Loss) Before Extraordinary
Item (1). . . . . . . . . . . . . 168,950 108,171 (686,700) (234,311) (643,890)
Preferred and Preference
Dividends . . . . . . . . . . . . 14,839 3,790 - - 18,629
-------- ------- --------- -------- ---------
Earnings (Loss) Applicable to Common
Stock Before Extraordinary
Item. . . . . . . . . . . . . . . $154,111 $104,381 $(686,700) $(234,311) $(662,519)
======== ======== ========= ========= =========
Average Common Shares Outstanding . 63,834 61,902 137,114 (73,988)(i)(j) 188,862
Earnings (Loss) Per Average Common
Share Before Extraordinary
Item. . . . . . . . . . . . . . . $ 2.41 $ 1.69 $ (5.01) $ (3.51)
(1) ADT recorded an extraordinary item for the early extinguishment of debt in
September 1996.
The accompanying Notes to Unaudited Pro Forma Combined Financial Information are
an integral part of this statement and should be read in their entirety.
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The pro forma adjustments have been made to the Unaudited Pro Forma
Combined Financial Information to reflect the following:
(a) To record the net effect of the following:
(i) The reduction in cash resulting from interest paid on short- and
long-term debt as described in note (e) below.
(ii) The receipt of approximately $300 million from the exercise of the
Republic Warrant.
(iii) The receipt of interest income earned on excess cash balances
primarily resulting from the exercise of the Republic Warrant at a
market-based, short-term rate of 4.5% on an annual basis.
(b) To record goodwill resulting from the Amalgamation. Other than the
auto auction assets discussed at (o) below, the net tangible assets of ADT are
expected to approximate their fair value. Goodwill is based upon the total
consideration paid in excess of the estimated fair value of the net assets
acquired. Goodwill is calculated assuming Western Resources acquires all
outstanding shares of ADT Common Stock which Western Resources and its
affiliates do not presently hold, the conversion of ADT's outstanding Liquid
Yield Option Notes ("LYONs") to shares of ADT Common Stock (see note (i)), the
exercise of the Republic Warrant (see note (iii)) and the exercise of all
outstanding options held principally by ADT's management, in each case for
$22.50 per share of ADT Common Stock. (See note (j) for a discussion of the
Republic Warrant and ADT anti-takeover devices.)
Calculation of total outstanding shares of ADT Common Stock, and shares of
ADT Common Stock to be purchased:
(millions,
except
price per
share)
Shares of ADT Common Stock outstanding. . . . . . . . . . . 141.4
Treasury shares (shares held by ADT Subsidiary) . . . . . . (3.2)
LYONs convertible debt (i). . . . . . . . . . . . . . . . . 21.9
Conversion of option shares (ii). . . . . . . . . . . . . . 7.3
Exercise of Republic Warrant (iii). . . . . . . . . . . . . 15.0
--------
Total shares of ADT Common Stock outstanding. . . . . . 182.4
Shares of ADT Common Stock already owned. . . . . . . . (38.3)
--------
Net shares of ADT Common Stock to be purchased. . . . . 144.1
Purchase price per share. . . . . . . . . . . . . . . . $ 22.50
--------
Total cost of shares of ADT Common Stock not presently owned $3,242.3
Plus: Basis in 38.3 million shares of ADT Common Stock
currently owned . . . . . . . . . . . . . . . . . . . . . 589.4
Plus: Estimated transaction costs . . . . . . . . . . . . . 40.0
--------
Total purchase price. . . . . . . . . . . . . . . . . . $3,871.7
Less: Estimated fair value of net assets acquired (iv). . . 1,130.5
Estimated goodwill. . . . . . . . . . . . . . . . . . . $2,741.2
Less: Existing ADT goodwill, net. . . . . . . . . . . . . . 458.0
Less: Incremental goodwill amortization for 1996. . . . . . 68.5
Adjustment. . . . . . . . . . . . . . . . . . . . . . . $2,214.7
========
<PAGE>
(i) LYONs are exchangeable for shares of ADT Common Stock or redeemable for
cash at the option of the holder upon a change of control. Conversion
terms allow the holder to exchange each LYON for 28.23 shares of ADT
Common Stock. The pro forma calculation of total shares of ADT Common
Stock outstanding assumes the LYONs are converted to shares of ADT Common
Stock.
(ii) Conversion of approximately 17.3 million outstanding option shares held by
management has been calculated using the treasury stock method.
(iii) Exercise of the Republic Warrant to purchase 15.0 million shares of ADT
Common Stock. The pro forma calculation of total shares of ADT Common
Stock outstanding includes Republic's exercise of the Republic Warrant for
15 million shares at $20 per share. (See note (j) for a related
discussion.)
(iv) Includes estimated fair value of auto auction business of $450 million.
(c) To record the additional long-term debt to be incurred for the Cash
Consideration and to refinance short-term debt used to acquire existing shares
of ADT Common Stock, less the elimination of the LYONs convertible debt
securities which are expected to be converted to shares of ADT Common Stock.
in
(millions)
Additional long-term debt:
144.1 million shares of ADT Common Stock times $10.00 per
share cash consideration. . . . . . . . . . . . . . . . . $1,441.0
Plus: Permanent financing of Western Resources' existing
interest. . . . . . . . . . . . . . . . . . . . . . . 589.4
Estimated transaction costs . . . . . . . . . . . . . 40.0
Less: Estimated LYONs debt outstanding at
acquisition date. . . . . . . . . . . . . . . . . . . (326.8)
--------
Net additional debt . . . . . . . . . . . . . . . . . $1,743.6
========
(d) To record the amortization of goodwill created in the purchase of ADT
over a 40-year period. The annual goodwill amortization is expected to
approximate $68.5 million. The adjustment represents the difference between this
amount, the historical amount recorded by ADT and the amounts recognized by
Western Resources related to its investment in ADT.
(e) To record the net effect of interest expense resulting from the
following:
(i) The reduction of interest expense associated with the short-term debt
incurred by Western Resources to acquire its initial equity interest in ADT and
the increase in interest expense in connection with the issuance of additional
long-term debt as detailed in note (c) above to finance the exchange of shares
of ADT Common Stock for the Cash Consideration and refinance short-term debt
used to acquire shares of ADT Common Stock. (See note (c).) The interest rate on
such borrowings is expected to be approximately 8%. The assumed interest rate is
reasonable given current corporate bond rates for companies with credit ratings
similar to Western Resources.
<PAGE>
A one-eighth percent change in interest on the net additional debt used
to finance the Amalgamation would impact the combined pro forma net income by
approximately $1.1 million on an annual basis. Pro forma earnings per share
would be impacted by approximately $0.01 per share on an annual basis.
(ii) The interest expense savings resulting from the conversion of the LYONs,
which accreted interest at a rate of 6.5%.
(iii) The interest income earned on excess cash balances primarily resulting
from the exercise of the Republic Warrant at a market-based, short-term rate of
4.5% on an annual basis.
(f) To adjust the income tax provision. The income tax provision exceeds
the federal statutory rate of 35% primarily due to the non-deductible goodwill
amortization and state income taxes.
(g) To reflect the net increase to common equity resulting from Western
Resources issuing additional Western Resources Common Stock needed to acquire
the net remaining shares of ADT Common Stock, to reflect the impact of the pro
forma adjustments and eliminate ADT's stand-alone equity.
(h) To reflect the elimination of the equity investment and related equity
earnings recorded by Western Resources for the 38.3 million shares of ADT Common
Stock presently held as an equity investment and the related short-term debt
incurred to finance this equity investment which is to be refinanced with
long-term debt. (See note (c).)
(i) To reflect the issuance of Western Resources Common Stock in connection
with the Merger and the Amalgamation:
(in thousands,
except price
per share)
Value of Consideration to be paid in Western Resources
Common Stock . . . . . . . . . . . . . . . . . . . . . . . $ 12.50
Divided by the price per share of Western Resources
Common Stock as of February 28, 1997. . . . . . . . . . . . $ 30.250
--------
Exchange Ratio . . . .. . . . . . . . . . . . . . . . . . .41322
Multiplied by net shares of ADT Common Stock to be
purchased by Western Resources. . . . . . . . . . . . . . . 144,100
Shares of Western Resources Common Stock needed to
acquire net shares of ADT Common Stock. . . . . . . . . . . 59,545
ADT average common shares outstanding . . . . . . . . . . . . 137,114
Less: Shares of Western Resources Common Stock
to be issued to ADT shareholders . . . . . . . . . . . . 59,545
--------
(77,569)
Plus: Additional shares of Western Resources
Common Stock to be issued to KCPL shareholders. . . . . . 3,581(*)
Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . (73,988)
<PAGE>
(*) Pro forma shares and related earnings per share have been calculated
assuming a Conversion Ratio of 1.05785 based on the closing price per share of
Western Resources Common Stock on February 28, 1997 of $30.250. The actual
Conversion Ratio will be based on a 20-day average of the price of Western
Resources Common Stock calculated for a period beginning on the 29th business
day prior to Closing and ending on the tenth business day prior to Closing.
(j) On July 1, 1996, ADT entered into an agreement with Republic (the
"Republic Agreement"), pursuant to which a subsidiary of Republic was to be
amalgamated with and into ADT with ADT being the surviving company. Under the
terms of the Republic Agreement, ADT granted to Republic the Republic Warrant to
purchase 15,000,000 Shares at a purchase price of $20 per Share, subject to
adjustment. The Republic Warrant was to become exercisable for a period of six
months following the termination of the Republic Agreement. On September 30,
1996, ADT and Republic jointly announced the termination of the Republic
Agreement, citing uncertainty attributable to market conditions, and amended
the Republic Warrant to include certain restrictions on the issuance of shares
of ADT Common Stock pursuant thereto and the transfer of such shares by Republic
to persons with an interest in 10% or more of ADT. Western Resources has
commenced litigation challenging the validity of the Republic Warrant. On March
21, 1997, Republic announced its exercise of the Republic Warrant and remitted
$300 million to ADT. The unaudited pro forma combined financial information
reflects this exercise and the receipt of approximately $300 million.
As described herein, Western Resources is initiating steps to hold a
special meeting of the ADT Shareholders, and among other matters, Western
Resources will be soliciting proxies in favor of the removal of the present
members of the ADT Board of Directors and the election of the nominees of
Western Resources to the ADT Board, who will then take steps needed to either
redeem or amend a rights agreement (the "Rights Agreement"), pursuant to which
ADT declared a dividend of one right for each outstanding ADT share of common
stock on November 4, 1996, to make the Rights Agreement inapplicable to the ADT
Offer.
(k) To reflect Western Resources' and KCPL's estimated direct merger costs
of $60 million as a reduction to equity.
(l) Prior to the consummation of the Merger, KCPL must redeem its preferred
stock outstanding pursuant to the Merger Agreement. Because the basis of
accounting for the Merger is a pooling of interests, the effect of this
redemption is not required to be reflected in the unaudited pro forma combined
financial statements. The required redemption price, as of December 31, 1996, is
approximately $90 million applicable to KCPL Preferred Stock. The ongoing effect
of this redemption is anticipated to be immaterial.
<PAGE>
(m) Intercompany transactions among Western Resources, KCPL and ADT are
immaterial.
(n) Amounts related to ADT's subscriber systems represent the historical
cost of equipment, installation labor and direct overheads capitalized upon
acquiring a new customer. In accordance with the provisions specified in APB No.
16, "Accounting for Business Combinations," Western Resources has allocated
value to the subscriber systems purchased from ADT at amounts that are believed
to approximate the fair value of the acquired customer base. Western Resources
believes the estimated fair value of ADT's historical balance for subscriber
systems assets approximates the fair value of the acquired customer base. This
amount will be amortized over the average customer life, which is estimated at
approximately 10 years.
(o) To reflect the following:
(i) Presentation of assets and liabilities related to ADT's auto auction
business as net property held for sale as Western Resources intends to sell such
business at, or near, the closing date of the Amalgamation. These assets have
been assigned a value of $450 million, equal to the estimated sales proceeds,
net of tax. The following reflects the reclassification of account balances to
properly reflect the fair value of assets following the sale of ADT's auto
auction business:
(in
millions)
Estimated sales proceeds, net of tax. . . . . . . . . $450.0
Less: Estimated net book value. . . . . . . . . . . . (349.2)
Estimated fair value of property held for
sale in excess of recorded amounts . . . . . . . . $100.8
(ii) Elimination of historical amounts recorded for the results of
operations related to ADT's auto auction business. The following amounts have
been eliminated to properly reflect the historical results of operations of
ADT's auto auction business as presented in ADT's 14(d) filing with the SEC
dated March 4, 1997:
For the year ended
December 31, 1996
(in thousands)
Operating revenues. . . . . . . . . . . . . . . . . . $ 297,800
Operating expenses. . . . . . . . . . . . . . . . . . (272,600)
---------
Operating income. . . . . . . . . . . . . . . . . . . $ 25,200
---------
Net income. . . . . . . . . . . . . . . . . . . . . . $ 6,400
=========
<PAGE>
<TABLE>
WESTERN RESOURCES AND KCPL SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL
INFORMATION
<CAPTION>
Years Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Pro Forma Combined (unaudited)
Ratio of earnings to fixed charges (1). . 2.37x 2.80x 2.99x
Ratio of earnings to combined fixed
charges and preferred dividend
requirements (1). . . . . . . . . . . . 2.17x 2.54x 2.69x
(1) Earnings are deemed to consist of net income to which has been added income
taxes (including net deferred investment tax credit) and fixed charges. Fixed
charges consist of all interest on indebtedness, amortization of debt discount
and expense, and the portion of rental expense which represents an interest
factor. Preferred and preference dividend requirements consist of an amount
equal to the pre-tax earnings which would be required to meet divided
requirements on preferred and preference stock.
</TABLE>
<PAGE>
Exhibit 99.2
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-707
KANSAS CITY POWER & LIGHT COMPANY
(Exact name of registrant as specified in its charter)
Missouri 44-0308720
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1201 Walnut Street
Kansas City, Missouri 64106
(Address of principal executive offices)
Registrant's telephone number, including area code: 816-556-2200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Cumulative Preferred Stock New York Stock Exchange
par value $100 per share -
3.80%, 4.50%, 4.35%
Common Stock without par value New York Stock Exchange
Chicago Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to the
Form 10-K. X
<PAGE>
On March 13, 1997, KCPL had 61,895,819 outstanding shares of common stock
without par value, and the aggregate market value (based upon the closing price
of these shares on the New York Stock Exchange) of voting securities held by
nonaffiliates of KCPL was approximately $1,763,113,626.
Documents Incorporated by Reference Portions of the 1997 Proxy
Statement are incorporated by reference in Part III of this report.
TABLE OF CONTENTS
Page
Number
Item 1. Business 1
Proposed Merger With Western Resources, Inc. 1
Regulation 2
Rates 2
Environmental Matters 2
Air 3
Water 3
Competition 3
Fuel Supply 4
Coal 4
Nuclear 4
High-Level Waste 4
Low-Level Waste 5
Employees 5
Subsidiaries 5
Officers of the Registrant 6
KCPL Officers 6
KLT Inc. Officers 7
Item 2. Properties 8
Generation Resources 8
Transmission and Distribution Resources 9
General 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security
Holders 11
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 11
Market Information 11
Holders 11
Dividends 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 8. Consolidated Financial Statements 21
<PAGE>
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 42
Item 10. Directors and Executive Officers of the Registrant 42
Item 11. Executive Compensation 42
Item 12. Security Ownership of Certain Beneficial Owners
and Management 42
Item 13. Certain Relationships and Related Transactions 42
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 43
PART I
ITEM 1. BUSINESS
Kansas City Power & Light Company (KCPL) was incorporated in Missouri in
1922 and is headquartered in downtown Kansas City, Missouri. KCPL is a
medium-sized public utility engaged in the generation, transmission,
distribution and sale of electricity to over 435,000 customers in a 4,700 square
mile area located in all or portions of 23 counties in western Missouri and
eastern Kansas. About two-thirds of the total retail kilowatt-hour sales and
revenues are from Missouri customers and the remainder from Kansas customers.
Customers include approximately 381,000 residences, 51,000 commercial firms, and
3,000 industrials, municipalities and other electric utilities. Retail revenues
in Missouri and Kansas accounted for approximately 91% of KCPL's total revenues
in 1996. Wholesale firm power, bulk power sales and miscellaneous electric
revenues accounted for the remainder of revenues. Low fuel costs and superior
plant performance enable KCPL to serve its customers well while maintaining a
leadership position in the bulk power market.
KCPL as a regulated utility does not have direct competition for retail
electric service in its service territory; however, there is competition in the
generation of electricity and between electric and gas as an energy source.
KLT Inc., a wholly-owned, unregulated subsidiary of KCPL, pursues
opportunities in domestic and international energy-related ventures. See
"Subsidiaries" on page 5 of this report. KCPL also owns 47% of Wolf Creek
Nuclear Operating Corporation, the operating company for the Wolf Creek
Generating Station (Wolf Creek).
Proposed Merger With Western Resources, Inc.
On February 7, 1997, KCPL and Western Resources, Inc.
<PAGE>
(Western Resources) entered into an Agreement and Plan of Merger (the Merger
Agreement) to form a strategic business combination. The effective time of the
merger is dependent upon all conditions of the Merger Agreement being met or
waived. At the effective time, KCPL will merge with and into Western Resources,
with Western Resources being the surviving corporation.
Western Resources first delivered an unsolicited exchange offer to KCPL's
Board of Directors during the second quarter of 1996. This initial offer,
subject to numerous conditions, proposed the exchange of $28 (later increased to
$31) worth of Western Resources common stock for each share of KCPL common
stock. After careful consideration, both offers were rejected by KCPL's Board of
Directors. In July 1996 Western Resources commenced an exchange offer for KCPL
common stock. In late 1996 KCPL began discussing a possible merger with Western
Resources leading to the Merger Agreement.
Under the terms of the Merger Agreement, KCPL common stock will be
exchanged for Western Resources common stock valued at $32.00, subject to a
conversion ratio limiting the amount of Western Resources common stock that
holders of KCPL common stock would receive per share of KCPL common stock to no
more than 1.1 shares (if Western Resources' stock is priced at or below $29.09
per share), and no less than 0.917 shares (if Western Resources' stock is priced
at or above $34.90 per share). However, there is a provision in the Merger
Agreement that allows KCPL to terminate the merger if Western Resources' stock
price drops below $27.64 and either the Standard and Poor's Electric Companies
Index increases or the decline in Western Resources stock exceeds by
approximately 5% any decline in this index. Western Resources could avoid this
termination by improving the conversion ratio.
The transaction is subject to several closing conditions including
approval by each company's shareholders, approval by a number of regulatory
authorities (statutory approvals) and dissenting shares equaling less than 5.5%
of KCPL's outstanding shares. If the effective time has not occurred by June 30,
1998 (the termination date), either party may terminate the agreement as long as
they did not contribute to the delay. This termination date will be
automatically extended to June 30, 1999, if all of the Merger Agreement closing
conditions have been met except for certain conditions relating to statutory
approvals.
The Merger Agreement does not allow KCPL to increase its common stock
dividend prior to the effective time or termination. It also requires KCPL to
redeem all outstanding shares of preferred stock prior to completion of the
merger.
If the Merger Agreement is terminated under certain circumstances, a
payment of $50 million will be due Western Resources if, within two and one-half
years following
<PAGE>
termination, KCPL agrees to consummate a business combination with a third party
that made a proposal to combine prior to termination. Western Resources will pay
KCPL $5 to $35 million if the Merger Agreement is terminated and all closing
conditions are satisfied other than conditions relating to Western Resources
receiving a favorable tax opinion, a favorable letter from its accountants
regarding pooling accounting, favorable statutory approvals, or an exemption
from the Public Utility Holding Company Act of 1935.
Regulation
KCPL is subject to the jurisdiction of the Public Service Commission of the
State of Missouri (MPSC), the State Corporation Commission of the State of
Kansas (KCC), the Federal Energy Regulatory Commission (FERC), the Nuclear
Regulatory Commission (NRC) and certain other governmental regulatory bodies as
to various phases of its operations, including rates, service, safety and
nuclear plant operations, environmental matters and issuances of securities.
Rates
KCPL's retail electric rates are regulated by the MPSC and KCC for sales
within the respective states of Missouri and Kansas. FERC approves KCPL's rates
for wholesale bulk electricity sales. Firm electric sales are made by
contractual arrangements between the entity being served and KCPL.
KCPL has not increased any of its retail or wholesale rates since 1988.
Pursuant to a stipulation and agreement with the MPSC, KCPL reduced Missouri
retail rates by about 2.7% effective January 1, 1994, 2% effective July 9, 1996,
and by about 2.5% effective January 1, 1997.
Environmental Matters
KCPL's operations must comply with federal, state and local environmental
laws and regulations. The generation and transmission of electricity uses,
produces and requires disposal of certain products and by-products, including
polychlorinated biphenyl (PCBs), asbestos and other potentially hazardous
materials. KCPL's policy is to act in an environmentally responsible manner and
to use the latest technology available to avoid and treat contamination. The
Federal Comprehensive Environmental Response, Compensation and Liability Act
(the Superfund law) imposes strict joint and several liability for those who
generate, transport or deposit hazardous waste. This liability extends to the
current property owner as well as prior owners since the time of contamination.
KCPL continually conducts environmental audits designed to detect contamination
and ensure compliance with governmental regulations. However, compliance
programs needed to meet future environmental laws
<PAGE>
and regulations governing water and air quality, including carbon dioxide
emissions, hazardous waste handling and disposal, toxic substances and the
effects of electromagnetic fields, could require substantial changes to
operations or facilities. KCPL cannot presently estimate any additional costs of
meeting such new regulations or standards which might be established in the
future, nor can it estimate the possible effect which any new regulations or
standards could have upon its operations. However, KCPL currently estimates that
expenditures necessary to comply with environmental regulations during 1997 will
not be material with the possible exceptions set forth below.
Air
The Clean Air Act Amendments of 1990 contain two programs significantly
affecting the utility industry. KCPL has spent approximately $5 million for the
installation of continuous emission monitoring equipment to satisfy the
requirements under the acid rain provision. KCPL expects no further material
expenditures for this project. The other utility-related program calls for a
study of certain air toxic substances. Based on the outcome of this study,
regulation of these substances, including mercury, could be required. KCPL
cannot predict the likelihood of any such regulations or compliance costs.
Proposed regulations to revise the ozone and particulate matter, National
Ambient Air Quality Standards, are scheduled to be issued by June 1997 and may
require capital expenditures which cannot be estimated at this time.
Water
KCPL commissioned an environmental assessment of its Northeast Station and
of its Spill Prevention Control and Countermeasure plan as required by the Clean
Water Act. The assessment revealed contamination of the site by petroleum
products, heavy metals, volatile and semi-volatile organic compounds, asbestos,
pesticides and other regulated substances. Based upon studies and discussions
with Burns & McDonnell, the cost of the cleanup could range between $1.5 million
and $6 million.
Also, groundwater analysis has indicated that certain volatile organic
compounds are moving through the Northeast site, just above bedrock, from
unidentified sources off-site. The Missouri Department of Natural Resources
(MDNR) was notified of the possible release of petroleum products and the
presence of volatile organic compounds moving under the site. Monitoring and
removal of free petroleum products continues at the site. MDNR has concluded
that the volatile organic compounds originated from a source off-site. MDNR
stated it will continue to investigate the source of the compounds. Because KCPL
believes it will not have liability in this matter, it has not performed a study
regarding the possible cost of remediation of the flow of organic
<PAGE>
compounds.
Competition
See "Regulation and Competition" on page 12 of this report.
Fuel Supply
KCPL's principal sources of fuel for electric generation are coal and
nuclear fuel. These fuels are expected to satisfy about 99% of the 1997 fuel
requirements with the remainder provided by other sources including natural gas,
oil and steam. The 1996 and estimated 1997 fuel mix, based on total Btu
generation, are as follows:
Estimated
1996 1997
Coal 76% 73%
Nuclear 23% 26%
Other 1% 1%
The fuel mix varies depending on the operation of Wolf Creek which requires
a refueling and maintenance outage about every 18 months. The next outage is
scheduled for the fourth quarter of 1997.
Coal
KCPL's average cost per million Btu of coal burned, excluding fuel handling
costs, was $0.85 in 1996 and $0.89 in 1995 and 1994. KCPL's cost of delivered
coal is about 63% of the regional average.
During 1997, approximately 10.4 million tons of coal (7.3 million tons,
KCPL's share) are projected to be burned at KCPL's generating units, including
jointly-owned units. KCPL has entered into coal-purchase contracts with various
suppliers in Wyoming's Powder River Basin, the nation's principal supplier of
low-sulfur coal. These contracts, with expiration dates ranging from 1997
through 2003, will satisfy approximately 95% of the projected coal requirements
for 1997, 50% for 1998, 50% for 1999, and 20% thereafter.
Nuclear
The Wolf Creek Nuclear Operating Corporation (WCNOC), which operates Wolf
Creek, has on hand or under contract 70% of the uranium required to operate Wolf
Creek through September 2003. The balance is expected to be obtained through
spot market and contract purchases.
Contracts are in place for 100% of Wolf Creek's uranium enrichment
requirements for 1997 and 82% of such requirements for 1998 to March 2005. The
balance of the 1998-2005 requirements is expected to be obtained through a
<PAGE>
combination of spot market and contract purchases. The decision not to contract
for the full enrichment requirements is one of cost rather than availability of
service.
Contracts are in place for the conversion of uranium to uranium
hexaflouride sufficient to meet Wolf Creek's requirements through 2001.
High-Level Waste
The Nuclear Waste Policy Act of 1982 established schedules, guidelines and
responsibilities for the Department of Energy (DOE) to develop and construct
repositories for the ultimate disposal of spent fuel and high-level waste. The
DOE has not yet constructed a high-level waste disposal site and has announced
that a permanent repository may not be in operation prior to 2010 although an
interim storage facility may be available earlier. The DOE likely will not
immediately begin accepting Wolf Creek's spent fuel upon opening of the
permanent repository. Instead, KCPL expects to experience a multi-year transfer
period beginning as much as six years after opening of the permanent repository.
Wolf Creek contains an on-site spent fuel storage facility which, under current
regulatory guidelines, provides space for the storage of spent fuel through 2005
while still maintaining fuel core off-load capability. KCPL believes adequate
additional storage space can be obtained, as necessary.
Low-Level Waste
The Low-Level Radioactive Waste Policy Amendments Act of 1985 mandated that
the various states, individually or through interstate compacts, develop
alternative low-level radioactive waste disposal facilities. The states of
Kansas, Nebraska, Arkansas, Louisiana and Oklahoma formed the Central Interstate
Low-Level Radioactive Waste Compact and selected a site in northern Nebraska to
locate a disposal facility. The present estimate of the cost for such a facility
is about $154 million. WCNOC and the owners of the other five nuclear units in
the compact have provided most of the pre-construction financing for this
project. As of February 28, 1997, utilities in the compact have spent in excess
of $75 million, of which $13 million was WCNOC's share.
There is uncertainty as to whether this project will be completed.
Significant opposition to the project has been raised by the residents in the
area of the proposed facility and attempts have been made through litigation and
proposed legislation to slow down or stop development of the facility.
Employees
At December 31, 1996, KCPL and its wholly-owned
subsidiaries had 2,297 employees (including temporary and
<PAGE>
part-time employees), 1,474 of which were represented by three local unions of
the International Brotherhood of Electrical Workers (IBEW). KCPL has labor
agreements with Local 1613, representing clerical employees (which expires March
31, 1999), with Local 1464, representing outdoor workers (which expires January
8, 2000), and with Local 412, representing power plant workers (which expires
February 28, 1998). KCPL is also a 47% owner of WCNOC, which employs 1,013
persons to operate Wolf Creek, 340 of which are represented by the IBEW.
Subsidiaries
KLT Inc. has six wholly-owned direct subsidiaries:
- KLT Investments Inc., a passive investor in affordable housing investments
which generate tax credits.
- KLT Investments II Inc., a passive investor in
economic, community-development and energy-related projects.
- KLT Energy Services Inc., a partner in an energy
management services and lighting services business.
- KLT Power Inc., a participant in independent power and cogeneration
projects. KLT Power Inc. has four subsidiaries, KLT Iatan Inc., which was
formed for the co- development of the Iatan Unit 2 coal-fired power plant;
KLT Power International, which participates in independent power projects
located in China; KLT Power Asia which participates in independent power
projects located in certain Asian countries; and KLT Power Latin American
which participates in independent power projects located in Latin America.
- KLT Gas Inc., a participant in oil and gas reserves and
exploration. KLT Gas Inc. has one wholly-owned subsidiary,
FAR Gas Acquisitions Corporation which holds limited
partnerships in coal seam methane gas wells that generate
tax credits.
- KLT Telecom Inc., an investor in communications and
information technology opportunities. KLT Telecom Inc. has
two majority-owned subsidiaries, Municipal Solutions, an
outsourcer of municipal services and Telemetry Solutions, a
provider of services using Cellnet-related technology.
KCPL's equity investment in KLT Inc. at December 31, 1996,
was $61 million.
Officers of the Registrant
KCPL Officers
Year Named
Name Age Positions Currently Held Officer
Drue Jennings 50 Chairman of the Board, President 1980
and Chief Executive Officer
<PAGE>
Bernard J. Beaudoin 56 Executive Vice President - Chief 1984
Financial Officer
Marcus Jackson 45 Executive Vice President - Chief 1989
Operating Officer
J. Turner White 48 Executive Vice President - Corporate 1990
Development
John J. DeStefano 47 Senior Vice President - Business 1989
Development
Jeanie Sell Latz 45 Senior Vice President - Corporate 1991
Services, Corporate Secretary
and Chief Legal Officer
Frank L. Branca 49 Vice President - Wholesale and 1989
Transmission Services
Steven W. Cattron 41 Vice President - Marketing and Sales 1994
Charles R. Cole 50 Vice President - Customer Services 1990
and Purchasing
Douglas M. Morgan 54 Vice President - Information Technology 1994
Richard A. Spring 42 Vice President - Production 1994
Bailus M. Tate 50 Vice President - Human Resources 1994
Neil A. Roadman 51 Controller 1980
Mark C. Sholander 51 General Counsel and Assistant 1986
Secretary
Andrea F. Bielsker 38 Treasurer 1996
KLT Inc. Officers
Year Named
Name Age Positions Currently Held Officer
Ronald G. Wasson 52 President 1995
Floyd R. Pendleton 53 Vice President-Business 1992
Development
David M. McCoy 49 Vice President-Business 1996
Development
Mark G. English 45 Vice President and General 1995
Counsel
Janee C. Rosenthal 35 Corporate Secretary and Treasurer 1992
Teresa D. Cook 36 Controller 1997
<PAGE>
All of the foregoing persons have been officers of KCPL or employees in a
responsible position with KCPL for the past five years except for Mr. Spring.
Mr. Spring was an employee of KCPL from 1978 to 1993, when he left KCPL to join
Northern Indiana Public Service Company as Director of Electric Production. In
July 1994, he rejoined KCPL as Vice President-Production.
The term of office of each officer commences with his or her appointment by
the Board of Directors and ends at such time as the Board of Directors may
determine.
ITEM 2. PROPERTIES
Generation Resources
KCPL's generating facilities consist of the following:
Estimated
1997
Year Megawatt(mw)
Unit Completed Capacity Fuel
Existing Units
Base Load...Wolf Creek(a) 1985 548(b) Nuclear
Iatan 1980 469(b) Coal
LaCygne 2 1977 334(b) Coal
LaCygne 1 1973 341(b) Coal
Hawthorn 6 1997 142(d) Gas/Oil
Hawthorn 5 1969 479 Coal/Gas
Montrose 3 1964 161 Coal
Montrose 2 1960 153 Coal
Montrose 1 1958 155 Coal
Peak Load...Northeast 13 and 14(c) 1976 110 Oil
Northeast 17 and 18(c) 1977 116 Oil
Northeast 15 and 16(c) 1975 111 Oil
Northeast 11 and 12(c) 1972 105 Oil
Grand Avenue (2 units) 1929 & 1948 73 Gas
---
Total 3,297
=====
(a) This unit is one of KCPL's principal generating facilities and has
the lowest fuel cost of any of its generating facilities. An extended
shutdown of the unit could have a substantial adverse effect on the
operations of KCPL and its financial condition.
(b) KCPL's share of jointly-owned unit.
(c) Combustion turbines.
(d) KCPL has entered into an operating lease with First Security Bank of
Utah, N.A. for a V.84.3A combustion turbine-generator, to be in service
in the year 1997, with an anticipated accredited capacity of
approximately 142 mw.
KCPL's maximum system net hourly peak load of 2,987 mw occurred on July 19,
1996. The maximum winter peak load of
<PAGE>
2,012 mw occurred on December 19, 1996. The accredited generating capacity of
KCPL's electric facilities in the summer (when peak loads are experienced) of
1996 under MOKAN Power Pool standards was 3,134 mw.
KCPL owns the Hawthorn Station (Jackson County, Missouri), Montrose
Station (Henry County, Missouri), Northeast Station (Jackson County, Missouri)
and two Grand Avenue Station turbine generators (Jackson County, Missouri). KCPL
also owns 50% of the 682-mw LaCygne 1 Unit and 668-mw LaCygne 2 Unit in Linn
County, Kansas; 70% of the 670-mw Iatan Station in Platte County, Missouri; and
47% of the 1,167 mw Wolf Creek in Coffey County, Kansas.
Transmission and Distribution Resources
KCPL's electric transmission system is interconnected with systems of other
utilities to permit bulk power transactions with other electricity suppliers in
Kansas, Missouri, Iowa, Nebraska and Minnesota. KCPL is a member of the MOKAN
Power Pool, which is a contractual arrangement among eleven utilities in western
Missouri and Kansas which interchange electric energy, share reserve generating
capacity, and provide emergency and standby electricity services to each other.
KCPL owns approximately 1,700 miles of transmission lines and approximately
9,000 miles of overhead distribution lines, and approximately 3,100 miles of
underground distribution lines. KCPL has all franchises necessary to sell
electricity within the territories from which substantially all of its gross
operating revenue is derived.
General
KCPL's principal plants and properties, insofar as they constitute real
estate, are owned in fee; certain other facilities are located on premises held
under leases, permits or easements; and its electric transmission and
distribution systems are for the most part located over or under highways,
streets, other public places or property owned by others for which permits,
grants, easements or licenses (deemed satisfactory but without examination of
underlying land titles) have been obtained.
Substantially all of the fixed property and franchises of KCPL, which
consists principally of electric generating stations, electric transmission and
distribution lines and systems, and buildings (subject to exceptions and
reservations) are subject to a General Mortgage Indenture and Deed of Trust
dated as of December 1, 1986.
ITEM 3. LEGAL PROCEEDINGS
Kansas City Power & Light Co. v. Western Resources, Inc.,
<PAGE>
et. al
On May 20, 1996, KCPL commenced litigation in the United States District
Court for the Western District of Missouri, Western Division (District Court),
against Western Resources, Inc. (Western Resources) and Robert L. Rives (Rives)
requesting the District Court to declare the Amended and Restated Agreement and
Plan of Merger between KCPL, KC Merger Sub, Inc., UtiliCorp and KC United Corp.,
dated January, 1996, amended May 20, 1996 (Amended Merger Agreement), and the
transactions contemplated thereby (collectively the Transaction) were legal and
could not be reversed. On May 24, 1996, Jack R. Manson (Manson), filed an action
to become a party to the above litigation as the shareholders' representative.
Manson made claims against KCPL and all its directors stating they had violated
their fiduciary duties, that their actions in adopting the Amended Merger
Agreement were illegal and ultra vires; that the adoption of the Amended Merger
Agreement illegally deprived shareholders of rights under Missouri law; and that
the adoption of the Amended Merger Agreement was an excessive response to
Western Resources' acquisition offer. On June 7, 1996, Western Resources and
Rives each filed claims against KCPL, charging the same violations against the
directors as Manson.
The District Court on August 2, 1996 ruled the transactions contemplated
by the Amended Merger Agreement were legally valid and authorized under Missouri
law; but the combined transactions resulted in a merger between KCPL and
UtiliCorp, requiring, under Missouri law, approval by the holders of two-thirds
of the outstanding shares of KCPL's stock.
By order dated November 25, 1996, the District Court allowed Manson to
amend his original petition claiming the directors breached their fiduciary
duties by refusing to meet with Western Resources and had committed reckless,
grossly negligent, or negligent waste of corporate assets by pursuing the merger
with UtiliCorp. In addition to requesting termination of the Amended Merger
Agreement, Manson sought monetary damages in an unspecified amount. KCPL filed a
motion on December 9, 1996 to dismiss Manson's claims and it is currently
pending before the District Court. KCPL cannot predict the outcome of these
proceedings at this time.
State of Missouri ex rel. Inter-City Beverage Co., Inc., et.
al vs. The Public Service Commission of the State of
Missouri, et. al;
Jewish Community Campus of Greater Kansas City, Inc. vs.
Kansas State Corporation Commission, et. al
On August 13, 1993, a lawsuit was filed by nine customers in the Circuit
Court of Jackson County, Missouri against KCPL. The suit alleged the
misapplication of
<PAGE>
certain of KCPL's electric rate tariffs resulting in overcharges to industrial
and commercial customers which had been provided service under those tariffs and
requested certification as a class action. On December 3, 1993, the Court
dismissed the matter for lack of subject matter jurisdiction. Plaintiffs
appealed to the Missouri Court of Appeals, Western District. The Court of
Appeals upheld the dismissal. Plaintiffs then filed a motion to transfer the
case with the Missouri Supreme Court. The motion was denied.
Plaintiffs then took their claims to the state commissions filing
complaints at the MPSC on August 23, 1995, and at the KCC on August 30, 1995.
The MPSC complaint was dismissed May 1, 1996. The Cole County, Missouri Circuit
Court affirmed the dismissal on January 29, 1997. The time for filing an appeal
from such circuit court's decision has not yet lapsed. The KCC complaint was
dismissed April 9, 1996. The Johnson County, Kansas District Court affirmed the
dismissal on February 4, 1997. The Plaintiff filed a Notice of Appeal to the
Kansas Court of Appeals on March 3, 1997.
Should the proceedings before the MPSC and KCC be overturned by the state
courts, KCPL could be required to refund the alleged overcharges. KCPL believes
it will be able to successfully defend these actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders through the solicitation of proxies
or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Market Information:
(1) Principal Market:
Common Stock of KCPL is listed on the New York Stock Exchange and the
Chicago Stock Exchange.
(2) Stock Price Information:
Common Stock Price Range
1996 1995
Quarter High Low High Low
First $27-1/4 $24 $24-1/2 $22-1/8
Second 27-3/4 23-5/8 24-1/8 22-1/8
Third 28-3/8 26-1/4 24-3/8 21-1/2
<PAGE>
Fourth 29-3/8 26-1/2 26-5/8 23-1/2
Holders:
At December 31, 1996, KCPL's Common Stock was held by 26,763 shareholders of
record.
Dividends:
Common Stock dividends were declared as follows:
Quarter 1997 1996 1995
First $0.405 $0.390 $0.380
Second 0.390 0.380
Third 0.405 0.390
Fourth 0.405 0.390
KCPL's Restated Articles of Consolidation contains certain restrictions on
the payment of dividends on KCPL's Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31
1996(a) 1995 1994(b) 1993 1992
(dollars in millions except per share amounts)
<S> <C> <C> <C> <C> <C>
Operating revenues $ 904 $ 886 $ 868 $ 857 $ 803
Net income $ 108 $ 123 $ 105 $ 106 $ 86
Earnings per common
share $ 1.69 $ 1.92 $ 1.64 $ 1.66 $ 1.35
Total assets at
year-end $2,915 $2,883 $2,770 $2,755 $2,647
Total redeemable
preferred stock and
long-term debt
(including current
maturities) $ 971 $ 911 $ 833 $ 870 $ 817
Cash dividends per
common share $ 1.59 $ 1.54 $ 1.50 $ 1.46 $ 1.43
Ratio of earnings to
fixed charges 3.06 3.94 4.07 3.80 3.12
(a) In 1996, KCPL recorded $31 million in merger related costs. (b) In 1994,
KCPL recorded a $22.5 million expense for a voluntary early retirement program.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
REGULATION AND COMPETITION
As competition develops throughout the electric utility industry, we are
positioning Kansas City Power & Light Company (KCPL) to excel in an open market.
We are improving the efficiency of KCPL's core utility operations and creating
growth through its unregulated
<PAGE>
subsidiary. As competition presents new opportunities, we will also consider
various strategies including partnerships, acquisitions, combinations, additions
to or dispositions of service territory, and restructuring wholesale and retail
businesses. In 1997 we will begin offering natural gas contracts to certain
customers. We have entered an Agreement and Plan of Merger with Western
Resources, Inc. (Western Resources). This agreement was reached after nine
months of defending against an unsolicited exchange offer (see Note 11 to the
Consolidated Financial Statements).
In December 1996 the Federal Energy Regulatory Commission (FERC) issued a
statement concerning electric utility mergers. Under the statement, companies
must demonstrate that their merger does not adversely affect competition or
wholesale rates. As remedies, FERC may consider a range of conditions including
transmission upgrades or divestitures of generating assets.
Competition in the electric utility industry was accelerated with the
National Energy Policy Act of 1992. This gave FERC the authority to require
electric utilities to provide transmission line access to independent power
producers (IPPs) and other utilities (wholesale wheeling). KCPL, already active
in the wholesale wheeling market, was one of the first utilities to receive
FERC's approval of an open- access tariff for wholesale wheeling transactions.
In April 1996 FERC issued an order requiring all owners of transmission
facilities to adopt open-access tariffs and participate in wholesale wheeling;
KCPL has made the necessary filings to comply with that order.
FERC's April order is likely to encourage more movement toward retail
competition at the state level. An increasing number of states have already
adopted open access requirements for utilities' retail electric service,
allowing competing suppliers access to their retail customers (retail wheeling).
Many other states are actively considering retail wheeling. Kansas has created a
retail wheeling task force to study and report on related issues.
Competition through retail wheeling could result in market-based rates
below current cost-based rates. This would provide growth opportunities for
low-cost producers and risks for higher-cost producers, especially those with
large industrial customers. Lower rates and the loss of major customers could
result in under-utilized assets (stranded investment) and place an unfair burden
on the remaining customer base or shareholders. If an adequate and fair
provision for recovery of these lost revenues is not provided, certain
generating assets may have to be evaluated for impairment and appropriate
charges recorded against earnings. In addition to lower profit margins,
market-based rates could also require generating assets to be depreciated over
shorter useful lives, increasing operating expenses.
Although Missouri and Kansas have not yet authorized retail wheeling, we
believe KCPL is positioned well to compete in an open market with its diverse
customer mix and pricing strategies. About 22% of KCPL's retail mwh sales are to
industrial customers compared to the utility average of about 35%. KCPL has a
flexible rate structure with industrial rates that are competitively priced
within our region. In addition, long-term contracts are in place or under
negotiation for a large portion of KCPL's industrial sales. There has not been
direct
<PAGE>
competition for retail electric service in our service territory although there
has been competition in the bulk power market and between alternative fuels.
Increased competition could also force utilities to change accounting
methods. Financial Accounting Standards Board (FASB) Statement No. 71 -
Accounting for Certain Types of Regulation, applies to regulated entities whose
rates are designed to recover the costs of providing service. An entity's
operations could stop meeting the requirements of FASB 71 for various reasons,
including a change in regulation or a change in the competitive environment for
a company's regulated services. For those operations no longer meeting the
requirements of regulatory accounting, regulatory assets would be written off.
KCPL's regulatory assets, totaling $164 million at December 31, 1996, will be
maintained as long as FASB 71 requirements are met.
It is possible that competition could eventually have a materially
adverse affect on KCPL's results of operations and financial position. Should
competition eventually result in a significant charge to equity, capital costs
and requirements could increase significantly.
NONREGULATED OPPORTUNITIES
KLT Inc. is a wholly-owned subsidiary pursuing nonregulated, mainly
energy-related business ventures. KLT's strategy capitalizes on new market
opportunities by combining our expertise in energy-related fields with the
knowledge of our joint venture partners. Existing ventures include investments
in domestic and international nonregulated power production, energy services,
oil and gas reserves, telecommunications, and affordable housing limited
partnerships.
We had a total equity investment in KLT of $61 million as of December 31,
1996, and expect that investment to grow to about $210 million within the next
five years. KLT's consolidated assets at December 31, 1996, totaled $224
million. Within the next five years we expect KLT consolidated assets of about
$800 million, generated through the $210 million of equity investment,
subsidiary retained earnings and borrowings. The growth of KLT accounts for the
majority of the increase in KCPL's consolidated investments and nonutility
property.
EARNINGS OVERVIEW
Earnings per share (EPS) for 1996 of $1.69 decreased $0.23 from 1995.
Terminating our merger agreement with UtiliCorp United Inc. (UtiliCorp) and
defending against Western Resources' unsolicited exchange offer reduced 1996 EPS
by $0.31. Other factors contributing to the decrease included mild summer
temperatures and the effects of a new stipulation and agreement with the
Missouri commission. In addition, EPS for 1995 included a $0.05 per share gain
on the sale of rail cars. Despite the unfavorable weather and merger related
charges, continued load growth contributed favorably to 1996 EPS.
EPS for 1995 of $1.92 increased $0.28 from 1994. This increase was due
mostly to 1994's one-time $22.5 million ($0.22 per share) charge for the
voluntary early retirement program (see Note 2 to the
<PAGE>
Consolidated Financial Statements). Other factors increasing 1995 EPS included
load growth, warmer summer temperatures, savings from the 1994 early retirement
program and a net gain of $0.05 per share from the sale of railcars. Partially
offsetting these increases, 1995 EPS also reflected decreased bulk power sales
and higher fuel and purchased power costs as a result of a forced outage at a
coal plant.
MEGAWATT-HOUR (MWH) SALES AND ELECTRIC OPERATING REVENUES
Sales and revenue data:
Increase (Decrease) from Prior Year
1996 1995
Mwh Revenues Mwh Revenues
(revenue change in millions)
Retail:
Residential 1 % $ - 6 % $ 17
Commercial 4 % 10 3 % 9
Industrial 6 % 5 - % (1)
Other (4)% - (6)% -
Total retail 4 % 15 3 % 25
Sales for resale:
Bulk power sales 1 % 6 (15)% (11)
Other 29 % - (11)% -
Total 21 14
Other revenues (3) 4
Total electric operating revenues $18 $18
During 1996 the Missouri Public Service Commission (MPSC) approved a new
stipulation and agreement authorizing a $20 million revenue reduction in two
phases, and an increase in depreciation and amortization expense by $9 million
per year. In July 1996 we implemented phase one of the revenue reduction
designed to reduce revenues from commercial and industrial customers by an
estimated $9 million per year. This decrease is achieved with an increase in
summer revenues offset by a larger decrease in winter revenues. This design more
closely follows our increased costs of generating electricity in the summer. The
second phase of this stipulation, effective January 1, 1997, will further reduce
Missouri residential, commercial and industrial revenues by an estimated $11
million per year. The decrease in 1996 revenues as a result of this stipulation
and agreement was about $3 million.
These lower rates, combined with lower billed sales in December of 1996
versus December of 1995, resulted in a lower accounts receivable balance at
December 31, 1996, compared with December 31, 1995.
During April and May of 1995 about 600 net commercial customers were
reclassified to industrial to more appropriately reflect their business
operations. This change resulted in the reclassification of about $680,000
(10,300 mwh sales) from commercial to industrial in each subsequent month. Prior
periods have not been restated.
Summer temperatures were very mild in 1996 compared with 1995, remaining
below normal for the fourth consecutive year. Despite this mild weather pattern,
retail mwh sales increased in each of the last four years due to load growth.
Load growth consists of higher usage-
<PAGE>
per-customer as well as the addition of new customers.
Retail mwh sales for 1996 increased 4% over 1995 while retail revenues
increased only 2%. This difference is due largely to the Missouri revenue
reductions discussed above and the effect of long-term sales contracts with
certain major industrial customers. These contracts are tailored to meet
customers' needs in exchange for their long-term commitment to purchase energy.
Long-term contracts are in place or under negotiation for a large portion of our
industrial sales.
Retail mwh sales and revenues for 1995 increased 3% over 1994. This
increase was due mainly to improved weather and continued load growth. Similar
to 1996, long-term contracts with major industrial customers resulted in a
slight decrease in 1995 industrial revenues from 1994, despite an equal level of
mwh sales.
Bulk power sales vary with system requirements, generating unit and
purchased power availability, fuel costs and the requirements of other electric
systems. A combination of these conditions contributed to record bulk power
sales in 1994.
Changes in other revenues during 1996 and 1995 reflected changes in
classification between other revenues and bulk power sales.
Total revenue per mwh sold varies with changes in the mix of mwh sales
among customer classifications and the effect of declining price per mwh as
usage increases. An automatic fuel adjustment provision is included in only
sales for resale tariffs, which apply to less than 1% of revenues.
Future mwh sales and revenues per mwh will be affected by national and
local economies, tariff changes, weather and customer conservation efforts.
Competition, including alternative sources of energy such as natural gas,
cogeneration, IPPs and other electric utilities, may also affect future sales
and revenue.
FUEL AND PURCHASED POWER
Combined fuel and purchased power expenses for 1996 increased 8% or $15
million from 1995, while total mwh sales (total of retail and sales for resale)
increased only 3%.
This increase is largely attributable to an increase in capacity
purchases. Capacity purchase contracts provide a cost-effective alternative to
constructing new capacity and have contributed to increases in purchased power
expenses. Additional capacity purchases increased purchased power expenses about
$9 million in 1996 and $4 million in 1995.
Nuclear fuel costs per MMBTU remain substantially less than the MMBTU
price of coal, despite increases of 26% during 1996 and 15% during 1995. Nuclear
fuel costs per MMBTU averaged 59%, 45% and 40% of the MMBTU price of coal during
1996, 1995 and 1994, respectively. We expect this relationship and the price of
nuclear fuel to remain fairly constant through the year 2001. During 1996 coal
represented about 75% of generation and nuclear fuel about 25%. During 1995
nuclear fuel accounted for about 30% of generation as no refueling
<PAGE>
outage was scheduled during that year (see Wolf Creek section).
The price of coal burned declined 4% during 1996 and increased 1% during
1995. Our coal procurement strategies continue to provide coal costs at or below
the regional average. We expect coal costs to remain fairly consistent with 1996
levels through 2001.
Other items affecting the change in combined fuel and purchased power
expenses from 1995 to 1996 include a $2 million decrease in expense from coal
inventory adjustments, an increase in replacement power expenses for Wolf
Creek's spring 1996 refueling outage (see Wolf Creek section) and a 1995 forced
generating station outage. During July 1995 a fire forced an outage at LaCygne
I, a low-cost, coal-fired generating unit. We replaced the power by increasing
the usage of higher-cost, coal-fired units and purchasing power on the wholesale
market. Damage to the unit was covered by insurance. However, uninsured,
incremental fuel and purchased power costs were about $4 million.
Combined fuel and purchased power expenses for 1995 increased 5% or $9
million from 1994, despite a 2% decrease in total mwh sales. Items contributing
to this increase include the LaCygne forced outage, increases in capacity
purchase contracts, increases in the cost of nuclear fuel and a $3 million
increase in fuel costs from coal inventory adjustments.
OTHER OPERATION AND MAINTENANCE EXPENSES
Combined other operation and maintenance expenses for 1994 were higher
than 1995 and 1996 due mainly to the costs of the voluntary early retirement
program in that year. Total program costs of $22.5 million ($0.22 per share)
were expensed during 1994. The decrease in 1995 expenses from 1994 was partially
offset by KCPL's $2 million share of Wolf Creek's voluntary early retirement
program recorded during 1995. Other cost variances in 1996 and 1995 resulted
from the timing of scheduled maintenance programs.
We continue to emphasize new technologies, improved methods and cost
control. We are changing processes to provide increased efficiencies and
improved operations. Through the use of cellular technology, a majority of
customer meters are read automatically. These types of changes have allowed us
to assimilate work performed by those who elected to participate in the early
retirement programs.
INCOME TAXES
Operating income taxes decreased $9 million in 1996 from 1995. The
decrease was primarily due to adjustments necessary to reflect the filing of the
1995 tax returns and the settlement with the Internal Revenue Service regarding
tax issues included in the 1985 through 1990 tax returns. This settlement is
also the primary reason for the decrease in accrued taxes.
GENERAL TAXES
Components of general taxes:
1996 1995 1994
(thousands)
<PAGE>
Property $ 45,519 $ 46,019 $ 46,895
Gross receipts 42,554 41,416 40,397
Other 9,175 9,386 9,070
Total $ 97,248 $ 96,821 $ 96,362
OTHER INCOME
Miscellaneous Income
Miscellaneous income for 1995 includes a $5 million gain from the sale of
steel railcars, which were replaced by leased aluminum cars. Aluminum cars
are lighter-weight and offer more coal capacity per car, contributing to
lower delivered coal prices.
Miscellaneous Deductions
Miscellaneous deductions increased in 1996 from 1995 due primarily to the
termination of the UtiliCorp merger agreement and defense against Western
Resources' unsolicited exchange offer (see Notes 11 and 12 to the
Consolidated Financial Statements). During the third quarter of 1996, $13
million in previously deferred merger costs and a $5 million termination
fee were expensed. In addition, costs incurred to defend against the
unsolicited exchange offer increased 1996 expenses by $13 million. Also,
subsidiary expenses increased about $9 million reflecting increased
investing activities. Total subsidiary expenses, including interest charges
discussed below, are substantially offset by related tax benefits.
Miscellaneous deductions increased in 1995 over 1994 due to increases in
charitable contributions, fees related to the sale of customer accounts
receivable and growing subsidiary operations.
Income Taxes
We accrued tax credits in 1996, 1995 and 1994 of $12, $5 and $1 million,
respectively, related primarily to KLT's investments in affordable housing
limited partnerships. Tax credits from the investments in affordable
housing more than offset the increase in interest expense incurred from
these investments. Nontaxable increases in the cash surrender value of
corporate-owned life insurance contracts also affected the relationship
between miscellaneous deductions and income taxes.
INTEREST CHARGES
Interest expense increased during 1996 reflecting higher average levels of
long-term debt outstanding compared with 1995. The higher levels of debt
resulted from additional financing by KLT to support expanding subsidiary
operations and new investments in unregulated ventures.
Interest expense increased during 1995 reflecting higher average levels of
long-term debt outstanding and higher weighted-average interest rates compared
with 1994. The higher average level of outstanding debt was primarily due to
subsidiary investments in affordable housing partnerships.
The average interest rate on long-term debt, including current
<PAGE>
maturities, was 6.0% in 1996 and 1995 compared with 5.4% in 1994.
We use interest rate swap and cap agreements to limit the interest expense
on a portion of our variable-rate long-term debt. We do not use derivative
financial instruments for trading or other speculative purposes. Although these
agreements are an integral part of our interest rate management, their
incremental effect on interest expense and cash flows is not significant.
WOLF CREEK
Wolf Creek is one of KCPL's principal generating units representing about
18% of its accredited generating capacity. The plant's operating performance has
remained strong, contributing about 25% of the annual mwh generation while
operating at an average capacity of 88% over the last three years. It has the
lowest fuel cost per MMBTU of any of KCPL's generating units.
Wolf Creek's eighth scheduled refueling and maintenance outage began in
early February 1996 and was completed in April 1996 (64 days). The incremental
operating, maintenance and replacement power costs are accrued evenly over the
unit's operating cycle, normally 18 months. As actual outage expenses are
incurred, the refueling liability and related deferred tax asset are reduced.
The eighth outage started one month early when the plant was shut down after
water flow from the cooling lake was restricted by ice buildup on an intake
screen. This extended the length of the outage and was the primary reason for
the increase in Wolf Creek related replacement power and maintenance expenses in
1996. Wolf Creek's ninth refueling and maintenance outage is scheduled for the
fall of 1997.
Wolf Creek's assets and operating expenses represent about 45% and 20% of
total assets and operating expenses, respectively. Currently, no major equipment
replacements are expected, but an extended shutdown of the unit could have a
substantial adverse effect on KCPL's business, financial condition and results
of operations. Higher replacement power and other costs would be incurred as a
result. Although not expected, an unscheduled plant shutdown could be caused by
actions of the Nuclear Regulatory Commission reacting to safety concerns at the
plant or other similar nuclear units. If a long-term shutdown occurred, the
state regulatory commissions could consider reducing rates by excluding the Wolf
Creek investment from rate base.
Ownership and operation of a nuclear generating unit exposes KCPL to risks
regarding the cost of decommissioning the unit at the end of its life and to
potential retrospective assessments and property losses in excess of insurance
coverage. These risks are more fully discussed in the related sections of Notes
1 and 4 to the Consolidated Financial Statements.
ENVIRONMENTAL MATTERS
Our policy is to act in an environmentally responsible manner and use the
latest technology available to avoid and treat contamination. We continually
conduct environmental audits designed to ensure compliance with governmental
regulations and detect contamination. However, these regulations are constantly
evolving; governmental
<PAGE>
bodies may impose additional or more rigid environmental regulations which could
require substantial changes to operations or facilities.
The Clean Air Act Amendments of 1990 contain two programs significantly
affecting the utility industry. We have spent about $5 million for the
installation of continuous emission monitoring equipment to satisfy the
requirements under the acid rain provision. The other utility-related program
calls for a study of certain air toxic substances. Based on the outcome of this
study, regulation of these substances, including mercury, could be required. We
cannot predict the likelihood of any such regulations or compliance costs.
Other proposed regulations to revise the ozone and particulate matter
National Ambient Air Quality Standards, scheduled to be finalized in June 1997,
may require capital expenditures which cannot be estimated at this time.
PROJECTED CONSTRUCTION EXPENDITURES
We are fully exploring alternatives to new construction. During 1995 we
entered into an operating lease for a new 142 mw combustion turbine, scheduled
to be placed in service during 1997. We have also contracted to purchase
capacity through fixed-price agreements (see Note 4 to the Consolidated
Financial Statements - Capacity Purchase Commitments). Compared to the long-term
fixed costs of building new capacity, these contracts provide a cost-effective
way of meeting uncertain levels of demand growth, even though there are risks
associated with market price fluctuations.
Total utility capital expenditures, excluding allowance for funds used
during construction, were $101 million in 1996. The utility construction
expenditures are projected for the next five years as follows:
<TABLE>
<CAPTION>
Construction Expenditures
1997 1998 1999 2000 2001 Total
(millions)
<S> <C> <C> <C> <C> <C> <C>
Generating facilities $ 35 $ 27 $ 35 $33 $ 19 $149
Nuclear fuel 20 21 2 24 27 94
Transmission facilities 11 5 2 4 3 25
Distribution and
general facilities 67 53 51 48 43 262
Total $133 $106 $ 90 $109 $ 92 $530
This construction expenditure plan is subject to continual review and
change. The next plan will be filed with the Missouri commission in July 1997.
</TABLE>
CAPITAL REQUIREMENTS AND LIQUIDITY
As of December 31, 1996, KCPL's liquid resources included cash flows from
operations, $300 million of registered but unissued, unsecured medium-term notes
and $375 million of unused bank lines of credit. The unused lines consisted of
KCPL's short-term bank lines of credit of $280 million and KLT's long-term
revolving line of credit of $95 million.
<PAGE>
KCPL continues to generate positive cash flows from operating activities,
although individual components of working capital will vary with normal business
cycles and operations including the timing of receipts and payments. Cash
required to meet current tax liabilities has increased as we no longer receive
the benefits of accelerated tax depreciation on any significant generating plant
assets. Accelerated depreciation lowers tax payments in the earlier years of an
asset's life while increasing deferred tax liabilities; this relationship
reverses in the later years of an asset's life. Our last significant generating
plant addition was the completion of Wolf Creek in 1985. The costs incurred to
repair damages from an October 1996 snow storm also lowered cash flows from
operating activities in 1996 and increased Other Regulatory Assets on the
balance sheet. Amortization of these costs will begin in 1997 and be reflected
as Amortization of Other in the Statement of Cash Flows. Amortization of Other
decreased in 1996 as the deferred costs of the 1993 flood were fully amortized
in 1995.
Cash used in investing activities varies with the timing of utility
capital expenditures and KLT's purchases of investments and nonutility
properties. The increase in nonutility properties during 1996 resulted mainly
from KLT's purchase of certain oil and gas projects during the year.
Subsidiary obligations increased during 1996 to finance KLT's purchases of
nonutility property and investments. KCPL's common dividend payout ratio was 94%
in 1996, 80% in 1995 and 91% in 1994. Merger related costs in 1996 and costs of
the voluntary early retirement program in 1994 contributed to the higher ratios
in those years.
EPS for 1997 will be reduced by $0.52 due to a $53 million payment in
February 1997 to UtiliCorp for terminating a merger agreement with them and then
signing an agreement to combine with Western Resources. After taxes, the payment
will reduce 1997 net income by $32 million. We sold commercial paper to pay this
termination fee.
Day-to-day operations, utility construction requirements and dividends are
expected to be met with internally-generated funds. Uncertainties affecting our
ability to meet these requirements with internally-generated funds include the
effect of inflation on operating expenses, the level of mwh sales, regulatory
actions, compliance with future environmental regulations, the availability of
generating units, and the outcome of pending legal proceedings (see Note 13 to
the Consolidated Financial Statements). The funds needed for the retirement of
$393 million of maturing debt through the year 2001 will be provided from
operations, refinancings or short-term debt. We might incur additional debt
and/or issue additional equity to finance growth or take advantage of new
opportunities.
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
<CAPTION>
1996 1995 1994
(thousands)
<S> <C> <C> <C>
ELECTRIC OPERATING REVENUES $903,919 $885,955 $868,272
OPERATING EXPENSES
Operation
Fuel 140,505 139,371 135,106
Purchased power 52,455 38,783 33,929
Other 180,719 178,599 202,304
Maintenance 71,495 78,439 72,468
Depreciation 103,912 97,225 94,361
Income taxes 68,155 77,062 70,949
General taxes 97,248 96,821 96,362
Deferred Wolf Creek costs amortization 11,617 12,607 13,102
Total 726,106 718,907 718,581
OPERATING INCOME 177,813 167,048 149,691
OTHER INCOME
Allowance for equity funds
used during construction 2,368 2,279 2,087
Miscellaneous income 4,843 8,623 3,015
Miscellaneous deductions (55,172) (11,101) (7,174)
Income taxes 36,402 10,259 4,572
Total (11,559) 10,060 2,500
INCOME BEFORE INTEREST CHARGES 166,254 177,108 152,191
INTEREST CHARGES
Long-term debt 53,939 52,184 43,962
Short-term debt 1,251 1,189 1,170
Miscellaneous 4,840 3,112 4,128
Allowance for borrowed funds
used during construction (1,947) (1,963) (1,844)
Total 58,083 54,522 47,416
Net Income 108,171 122,586 104,775
Preferred Stock
Dividend Requirements 3,790 4,011 3,457
Earnings Available for
Common Stock $104,381 $118,575 $101,318
Average Number of Common
Shares Outstanding 61,902 61,902 61,903
Earnings per Common Share $1.69 $1.92 $1.64
Cash Dividends per
Common Share $1.59 $1.54 $1.50
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Year Ended December 31
1996 1995 1994
(thousands)
<S> <C> <C> <C>
Beginning Balance $449,966 $426,738 $418,201
Net Income 108,171 122,586 104,775
558,137 549,324 522,976
Dividends Declared
Preferred stock - at required rates 3,782 4,029 3,384
Common stock 98,421 95,329 92,854
Ending Balance $455,934 $449,966 $426,738
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
</TABLE>
<PAGE>
<TABLE>
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31 December 31
1996 1995
(thousands)
<S> <C> <C>
ASSETS
UTILITY PLANT, at original cost
Electric $ 3,472,607 $ 3,388,538
Less-accumulated depreciation 1,238,187 1,156,115
Net utility plant in service 2,234,420 2,232,423
Construction work in progress 69,577 72,365
Nuclear fuel, net of amortization of
$84,540 and $81,452 39,497 54,673
Total 2,343,494 2,359,461
REGULATORY ASSET - DEFERRED WOLF CREEK COSTS 0 8,880
REGULATORY ASSET - RECOVERABLE TAXES 126,000 123,000
INVESTMENTS AND NONUTILITY PROPERTY 231,874 166,751
CURRENT ASSETS
Cash and cash equivalents 23,571 28,390
Customer accounts receivable, net of allowance
for doubtful accounts of $1,644 and $1,574 27,093 32,830
Other receivables 36,113 31,838
Fuel inventories, at average cost 19,077 22,103
Materials and supplies, at average cost 47,334 47,175
Deferred income taxes 2,737 5,947
Other 5,055 5,179
Total 160,980 173,462
DEFERRED CHARGES
Regulatory assets
Settlement of fuel contracts 9,764 13,007
KCC Wolf Creek carrying costs 1,368 4,104
Other 26,615 21,231
Other deferred charges 14,417 12,610
Total 52,164 50,952
Total $2,914,512 $2,882,506
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (see statements) $1,943,647 $1,824,087
CURRENT LIABILITIES
Commercial paper 0 19,000
Current maturities of long-term debt 26,591 73,803
Accounts payable 55,618 52,506
Accrued taxes 18,443 39,726
Accrued interest 21,054 16,906
Accrued payroll and vacations 25,558 22,764
Accrued refueling outage costs 7,181 13,563
Other 11,980 11,787
Total 166,425 250,055
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 643,189 648,374
Deferred investment tax credits 67,107 71,270
Other 94,144 88,720
Total 804,440 808,364
COMMITMENTS AND CONTINGENCIES (note 4)
Total $2,914,512 $2,882,506
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
</TABLE>
<PAGE>
<TABLE>
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended December 31
1996 1995 1994
(thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $108,171 $122,586 $104,775
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation 103,912 97,225 94,361
Amortization of:
Nuclear fuel 16,094 14,679 10,136
Deferred Wolf Creek costs 11,617 12,607 13,102
Other 5,507 8,152 9,608
Deferred income taxes (net) (8,662) (3,268) 20,524
Deferred investment tax credit
amortization and reversals (4,163) (11,570) (4,345)
Deferred storm costs (8,885) 0 0
Allowance for equity funds used
during construction (2,368) (2,279) (2,087)
Cash flows affected by changes in:
Receivables 1,462 (17,551) 1,543
Fuel inventories 3,026 (5,533) (2,020)
Materials and supplies (159) (2,222) (796)
Accounts payable 3,112 (20,980) 14,065
Accrued taxes (21,283) 15,042 (3,116)
Accrued interest 4,148 4,697 (3,366)
Wolf Creek refueling outage accrual (6,382) 11,443 (5,142)
Pension and postretirement benefit
obligations (84) (4,176) 32,203
Other operating activities 11,846 4,325 (2,860)
Net cash from operating activities 216,909 223,177 276,585
CASH FLOWS FROM INVESTING ACTIVITIES
Utility capital expenditures (100,947) (134,070) (124,965)
Allowance for borrowed funds used
during construction (1,947) (1,963) (1,844)
Purchases of investments (35,362) (56,759) (67,560)
Purchases of nonutility property (20,395) 0 0
Other investing activities (931) 9,046 5,624
Net cash used in investing
activities (159,582) (183,746) (188,745)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 135,441 111,055 133,793
Repayment of long-term debt (74,230) (33,428) (170,170)
Special deposits 0 0 60,118
Net change in short-term borrowings (19,000) (13,000) 3,000
Dividends paid (102,203) (99,358) (96,238)
Other financing activities (2,154) 3,473 335
Net cash used in financing
activities (62,146) (31,258) (69,162)
NET CHANGE IN CASH AND CASH
EQUIVALENTS (4,819) 8,173 18,678
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 28,390 20,217 1,539
CASH AND CASH EQUIVALENTS
AT END OF YEAR $23,571 $28,390 $20,217
CASH PAID DURING THE YEAR FOR:
Interest (net of amount capitalized) $52,457 $48,200 $48,246
Income taxes $58,344 $67,053 $53,720
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
</TABLE>
<PAGE>
<TABLE>
KANSAS CITY POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
<CAPTION>
December 31 December 31
1996 1995
(thousands)
<S> <C> <C>
COMMON STOCK EQUITY
Common stock-150,000,000 shares authorized
without par value-61,908,726 shares issued,
stated value $ 449,697 $ 449,697
Retained earnings (see statements) 455,934 449,966
Unrealized gain on securities available for sale 6,484 0
Capital stock premium and expense (1,666) (1,725)
Total 910,449 897,938
CUMULATIVE PREFERRED STOCK
$100 Par Value
3.80% - 100,000 shares issued 10,000 10,000
4.50% - 100,000 shares issued 10,000 10,000
4.20% - 70,000 shares issued 7,000 7,000
4.35% - 120,000 shares issued 12,000 12,000
No Par Value
4.38%* - 500,000 shares issued 50,000 50,000
$100 Par Value - Redeemable
4.00% - (note 8) 62 1,436
Total 89,062 90,436
LONG-TERM DEBT (excluding current maturities)
General Mortgage Bonds
Medium-term Notes due 1997-2008, 6.81% and
6.72% weighted-average rate at December 31 468,500 387,000
4.24%* Environmental Improvement Revenue
Refunding Bonds due 2012-23 158,768 158,768
Guaranty of Pollution Control Bonds
4.13%* due 2015-17 196,500 196,500
Subsidiary Obligations
Affordable Housing Notes due 2000-05, 8.51%
and 8.54% weighted-average rate at
December 31 65,368 69,945
Bank Credit Agreement due 1999, 6.78% and 7.66%
weighted-average rate at December 31 55,000 23,500
Total 944,136 835,713
Total $1,943,647 $1,824,087
* Variable rate securities, weighted-average rate as of December 31, 1996
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
</TABLE>
<PAGE>
KANSAS CITY POWER & LIGHT COMPANY
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Kansas City Power & Light Company is a medium-sized electric utility with
more than 435,000 customers in western Missouri and eastern Kansas. About 95% of
our retail revenues are from the Kansas City metropolitan area, an agribusiness
center and major regional center for wholesale, retail and service companies.
About two-thirds of our retail sales are to Missouri customers, the remainder to
Kansas customers.
The consolidated financial statements include the accounts of Kansas City
Power & Light Company and KLT Inc., a wholly-owned, nonutility subsidiary. The
consolidated entity is referred to as KCPL. KLT was formed in 1992 as a holding
company for various nonregulated business ventures. Currently, the electric
utility accounts for about 92% of consolidated assets and substantially all
results of operations. Intercompany balances and transactions have been
eliminated. KLT's revenues and expenses have been classified as Other Income and
Interest Charges in the income statement.
The accounting records conform to the accounting standards prescribed by
the Federal Energy Regulatory Commission (FERC) and generally accepted
accounting principles. These standards require the use of estimates and
assumptions that affect amounts reported in the financial statements and the
disclosure of commitments and contingencies.
<PAGE>
Cash and Cash Equivalents
Cash and cash equivalents consists of highly liquid investments with
original maturities of three months or less.
Derivative Financial Instruments
We use interest rate swap and cap agreements to reduce the impact of
changes in interest rates on variable-rate debt.
Interest rate swap agreements effectively fix the interest rates on a
portion of KCPL's variable-rate debt. Interest rate caps limit the interest rate
on a portion of KCPL's variable-rate debt by setting a maximum rate. The costs
of rate caps are paid annually and included in interest expense. Any difference
paid or received due to these agreements is recorded as an adjustment to
interest expense.
These agreements are not marked to market value as they are used only to
manage interest expense and the intent is to hold them until their termination
date. We do not use derivative financial instruments for trading or other
speculative purposes.
Fair Value of Financial Instruments
The stated values of financial instruments as of December 31, 1996 and
1995, approximated fair market values. KCPL's incremental borrowing rate for
similar debt was used to determine fair value if quoted market prices were not
available.
Securities Available for Sale
Certain investments in equity securities are accounted for as securities
available for sale in accordance with Financial Accounting Standards Board
(FASB) Statement No. 115 - Accounting for Certain Investments in Debt and Equity
Securities. This requires adjusting the securities to market value with
unrealized gains (or losses), net of deferred income taxes, reported as a
separate component of shareholders' equity.
Investments in Affordable Housing Limited Partnerships
Through December 31, 1996, a subsidiary of KLT had invested $97 million in
affordable housing limited partnerships. About $80 million of these investments
were recorded at cost; the equity method was used for the remainder. Tax credits
are recognized in the year generated. A change in accounting principle relating
to investments made after May 19, 1995, requires limited partnership investments
of more than 5% to use the equity method. Of the investments recorded at cost,
$70 million exceed this 5% level but were made prior to May 19, 1995.
Utility Plant
Utility plant is stated at historical costs of construction. These costs
include taxes, an allowance for funds used during construction (AFDC) and
payroll-related costs including pensions and other fringe benefits. Additions
of, and replacements and improvements to units of property are capitalized.
Repairs of property and replacements of items not considered to be units of
<PAGE>
property are expensed as incurred (except as discussed under Wolf Creek
Refueling Outage Costs). When property units are retired or otherwise disposed,
the original cost, net of salvage and removal, is charged to accumulated
depreciation.
AFDC represents the cost of borrowed funds and a return on equity funds
used to finance construction projects. It is capitalized as a cost of
construction work in progress. AFDC on borrowed funds reduces interest charges.
AFDC on equity funds is shown as a noncash item of other income. When a
construction project is placed in service, the related AFDC, as well as other
construction costs, is used to establish rates under regulatory rate practices.
The rates used to compute gross AFDC are compounded semi-annually and averaged
8.5% for 1996, 8.7% for 1995 and 7.8% for 1994.
Depreciation is computed using the straight-line method over the estimated
lives of depreciable property based on rates approved by state regulatory
authorities. Average annual composite rates were about 3.1% in 1996 compared
with 2.9% in 1995 and 1994.
Wolf Creek Refueling Outage Costs
Forecasted incremental costs to be incurred during scheduled Wolf Creek
Generating Station (Wolf Creek) refueling outages are accrued monthly over the
unit's operating cycle, normally about 18 months. Estimated incremental costs,
which include operating, maintenance and replacement power expenses, are based
on budgeted outage costs and the estimated outage duration. Changes to or
variances from those estimates are recorded when known or probable.
Nuclear Plant Decommissioning Costs
The Missouri Public Service Commission (MPSC) and the Kansas Corporation
Commission (KCC) require the owners of Wolf Creek to submit an updated
decommissioning cost study every three years. The most recent study was filed
during 1996 and is currently under review by the MPSC and the KCC. Based on this
study, total decommissioning costs are expected to increase to reflect 1996
dollars; however, no increase in the current level of funding and expenses is
anticipated.
The following table shows the decommissioning cost estimates and the
escalation rate and earnings assumptions approved by the MPSC and the KCC in
1994 with regard to the study filed in 1993. The decommissioning cost estimates
are based on the immediate dismantlement method and include the costs of
decontamination, dismantlement and site restoration. Plant decommissioning is
not expected to start before 2025.
KCC MPSC
Future cost of decommissioning:
Total Station $1.3 billion $1.8 billion
47% share $595 million $859 million
Current cost of decommissioning (in 1993 dollars):
Total Station $370 million $370 million
47% share $174 million $174 million
<PAGE>
Annual escalation factor 3.45% 4.50%
Annual return on trust assets 6.48% 7.66%
We contribute to a tax-qualified trust fund (about $3 million for each of
the last three years) to be used to decommission Wolf Creek. These costs were
charged to other operation expenses and recovered in rates. Based on the 1993
study, contributions are expected to increase slightly beginning in 1997. These
funding levels assume a certain return on trust assets. If the actual return on
trust assets is below the anticipated level, we believe a rate increase will be
allowed ensuring full recovery of decommissioning costs over the remaining life
of the unit. This assumes we continue to be regulated.
As of December 31, 1996 and 1995, the trust fund balance, including
reinvested earnings, was $31 and $26 million, respectively. These amounts are
reflected in Investments and Nonutility Property. The related liabilities for
decommissioning are included in Deferred Credits and Other Liabilities - Other.
In 1996 FASB issued an Exposure Draft of a proposed Statement of Financial
Accounting Standards, Accounting for Certain Liabilities Related to Closure or
Removal of Long-Lived Assets, that addressed the accounting for obligations
arising from dismantlement, removal, site reclamation, and decontamination of
certain long-lived assets. FASB hopes to finalize a statement or revised
exposure draft in 1997. If current electric utility industry accounting
practices for such decommissioning costs are changed: 1) annual decommissioning
expenses could increase, and 2) trust fund income from the external
decommissioning trusts could be reported as investment income. We are not able
to predict what affect those changes would have on results of operations,
financial position, or related regulatory practices until the final issuance of
a revised accounting guidance. However, we do not anticipate results of
operations to be significantly affected as long as we are regulated.
Nuclear Fuel
Nuclear fuel is amortized to fuel expense based on the quantity of heat
produced for the generation of electricity. Under the Nuclear Waste Policy Act
of 1982, the Department of Energy (DOE) is responsible for the permanent
disposal of spent nuclear fuel. We pay the DOE a quarterly fee of one-tenth of a
cent for each kilowatt-hour of net nuclear generation delivered and sold for
future disposal of spent nuclear fuel. These disposal costs are charged to fuel
expense and recovered through rates.
A permanent disposal site may not be available for the industry until 2010
or later, although an interim facility may be available earlier. Under current
DOE policy, once a permanent site is available, the DOE will accept spent
nuclear fuel on a priority basis; the owners of the oldest spent fuel will be
given the highest priority. As a result, disposal services for Wolf Creek may
not be available prior to 2016. Wolf Creek has an on-site, temporary storage
facility for spent nuclear fuel. Under current regulatory guidelines, this
facility can provide storage space until about 2005. Management believes
additional temporary storage space can be built or obtained as necessary.
<PAGE>
Regulatory Assets
FASB Statement No. 71 - Accounting for Certain Types of Regulation,
applies to regulated entities whose rates are designed to recover the costs of
providing service. In accordance with this statement, certain items that would
normally be reflected in the income statement are deferred on the balance sheet.
These items are then amortized as the related amounts are recovered from
customers through rates.
We recognize regulatory assets when allowed by a commission's rate order
or when it is probable, based on regulatory precedent, that future rates will
recover the amortization of the deferred costs. We continuously monitor changes
in market and regulatory conditions and consider the effects of any changes in
assessing the continued applicability of FASB 71. If we were unable to apply
FASB 71, the unamortized balance of $164 million of our regulatory assets, net
of the related tax benefit, would be written off.
Deferred Wolf Creek Costs
The KCC and MPSC allowed continued construction accounting for
ratemaking purposes after Wolf Creek's 1985 commercial in-service date.
Certain other carrying costs were also deferred. The deferrals were
amortized and recovered in rates from 1987 through 1996.
Recoverable Taxes
See the following Income Taxes section.
Settlement of Fuel Contracts
We deferred the cost of terminating certain coal purchase contracts.
These costs are being amortized over various periods ending in 2002.
KCC Wolf Creek Carrying Costs
The KCC ordered certain Wolf Creek carrying costs to be deferred.
These costs are being recovered and amortized over six years ending in June
1997.
Other
Other regulatory assets include premium on redeemed debt, deferred
costs to decommission and decontaminate federal uranium enrichment
facilities and other costs. These deferrals are amortized over various
periods extending to 2023. Also included in other regulatory assets are
incremental costs of $8.9 million related to an October 1996 snow storm. We
have received accounting authority orders from the KCC and MPSC approving
the deferral of these costs. The costs will be amortized over five years
beginning in January 1997.
Revenue Recognition
We use cycle billing and accrue estimated unbilled revenue at the
<PAGE>
end of each reporting period.
Income Taxes
The balance sheet includes deferred income taxes for all temporary
differences between the tax basis of an asset or liability and that reported in
the financial statements. These deferred tax assets and liabilities are
determined using the tax rates scheduled by the tax law to be in effect when the
differences reverse.
Regulatory Asset - Recoverable Taxes mainly reflects the future revenue
requirements necessary to recover the tax benefits of existing temporary
differences previously passed through to customers. Operating income tax expense
is recorded based on ratemaking principles. However, if the method used for the
balance sheet were reflected in the income statement, net income would remain
the same.
Investment tax credits are deferred when utilized and amortized to income
over the remaining service lives of the related properties.
Environmental Matters
Environmental costs are accrued when it is probable a liability has been
incurred and the amount of the liability can be reasonably estimated. We believe
all appropriate costs related to environmental matters have been recorded.
2. PENSION PLANS AND OTHER EMPLOYEE BENEFITS
Early Retirement Program
In 1994, 332 employees retired under a voluntary early retirement plan. We
expensed estimated pension and postretirement program costs of $16.5 and $6.0
million, respectively ($0.22 per share).
In 1995, 56 employees retired under the Wolf Creek voluntary early
retirement plan. We expensed our share of estimated program costs of $2.1
million ($0.02 per share) during the second quarter of 1995.
Pension Plans
KCPL has defined benefit pension plans for its employees, including
officers. Benefits under these plans reflect the employees' compensation, years
of service and age at retirement. KCPL satisfies at least the minimum funding
requirements under the Employee Retirement Income Security Act of 1974.
Funded status of the plans:
December 31 1996 1995
(thousands)
Accumulated benefit obligation:
Vested $247,264 $251,042
Nonvested 6,526 6,474
Total $253,790 $257,516
Determination of plan assets less obligations:
Fair value of plan assets (a) $363,285 $339,236
<PAGE>
Projected benefit obligation (b) 307,050 315,395
Difference $ 56,235 $ 23,841
Reconciliation of difference:
Accrued trust liability $(13,645) $(13,890)
Unrecognized transition obligation 10,541 12,612
Unrecognized net gain 63,022 29,293
Unrecognized prior service cost (3,683) (4,174)
Difference $ 56,235 $ 23,841
(a) Plan assets are invested in insurance contracts, corporate bonds, equity
securities, U.S. Government securities, notes, mortgages and short-term
investments.
(b) Based on weighted-average discount rates of 8.0% in 1996 and 7.5% in 1995;
and increases in future salary levels of 4% to 5% in 1996 and 1995.
Components of provisions for pensions (excluding 1995 and 1994 early retirement
program costs):
1996 1995 1994
(thousands)
Service cost $ 8,164 $ 6,414 $ 8,193
Interest cost on projected benefit
obligation 23,379 22,593 20,759
Actual return on plan assets (40,831) (50,108) (1,143)
Other 15,347 25,656 (22,297)
Net periodic pension cost $ 6,059 $ 4,555 $ 5,512
Long-term rates of return on plan assets of 8.5% to 9.25% were used.
Postretirement Benefits Other Than Pensions
In addition to providing pension benefits, certain postretirement health
care and life insurance benefits are provided for substantially all retired
employees.
We accrue the cost of postretirement health care and life insurance
benefits during an employee's years of service. These costs are currently
recovered through rates on an accrual basis in Missouri and a pay-as-you-go
basis in Kansas. In 1995 we began funding the year's overall net periodic
postretirement benefit cost, subject to maximum deductible limits for income tax
purposes.
Reconciliation of postretirement benefits to amounts recorded in the balance
sheets:
December 31 1996 1995
(thousands)
Accumulated postretirement benefit obligation (APBO) (a):
Retirees $ 20,582 $22,515
Fully eligible active plan participants 3,149 2,659
Other active plan participants 8,459 9,315
Total APBO 32,190 34,489
Fair value of plan assets (b) (3,620) (2,189)
Unrecognized transition obligation (18,791) (19,965)
<PAGE>
Unrecognized net gain 3,255 892
Unrecognized prior service cost (709) (786)
Accrued postretirement benefit obligation
(included in Deferred Credits
and Other Liabilities - Other) $ 12,325 $12,441
(a) Based on weighted-average discount rates of 8.0% in 1996 and 7.5% in 1995;
and increases in future salary levels of 4% in 1996 and 1995.
(b) Plan assets are invested in certificates of deposit.
Net periodic postretirement benefit cost (excluding 1995 and 1994 early
retirement program costs):
1996 1995 1994
(thousands)
Service cost $ 574 $ 435 $ 645
Interest cost on APBO 2,520 2,423 2,305
Amortization of unrecognized
transition obligation 1,174 1,175 1,175
Other 6 (60) 75
Net periodic postretirement benefit cost $4,274 $3,973 $4,200
Actuarial assumptions include an increase in the annual health care cost
trend rate for 1997 of 10%, decreasing gradually over a four-year period to its
ultimate level of 6%. The health care plan requires retirees to share in the
cost when premiums exceed a certain amount. Because of this provision, an
increase in the assumed health care cost trend rate by 1% per year would only
increase the APBO as of December 31, 1996, by about $704,000 and the combined
service and interest costs of the net periodic postretirement benefit cost for
1996 by about $80,000.
Long-term Incentive Plan
We have granted stock options where the exercise price equals the market
price of KCPL's common stock on the grant date. One-half of all options granted
vest one year after the grant date, the other half vest two years after the
grant date. When exercised, recipients receive shares of stock and accumulated
dividends (as though they had been reinvested). Unexercised options expire 10
years after the grant date.
KCPL follows APB Opinion 25 - Accounting for Stock Issued to Employees and
related Interpretations in accounting for this plan. Because of the dividend
provision, we expensed $1.4, $1.0 and $0.4 million for 1996, 1995 and 1994,
respectively. The expense includes accumulated and reinvested dividends plus the
appreciation in stock price since the grant date. If the stock price fell below
the exercise price, the cumulative expense related to those options is reversed.
If KCPL accounted for this plan using the optional, fair-value method of
FASB Statement No. 123 - Accounting for Stock-Based Compensation, the fair value
of options granted and related expense recorded for these plans would not be
material.
<PAGE>
For options outstanding at December 31, 1996, exercise prices range from
$20.625 to $26.188 and the weighted-average remaining contractual life is 7
years.
Stock option activity over the last three years is summarized below:
1996 1995 1994
shares price* shares price* shares price*
Outstanding at January 1 266,125 $22.14 197,375 $21.87 145,125 $22.60
Granted 59,000 26.19 68,750 23.06 69,125 20.63
Exercised (26,250) 22.27 - - (6,000) 21.63
Canceled - - - - (10,875) 23.88
Outstanding at December 31 298,875 $22.96 266,125 $22.18 197,375 $21.87
Exercisable as of December 31 206,500 $22.02 162,813 $22.14 102,125 $22.20
*weighted-average exercise price
3. INCOME TAXES
Income tax expense consisted of the following:
1996 1995 1994
(thousands)
Current income taxes:
Federal $35,816 $69,697 $42,736
State 8,762 11,944 7,462
Total 44,578 81,641 50,198
Deferred income taxes, net:
Federal (7,441) (3,152) 17,005
State (1,221) (116) 3,519
Total (8,662) (3,268) 20,524
Investment tax credit amortization
and reversals (4,163) (11,570) (4,345)
Total income tax expense $31,753 $66,803 $66,377
KCPL's effective income tax rates differed from the statutory federal rates
mainly due to the following:
1996 1995 1994
Federal statutory income tax rate 35.0% 35.0% 35.0%
Differences between book and tax
depreciation not normalized (0.4) 1.2 1.2
Amortization of investment tax credits (3.0) (2.5) (2.5)
Income tax credits (9.1) (2.3) (0.2)
State income taxes 3.5 4.1 4.2
Other (3.3) (0.2) 1.1
Effective income tax rate 22.7% 35.3% 38.8%
The tax effects of major temporary differences resulting in deferred
tax assets and liabilities in the balance sheets are as follows:
December 31 1996 1995
(thousands)
Plant related $562,287 $572,792
Recoverable taxes 49,000 48,000
Other 29,165 21,635
Net deferred income tax liability $640,452 $642,427
<PAGE>
The net deferred income tax liability consisted of the following:
December 31 1996 1995
(thousands)
Gross deferred income tax assets $(60,979) $(61,181)
Gross deferred income tax liabilities 701,431 703,608
Net deferred income tax liability $640,452 $642,427
4. COMMITMENTS AND CONTINGENCIES
Nuclear Liability and Insurance
Liability Insurance
The Price-Anderson Act currently limits the combined public liability of
nuclear reactor owners to $8.9 billion for claims that could arise from a
single nuclear incident. The owners of Wolf Creek (the Owners) carry the
maximum available commercial insurance of $0.2 billion. The remaining $8.7
billion balance is provided by Secondary Financial Protection (SFP), an
assessment plan mandated by the Nuclear Regulatory Commission.
Under SFP, if there were a catastrophic nuclear incident involving any of
the nation's licensed reactors, the Owners would be subject to a maximum
retrospective assessment per incident of up to $79 million ($37 million,
KCPL's share). The Owners are jointly and severally liable for these
charges, payable at a rate not to exceed $10 million ($5 million, KCPL's
share) per incident per year, excluding applicable premium taxes. The
assessment, most recently revised in 1993, is subject to an inflation
adjustment every five years based on the Consumer Price Index.
Property, Decontamination and Premature Decommissioning Insurance
The Owners also carry $2.8 billion ($1.3 billion, KCPL's share) of property
damage, decontamination and premature decommissioning insurance for loss
resulting from damage to the Wolf Creek facilities. Nuclear insurance pools
provide $0.5 billion of coverage, while Nuclear Electric Insurance Limited
(NEIL) provides $2.3 billion.
In the event of an accident, insurance proceeds must first be used for
reactor stabilization and site decontamination. KCPL's share of any
remaining proceeds can be used for property damage and premature
decommissioning costs. Premature decommissioning coverage applies only if an
accident at Wolf Creek exceeds $500 million in property damage and
decontamination expenses, and only after trust funds have been exhausted
(see Note 1 - Nuclear Plant Decommissioning Costs).
Extra Expense Insurance - Including Replacement Power
The Owners also carry additional insurance from NEIL to cover costs of
replacement power and other extra expenses incurred in the event of a
prolonged outage resulting from accidental property damage at Wolf Creek.
Retrospective Assessments
<PAGE>
Under all NEIL policies, KCPL is subject to retrospective assessments
if NEIL losses, for each policy year, exceed the accumulated funds
available to the insurer under that policy. The estimated maximum amount of
retrospective assessments to KCPL under the current policies could total
about $8 million.
Other
In the event of a catastrophic loss at Wolf Creek, the insurance
coverage may not be adequate to cover property damage and extra expenses
incurred. Uninsured losses, to the extent not recovered through rates,
would be assumed by KCPL and could have a material, adverse effect on our
financial condition and results of operations.
Nuclear Fuel Commitments
As of December 31, 1996, KCPL's portion of Wolf Creek nuclear fuel
commitments included $130 million for enrichment and fabrication through 2025
and $15 million for uranium and conversion through 2001.
Environmental Matters
KCPL's operations must comply with federal, state and local environmental
laws and regulations. The generation and transmission of electricity uses,
produces and requires disposal of certain products and by-products, including
polychlorinated biphenyl (PCBs), asbestos and other potentially hazardous
materials. The Federal Comprehensive Environmental Response, Compensation and
Liability Act (the Superfund law) imposes strict joint and several liability for
those who generate, transport or deposit hazardous waste. This liability extends
to the current property owner as well as prior owners since the time of
contamination. We continually conduct environmental audits designed to detect
contamination and ensure compliance with governmental regulations. However,
compliance programs needed to meet future environmental laws and regulations
governing water and air quality, including carbon dioxide emissions, hazardous
waste handling and disposal, toxic substances and the effects of electromagnetic
fields, could require substantial changes to operations or facilities.
Long-term Coal Contracts
KCPL's share of coal purchased under long-term contracts was $36, $42 and
$21 million in 1996, 1995 and 1994, respectively. Under these coal contracts,
KCPL's remaining share of purchase commitments totals $113 million. Obligations
for the years 1997 through 2001 total $34, $20, $20, $10 and $10 million,
respectively. The remainder of our coal requirements are fulfilled through spot
market purchases.
Leases
KCPL has a transmission line lease with another utility whereby, with FERC
approval, the rental payments can be increased by the lessor. If this occurs, we
can cancel the lease if we are able to secure an alternative transmission path.
Commitments under this lease total $2 million per year and $54 million over the
remaining life of
<PAGE>
the lease if it is not canceled.
Rental expense for other leases including railcars, computer equipment,
buildings, transmission line and other items was $18 to $20 million per year
during the last three years. The remaining rental commitments under these leases
total $174 million. Obligations for the years 1997 through 2001 average $14
million per year. Capital leases are not material and are included in these
amounts.
As the managing partner of three jointly-owned generating units, we have
entered into leases for railcars to serve those units. The entire lease
commitment is reflected in the above amounts although about $2 million per year
($31 million total) will be reimbursed by the other owners.
Purchased Capacity Commitments
We purchase capacity from other utilities and nonutility suppliers.
Purchased capacity gives us the option to purchase energy if needed or when
market prices are favorable. This provides a cost-effective alternative to new
construction. As of December 31, 1996, contracts to purchase capacity total $267
million through 2016. During 1996, 1995 and 1994, capacity purchases were $26,
$17 and $13 million, respectively. For the years 1997 through 2001, these
commitments average $22 million per year. For each of the next five years, net
capacity purchases represent about 11% of KCPL's 1996 total available capacity.
Legal Proceedings
See Note 13.
5. SECURITIES AVAILABLE FOR SALE
KLT Inc., a wholly-owned subsidiary of KCPL, held a $5 million investment
in convertible preferred stock. In September 1996 the investee company completed
a public offering triggering conversion of the preferred stock into common
stock. As a result of the conversion, the carrying value of the investment at
December 31, 1996, was adjusted to its market value of $15.2 million. The $10.2
million increase in market value over original cost resulted in an unrealized
gain at December 31, 1996, of $6.5 million (net of deferred taxes of $3.7
million).
6. SALE OF ACCOUNTS RECEIVABLE
As of December 31, 1996 and 1995, an undivided interest in $60 million of
designated customer accounts receivable was sold with limited recourse. Related
costs of $3.5, $3.8 and $2.8 million for 1996, 1995 and 1994, respectively, were
included in Other Income Miscellaneous deductions.
7. SHORT-TERM BORROWINGS
Short-term borrowings consist of funds borrowed from banks or through the
sale of commercial paper as needed. The weighted-average interest rate on the
short-term debt outstanding as of December 31, 1995, was 5.9%. As of December
31, 1996, under minimal fee
<PAGE>
arrangements, unused bank lines of credit totaled $280 million.
8. COMMON STOCK EQUITY, PREFERRED STOCK AND REDEEMABLE PREFERRED STOCK
Common Stock Equity
KCPL has shares of common stock registered with the Securities and
Exchange Commission for a Dividend Reinvestment and Stock Purchase Plan (the
Plan). The Plan allows common shareholders, directors and employees to purchase
shares of the common stock by reinvesting dividends or making optional cash
payments. We are currently purchasing shares for the Plan on the open market.
As of December 31, 1996 and 1995, KCPL held 12,907 and 6,643 shares of its
common stock to be used for future distribution, respectively. The cost of these
shares is included in Investments and Nonutility Property.
The Restated Articles of Consolidation contain a restriction relating to
the payment of dividends in the event common equity falls to 25% of total
capitalization.
If preferred stock dividends are not declared and paid when scheduled,
KCPL could not declare or pay common stock dividends or purchase any common
shares. If the unpaid preferred stock dividends equal four or more full
quarterly dividends, the preferred shareholders, voting as a single class, could
elect members to the Board of Directors.
Preferred Stock and Redeemable Preferred Stock
Scheduled mandatory sinking fund requirements for the redeemable 4%
Cumulative Preferred Stock are 1,600 shares per year. Shares issued as of
December 31 totaled 12,757 in 1996 and 14,357 in 1995. Shares held by KCPL at
December 31 to meet future sinking fund requirements totaled 12,134 in 1996 and
3,192 in 1995. The cost of the shares held at the end of 1996 is reflected as a
reduction of the capital account while at the end of 1995 is included in
Investments and Nonutility Property.
As of December 31, 1996, 0.4 million shares of $100 par Cumulative
Preferred Stock, 1.6 million shares of Cumulative No Par Preferred Stock and 11
million shares of no par Preference Stock were authorized. We have the option to
redeem the $89 million Cumulative Preferred Stock at prices approximating par or
stated value.
9. LONG-TERM DEBT
General Mortgage Bonds and Unsecured Notes
KCPL is authorized to issue mortgage bonds under the General Mortgage
Indenture and Deed of Trust dated December 1, 1986, as supplemented. The
Indenture creates a mortgage lien on substantially all utility plant.
As of December 31, 1996, $644 million general mortgage bonds were pledged
under the Indenture to secure the outstanding medium-term notes and revenue
refunding bonds.
<PAGE>
KCPL is also authorized to issue up to $300 million in unsecured
medium-term notes under an indenture dated December 1, 1996. This indenture
prohibits KCPL from issuing additional general mortgage bonds while any
unsecured notes are outstanding. As of December 31, 1996, no unsecured notes had
been issued.
Interest Rate Swap and Cap Agreements
As of December 31, 1996, we had entered into five interest rate swap
agreements and three cap agreements to limit the interest rate on $120 million
of long-term debt. The swap agreements mature from 1997 to 1998 and effectively
fix the interest rates on $60 million of variable-rate debt to a
weighted-average rate of 3.84% as of December 31, 1996. The cap agreements limit
the interest rate on $60 million of variable-rate debt to 5.0% expiring through
1998.
As of December 31, 1995, we had entered into eight interest rate swap
agreements and three cap agreements limiting the interest rate on $150 million
of long-term debt. The swap agreements matured from 1996 to 1998 and effectively
fixed the interest rates on $90 million of variable-rate debt to a
weighted-average rate of 3.7% as of December 31, 1995. The cap agreements
limited the interest rate on $60 million of variable-rate debt to 5.0% expiring
through 1998.
These swap and cap agreements are with several highly rated financial
institutions and simply limit our exposure to increases in interest rates. They
do not subject KCPL to any material credit or market risks. The fair value of
these agreements is immaterial and is not reflected in the financial statements.
Although derivatives are an integral part of our interest rate management, their
incremental effect on interest expense for 1996 and 1995 was insignificant.
Subsidiary Obligations
During 1995 KLT entered into a long-term revolving line of credit agreement
for $65 million collateralized by the capital stock of KLT's direct
subsidiaries. During 1996 KLT amended this agreement, extending the amount of
credit available to $150 million. Other significant terms were not changed. The
affordable housing notes are collateralized by the affordable housing
investments.
Scheduled Maturities
Long-term debt maturities for the years 1997 through 2001 are $27, $73,
$136, $66 and $91 million, respectively.
10. JOINTLY-OWNED ELECTRIC UTILITY PLANTS
Joint ownership agreements with other utilities provide undivided interests
in utility plants as of December 31, 1996, as follows (in millions of dollars):
Wolf Creek LaCygne Iatan
Unit Units Unit
KCPL's share 47% 50% 70%
Utility plant in service $1,344 $ 287 $ 244
Estimated accumulated depreciation
<PAGE>
(production plant only) $ 357 $ 171 $ 129
Nuclear fuel, net $ 39 $ - $ -
KCPL's accredited capacity-megawatts 548 672 469
Each owner must fund its own portion of the plant's operating expenses and
capital expenditures. KCPL's share of direct expenses is included in the
appropriate operating expense classifications in the income statement. Western
Resources, Inc. (Western Resources) also owns a 47% share of the Wolf Creek unit
and a 50% share of the LaCygne units (see Note 11).
11. AGREEMENT AND PLAN OF MERGER WITH WESTERN RESOURCES
On February 7, 1997, KCPL and Western Resources entered into an Agreement
and Plan of Merger (the Merger Agreement) to form a strategic business
combination. The effective time of the merger is dependent upon all conditions
of the Merger Agreement being met or waived. At the effective time, KCPL will
merge with and into Western Resources, with Western Resources being the
surviving corporation.
Western Resources first delivered an unsolicited exchange offer to KCPL's
Board of Directors during the second quarter of 1996. This initial offer,
subject to numerous conditions, proposed the exchange of $28 (later increased to
$31) worth of Western Resources stock for each share of KCPL stock. After
careful consideration, both offers were rejected by KCPL's Board of Directors.
In July 1996 Western Resources commenced an exchange offer for KCPL common
stock. In late 1996 KCPL began discussing a possible merger with Western
Resources leading to the Merger Agreement.
Under the terms of the Merger Agreement, KCPL common stock will be
exchanged for Western Resources common stock valued at $32.00, subject to a
conversion ratio limiting the amount of Western Resources common stock that
holders of KCPL common stock would receive per share of KCPL common stock to no
more than 1.1 shares (if Western Resources' stock is priced at or below $29.09
per share), and no less than 0.917 shares (if Western Resources' stock is priced
at or above $34.90 per share). However, there is a provision in the Merger
Agreement that allows KCPL to terminate the merger if Western Resources' stock
price drops below $27.64 and either the Standard and Poor's Electric Companies
Index increases or the decline in Western Resources stock exceeds by
approximately 5% any decline in this index. Western Resources could avoid this
termination by improving the conversion ratio.
The transaction is subject to several closing conditions including
approval by each company's shareholders, approval by a number of regulatory
authorities (statutory approvals) and dissenting shares equaling less than 5.5%
of KCPL's outstanding shares. If the effective time has not occurred by June 30,
1998 (the termination date), either party may terminate the agreement as long as
they did not contribute to the delay. This termination date will be
automatically extended to June 30, 1999, if all of the Merger Agreement closing
conditions have been met except for certain conditions relating to statutory
approvals.
The Merger Agreement does not allow KCPL to increase its common stock
dividend prior to the effective time or termination. It also
<PAGE>
requires KCPL to redeem all outstanding shares of preferred stock prior to
completion of the merger.
If the Merger Agreement is terminated under certain circumstances, a
payment of $50 million will be due Western Resources if, within two and one-half
years following termination, KCPL agrees to consummate a business combination
with a third party that made a proposal to combine prior to termination. Western
Resources will pay KCPL $5 to $35 million if the Merger Agreement is terminated
and all closing conditions are satisfied other than conditions relating to
Western Resources receiving a favorable tax opinion, a favorable letter from its
accountants regarding pooling accounting, favorable statutory approvals, or an
exemption from the Public Utility Holding Company Act of 1935.
In February 1997 KCPL paid UtiliCorp United Inc. (UtiliCorp) $53 million
for agreeing to combine with Western Resources within two and one-half years
from the termination of KCPL's agreement to merge with UtiliCorp. This agreement
was terminated due to failure of KCPL shareholders to approve the transaction
with UtiliCorp.
12. QUARTERLY OPERATING RESULTS (UNAUDITED)
Quarter
1st 2nd 3rd 4th
(millions)
1996
Operating revenues $ 207 $ 226 $ 270 $ 201
Operating income 35 42 68 33
Net income 25 27 36 20
Earnings per common share $ 0.38 $ 0.43 $ 0.57 $0.31
Quarter
1st 2nd 3rd 4th
(millions)
1995
Operating revenues $ 199 $ 205 $ 278 $ 204
Operating income 29 31 72 35
Net income 23 19 58 23
Earnings per common share $ 0.35 $ 0.29 $ 0.91 $ 0.37
The quarterly data is subject to seasonal fluctuations with peak periods
occurring during the summer months. As a result of terminating the merger
agreement with UtiliCorp, $13 million in previously deferred merger costs and a
$5 million termination fee were expensed lowering 1996 third quarter earnings.
During 1996 about $13 million in costs to defend against Western Resources'
unsolicited exchange offer were expensed ($5 million during the second quarter
and $8 million during the third quarter).
13. LEGAL PROCEEDINGS
Jack R. Manson (Manson), as a representative of KCPL's shareholders,
alleged in a District Court proceeding, that KCPL and its directors breached
their fiduciary duties in adopting the Amended Merger Agreement with UtiliCorp
(Agreement). Manson also alleged
<PAGE>
their actions 1) were illegal, 2) illegally deprived KCPL shareholders of voting
and appraisal rights under Missouri law, and 3) were a disproportionate response
to Western Resources' acquisition offer. Also, on June 7, 1996, Western
Resources and Robert L. Rives each alleged against KCPL in the same court
proceeding, that the Agreement was illegal under Missouri law and the directors
had breached their fiduciary duties by adopting the Agreement.
By order dated November 25, 1996, the District Court allowed Manson to
amend his allegation to allege that the directors breached their fiduciary
duties by refusing to negotiate a merger with Western Resources and committed
reckless, grossly negligent, or negligent waste of corporate assets by pursuing
the merger with UtiliCorp. Manson seeks monetary damages in an unspecified
amount for the waste of corporate assets. KCPL filed a motion on December 9,
1996, to dismiss Manson's amendment; it is currently pending before the District
Court. The Company cannot predict the outcome of these proceedings at this time.
14. SUBSEQUENT EVENTS
In 1997 KLT closed investments totaling nearly $60 million financed
through additional borrowings.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Kansas City Power & Light Company:
We have audited the consolidated financial statements of Kansas City Power
& Light Company and Subsidiary listed in the index on page 43 of this Form 10-K.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Kansas City
Power & Light Company and Subsidiary as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
<PAGE>
/s/Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Kansas City, Missouri
February 14, 1997
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
See General Note to Part III.
Executive Officers
See Part I, page 7, entitled "Officers of the
Registrant."
ITEM 11. EXECUTIVE COMPENSATION
See General Note to Part III.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
See General Note to Part III.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
GENERAL NOTE TO PART III
Pursuant to General Instruction G to Form 10-K, the other information
required by Part III (Items 10, 11, and 12) of Form 10-K not disclosed above
will be either (i) incorporated by reference to the Definitive Proxy Statement
for KCPL's 1997 Annual Meeting of Shareholders, filed with the Securities and
Exchange Commission not later than April 30, 1997, or (ii) included in an
amendment to this report filed with the Commission on Form 10-K/A.
PART IV
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
Page
No.
Financial Statements
a. Consolidated Statements of Income and Consolidated 21
Statements of Retailed Earnings for the years ended
December 31, 1996, 1995, and 1994
b. Consolidated Balance Sheets - December 31, 1996, and 22
c. Consolidated Statements of Cash Flows for the years ended 23
<PAGE>
December 31, 1996, 1995, and 1994
d. Consolidated Statements of Capitalization - December 31,
1996 and 1995 24
e. Notes to Consolidated Financial Statements 25
f. Report of Independent Accountants 41
Exhibits
Exhibit
Number Description of Document
2 *Amendment and Plan of Merger (Exhibit (2)-1
to Form 8-K dated February 11, 1997).
3-a *Restated Articles of Consolidation of KCPL
dated as of May 5, 1992 (Exhibit 4 to Registration
Statement, Registration No. 33-54196).
3-b *By-laws of KCPL, as amended and in effect on August 6, 1996 (Exhibit
3(ii) to Form 10-Q dated September 30, 1996).
4-a *General Mortgage and Deed of Trust dated as of December 1, 1986,
between KCPL and UMB Bank, n.a. (formerly United Missouri Bank) of
Kansas City, N.A., Trustee (Exhibit 4-bb to Form 10-K for the year ended
December 31, 1986).
4-b *Third Supplemental Indenture dated as of April 1, 1991, to Indenture
dated as of December 1, 1986 (Exhibit 4-aq to Registration Statement,
Registration No. 33-42187).
4-c *Fourth Supplemental Indenture dated as of February 15, 1992, to
Indenture dated as of December 1, 1986 (Exhibit 4-y to Form 10-K for
year ended December 31, 1991).
4-d *Fifth Supplemental Indenture dated as of September 15, 1992, to
Indenture dated as of December 1, 1986 (Exhibit 4-a to Form 10-Q dated
September 30, 1992).
4-e *Sixth Supplemental Indenture dated as of November 1, 1992, to Indenture
dated as of December 1, 1986 (Exhibit 4-z to Registration Statement,
Registration No. 33-54196).
4-f *Seventh Supplemental Indenture dated as of October 1, 1993, to
Indenture dated as of December 1, 1986 (Exhibit 4-a to Form 10-Q dated
September 30, 1993).
4-g *Eighth Supplemental Indenture dated as of December 1, 1993, to
Indenture dated as of December 1, 1986 (Exhibit 4 to Registration
Statement, Registration No. 33-51799).
4-h *Ninth Supplemental Indenture dated as of February 1, 1994, to Indenture
dated as of December 1, 1986 (Exhibit 4-h to Form 10-K for year ended
<PAGE>
December 31, 1993).
4-i *Tenth Supplemental Indenture dated as of November 1, 1994, to Indenture
dated as of December 1, 1986 (Exhibit 4I to Form 10-K for year ended
December 31, 1994).
4-j *Resolution of Board of Directors Establishing
3.80% Cumulative Preferred Stock (Exhibit 2-R to
Registration Statement, Registration No. 2-40239).
4-k *Resolution of Board of Directors Establishing
4% Cumulative Preferred Stock (Exhibit 2-S to
Registration Statement, Registration No. 2-40239).
4-l *Resolution of Board of Directors Establishing
4.50% Cumulative Preferred Stock (Exhibit 2-T to
Registration Statement, Registration No. 2-40239).
4-m *Resolution of Board of Directors Establishing
4.20% Cumulative Preferred Stock (Exhibit 2-U to
Registration Statement, Registration No. 2-40239).
4-n *Resolution of Board of Directors Establishing
4.35% Cumulative Preferred Stock (Exhibit 2-V to
Registration Statement, Registration No. 2-40239).
4-o *Certificate of Designation of Board of Directors Establishing the
$50,000,000 Cumulative No Par Preferred Stock, Auction Series A (Exhibit
4- a to Form 10-Q dated March 31, 1992).
4-p *Indenture for Medium-Term Note Program dated as of April 1, 1991,
between KCPL and The Bank of New York (Exhibit 4-bb to Registration
Statement, Registration No. 33-42187).
4-q *Indenture for Medium-Term Note Program dated as of February 15, 1992,
between KCPL and The Bank of New York (Exhibit 4-bb to Registration
Statement, Registration No. 33-45736).
4-r *Indenture for Medium-Term Note Program dated as of November 15, 1992,
between KCPL and The Bank of New York (Exhibit 4-aa to Registration
Statement, Registration No. 33-54196).
4-s *Indenture for Medium-Term Note Program dated as of November 17, 1994,
between KCPL and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Smith Barney Inc. (Exhibit 4-s to Form 10-K for
year ended December 31, 1994).
4-t Indenture for Medium-Term Note Program
dated as of December 1, 1996, between KCPL and The
Bank of New York. (Exhibit 4 to Registration
Statement, Registration No. 333-17285).
10-a *Copy of Wolf Creek Generating Station Ownership Agreement between
Kansas City Power & Light Company, Kansas Gas and Electric Company and
Kansas Electric Power Cooperative, Inc. (Exhibit 10-d to Form 10-K for
the year ended December 31, 1981).
10-b *Copy of Receivables Purchase Agreement dated as of
September 27, 1989, between KCPL, Commercial
Industrial Trade-Receivables Investment Company and
Citicorp North America, Inc., (Exhibit 10-p to Form
<PAGE>
10-K for year ended December 31, 1989).
10-c *Copy of Amendment to Receivables Purchase
Agreement dated as of August 8, 1991, between KCPL, Commercial
Industrial Trade-Receivables Investment Company and Citicorp North
America, Inc. (Exhibit 10-m to Form 10-K for year ended December 31,
1991).
10-d *Long-Term Incentive Plan (Exhibit 28 to
Registration Statement, Registration 33-42187).
10-e Long-and Short-Term Incentive Compensation Plan,
January 1, 1997.
10-f *Copy of Indemnification Agreement entered into by KCPL with each of its
officers and directors. (Exhibit 10-f to Form 10-K for year ended
December 31, 1995).
10-g *Copy of Severance Agreement entered into by KCPL with certain of its
executive officers. (Exhibit 10 to Form 10-Q dated June 30, 1993).
10-h *Copy of Amendment to Severance Agreement dated January 15, 1996,
entered into by KCPL with certain of its executive officers. (Exhibit
10-h to Form 10-K dated December 31, 1995).
10-i Copy of Amendment to Severance Agreement dated January, 1997 entered
into by KCPL with certain of its executive officers.
10-j *Copy of Supplemental Executive Retirement and Deferred Compensation
Plan (Exhibit 10-h to Form 10-K for year ended December 31, 1993).
10-k *Copy of $50 million Letter of Credit and reimbursement agreement dated
as of August 19, 1993, with The Toronto-Dominion Bank (Exhibit 10-i to
Form 10-K for year ended December 31, 1993).
10-l *Copy of $56 million Letter of Credit and Reimbursement Agreement dated
as of August 19, 1993, with Societe Generale, Chicago Branch (Exhibit
10-j to Form 10-K for year ended December 31, 1993).
10-m *Copy of $50 million Letter of Credit and Reimbursement Agreement dated
as of August 19, 1993, with The Toronto-Dominion Bank (Exhibit 10-k to
Form 10-K for year ended December 31, 1993).
10-n *Copy of $40 million Letter of Credit and Reimbursement Agreement dated
as of August 19, 1993, with Deutsche Bank AG, acting through its New
York and Cayman Islands Branches (Exhibit 10-l to Form 10-K for year
ended December 31, 1993).
10-o *Copy of Railcar Lease dated as of April 15, 1994, between Shawmut Bank
Connecticut, National Association, and KCPL (Exhibit 10 to Form 10-Q for
period ended June 30, 1994).
10-p *Copy of Amendment No. 2 to Receivables Purchase
Agreement between KCPL and Ciesco L.P. and Citicorp
North America, Inc. (Exhibit 10 to Form 10-Q for
period ended September 30, 1994).
<PAGE>
10-q *Copy of Railcar Lease dated as of January 31, 1995, between First
Security Bank of Utah, National Association, and KCPL (Exhibit 10-o to
Form 10-K for year ended December 31, 1994).
10-r *Copy of Lease Agreement dated as of October 18, 1995, between First
Security Bank of Utah, N.A., and KCPL (Exhibit 10 to Form 10-Q for
period ended September 30, 1995).
12 Computation of Ratios of Earnings to Fixed
Charges.
23-a Consent of Counsel.
23-b Consent of Independent Accountants--Coopers &
Lybrand L.L.P.
24 Powers of Attorney.
27 Financial Data Schedules (filed electronically).
* Filed with the Securities and Exchange Commission as exhibits to prior
registration statements (except as otherwise noted) and are incorporated herein
by reference and made a part hereof. The exhibit number and file number of the
documents so filed, and incorporated herein by reference, are stated in
parenthesis in the description of such exhibit.
Copies of any of the exhibits filed with the Securities and Exchange
Commission in connection with this document may be obtained from KCPL upon
written request.
Reports on Form 8-K
No report on Form 8-K was filed in the last quarter of 1996; however, a
report on Form 8-K was filed with the Securities and Exchange Commission on
February 11, 1997, with attached copy of the Agreement and Plan of Merger dated
as of February 7, 1997, by and among KCPL and Western Resources, Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Kansas
City, and State of Missouri on the 17th day of March, 1997.
KANSAS CITY POWER & LIGHT COMPANY
By /s/Drue Jennings
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates
<PAGE>
indicated.
Signature Title Date
Chairman of the Board and )
/s/ Drue Jennings President (Principal )
(Drue Jennings) Executive Officer) )
)
Executive Vice President-Chief )
/s/ Bernard J. Beaudoin Financial Officer (Principal )
(Bernard J. Beaudoin) Financial Officer) )
)
/s/ Neil A. Roadman Controller (Principal )
(Neil A. Roadman) Accounting Officer) )
)
David L. Bodde* Director )
)
William H. Clark* Director ) March 17,1997
)
Robert J. Dineen* Director )
)
Arthur J. Doyle* Director )
)
W. Thomas Grant II* Director )
)
George E. Nettels, Jr.* Director )
)
Linda Hood Talbott* Director )
)
Robert H. West* Director )
)
*By /s/ Drue Jennings
(Drue Jennings)
Attorney-in-Fact
<PAGE>
FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-16979
- -------------------------------------------------------------------------------
ADT LIMITED
(Exact Name of Registrant as Specified in its Charter)
BERMUDA Cedar House Not Applicable
(Jurisdiction of Incorporation 41 Cedar Avenue (I.R.S. Employer
or Organization) Hamilton HM12, Bermuda Identification No.)
(Address of Principal
Executive Offices)* Not Applicable
(Zip Code)
Registrant's telephone number, including area code 441-295-2244* *See page 2
- ------------------------------------------------------------------------------
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Shares, par value
$0.10 per share New York Stock Exchange
Series A First Preference
Share purchase rights New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
Based on the closing market price per Common Share of $26 7/8 on March 24, 1997,
the aggregate market value of the voting shares held by non affiliates of the
registrant was $4,125.7 million.
At March 24, 1997, the number of shares outstanding of the registrant's Common
Shares par value $0.10 per share was 156,696,447 shares. A subsidiary of ADT
Limited owns 3,182,787 Common Shares which are included in the number
outstanding.
<PAGE>
Table of Contents
Page
PART I
ITEM 1. DESCRIPTION OF BUSINESS................................ 1
ITEM 2. DESCRIPTION OF PROPERTIES.............................. 15
ITEM 3. LEGAL PROCEEDINGS...................................... 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS...................................... 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS........................ 19
ITEM 6. SELECTED FINANCIAL DATA................................ 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......... 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............ 34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..... 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..... 34
ITEM 11. EXECUTIVE COMPENSATION................................. 37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
AND MANAGEMENT......................................... 45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......... 47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K................................ 47
SIGNATURES............................................. 52
i
<PAGE>
ADT LIMITED ANNUAL REPORT ON FORM 10-K
The consolidated financial statements of ADT Limited (ADT Limited and its
subsidiaries, where appropriate, is sometimes referred to hereinafter as "ADT"
or the "Company") appearing in this Annual Report have been prepared in United
States dollars ("US dollars" or "$") in accordance with generally accepted
accounting principles in the United States.
This Annual Report contains translations of certain amounts from various
currencies into US dollars. The translations of such foreign currencies into US
dollars appearing in this Annual Report have been made in accordance with the
principles set out in notes 2 and 3 of the notes to consolidated financial
statements of the Company.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
ADT, through its subsidiaries, is engaged in two service businesses, electronic
security services in North America and Europe and vehicle auction and related
services in the United States.
History of ADT Limited
ADT Limited was incorporated in Bermuda on September 28, 1984 under the name
Hawley Group Limited. In December 1984, as part of a corporate reorganization,
Hawley Group Limited became the parent company of the Hawley group of companies.
Prior to this reorganization, the parent company of the Hawley group of
companies was Hawley Group PLC ("Hawley Group"), a company into which new
management had been introduced in 1977, headed by Mr. M.A. Ashcroft, Chairman
and Chief Executive Officer of ADT Limited. At the time of the reorganization,
the Hawley group of companies had a number of interests in service and other
industries. ADT Limited became a publicly traded company under the name Hawley
Group Limited on December 24, 1984 when its common shares were listed for
trading on the London Stock Exchange. Prior to this date, the ordinary shares of
Hawley Group had been listed on the London Stock Exchange. Hawley Group Limited
changed its name to ADT Limited in 1988 after its acquisition in 1987 of ADT,
Inc. (now named ADT Security Services, Inc., hereinafter "ADT Security
Services"). ADT Limited's businesses are conducted through its subsidiaries.
ADT Limited operates under the Companies Act, 1981 of Bermuda (as amended).
Development of ADT's Electronic Security Services Business
The electronic security services division in North America principally consists
of ADT Security Services, ADT Canada, Inc., Alert Centre, Inc. ("Alert") and API
Security, Inc., a subsidiary of Automated Security (Holdings) PLC ("ASH"). ADT
built the core of its North American electronic security services business by
acquiring Electro-Protective Corporation of America in 1981, the business of
Crime Control, Inc., and ADT Security Services in 1987. Between 1982 and 1985,
ADT also acquired several small security services businesses in North America.
The electronic security services division in Europe consists of ASH, principally
doing business as Modern Security Systems Limited in the United Kingdom, and
Electric Protection Services Limited doing business as ADT Security Systems in
the United Kingdom ("Electric Protection") and other subsidiaries doing business
under the ADT name in continental Europe. Electric Protection and the principal
continental European subsidiaries were acquired as part of the acquisition of
ADT Security Services in 1987.
1
<PAGE>
In 1990, ADT acquired Britannia Security Group PLC
("Britannia"), operating principally in the United Kingdom and, in the third
quarter of 1996 merged with and acquired ASH, which provides electronic security
services in the United Kingdom and North America. In the fourth quarter of 1995,
ADT disposed of its electronic article surveillance business which was based in
Europe and which was previously acquired as part of Britannia. Alert, which
provides electronic security services in the United States, was acquired in the
fourth quarter of 1995.
Development of ADT's Vehicle Auction Business
ADT's auction division was established in 1987 by the acquisition of The British
Car Auction Group PLC ("BCA") which, at that time, had 14 auction centers in the
United Kingdom and 12 auction centers in the United States. BCA was established
in the United Kingdom in 1946 and, during the period from 1946 to 1982, it
expanded its vehicle auction business in the United Kingdom. In 1982, BCA
entered the vehicle auction business in the United States by acquiring two
vehicle auctions. From 1982 to 1987, BCA acquired and constructed additional
auction sites in both the United States and the United Kingdom. Since 1987, the
auction division has expanded its vehicle auction operations by the purchase of
eight auction businesses and four auction centers in the United States, the
development and construction of seven new auction centers and by internal
growth. In the fourth quarter of 1995, ADT disposed of its vehicle auction
businesses in the United Kingdom and continental Europe, retaining a 10 per cent
equity interest. In the United States, the auction division consists of ADT
Automotive Holdings, Inc. and its subsidiaries (formerly Anglo American Auto
Auctions).
Registered and Principal Executive Offices
The registered and principal executive offices of ADT Limited are located at
Cedar House, 41 Cedar Avenue, Hamilton HM 12, Bermuda. The executive offices of
the subsidiary which supervises ADT's North American activities are located in
the United States at 1750 Clint Moore Road, PO Box 5035, Boca Raton, Florida
33431. The telephone
number there is 561-988-3600.
BUSINESS DESCRIPTION
ADT, through its subsidiaries, is engaged in two service businesses, electronic
security services in North America and Europe and vehicle auction and related
services in the United States. In this business description, the term "ADT" is
used to refer to the relevant operating subsidiary of ADT Limited engaged in
that part of the business being described where the term appears.
ADT'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. Monitored systems may be sold or, as is most often the case, ADT may
retain ownership of installed systems. ADT receives contractual recurring fees
for monitoring security systems through its electronic customer monitoring
centers and for maintenance of security systems installed at customer premises
and other related services. ADT sells, installs and maintains monitored security
systems, integrated electronic security systems and other electronic security
products for additional fees. Annualized contractually recurring fees for
electronic monitoring and maintenance of security systems installed at customer
premises, and other related services, as of December 31, 1996, represented
approximately 65 per cent of ADT's total electronic security services revenues
in North America and Europe for 1996. The remainder of ADT's security revenues
were derived from the outright sale and installation of security systems, the
installation of security systems in accordance with monitoring service
agreements and the maintenance of security systems on a non-contractual basis.
2
<PAGE>
ADT's vehicle auction business operates a network of large modern auction
centers in the United States which provide an organized wholesale marketplace
for the sale and purchase of used vehicles. Principal sellers, or consignors,
include new and used vehicle dealers, vehicle manufacturers, fleet operators,
leasing companies, financial institutions and government agencies. Principal
purchasers include franchise and nonfranchise vehicle dealers and distributors
who acquire vehicles to sell in the retail market. The following table presents
the proportion of revenues derived by ADT from electronic security services and
vehicle auction services in 1995 and 1996.
<TABLE>
<CAPTION> Proportion of total Proportion of total
Electronic Security Services Business Revenues
Revenues
<S> <C> <C> <C> <C>
1995 1996 1995 1996
Electronic Security Services
North America 71% 75% 54% 62%
United Kingdom and Continental Europe 29% 25% 22% 20%
Proportion of total Vehicle
Auction Services Revenues
Vehicle Auction Services
United States 62% 100% 15% 18%
United Kingdom and Continental Europe 38% * 9% *
* ADT's vehicle auction services businesses in the United Kingdom and continental Europe
were disposed of in the fourth quarter of 1995.
Electronic Security Services
</TABLE>
The Industry
The security services industry encompasses a wide range of products and
services, which can be broadly divided into electronic security products and
services and highly labor intensive manned guarding and patrol services. ADT's
electronic security services division competes primarily in the comparatively
capital intensive electronic monitoring security services sector of the
industry. Electronic security products and services consist of the sale,
installation, continuous monitoring and maintenance of electronic security
systems for commercial and residential use. This business utilizes modern
electronic devices installed in customers' businesses and residences to provide
detection of events, such as intrusion or fire, surveillance and control of
access or articles. Event detection devices may be monitored by monitoring
centers, such as ADT's customer monitoring centers, which are linked to the
customer through telephone lines. These centers are often located at remote
distances from the customer's premises. In some instances, the customer may
monitor these devices at its own premises or the devices may be connected to
local fire or police departments. The products and services marketed in the
electronic security services industry range from residential systems that
provide basic entry and fire protection to sophisticated commercial systems
incorporating closed circuit television systems and access control.
3
<PAGE>
The development of centrally monitored alarm systems began at the turn of the
century and, historically, these systems were considered a relatively expensive
form of security and were purchased primarily by businesses and affluent
individuals. The industry continued to evolve as telephone networks spread and
technology advanced. Progress continued steadily until the early 1970's when
computer technology and semi-conductor components began to be incorporated into
monitoring systems. Since then, the development of telecommunications technology
and its application in security systems has accelerated, and technological
advances have increased the availability of lower cost, sophisticated
electronics. These advances have enabled the industry to access a wider market
by providing a broader range of monitored security services at a variety of
price levels. Concurrently with these technological advances, demand for
security systems has grown with the increase in the general awareness of
security issues and rising crime rates. Customers also purchase security systems
due to the practice in the insurance industry of reducing premiums for customers
who have a security system installed, or requiring the installation of a
security system as a condition of coverage.
STAT Resources, Inc., an independent market research firm ("STAT Resources"),
estimates that total United States commercial electronic security systems and
services market revenues and total residential electronic security systems and
services market revenues were approximately $8.0 billion and $5.0 billion,
respectively in 1996. ADT accounted for approximately 7.7 per cent and 7.5 per
cent of these amounts, respectively. Although a certain amount of industry
consolidation has taken place, the industry in North America remains highly
fragmented and STAT Resources estimates that there were approximately 13,000
companies in the United States electronic security systems and services market
in 1996. The electronic security services industry in Europe is also highly
fragmented.
Business Strategy
ADT[Registered] is a leading name in electronic security services, and ADT
believes that its name is important in the marketing of its security services
and in competing with other electronic security service providers. Before 1987,
ADT's electronic security services business served predominantly commercial
customers. Since 1987, ADT's goals have been to create a lower cost, more
efficient operation, suitable for long-term growth and greater profitability,
and to take advantage of the economies of scale resulting from increased
utilization of its infrastructure. Since 1987, ADT has (i) reduced the number of
central stations and equipped its customer monitoring centers with enhanced
computer technology to further automate the monitoring process and thus provide
increased monitoring capacity, (ii) modernized and streamlined its
computer-based administration and control systems, (iii) enhanced customer
service programs through improved training programs for sales, management,
installation and service employees and (iv) intensively marketed electronic
monitoring services to residential customers to take greater advantage of the
increased monitoring capacity created by the monitoring center consolidation and
modernization program.
Between 1987 and 1993, ADT significantly reduced the number of its central
stations from 162 to 30 in North America and Europe while increasing monitoring
capacity and maintaining geographical coverage. Since then ADT has continued to
pursue its strategy of central station consolidation, although closures have
taken place at a slower rate. Further opportunities for central station
consolidation now exist following the acquisition of ASH. In the first quarter
of 1997, ADT announced that it was investing in planned enhancements to its
technological infrastructure to facilitate a further consolidation of its
monitoring center network in order to provide for future anticipated growth
opportunities while lowering costs and increasing monitoring capacity and
operating efficiency.
As a result of ADT's program implemented in 1988 to target the residential
sector in North America, as well as growth in the level of consumer concern over
crime and security generally and the availability of lower priced systems, ADT
has significantly expanded its residential customer base in North America. Since
1988, ADT has enjoyed an annual compound growth rate in residential unit sales
in excess of 36 per cent. ADT believes that because of the success of its sales
and marketing efforts since 1988, it is uniquely positioned to benefit from the
range of technological developments that are expanding and diversifying the
types of services that ADT is able to offer.
4
<PAGE>
During the past several years, ADT's business has been evolving from that of
primarily an intrusion alarm company into a data information company. ADT has,
in the past few years, been offering energy management products and services to
regulate the temperature and lighting in a customer's premises. This service has
been achieved through the use of a communication protocol which utilizes the
premises' existing alternating-current wiring. Another creative use of new
technologies has permitted the launch of CarCop[Registered] which combines three
significant infrastructures, cellular communications, the global positioning
satellite system and ADT's 24 hour monitoring services, to provide a
revolutionary new personal protection and vehicle security service. ADT believes
that its broad customer base, its unique national distribution system and its
highly skilled workforce provide it with a strong capacity to exploit new
technologies and, given the rapid pace of technological change, ADT anticipates
that it will explore partnering opportunities with premier companies in a
variety of industries.
ADT's overall goal is to expand its customer base in both the commercial and
residential sectors. The commercial sectors in North America, the United Kingdom
and continental Europe represent well established markets with growth prospects
closely related to the overall economic growth in these markets. ADT's strategy
is to retain a high percentage of its existing commercial and residential
customers by continuing to provide high quality service. As part of its strategy
to maintain and enhance its commercial market position in North America, ADT has
a national accounts sales team in place in the United States to serve customers
that have multiple locations. ADT believes that the North American residential
marketplace continues to represent a relatively unpenetrated market and ADT's
strategy is to continue to market and install large numbers of new residential
security systems, primarily in this market. ADT is continuing to implement this
strategy through intensive advertising and marketing in metropolitan areas. ADT
believes that incremental monitoring revenues from new customers should enhance
operating margins because additional customers can be served through ADT's
existing monitoring facilities with very little impact on ADT's total operating
costs associated with monitoring security systems. ADT, however, incurs
marketing costs associated with the sale of new systems and incremental
installation costs in respect of each new system sold which are partly offset by
a fee charged to the customer on installation of the system. In the first
quarter of 1997, ADT announced that it was investing in planned enhancements to
its technological infrastructure to facilitate monitoring center consolidation
and provide increased capacity for future anticipated growth opportunities.
Consistent with its strategy, ADT acquired Alert in the fourth quarter of 1995
and merged with ASH in the third quarter of 1996 adding, in aggregate, over
375,000 customers to ADT's customer base. The acquisition of Alert also provided
ADT with an established dealer program under which security systems are
installed by third parties with the monitoring contracts being onsold to ADT for
monitoring. Such a program represents a cost effective way for ADT to further
enhance its operating leverage. The acquisition of ASH gave ADT leadership in
the electronic security services sector in the United Kingdom and will provide
ADT with a new marketing opportunity in the UK residential market place.
The following table presents the approximate number of commercial and
residential customers in North America and Europe contracting with ADT for the
monitoring or maintenance of electronic security systems, together with the
aggregate annualized service revenue under contract, as of December 31, 1996,
and the annual combined discontinuance rate for commercial and residential
contracts in respect of 1996.
<TABLE>
<S> <C> <C> <C>
Number of Commercial Number of Residential Annualized Service Annual Combined
Customers Customers Revenue Discontinuance Rate
672,000 1,149,000 $920m 10.4%
</TABLE>
Annualized service revenue and annual combined discontinuance rate are defined
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations Results of Operations-Electronic Security Services".
5
<PAGE>
Commercial
ADT provides electronic security services and products to financial
institutions, industrial and commercial businesses and complexes, warehouses,
facilities of federal, state and local government departments, defense
installations, and health care and educational facilities. ADT conducts its
commercial operations in the United States, Canada, the United Kingdom, Spain,
France, Belgium, Greece, The Netherlands and the Republic of Ireland. ADT sells,
installs, monitors and maintains electronic security systems and products
located at its customers' premises. These systems and products are tailored to
customers' specific needs and include electronic monitoring services that
provide intrusion and fire detection, as well as card or keypad activated access
control systems and closed circuit television systems. ADT also markets standard
security packages for specific types of commercial customers, such as retailers
and banks. Certain commercial customers require more complex electronic security
systems. To meet this demand, ADT also sells integrated electronic security
systems that combine a variety of electronic security services and products.
These systems are integrated by ADT to provide a single computer controlled
security system. Integrated security systems are typically owned by the customer
and can range in price from a few thousand to several million dollars.
Integrated security systems may be monitored by the customer at its premises or
connected to an ADT monitoring center. In either case, ADT usually provides
support and maintenance for these systems through service contracts.
The systems installed at commercial customers' premises may be owned by ADT or,
as in the case of most integrated systems, by the customer. When the system is
sold, the customer pays ADT the purchase price upon installation and the
customer also pays an installation fee. When monitoring equipment is owned by
ADT, as is most often the case, only an installation fee is charged. Most
customers also agree to pay an annual service charge for monitoring and
maintenance. Some customers elect to pay for maintenance on a per visit basis.
Service contracts for integrated security systems are negotiated on an
individual basis. For integrated systems, a separate fee is charged for systems
integration and installation. Service contracts are negotiated on an individual
basis depending upon the number of systems monitored, the type of alarm
transmission and the level of response services required. STAT Resources
estimates that total United States commercial electronic security systems and
services market revenues were approximately $8.0 billion in 1996. ADT accounted
for approximately 7.7 per cent of this amount. Commercial customers are
motivated to purchase security systems to protect their property, employees and
customers and by their insurance carriers which may offer lower premium rates if
a security system is installed or require that a system be installed as a
condition to coverage. Of those insurance carriers in North America which offer
lower premiums or will provide coverage only to customers with centrally
monitored alarm systems, most require the monitoring center to be approved by
Underwriters Laboratories, Inc. ("UL"). UL requires each monitoring center to
meet specified design, technical and operational standards, including back up
power capability. UL confirms compliance with its specifications through
periodic on-site inspections. All of ADT's customer monitoring centers in the
United States are UL approved. As of December 31, 1996, approximately 478,000
commercial customers, some of which have multiple locations, were under contract
in North America, approximately 153,000 were under contract in the United
Kingdom and approximately 41,000 were under contract in continental Europe. The
electronic security services business in Europe services primarily commercial
customers. In 1996, approximately 68 per cent of ADT's total electronic security
services revenues in North America and Europe were derived from commercial
customers. The electronic security services division is not dependent upon any
single customer, as the revenue from any one customer does not exceed one per
cent of the division's total net revenues. Contracts with commercial customers
for monitoring and maintenance services are usually for an initial five-year
term, automatically renewing on a year-to-year basis thereafter, unless
canceled. A substantial number of contracts are now beyond their initial term
and are therefore on an automatic renewal basis. It has been ADT's experience
that monitoring contracts for security systems are generally renewed upon their
expiration. Contract discontinuances, however, do occur, principally as a result
of customer relocation or closure.
ADT markets its electronic security services to commercial customers through a
direct sales force in North America and Europe and through direct mail and print
advertising. Customers which have multiple locations in North America are
serviced by a separate national accounts sales force.
6
<PAGE>
Residential
Residential electronic security services are primarily marketed to customers in
North America and consist of the sale, installation, monitoring and maintenance
of electronically monitored security systems to detect intrusion and fire.
Residential customer service and monitoring are performed from the same
facilities as those used for commercial accounts.
STAT Resources estimates that total United States residential electronic
security systems and services market revenues were approximately $5.0 billion
in 1996. ADT accounted for approximately 7.5 per cent of this amount.
As part of its business strategy, ADT began to intensively market monitored
security systems to residential customers in North America in 1988 and ADT
believes that it has been able to sell a large number of residential security
systems due to the growing level of consumer concern over crime and security
generally and the availability of lower priced systems. In addition, residential
customers are usually able to obtain more favorable insurance rates if an
electronically monitored security system is installed in their home. ADT targets
two groups of residential customers, those who typically require relatively
inexpensive, standard electronically monitored security systems and a smaller
group of residential customers who require more sophisticated systems.
In 1996, ADT contracted to install and monitor approximately 280,000 new
residential security systems, principally in North America, and as of December
31, 1996, ADT had approximately 1,149,000 residential customers under contract
for monitoring services, of which approximately 90 per cent were located in
North America. In 1996, approximately 32 per cent of ADT's total electronic
security services revenues in North America and Europe were derived from
residential customers. On average, fees charged by ADT for residential
monitoring services are lower than the fees charged for commercial monitoring
services. Contracts for residential services entered into after 1990 have
usually been for an initial three-year term, automatically renewing on a
year-to-year basis thereafter, unless canceled. For contracts entered into after
April 1992, automatic renewal has been for two-year terms, unless canceled. A
substantial number of contracts are now beyond their initial term and are
therefore on an automatic renewal basis. It has been ADT's experience that
residential contracts are generally renewed upon their expiration. Contract
discontinuances, however, do occur, principally as a result of customers
relocating.
In North America, ADT usually retains ownership of standard residential systems
whereas the more sophisticated systems are usually purchased by the customer.
When the system is sold, the customer pays ADT the purchase price upon
installation and the customer also pays an installation fee. When the system is
owned by ADT, as is most often the case, only an installation fee is charged.
Substantially all residential customers agree to pay an annual service charge
for monitoring and may also subscribe for maintenance services. Uniform package
prices are offered to residential customers who purchase ADT's standard
residential security system which includes a fixed number of detection devices.
Frequently, customers add detection devices to expand the coverage of the system
for which ADT charges an additional installation fee and an additional sales
charge if the system is purchased. Pricing for residential customers who require
more sophisticated systems depends upon the monitoring components installed, the
type of alarm transmission and other services required.
ADT markets its electronic security services to residential customers through
television and radio advertising, print advertising, telemarketing, direct mail
and through a direct residential sales force as well as through approximately
120 independent ADT authorized dealers and through third party affinity
marketing arrangements.
Installation, Service and Maintenance
As part of its effort to provide high quality service to its commercial and
residential customers, ADT maintains a trained installation, service and
maintenance force of in North America and Europe. These employees are trained by
ADT to install and service the various types of commercial and residential
security systems which are marketed by ADT.
ADT also uses sub-contracted personnel where appropriate.
7
<PAGE>
Product Sourcing
ADT does not manufacture any of the components used in its electronic security
services business, although it does provide its own specifications to
manufacturers for certain security system components and undertakes some final
assembly work in respect of more sophisticated systems. Due to the general
availability of the components used in its electronic security services
business, ADT believes that it is not consistent with its role as a services
company to be involved in manufacturing. This policy allows ADT to obtain the
components of its systems from a number of different sources and, by so doing,
to supply its customers with the latest technology generally available in the
industry. ADT is not dependent on any single source for its supplies and
components and has not experienced any material shortages of components.
Monitored Electronic Security Systems
ADT's electronically monitored security systems involve the use on a customer's
premises of devices designed to detect or react to various occurrences or
conditions, such as intrusions, movement, fire, smoke, flooding, environmental
conditions (including temperature or humidity variations), industrial operations
(such as water, gas or steam pressure and process flow controls) and other
hazards. In most systems, these detection devices are connected to a
microprocessor based control panel which communicates through telephone lines to
an ADT monitoring center where alarm and supervisory signals are received and
recorded. Systems may also incorporate an emergency "panic button", which when
pushed causes the control panel to transmit an alarm signal that takes priority
over other alarm signals. In most systems, control panels can identify the
nature of the alarm and the areas within a building where the sensor was
activated and transmit the information to an ADT customer monitoring center.
Depending upon the type of service for which the subscriber has contracted,
monitoring center personnel respond to alarms by relaying appropriate
information to the local fire or police departments, notifying the customer or
taking other appropriate action, such as dispatching employees to the customer's
premises.
In most systems, the control panel communicates with an ADT customer monitoring
center through one of four telephone line transmission systems, direct wire,
multiplex, digital communicator or derived channel. Direct wire and multiplex
systems are used mainly for commercial customers who require a higher level of
security, whereas digital communicator or derived channel systems are used
primarily in systems where cost is more important. Direct wire transmission uses
a dedicated leased telephone line and is the most expensive form of monitoring
connection. The multiplex system uses a remote device to receive signals from
multiple customers' premises and concentrate and retransmit them over a
dedicated leased telephone line to an ADT customer monitoring center. These two
transmission methods allow ADT to continuously monitor the customer's security
system to confirm that the connection to the monitoring center is functioning
properly. The multiplex system provides the same level of security as direct
wire but is less costly due to the reduced number of dedicated telephone lines
which are necessary to monitor the same number of customers. ADT has a
continuing selective conversion program to replace direct wire transmission
systems with lower cost multiplex or digital systems. These conversions
typically replace older equipment and result in a reduction in telephone line
costs and in the frequency of customer service calls.
A security system which utilizes a digital communicator responds to an event by
dialing the monitoring center through the customer's regular telephone line.
Unlike multiplex and direct wire systems, these systems are not continuously
monitored, and if a control panel or the telephone line is not functioning
properly the monitoring center may not be alerted. The derived channel system,
which is not available in all markets, ties into the existing regular telephone
line network but allows parallel simultaneous communication on one line using
separate distinct frequencies. Using the derived channel system, it is possible
to continuously monitor a digital communicator connection over the customer's
regular telephone line. In certain markets ADT also offers systems with backup
transmission capability through radio frequency transmission or the local
cellular telephone network.
8
<PAGE>
Other Security Businesses
ADT entered the mobile security services market in 1996 with the launch of
CarCop[Registered], a vehicle security system introduced in the fourth quarter
of 1996 in conjunction with Mobile Security Communications, Inc. which is
responsible for the sale and installation of the CarCop product. CarCop combines
ADT's 24 hour monitoring services with cellular communications technology and
the Global Positioning Satellite system to provide constant security coverage
for a vehicle and its occupants whether the vehicle is parked, unattended or in
use. The system can detect a range of emergency situations and, through
utilizing ADT's 24 hour monitoring services and employing satellite tracking
technology, the appropriate assistance can be despatched to the vehicle's exact
location at any time, day or night. Competition
The electronic security services business in North America is highly
competitive. New competitors, who have not necessarily had any previous
involvement in the provision of electronic security services, are continually
entering the field. Competition is based primarily on price in relation to
quality of service. ADT believes that the quality of its services is higher than
that of many of its competitors. Accordingly, ADT's prices may therefore be
higher than those charged by many of its competitors. Sources of competition in
the security services business are other providers of central monitoring
services, systems directly connected to police and fire departments, local alarm
systems and other methods of protection, such as manned guarding. ADT believes
the number of local police and fire departments that perform monitoring has been
declining for some years.
The central monitoring sector of the electronic security services business is
characterized by high fixed costs but has low marginal costs associated with
monitoring additional customers. Opportunities exist within the industry to
achieve economies of scale by consolidation of monitoring and administrative
functions and a certain amount of industry consolidation is currently taking
place. The industry in both North America and Europe, however, remains highly
fragmented. ADT believes that it services more customers through its customer
monitoring centers in North America than any other company. Individual
competitors, however, may service more customers in a given local market.
ADT competes with other major firms in North America, which have substantial
financial resources, including Ameritech Corporation (operating under the
SecurityLink from Ameritech[Registered] brand name); Borg-Warner Security
Corporation (operating under the Wells Fargo[Registered] and Pony
Express[Registered] brand names); the Honeywell Protection Services division of
Honeywell, Inc.; the Brink's Home Security division of The Pittston Company; and
approximately 13,000 smaller regional and local companies. ADT also competes
with several national companies and several thousand regional and local
companies in the United Kingdom and continental Europe.
In February 1996, a federal telecommunications reform bill was enacted which
contained provisions specific to the electronic security services industry.
Ameritech Corporation was prohibited from acquiring additional equity or
financial interests in alarm monitoring companies for five years from the date
of enactment of the law and the other regional Bell operating companies are
barred from acquiring more than a 10 per cent equity interest in alarm
monitoring companies or otherwise entering the business for five years from the
same date.
9
<PAGE>
Regulation
ADT's operations are subject to a variety of federal, state, county and
municipal laws, regulations and licensing requirements in the United States and
national and local government laws, regulations and licensing requirements in
countries outside the United States. Many of the states and countries in which
ADT operates, as well as certain local authorities, require ADT to obtain
licenses or permits to conduct its security services business. Certain
governmental entities also require persons engaged in the alarm business to be
licensed and to meet certain standards in the selection and training of
employees and in the conduct of business. ADT believes that it is in substantial
compliance with all such licensing and regulatory requirements in each
jurisdiction in which it operates. In addition, there has been a trend recently
on the part of municipalities and other localities to attempt to reduce the
level of false alarms through various measures such as the licensing of
individual alarm systems and the imposition of fines upon customers, revocation
of licenses or non-response to alarms after a certain number of false alarms.
While such statutes and ordinances have not had a material adverse affect on
ADT's business operations to date, ADT is unable to predict whether such
statutes or ordinances, or any similar statutes or ordinances enacted by other
jurisdictions, will adversely affect ADT's business and operations in the
future. The alarm industry is also subject to the oversight and requirements of
various insurance, approval, listing and standards organizations. Adherence to
the standards and requirements of such organizations may be mandatory or
voluntary depending upon the type of customer served, the nature of security
service provided and the requirements of the local governmental jurisdiction.
ADT has not had any material difficulties in complying with such standards and
requirements in the past.
ADT's electronic security business relies upon the use of telephone lines to
transmit signals, and the cost of such lines and the type of equipment which may
be utilized are currently regulated by both the federal and state governments in
the United States and national and local governments in other countries.
Risk Management
The nature of the services provided by ADT potentially exposes it to greater
risks of liability for employee acts or omissions or product liability than may
be inherent in many other service businesses. To attempt to reduce this risk,
ADT's electronic security service contracts contain provisions limiting its
liability and requiring indemnification by its customers. ADT also carries
insurance of various types, including general liability and errors and omissions
insurance, to protect it from product defects and negligent acts of its
employees. ADT obtains such insurance at rates and upon terms negotiated
periodically with various underwriters. The loss experience of ADT and, to some
extent, other security services companies, may affect premium rates charged to
ADT. As of December 31, 1996 such policies provided that ADT retain liability
for the first $1.0 million per occurrence. Certain of ADT's insurance policies
and the laws of some states may limit or prohibit insurance coverage for
punitive or certain other kinds of damages arising from employee misconduct. In
addition, in some states ADT's limitation of liability clause may be ineffective
in cases of gross negligence and in certain other situations.
Patents and Trademarks
ADT Security Services holds approximately 40 active patents worldwide and has
several pending patent applications. No patents are due to expire in the near
future that would materially affect the operations of ADT's electronic security
services business. The ADT[Registered] trademark and service mark are important
to ADT's electronic security business. ADT Security Services uses several other
trademarks and service marks in marketing its products and services,including
Focus[Registered], Centrascan[Registered], Safewatch[Registered] and Customer
Link[Registered] . ADT believes that the rights in these trademarks and service
marks, including Focus, Centrascan, Safewatch and the ADT trademark are
adequately protected.
Employees
As of December 31, 1996, the electronic security services division had
approximately 16,000 employees, of whom approximately 12,000 were based in North
America and approximately 4,000 were based in Europe. The majority of these
employees are not represented by unions or covered by collective bargaining
agreements. ADT believes its relations with employees and their unions are
generally good.
10
<PAGE>
Vehicle Auction Services
The Industry
Vehicle auctions constitute a principal channel of distribution and
redistribution for used vehicles. An auction brings together, in one location,
dealers seeking to restock and diversify their inventory of used cars with a
high volume of various makes and models provided by sellers seeking to dispose
of their vehicles. The vehicle auction industry provides a reliable marketplace
where many dealers participate in the auction's bid process and thus establish
true wholesale prices for used vehicles. Vehicle auctions are preferred by many
dealers, financial institutions and other sellers because an auction provides an
efficient, cost-effective and convenient method of vehicle resale at the
prevailing market price. The principal sources of vehicles for sale through
auctions are consignments by new and used vehicle dealers, vehicle
manufacturers, corporate owners of vehicles such as fleet operators, daily
rental companies, leasing companies, banks and other financial institutions,
manufacturers' credit subsidiaries and government agencies. The vehicles
consigned by dealers include vehicles of all types and ages and include vehicles
that have been traded in against new car sales. Vehicles consigned by corporate
and financial owners include both repossessed and off-lease vehicles and, as a
result, are normally in the range of one to four years old. The principal
purchasers of vehicles at ADT's auctions are new and used vehicle dealers and
distributors.
ADT believes that the consignment of vehicles from dealers is the foundation of
the auction industry. Dealers rely on the sale of used vehicles for a
significant proportion of their profits and are both buyers and sellers at
auction.
A significant number of vehicles sold at auction in recent years has been
attributable to vehicles being disposed of by domestic and import manufacturers
who contract with certain auctions to sell used vehicles on their behalf. In the
late 1980's, vehicle manufacturers found it advantageous to produce more
vehicles than were necessary to satisfy immediate retail demand. These vehicles
were either sold to daily rental car companies with a guarantee by such
manufacturers to repurchase the vehicles or were leased to the daily rental car
companies ("Program Cars"). Upon repurchase, the vehicle manufacturers chose to
remarket these late-model cars to their dealers primarily through the vehicle
auction network. Program Car auctions are restricted to each manufacturer's
franchised dealers with the exception of auctions for some small volume import
manufacturers. According to industry sources, the number of vehicles coming to
auction from this source reached a peak of 1.6 million units in 1991. As the
industry came out of recession in 1992, volumes reduced and have stabilized at
around 1.1 million vehicles per year. When the number of cars available to daily
rental companies through manufacturers' guaranteed repurchase programs was at
its peak, many of the top rental companies obtained large numbers of their
vehicles through such programs. As manufacturers have reduced their buy back
programs , the daily rental companies have been obliged to purchase more
vehicles in their own names and, consequently, their need to remarket vehicles
at the end of their life cycle has increased.
Vehicles owned by corporations and financial institutions represent another
major source of vehicles for sale at auction and include vehicles owned by daily
rental companies, vehicles from company fleets, end of term or early termination
vehicles from leasing companies, including manufacturers' finance subsidiaries,
vehicles from finance companies, including repossessed vehicles, and vehicles
from the public sector. The dynamics of this segment are changing, particularly
as the trend towards leasing new vehicles by individuals under manufacturers'
lease programs increases.
ADT Auctions
As of December 31, 1996, ADT operated 27 vehicle auction centers in the United
States where it is the second largest provider of vehicle auction services. In
1996 the aggregate value of vehicles sold through ADT auction centers was
approximately $8.7 billion. Substantially all of the vehicles sold at ADT
auction centers are passenger cars and light trucks with the balance consisting
of heavy trucks and industrial vehicles.
11
<PAGE>
The following table presents the approximate number of vehicles entered and sold
through all of ADT's vehicle auction centers in the United States during 1994,
1995 and 1996.
1994 1995 1996
Vehicles Entered 1,660,000 1,798,000 1,881,000
Vehicles Sold 967,000 994,000 1,064,000
Business Strategy
ADT has been a leader in developing the wholesale vehicle auction business in
the United States. ADT aims to provide a wholesale redistribution system for
used vehicles which is efficient, economical and reliable. ADT's specific
strategies are (i) to maintain and further strengthen its current relationships
with vehicle manufacturers, fleet/lease operators, daily rental companies and
other significant vehicle suppliers and dealers that both supply vehicles for
auction and purchase vehicles at auction and (ii) to increase ADT's share of
total used vehicle transactions. ADT is pursuing these strategies in part by
encouraging more vehicle dealers to attend its auctions. Where possible, ADT
categorizes its auction sales in order to facilitate the matching of appropriate
buyers with vehicles being offered for sale. Auctions may be categorized by the
type of vehicle being sold or by age of vehicle, mileage or source, for example
ex- rental vehicles. ADT maintains a record of dealers that are authorized to
bid at its auctions and employs direct marketing techniques to target dealers
who are known buyers for the category of vehicle being auctioned and who are
registered with ADT as approved buyers. ADT also holds closed sales for
manufacturers' vehicles, including Program Cars and fleet vehicles, restricted
to dealers holding a franchise from that particular manufacturer.
ADT keeps its site location strategy and real estate requirements under
continuous review together with the potential benefits of expanding its network
through the acquisition of vehicle auction businesses and the development of new
auction centers. ADT however believes that the geographic coverage of its
auction network in the United States is substantially complete.
Auction Operations
ADT operates a network of large modern auction centers and provides a
comprehensive range of vehicle redistribution services. These services include
collection and transportation of a seller's vehicles to an auction center,
reconditioning the vehicles to retail standards, matching the vehicles with the
auction market most likely to generate the highest amount of sale proceeds and
delivering the vehicles to the buyer. Separate fees are charged for each of
these services. ADT acts solely as an agent in auction transactions and does not
purchase vehicles for its own account. ADT repurchases a small number of
vehicles under its buyer protection programs which require it to repurchase
vehicles that have suffered odometer tampering or that have an undisclosed
salvage history. See "Vehicle Auction Services-Services and Fees- Insurance."
ADT operates almost exclusively in the wholesale marketplace. In general, the
public is not permitted to attend auctions.
When a vehicle arrives at an ADT auction center, it is checked in and assigned a
computer tracking number. A seller may instruct ADT to perform various services
including vehicle appraisal, appearance reconditioning and paint or body work to
prepare the vehicle for auction. The title is checked against a computer
database held by ADT. If a salvage history appears, the seller must either
disclose the damage or withdraw the vehicle from the auction. ADT completes all
requested services and holds the vehicles in secure parking areas until the
scheduled auction day. The auction centers use computerized control systems to
track vehicles through each step of the auction process. ADT is responsible for
the vehicles while they are under its control.
12
<PAGE>
Generally, ADT's auction centers hold regularly scheduled auctions for vehicles
from specific market sources. Additional auctions are scheduled as necessary,
including auctions for specific types or categories of vehicles, such as heavy
trucks, municipal and agricultural equipment and classic cars. A typical auction
center consists of an auction hall, large paved areas for the storage of
vehicles, facilities for reconditioning and separate areas for parking vehicles
immediately prior to auction, some of which are covered. Auction halls typically
have a number of lanes through which vehicles are normally driven, and where the
auction bidding process takes place. This is a continuous process that enables a
large number of vehicles to be auctioned quickly and efficiently. The auction
hall building also contains the cashiers and other administrative personnel, as
well as cafeteria and other customer facilities. When a vehicle is sold, the
paperwork associated with a sale, including conveyance instruments, title or
title applications and tag applications, is generally processed within one hour
of the sale and immediate delivery arrangements are made. A particular vehicle
may pass through the auction system more than once prior to being sold to a new
owner. ADT is responsible for payment to sellers upon presentation of title
after a vehicle is sold. If purchases are made other than on a cash basis, ADT
determines in advance the credit-worthiness of the buyer. It is customary for
buyers at ADT's auctions to pay by banker's draft. The auction collects funds on
drafts within an average of ten working days. ADT's bad debt experience on these
transactions is negligible.
Sources of Vehicles
The principal sources of vehicles for sale at ADT's auctions are consignments by
new and used vehicle dealers, vehicle manufacturers, corporate owners such as
fleet operators, daily rental companies, leasing companies, banks and other
financial institutions, manufacturers' credit subsidiaries and government
agencies.
The supply of consignment vehicles from dealers is relatively constant
throughout the year. The number of Program Cars and vehicles consigned to
auction by corporate fleet owners may fluctuate considerably throughout the
year. As a consequence, auction revenues may fluctuate from quarter to quarter
and at certain times during the year ADT may be storing large numbers of
vehicles awaiting auction.
ADT contracts with vehicle manufacturers for the auction of Program Cars. These
contracts, which do not require the manufacturers to sell any minimum number of
vehicles through ADT's auctions, generally have a term of one year and may be
terminated upon 30 days' notice. In 1996, approximately 27 per cent of the
vehicles sold at ADT auctions were Program Cars, compared to approximately 31
per cent in 1995. ADT also auctions vehicles from the manufacturers' own fleets
and from manufacturers' affiliates such as their credit subsidiaries.
During 1996, General Motors Corporation and its credit subsidiaries accounted
for approximately 8 per cent of the vehicle auction division's United States
revenues. ADT believes that its relationship with General Motors Corporation and
the other vehicle manufacturers with which it does business is good. The loss of
General Motors Corporation's business would, however, have a material adverse
effect on the auction division's operations.
Services and Fees
Auction Services: ADT receives a variety of fees for its auction services. Entry
fees are set charges assessed on the majority of vehicles registered for
auction, except Program Cars, and are payable irrespective of whether the
vehicle is sold. If the vehicle is sold, ADT also receives an auction fee from
the seller and a fee from the buyer of the vehicle. At most sales, the buyer's
auction fee is based upon the sale price of the vehicle, except for Program Cars
where a fixed fee is charged. At most sales, other than fleet/lease consignment
sales and Program Car sales, the seller's auction fee is based on the sale price
of the vehicle. For fleet/lease consignment sales, the seller's auction fees are
based on a fixed fee for national fleet/lease consignors and on the sale price
of the vehicle for local fleet/lease consignors. For sales of Program Cars,
auction fees are fixed periodically by agreement with the vehicle manufacturers
on a per vehicle sold basis.
13
<PAGE>
Reconditioning Services: Customers may request ADT to prepare, for a fee, a
detailed condition report on vehicles entered for auction. For a separate fee,
ADT also performs on-site reconditioning services. The largest portion of
reconditioning revenue relates to appearance reconditioning and paint and body
work but more extensive body work services including body panel painting and
repair of minor collision damage are also carried out. Appearance reconditioning
services include engine steam-cleaning, washing, detailing, buffing and waxing,
and upholstery cleaning. Other services at certain centers include replacement
of parts, upholstery, tires and glass. Most manufacturers' vehicles and some
fleet/lease vehicles receive appearance reconditioning and, if necessary, paint
and body work. The reconditioning of manufacturers' Program Cars generates a
significant portion of ADT's reconditioning revenues. Program Cars are delivered
to the auction centers directly from rental car lots or marshaling yards,
financial institutions deliver vehicles directly off-lease or after repossession
and fleet operators deliver vehicles immediately from use. These vehicles
generally require reconditioning to bring them up to sale standards. In many
instances, these sellers do not have the facilities necessary to recondition the
vehicles expediently or economically. ADT does not usually recondition vehicles
consigned by dealers, who generally bring fully serviced cars to auction
directly from their lots. Dealers who purchase reconditioned vehicles are able
to place them in their showrooms or lots immediately, thereby minimizing the
time between purchase and retail sale.
ADT also provides high quality vehicle paint and body repair services under the
Quality Image Services name for vehicles other than those going through the
auction process, principally for fleet owners and insurance companies. The
service, which is aimed at new customers in addition to traditional auction
customers, utilizes ADT's existing reconditioning facilities and expertise.
Transportation Services: ADT collects and delivers customers' vehicles and
believes that its ability to provide transportation services at competitive
prices is extremely valuable to its marketing efforts. ADT operates a fleet of
vehicle transporters and sub-contracts any additional vehicle transportation
requirements that cannot be met by this fleet. Insurance: ADT offers, for a fee,
a 15-day power and drive train service contract provided by a third party. ADT
also undertakes to repurchase vehicles that have suffered odometer tampering or
have an undisclosed prior salvage history. ADT also assists sellers in complying
with laws regarding title and odometer readings by providing forms which include
the necessary representations as part of the paperwork signed and delivered in
connection with the auction sale. ADT's liability for losses arising from title
and odometer insurance, power and drive train service contracts and prior
salvage history has been negligible.
Valuation and Appraisal: ADT provides valuation and appraisal advice to
customers in connection with their vehicle disposal programs with a view to
assisting its customers to obtain the best possible price for their vehicles.
Specialized Services: Specialized auctions carried out by the division include
sales of government vehicles, to which the general public is invited, sales of
plant and equipment, sales of construction vehicles, sales of heavy trucks,
sales of municipal and agricultural equipment and sales of classic cars. ADT
provides a vehicle repossession service whereby vehicles are recovered from a
defaulting party and delivered directly to an auction center for liquidation.
ADT's market expertise allows it to offer a comprehensive vehicle remarketing
service to fleet operators, ranging from collection of vehicles leaving the
fleet to advice on vehicle replacement cycles.
Competition
ADT considers its competition to be two other significant auction chains and a
large number of independently owned local auctions which are members of the
National Auto Auction Association. The competing auction chains are Manheim
Auctions, a subsidiary of Cox Broadcasting Company, and ADESA Corporation, a
subsidiary of Minnesota Power & Light Company. Competition is based primarily on
price in relation to the quality and range of services offered to sellers and
buyers of vehicles and ease of accessibility of auction locations. ADT believes
it provides a higher quality of service than its competitors and its prices may
therefore be higher.
14
<PAGE>
Regulation
Each auction center is licensed by the state in which it is located, in most
cases as a vehicle auction or dealer. These licensing authorities may revoke a
license if an auction is not conducted according to regulations then in effect.
In addition, ADT's vehicle transportation fleet is regulated by the Interstate
Commerce Commission. ADT believes that it is in substantial compliance with the
regulations to which it is subject and has not had any material difficulties
with these regulatory authorities.
Employees
As of December 31, 1996, the vehicle auction division in the United States
employed approximately 3,900 persons on a full-time basis and approximately
2,400 persons on a part-time basis. The part-time employees are utilized
primarily on auction sale days. The majority of these employees are not
represented by unions or covered by collective bargaining agreements. ADT
believes its relations with employees and their unions are generally good.
ITEM 2. DESCRIPTION OF PROPERTIES
In North America, as of December 31, 1996, ADT, through its subsidiaries, owned
2 customer monitoring centers, leased 19 customer monitoring centers, owned 22
offices and other properties and leased 315 offices and other properties which
were used in connection with the electronic security services business. In the
United States, as of December 31, 1996, ADT, through its subsidiaries, owned 21
auction centers, leased 6 auction centers and owned or leased 6 offices and
other properties, which were used in connection with the vehicle auction
business. In Europe, as of December 31, 1996, ADT, through its subsidiaries,
owned 5 customer monitoring centers, leased 8 customer monitoring centers, owned
11 offices and other properties and leased 107 offices and other properties
which were used in connection with the electronic security services business. In
addition, as of December 31, 1996, ADT, through its subsidiaries, owned
approximately 1,294 acres of land and leased approximately 284 acres of land in
the United States used in connection with the vehicle auction business.
15
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
On December 27, 1996, Westar Capital, Inc. ("WCI") filed a complaint in the U.S.
District Court for the Southern District of Florida (the "Court") against the
Company, the directors of the Company and Republic Industries, Inc.
("Republic"). The complaint alleges that the Company and its directors breached
their fiduciary duties to WCI and the Company's other shareholders (i) by
issuing to Republic a share purchase warrant for 15,000,000 Common Shares (the
"Republic Warrant") in connection with a proposed amalgamation with Republic in
July 1996 (the "Republic Merger"), (ii) by adopting the Rights Plan, and (iii)
by holding shares of the Company in one of the Company's subsidiaries with the
intention of voting those shares as needed to entrench existing management. The
complaint seeks a court order (i) declaring the Republic Warrant null and void
or preventing the Company and Republic from exercising their rights under the
Republic Warrant, (ii) directing the Company to redeem the Rights Plan, and
(iii) preventing the Company from voting the shares held by its subsidiary.
On January 3, 1997, WCI filed an amended complaint which, in addition to the
allegations made in the prior complaints, alleges that the Company and its
directors have attempted to interfere with WCI's voting rights by seeking
certain information from WCI pursuant to procedures established in the Company's
Bye-Laws. The amended complaint seeks the same relief as the prior complaint and
also requests that the Court confirm WCI's voting rights.
On January 21, 1997, the Court granted WCI leave to file a second amended
complaint. The second amended complaint contains the same allegations as the
amended complaint and in addition alleges (i) that the Company and its directors
breached their fiduciary duties by setting a July 8, 1997 date for a meeting of
the Company's shareholders, and (ii) that the Company and its directors violated
Section 14(d) of the Securities Exchange Act of 1934, as amended, by making a
recommendation to the Company's shareholders regarding the tender offer without
first making certain filings with the Securities and Exchange Commission
("SEC"). WCI asks for a court order (i) enjoining the Company from holding the
shareholders meeting (the "Special General Meeting") on July 8, 1997, (ii)
compelling the Company to hold the special General Meeting on or before March
20, 1997, and (iii) declaring that the Company has violated Section 14(d) and
enjoining the Company from making any further recommendations relating to the
tender offer until the required SEC filings are made.
On January 23, 1997, WCI filed a motion for a preliminary injunction asking the
Court to enjoin the Company from holding the Special General Meeting on July 8,
1997, and compelling the Company to hold the Special General Meeting on or
before March 20, 1997. On March 4, 1997, WCI filed a supplemental brief in
support of its motion for a preliminary injunction representing that WCI is no
longer seeking a Special General Meeting on or before March 20, 1997 on the
grounds that such a meeting date would now be impractical. In its supplemental
brief, WCI requests that the meeting date be set 30 days after its proxy
materials for the Special General Meeting are distributed. As of this date, the
Court has not rendered any decision with respect to plaintiff's motion for a
preliminary injunction.
On January 27, 1997, the Company and its directors filed a motion to dismiss the
second amended complaint based on, among other things, the Court's lack of
personal jurisdiction over the Company and its directors and for failure to
state a claim upon which relief can be granted. WCI has filed papers in
opposition to the motion. On February 21, 997, the Court entered an order ruling
that the second amended complaint did not adequately plead personal jurisdiction
over the ADT defendants. On February 27, 1997, WCI filed a third amended
complaint. The third amended complaint contains the same allegations as the
second amended complaint and contains additional allegations relating to
personal jurisdiction.
16
<PAGE>
On March 11, 1997, the court granted WCI leave to file a fourth amended
complaint. The fourth amended complaint contains the same allegations as those
in the third amended complaint as well as additional allegations relating to the
Amendment to the Rights Plan implemented by the Company on March 3, 1997. In
addition to the relief previously requested, the fourth amended complaint seeks
judicial nullification of the Amendment to the Rights Plan and a rescission of
actions by ADT if it is shown that a subsidiary of ADT cast decisive votes as a
shareholder with respect to those actions. On March 17, 1997, the Company and
its directors filed a motion to dismiss the fourth amended complaint based on,
among other things, the Court's lack of personal jurisdiction over the Company
and its directors and for failure to state a claim upon which relief can be
granted.
The Company and the Board believe that the allegations in the WCI's fourth
amended complaint are without merit and intend to vigorously defend against
them.
On March 24, 1997, WCI filed a motion for a preliminary injunction (i)
preventing Republic from selling or transferring any of the warrant shares it
currently owns, and (ii) preventing the Chairman of ADT from exercising the
proxy on the warrant shares. The Company and the Board have yet to respond to
this motion.
On December 26, 1996, Charles Gachot filed a complaint in the Circuit Court for
the Fifteenth Judicial Circuit in Palm Beach County, Florida against the
Company, certain of its directors, Western and WCI. The complaint was brought on
behalf of a class of all shareholders of the Company and alleges that Western
and WCI have breached their fiduciary duties to the Company's shareholders by
offering an inadequate price for the outstanding Common Shares. The complaint
seeks to enjoin Western and WCI from acquiring the outstanding Common Shares.
The complaint also alleges that the Company and its directors have refused to
negotiate with Western and WCI and that the Republic Warrant and the Rights Plan
are improper. The complaint seeks unspecified monetary relief from all
defendants. The Company and the Board believe that the allegations in Gachot's
complaint against the Company and the directors are without merit and intend to
vigorously defend against them.
On February 7, 1997, ADT Operations, Inc. ("ADT Operations"), a subsidiary of
ADT, filed a complaint in the Supreme Court of the State of New York, County of
New York against The Chase Manhattan Bank, N.A. ("Chase"). The complaint states
that Chase has been an important lender and financial advisor to ADT Operations
since 1993, and that in the course of this business relationship, ADT Operations
has disclosed confidential business information to Chase. The complaint asserts
that ADT Operations and Chase expressly agreed that Chase would not aid any
third party in a hostile takeover bid for ADT. The complaint alleges that Chase
is currently aiding Western in its attempt to take control of ADT and that
Chase's actions constitute: (i) a breach of an express agreement between Chase
and ADT Operations; (ii) a breach of the implied covenant of good faith that is
part of the express agreement between Chase and ADT Operations; and (iii) a
breach of the fiduciary duties that Chase owes to ADT Operations. The complaint
seeks $50 million in monetary damages. The complaint also seeks to enjoin Chase
from advising, funding, or participating in Western's attempts to take control
of ADT and from disclosing any confidential information regarding ADT Operations
and ADT. On March 3, 1997, Chase filed a motion for dismissal of ADT Operations'
complaint or, alternatively, summary judgment. This motion is scheduled to be
heard on April 11, 1997.
On February 7, 1997, ADT Operations filed a motion for a preliminary injunction,
seeking to enjoin Chase from: (i) advising, funding, or assisting Western in its
efforts to take over ADT or participating in these efforts; and (ii) using or
disclosing any confidential information that ADT Operations provided to Chase.
The motion was argued before the Court on February 24, 1997 and is currently
pending.
On March 11, 1997, Crandon Capital Partners ("CCP") filed a complaint in the
Circuit Court for the Fifteenth Judicial Circuit in Palm Beach County, Florida
against the Company, certain of its current and former directors, and Republic.
The complaint was brought by CCP in a derivative capacity on behalf of ADT. The
complaint alleges that ADT's directors breached their fiduciary duties and
wasted corporate assets in connection with (i) the granting of options to
certain officers of ADT in 1996, (ii) the issuance of the Republic Warrant,
(iii) the implementation of the Rights Plan, and (iv) harassing and attempting
to disenfranchise WCI. The complaint seeks an unspecified amount of damages and
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.
<PAGE>
The Company and its directors believe that the allegations in the complaint
brought by CCP are without merit and intend to vigorously defend against them.
17
<PAGE>
ADT Limited and various of its subsidiaries are defendants in a number of other
pending legal proceedings incidental to present and former operations,
acquisitions and dispositions. ADT does not expect that the outcome of these
proceedings, either individually or in the aggregate, will have a material
adverse effect upon ADT's consolidated results of operations and cash flows or
its consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the last quarter
of the period covered by this Annual Report.
18
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ADT Limited's common shares ("Common Shares") have been listed on the New York
Stock Exchange ("NYSE") since August 1991 and on the London Stock Exchange since
December 1984.
The following table sets forth, for the periods indicated, the high and low
sales prices for the Common Shares as reported in the consolidated transaction
reporting system on the NYSE.
High Low
$ $
1995
First Quarter 12 1/4 9 5/8
Second Quarter 12 1/4 10 1/8
Third Quarter 14 1/8 11 5/8
Fourth Quarter 15 1/4 13
1996
First Quarter 18 14
Second Quarter 19 1/2 16 1/4
Third Quarter 24 3/4 15 7/8
Fourth Quarter 23 1/4 18 1/2
1997
First Quarter to March 24 27 5/8 21 1/4
At March 24, 1997, 156,696,447 Common Shares were held of record by 15,749
record holders. Since a number of the Common Shares were held by brokers or
other nominees, the number of record holders may not be representative of the
number of beneficial holders. A subsidiary of ADT Limited owns 3,182,787
Common Shares which are included in the number outstanding.
Dividends
ADT Limited has not declared any dividends on the Common Shares since April
1991. ADT Limited has no present intention to pay any dividends on the Common
Shares but will keep its dividend policy under review in the light of prevailing
circumstances. Under the terms of the senior notes and revolving bank credit
agreement ADT Limited may not declare, pay or make any dividend or distribution
with respect to its Common Shares, except in certain defined circumstances (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources").
19
<PAGE>
Exchange Controls and Other Limitations Affecting Security Holders ADT Limited
has been designated as a non-resident for exchange control purposes by the
Bermuda Monetary Authority, Foreign Exchange Control. There are no limitations
on the rights of non-Bermuda owners of the Common Shares arising out of such
designation to hold or vote their shares. Because ADT Limited has been
designated as a non-resident for Bermuda exchange control purposes, there are no
exchange control restrictions on its ability to transfer funds in and out of
Bermuda or to pay dividends to United States residents who are holders of the
Common Shares, except that ADT Limited may not hold Bermuda dollars except
external Bermuda dollars.
The transfer of Common Shares already issued between persons regarded as
resident outside Bermuda for exchange control purposes and the issue of Common
Shares for which consent has already been granted to such persons, may be
effected without specific consent under the Exchange Control Act of 1972 and
regulations thereunder. All further issues of Common Shares and any transfers of
Common Shares involving any person regarded as resident in Bermuda for exchange
control purposes require specific prior approval under the Exchange Control Act
of 1972.
In accordance with Bermuda law, share certificates are only issued in the names
of corporations, partnerships or individuals. In the case of an applicant acting
in a special capacity (for example, as an executor or trustee), certificates
may, at the request of the applicant, record the capacity in which the applicant
is acting. Notwithstanding the recording of any such special capacity, ADT
Limited is not bound to investigate or incur any responsibility in respect of
the proper administration of any such estate or trust.
Shares purchased for those under 21 years of age must be registered in the name
of the parent or guardian but may be designated with the minor's initials for
the purpose of identification. ADT Limited will take no notice of any trust
applicable to the shares represented by such certificates. As an "exempted
company", ADT Limited is exempt from Bermuda laws which restrict the percentage
of share capital that may be held by non-residents of Bermuda, but as an
exempted company ADT Limited may not participate in certain business
transactions, including (i) the acquisition or holding of land in Bermuda (other
than that required for its business and held by way of lease or tenancy for
terms of not more than 21 years) without the express authorization of the
Bermuda legislature or the Minister of Finance; (ii) the taking of mortgages on
land in Bermuda to secure an amount in excess of $50,000; (iii) the acquisition
of securities created or issued by, or any interest in, any local company or
business, other than certain types of Bermuda Government securities or
securities of another "exempted" company, partnership or any other corporation
resident in Bermuda but incorporated abroad; or (iv) the carrying on of business
of any kind in Bermuda, except as necessary in furtherance of the business of
the ADT Limited carried on outside Bermuda or under a license granted by the
Minister of Finance of Bermuda.
Under current Bermuda law, no Bermuda withholding tax will be imposed upon
payment of dividends by ADT Limited to its common shareholders. Furthermore, ADT
Limited has received from the Minister of Finance of Bermuda, under the Exempted
Undertakings Tax Protection Act of 1966, as amended, an undertaking that, in the
event of there being enacted in Bermuda any legislation imposing any tax
computed on profits or income, including any dividend or capital gains
withholding tax, or computed on any capital assets, gain or appreciation, or any
tax in the nature of an estate or inheritance tax or duty, the imposition of
such tax shall not be applicable to ADT Limited or any of its operations, nor to
the Common Shares, preference shares or other obligations of ADT Limited, until
the year 2016. This undertaking does not, however, prevent the application of
Bermuda taxes to persons ordinarily resident in Bermuda.
Under current Bermuda law, ADT Limited is required to pay the Bermuda Government
an annual registration fee, which is calculated by a reference to the authorized
capital and share premium of ADT Limited. ADT Limited pays the maximum fee,
which is currently $25,000 per annum.
20
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below has been derived from the audited
consolidated financial statements of the Company. The information presented
below should be read in conjunction with, and is qualified by reference to, the
consolidated financial statements of the Company and the related notes thereto
and the consolidated financial statement schedules and "Management's Discussion
and Analysis of Financial Condition and Results of Operations". Consolidated
income statement data
<TABLE>
<CAPTION>
Year ended December 31 1996 1995 1994 1993 1992
$m $m $m $m $m
<S> <C> <C> <C> <C> <C>
Net sales 1,704.0 1,783.8 1,629.4 1,528.5 1,552.2
======= ======= ======= ======= =======
Operating (loss) income (i) (765.5) 200.8 206.0 186.8 165.3
Interest income 27.5 16.2 15.2 13.3 25.3
Interest expense (101.0) (116.3) (99.3) (76.7) (95.7)
Gain (loss) on disposal of businesses (ii) 1.7 (36.6) (0.3) - 60.5
Other income less expenses (iii) 128.8 (5.0) (4.1) 9.8 23.8
------ ------ ------ ------ ------
(Loss) income before income taxes (708.5) 59.1 117.5 133.2 179.2
Income taxes 21.8 (28.1) (34.9) (22.5) (20.1)
------ ------ ------ ------ ------
(Loss) income from continuing operations (686.7) 31.0 82.6 110.7 159.1
Loss from discontinued operations (iv) - - (3.3) - (2.7)
------ ------ ------ ------ ------
(Loss) income before extraordinary items (686.7) 31.0 79.3 110.7 156.4
Extraordinary items (net of
income taxes) (v) (8.4) (9.8) - - 5.6
------ ------ ------ ------ ------
Net (loss) income (695.1) 21.2 79.3 110.7 162.0
======= ======= ======= ======= =======
$ $ $ $ $
Primary (loss) earnings per common share (vi):
(Loss) income from continuing operations (5.01) 0.22 0.51 0.74 1.19
Loss from discontinued operations - - (0.03) - (0.02)
Extraordinary items (0.06) (0.07) - - 0.05
------ ------ ------ ------ ------
Net (loss) income per common share (5.07) 0.15 0.48 0.74 1.22
======= ======= ======= ======= =======
Consolidated balance sheet data
At December 31 1996 1995 1994 1993 1992
$m $m $m $m $m
Total assets (vii) 2,730.4 3,419.7 3,412.3 3,477.4 3,368.9
Long-term debt (including
current portion) 1,068.7 1,180.3 1,211.4 953.4 1,067.8
Convertible redeemable preference
shares (viii) - 4.9 5.2 427.2 434.6
Non-voting exchangeable shares - - - 15.0 15.1
Exchangeable redeemable preference shares - - - - 21.0
Total shareholders' equity (ix) 759.8 1,425.3 1,376.5 1,264.8 1,054.4
21
<PAGE>
(i) Operating loss in 1996 included restructuring and other non-recurring
charges of $237.3 million relating principally to the electronic security
services divisions in the United States and the United Kingdom, and a charge of
$744.7 million relating to the impairment of long-lived assets following the
adoption by the Company 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" ("SFAS 121"). Operating income in 1995 included restructuring
and other non-recurring charges of $34.2 million relating principally to the
United States electronic security services division and to corporate
restructuring in Europe. Operating income in 1994 included restructuring and
other non-recurring charges of $4.5 million relating to corporate restructuring
in Europe.
(ii) Loss on disposal of businesses in 1995 included a net loss of $65.8 million
relating to the disposal by the Company of an interest in its United Kingdom and
Continental European vehicle auction services businesses offset by a net gain of
$31.4 million relating to the disposal by the Company of its entire European
electronic article surveillance business. Gain on disposal of businesses in 1992
related to the disposal by the ASH group of its entire European loss prevention
business.
(iii) Other income less expenses in 1996 included a net gain of $53.4 million
relating to the disposal of the Company's entire investment in Limelight Group
plc, and a net settlement gain of $65.0 million relating to an agreement in full
and final settlement of the Company's litigation against BDO Binder Hamlyn
("BDO"). Other income less expenses in 1994 included net gains of $21.5 million
arising from the ownership of investments and a net write off of $30.7 million
relating to the Company's entire equity investment in Arius, Inc. which was held
by the ASH group. Other income less expenses in 1992 included a $50.9 million
deferred net gain arising from the Company's investment in Quoteplan PLC and a
net write off of $33.7 million of the Company's equity investment in Nu-Swift
plc.
(iv) Discontinued operations comprised the disposal during 1994 of all the
Company's non-core businesses, principally Insight Travel Group. The company no
longer has any interests in non-core businesses. Included in the loss from
discontinued operations for 1994 were net losses on disposal of the non-core
businesses amounting to $3.7 million. Net sales from discontinued operations
amounted to $80.6 million in 1994, $96.9 million in 1993 and $101.4 million in
1992. These net sales are not included in net sales in the consolidated income
statement data.
(v) Extraordinary items principally were comprised of the gains and losses
arising on reacquisition/ repayment and the write off of net unamortized
deferred refinancing costs relating to the early extinguishment of certain
amounts outstanding under the Company's long-term debt obligations, and were
stated net of applicable income taxes.
(vi) The calculation of primary earnings per common share was based on the
weighted average number of common shares in issue during the period. Such
weighted average number of common shares in issue for the years ended December
31, 1996, 1995, 1994, 1993 and 1992 was 137,114,415, 138,283,458, 136,148,361,
122,043,139 and 113,480,672 common shares, respectively.
(vii) Following the adoption of SFAS 121 during 1996, the Company recorded a
charge of $744.7 million relating to the impairment of long-lived assets. (viii)
During 1994 the Company redeemed a significant proportion of its convertible
redeemable preference shares. The net effect of this transaction was to reduce
the carrying value of the convertible redeemable preference shares by $422.0
million. The Company funded the redemption from cash on hand and through the
drawdown of long-term debt facilities.
(ix) During 1993 the Company issued common shares for cash resulting in net
proceeds of $154.8 million.
</TABLE>
<PAGE>
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
In September 1996 the Company 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. The merger with and
acquisition of ASH by the Company 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 accompanying consolidated financial statements give
effect to the transaction by means of the pooling of interests and have been
restated.
During 1995 management commenced a strategic review of the Company's 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. As part of this strategic review, management
approved the redeployment of certain of the Company's assets in order to further
concentrate the Company's resources on the electronic security services
operations, principally in the United States, where management believes the
greatest potential for future growth lies. Consequently, Actron Group, the
Company's European electronic article surveillance business, was disposed of in
November 1995 and in December 1995 the Company disposed of an interest in its
European vehicle auction services businesses.
During the fourth quarter of 1995, the Company entered into an agreement for the
acquisition of Alert, the tenth largest electronic security services company in
the United States, with a predominantly residential customer base located
principally in Texas, Florida and Georgia.
As part of the strategic review of its business operations undertaken during
1995, and in the context of the acquisition of Alert and the disposal of an
interest in the European vehicle auction services businesses, management
commenced an evaluation of the entire group corporate structure, and the
administrative, accounting and management information systems 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 in order to create a more
profitable, efficient organization with significantly improved marketing,
selling, installation and servicing capabilities supported by upgraded
management information systems.
During 1996 the restructuring in the electronic security services division
included a reorganization of senior management, the closure of a major corporate
office in Parsippany, New Jersey, and a realignment of the organizational
structure along the functional business lines of residential, commercial and
customer service, rather than along geographic lines.
During 1996, as a result of the acquisition of ASH and the further development
of the Re-Engineering Project under the control of new senior management, the
Company identified the need to extend the process of strategic change to include
a significantly expanded agenda. As a result, various strategic initiatives have
been added to the corporate plan and the implementation of these plans is
currently in progress and will continue throughout 1997. In the United States
the plans relate principally to a significant investment in technological
infrastructure enhancements to facilitate further consolidation of the Company's
entire customer monitoring center network down to four, state of the art,
customer service centers, and to place the Company in a stronger position to
take advantage of the significant opportunities in the changing market place. In
Europe, the plans relate principally to the merger, integration and
consolidation of the Company's existing electronic security services businesses
with that of ASH.
23
<PAGE>
RECENT DEVELOPMENTS
In November 1996 the Company announced that it intended to dispose of the
vehicle auction services operations in the United States in order to concentrate
further on the expansion of the Company's electronic security services business.
Accordingly, the Company's vehicle auction services business segment was then
initially reclassified as a discontinued operation for all years presented. The
preliminary, summarized consolidated results of operations of the Company for
the year ended December 31, 1996 were announced on March 3, 1997, and were filed
under Schedule 14A. On March 17, 1997 the Company announced that the
aforementioned intention had been rescinded and that the vehicle auction
services operations in the United States would no longer be disposed of.
Accordingly, all consolidated financial information set forth in this Form 10-K,
including the audited consolidated financial statements of the Company, is
presented with the Company's vehicle auction services business segment
classified as a continuing operation for all years presented. There is no net
effect on the reported net income and total shareholders' equity when comparing
the preliminary, summarized consolidated results of operations of the Company
referred to above and the consolidated financial information set forth in this
Form 10-K. All differences relate to the reclassification of the vehicle auction
services business segment from discontinued operations to continuing operations.
In December 1996 Western Resources, Inc. ("Western") announced its intention to
commence an offer to exchange all of ADT Limited's outstanding common shares for
consideration consisting of cash and shares of Western common stock. On March 3,
1997 the Company announced that its board of directors had determined that the
offer made by Western was inadequate and not in the best interests of ADT
Limited's shareholders. On March 17, 1997 the offer made by Western commenced.
On March 17, 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 Limited shareholders, through a reverse stock split, will receive 0.48133
common shares in the combined company for each ADT Limited common share.
The information presented below should be read in conjunction with, and is
qualified by reference to, the consolidated financial statements of the Company
and the related notes thereto and the consolidated financial statement
schedules.
24
<PAGE>
RESULTS OF OPERATIONS
The following discussion of results of operations addresses net sales, operating
(loss) income and certain other line items in the consolidated financial
statements.
Net sales
Year ended December 31 1996 1995 1994
$m $m $m
Electronic security services 1,406.2 1,350.9 1,253.3
Vehicle auction services 297.8 432.9 376.1
------- ------- -------
1,704.0 1,783.8 1,629.4
======= ======= =======
Operating (loss) income and (loss) income before income taxes
Year ended December 31 1996 1995 1994
$m $m $m
Electronic security services (756.5) 172.4 182.1
Vehicle auction services 27.1 70.2 62.7
Corporate expenses (36.1) (41.8) (38.8)
------- ------- -------
Operating (loss) income (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 1.7 (36.6) (0.3)
Other income less expenses 128.8 (5.0) (4.1)
------- ------- -------
(Loss) income before income taxes (708.5) 59.1 117.5
======= ======= =======
Restructuring and other non-recurring charges 237.3 34.2 4.5
Charge for the impairment of long-lived assets 744.7 - -
Depreciation and amortization 224.8 247.9 226.7
Capital expenditures 344.4 325.8 282.6
Electronic Security Services
Net sales derived from the electronic security services division are dependent
on the volume of new customer installations and the number of customers under
contract for the provision of electronic monitoring services. A majority of the
division's revenues are derived from contractually recurring fees for electronic
monitoring and maintenance of security systems installed at customer premises
and other related services. The remainder of the division's revenues are derived
from the outright sale and installation of security systems, the installation of
security systems in accordance with a monitoring service agreement and the
maintenance of security systems on a non- contractual basis. Security system
installation revenues are recognized when the installation of a system is
complete. Where a system has been installed in accordance with the terms of a
monitoring service agreement, the Company retains ownership of the system and
all direct installation costs, which include materials, labor and installation
overheads, are capitalized and recorded as a fixed asset under subscriber
systems. These subscriber systems are depreciated over their estimated useful
life, which is principally 14 years and 10 years for commercial and residential
systems, respectively, or, in the case of commercial systems, the actual
contract duration if shorter. All selling and marketing costs are expensed in
the year incurred.
25
<PAGE>
The following table presents the approximate number of commercial and
residential customers in North America and Europe contracting with the Company
for the monitoring or maintenance of electronic security systems together with
the annualized service revenue under contract as of December 31, 1996, and the
annual combined discontinuance rate for commercial and residential contracts in
respect of 1996.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Number of Commercial Number of Residential Annualized Service Annual Combined
Customers Customers Revenue Discontinuance Rate
672,000 1,149,000 $920m 10.4%
</TABLE>
ADT defines annualized service revenue as the annualized service billing arising
from its customer base at a point in time for monitoring, maintenance and
related services. The aggregate annualized service billings amount takes account
of cancellations or terminations, increases in contract revenues due to new
contracts, additional services to existing customers and rate variations at the
date of computation. The actual amount of service revenue for future periods
will vary in accordance with changes in the customer base and fees charged.
ADT calculates the annual combined discontinuance rate by dividing the
annualized service revenue from contracts cancelled or reduced in price during
the year by the annualized service revenue in force at the beginning of the
year, expressed as a percentage.
Since 1987 the division's goals have been to create a lower cost, more efficient
operation, suitable for long-term growth and greater profitability, and to take
advantage of the economies of scale resulting from the utilization of the
existing infrastructure which services its commercial customer base. During this
period the Company equipped its regional customer monitoring centers with
enhanced computer technology to further automate the monitoring process and
increase monitoring capacity. As a result of increased monitoring and service
capacity, and a lower cost structure due to manpower reductions and reduced
facility costs, in the early 1990s the Company began marketing electronically
monitored security systems and services at lower installation price points to
residential customers throughout North America. As a result of the rapid
expansion of the Company's business during the recent past and a broader
business strategy adopted by the Company in a changing market place, the Company
has identified the need to improve and expand its technological and physical
capacity in order to expand its customer base and product range. Consequently,
the Company has approved a plan to significantly enhance its monitoring
capacity, service quality and ability to expand its service and product range.
The Company will continue to aggressively market residential security systems in
North America, while also focusing on opportunities for growth in the commercial
sector as the economies in North America and Europe improve.
Further details of the electronic security services division's business strategy
are set out under "Description of Business - Business Description - Electronic
Security
Services."
26
<PAGE>
1996 compared with 1995
Net sales of the division increased 4.1 per cent in 1996 to $1,406.2 million
from $1,350.9 million in 1995. This sales increase was attributable to an
increase of $102.1 million in the sales of the North American operations offset
by a $46.8 million decline in the sales of the European operations, which was
due to the exclusion of sales of the European electronic article surveillance
operation and certain businesses operating in the ASH group, all of which were
disposed of during 1995. In North America the increase in sales was principally
due to the first time inclusion of the sales of Alert which was acquired in
December 1995, as well as increased recurring monitoring and maintenance
revenues arising from a larger base of residential security systems. Although
unit residential security systems sales in North America increased in 1996
compared to 1995, due to price competition in the market place, residential
installation revenues in North America showed a modest decline in 1996 compared
with 1995. The commercial business in the United States remained flat in both
new system sales and installation revenues, and growth in recurring commercial
revenues continues to be affected by these factors. In Europe, after allowing
for business disposals and the effect of foreign exchange, sales showed a modest
increase in 1996 compared with 1995.
Operating results of the division declined from $172.4 million income in 1995 to
a $756.5 million loss in 1996, principally due to a charge for the impairment of
long-lived assets of $731.7 million and restructuring and other non-recurring
charges of $232.5 million in 1996.
Operating income of the division before the charge for the impairment of
long-lived assets and restructuring charges increased 7.2 per cent in 1996 to
$207.7 million from $193.8 million in 1995. Operating income before the charge
for the impairment of long-lived assets and restructuring charges as a
percentage of net sales ("operating margin") increased to 14.8 per cent in 1996
from 14.3 per cent in 1995. The increase in operating income before the charge
for the impairment of long-lived assets and restructuring charges principally
reflected the first time inclusion of Alert, the disposal of the European
electronic article surveillance operation in November 1995, and the continuing
success of the North American residential security systems sales program, which
has achieved further advances in recurring revenues in 1996. However, this
improvement has been offset by continued price competition and by increased
marketing and selling costs, which have caused the contribution from residential
installation revenues and outright residential sales to show a modest decline.
The North American commercial installation revenues and outright sales remained
flat. The contribution in Europe showed a modest increase.
1995 compared with 1994
Net sales of the division increased 9.2 per cent in 1995 to $1,350.9 million
from $1,236.6 million in 1994 (excluding net sales of $16.7 million relating to
the Company's electronic security services businesses in Australia and New
Zealand, disposed of in June 1994). This increase was attributable to increases
in net sales of $90.2 million and $24.1 million in North America and Europe,
respectively. The sales increase in North America was principally due to
increased recurring monitoring and maintenance revenues arising from a larger
base of residential security systems. In addition, the commercial business in
the United States experienced improved growth in new system sales and
installation revenues. However, corporate downsizing and cost containment has
meant that growth in recurring revenues from the commercial sector has been
modest. Sales in Canada, however, have marginally declined. The increase in
sales in Europe was due to increased sales in the commercial business,
particularly in the United Kingdom, as well as increased recurring monitoring
and maintenance revenues from commercial customers, and the strengthening of
European currencies against the US dollar.
Operating income of the division declined from $182.1 million in 1994 to $172.4
million in 1995, principally due to restructuring and other non-recurring
charges of $21.4 million in 1995.
27
<PAGE>
Operating income of the division before restructuring charges increased 6.5 per
cent in 1995 to $193.8 million from $181.9 million in 1994 (excluding operating
income of $0.2 million relating to Australia and New Zealand, disposed of in
June 1994). Operating margin declined from 14.7 per cent in 1994 (after
excluding Australia and New Zealand) to 14.3 per cent in 1995 reflecting the
higher cost of adding new residential customers in North America during 1995.
The increase in operating income before restructuring charges in North America
reflected the continuing success in the United States of the residential
security systems sales program and growth in the sale of new systems and
installation revenues in the commercial sector. The growth in residential and
commercial sales resulted in increased installation fees and related monitoring
and maintenance revenues and increased utilization of the monitoring network in
the United States. In Canada, however, sales and margins have fallen and the
overall business performance was disappointing. In Europe operating income
before restructuring charges showed a modest increase despite pressure on
margins in the electronic article surveillance business. In November 1995 the
Company disposed of its entire electronic article surveillance business.
Restructuring and other non-recurring charges
During 1995, the Company commenced a strategic review of its business operations
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 electronic security services businesses in the late 1990s. This
strategic review process continued during 1996 following the completion of the
acquisition of Alert, the senior management reorganization which took place in
the first quarter of 1996, and the identification by the new senior management
team of the need to expand significantly the terms of reference of the
restructuring in the United States. The effects of the Re- Engineering Project
and the consequent restructuring are more fully described in note 5(i) of the
notes to consolidated financial statements. As a consequence of the Re-
Engineering Project, 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 $134.7 million and $21.4
million, respectively.
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 the end of 1997. As a
consequence of the restructuring plan a charge for restructuring and other
non-recurring items of $97.8 millon was recorded in the fourth quarter of 1996.
Details of the restructuring are more fully described in note 5(i) of the notes
to consolidated financial statements.
Charge for the impairment of long-lived assets
Effective January 1, 1996, the Company was required to adopt SFAS 121. Following
the adoption of SFAS 121, in the first quarter of 1996 the Company recorded an
aggregate non-cash charge for the impairment of long-lived assets of $731.7
million in the electronic security services division with a consequential tax
credit of $10.8 million. The impairment charge comprised $397.1 million relating
to the ADT group, principally all of which related to the carrying value of
goodwill and other intangibles, and $334.6 million relating to the ASH group, of
which $121.0 million related to the carrying value of subscriber systems
installed at customers' premises which are included in property, plant and
equipment, and $213.6 million related to the carrying value of goodwill and
other intangibles. Further details are set out in note 6(i) of the notes to
consolidated financial statements.
28
<PAGE>
Vehicle Auction Services
Net sales of the vehicle auction services division are a function of the number
of vehicles handled, the number of vehicles sold at auction and the number of
vehicles handled for which ancillary services are provided. The Company charges
an entry fee for the majority of vehicles entered at auction. On the sale of a
vehicle at auction, the Company charges a separate seller's and buyer's fee for
each vehicle sold. This fee per vehicle sold is either a fixed fee or a variable
fee directly related to the sale price achieved. The fee structure for each
vehicle transaction is based upon the contractual relationship with the
customer. Revenues from additional services, which include reconditioning, body
repair, inspection, transportation and insurance are related to the number of
vehicles handled and are an additional integral source of the division's
revenue.
In December 1995 the Company disposed of an interest in its United Kingdom and
Continental European vehicle auction services businesses.
1996 compared with 1995
Net sales of the division declined from $432.9 million in 1995 to $297.8 million
in 1996 due to the exclusion of the sales of European Auctions which was sold in
December 1995.
Net sales of the United States vehicle auction services business increased 10.4
per cent in 1996 to $297.8 million from $269.8 million in 1995. The volume of
vehicles sold increased by approximately 7 per cent which was principally due to
an increase in the volume of vehicles sold for fleet lease customers of
approximately 35 per cent, while the volume of vehicles sold for vehicle
manufacturers and new and used vehicle dealers declined by approximately 5 per
cent and approximately 2 per cent, respectively. Operating income of the
division declined from $70.2 million in 1995 to $25.2 million in 1996 due to a
charge for the impairment of long-lived assets of $13.0 million (see note 6(ii)
of the notes to consolidated financial statements) and the exclusion of the
operating income of European Auctions.
Operating income before the charge for the impairment of long-lived assets of
the United States vehicle auction services business increased 11.4 per cent in
1996 to $38.2 million from $34.3 million in 1995. Operating margin increased to
12.8 per cent in 1996 from 12.7 per cent in 1995. The increase in operating
income and operating margin were due principally to the increase in the volume
of vehicles sold and to an increase in the ratio of vehicles sold to vehicles
entered for sale ("conversion ratio") to 56.6 per cent in 1996 from 55.3 per
cent in 1995, which was due to a higher proportion of vehicles entered for sale
by fleet lease customers.
In December 1995 the Company disposed of an interest in European Auctions for an
aggregate consideration of $334.9 million. 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 and a $23.2 million charge relating to cumulative
currency translation adjustments.
1995 compared with 1994
Net sales of the division increased 15.1 per cent in 1995 to $432.9 million from
$376.1 million in 1994. This increase was attributable to increases in net sales
of $40.3 million and $16.5 million in Europe and the United States,
respectively. The increase in Europe was primarily attributable to an increase
in the number of vehicles sold in 1995 of approximately 7 per cent, the
inclusion of the vehicle reconditioning and transportation business in the
United Kingdom which was acquired in December 1994 and the strengthening of
European currencies against the US dollar. In Europe the volume of vehicles sold
for new and used vehicle dealers, fleet lease customers and vehicle
manufacturers increased by approximately 5 per cent, approximately 10 per cent
and approximately 8 per cent, respectively. In the United States the volume of
vehicles sold increased by approximately 3 per cent. This was principally due to
an increase in the volume of vehicles sold for fleet lease customers of
approximately 30 per cent, offset by a decline, in each case, in the volume of
vehicles sold for vehicle manufacturers and new and used vehicle dealers of
approximately 5 per cent.
Operating income of the division increased 12.0 per cent in 1995 to $70.2
million from $62.7 million in 1994. Operating income in Europe increased by $6.9
million due to the increase in revenue per vehicle sold at auctions, the
inclusion of the vehicle
<PAGE>
reconditioning and transportation business in the United Kingdom, effective
overhead containment and the strengthening of European currencies against the US
dollar. Operating income in the United States increased by $0.6 million and
operating margin declined from 13.3 per cent to 12.7 per cent. This was
principally due to a decline in the conversion ratio from 58.3 per cent in 1994
to 55.3 per cent in 1995 which was due to a lower proportion of vehicles entered
for sale by manufacturers and to lower dealer conversion ratios.
29
<PAGE>
Corporate expenses
Corporate expenses comprise administrative, legal and general corporate expenses
net of other income and include all central costs incurred not directly
connected with the operational management of the Company's two businesses which
are responsible for their own corporate overheads. 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 the fourth quarter of 1996 of $4.8 million. During 1995
management evaluated the Company's entire group corporate structure, in
particular in the United Kingdom. As a result, in December 1995, senior
executive management approved a restructuring plan which resulted in a charge
for restructuring and other non-recurring items at the corporate level of $12.8
million. The corporate restructuring charge in 1994 of $4.5 million was
principally attributable to the Company's corporate administration in the United
Kingdom. Details of the restructurings are more fully described in note 5(ii) of
the notes to consolidated financial statements. OTHER ITEMS - INCOME STATEMENT
Interest income and interest expense
Year ended December 31 1996 1995 1994
$m $m $m
Interest income 27.5 16.2 15.2
Interest expense (101.0) (116.3) (99.3)
Interest income increased in 1996 compared with 1995 principally due to the
effects of the disposal of the European vehicle auction division and the
European electronic article surveillance business in the fourth quarter of 1995,
and the inclusion of $8.9 million interest income in 1996 related to the ITS
Vendor Note. Interest income increased in 1995 to compared with 1994 principally
due to the increase in the level of cash deposits held by the Company in 1995.
Interest expense declined in 1996 compared with 1995 principally due to the
effects of the refinancing which took place in the third quarter of 1995. In
1996 interest expense included $20.3 million (1995 - $9.4 million) relating to
Liquid Yield Option Notes discount amortization, and $3.7 million (1995 - $5.3
million) relating to refinancing costs amortization. Interest expense increased
in 1995 compared with 1994 principally due to the effects of the financing of
the redemption of a significant proportion of the Company's convertible
redeemable preference shares in 1994. In 1995 interest expense included $9.4
million (1994 - nil) relating to Liquid Yield Option Notes discount
amortization, and $5.3 million (1994 - $5.7 million) relating to refinancing
costs amortization. The Company holds no derivative financial instruments.
See Liquidity and Capital Resources and notes 21 and 23 of the notes to
consolidated financial statements which provide details of short-term and
long-term debt, respectively.
30
<PAGE>
Disposal of businesses
In December 1995 the Company disposed of an interest in its United Kingdom and
Continental European vehicle auction services businesses for an aggregate
consideration of $334.9 million (see notes 18 and 34 of the notes to
consolidated financial statements for further details). The net loss on disposal
of $65.8 million included $136.5 million relating to the write off of net
unamortized goodwill and a $23.2 million charge relating to cumulative currency
translation adjustments.
In November 1995 the Company disposed of its entire European electronic article
surveillance business for an aggregate consideration of $54.0 million. The net
gain on disposal of $31.4 million included a $2.1 million gain relating to
cumulative currency translation adjustments.
Other income less expenses
Year ended December 31 1996 1995 1994
$m $m $m
Gains and losses arising from the
ownership of investments 54.4 (5.0) 21.5
Write off in value of associate - - (30.7)
Settlement gain 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)
===== ==== =====
During 1996 gains arising from the ownership of investments included a net gain
of $53.4 million relating to the disposal in November 1996 of the Company's
entire investment in Limelight Group plc. The write off in value of associate in
1994 related to the Company's entire equity investment in Arius, Inc. which was
held by the ASH group. In December 1996 the Company and BDO entered into an
agreement in full and final settlement of the Company's litigation against BDO.
The net gain arising on this settlement, after the write off of certain deferred
legal costs, 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. See
note 8 of the notes to consolidated financial statements for further details of
other income less expenses. Income taxes
Current income taxes principally relate to state, local and other tax
liabilities incurred in the United States and other non-US tax liabilities. The
Company's effective income tax rate as adjusted for financial reporting purposes
has increased in 1996, 1995 and 1994. This effective tax rate increase
principally arose from an increase in the deferred tax charge. During 1996 the
Company's deferred income tax charge was impacted by tax effects of the
restructuring in the United States and other non-US tax jurisdictions. See note
9 of the notes to consolidated financial statements for further details of
income taxes.
Discontinued operations
Discontinued operations comprised the disposal during 1994 of all the Company's
non-core businesses. The Company no longer has any interests in non-core
businesses. Included in the loss from discontinued operations for 1994 were net
losses on disposal of the non-core businesses amounting to $3.7 million, which
included $19.1 million relating to the write off of net unamortized goodwill and
other intangibles on the disposal of the non-core businesses. The net income
from operations for 1994 included in the loss from discontinued operations
amounted to $0.4 million on net sales of $80.6 million.
31
<PAGE>
Extraordinary items
Extraordinary items in 1996 and 1995 included net losses amounting to $1.2
million and $1.5 million, respectively, arising on the reacquisition of certain
of the Company's senior subordinated notes. Further details are provided in
notes 11 and 23(ii) of the notes to consolidated financial statements.
In September 1996 the Company repaid in full all amounts owed by the ASH group
under its senior notes and bank credit agreement. Further details on the net
loss amounting to $4.6 million which arose on these transactions are provided in
notes 11 and 23(vi) of the notes to consolidated financial statements. In
December 1996 the Company gave notice that it would redeem in full all amounts
outstanding to the convertible capital bond holders owed by the ASH group.
Further details on the net loss amounting to $1.6 million which arose on this
transaction are provided in notes 11 and 23(v) of the notes to consolidated
financial statements.
In July 1995 and December 1996 the Company repaid in full and cancelled certain
bank credit agreements as part of refinancing arrangements at the time. Further
details of the net losses amounting to $8.3 million in 1995 and $1.0 million in
1996 which arose on these transactions are provided in notes 11, 23(iii) and
23(iv) of the notes to consolidated financial statements. Dividends on
preference shares
As a result of the redemption of a significant proportion of the Company's
convertible redeemable preference shares in 1994, dividends payable on the
balance of such shares outstanding were negligible in 1996 and 1995. Effects of
inflation
Due to the relatively low levels of inflation experienced in 1994, 1995 and 1996
in the major markets in which the Company operates, inflation did not have a
significant effect on the results of the Company in these years.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated cash flow information
The net decrease in cash and cash equivalents amounted to $135.0 million, after
the positive effect of currency translation on cash and cash equivalents of $1.4
million. Net cash of $308.7 million provided by operating activities was offset
by net cash utilized by investing activities of $328.4 million and net cash
utilized by financing activities of $116.7 million. Net cash provided by
operating activities of $308.7 million principally included cash provided by the
Company's electronic security services and vehicle auction services divisions
less other expenses and adjusted for the net increase in working capital. Within
the net increase of $32.7 million in working capital were increases in accounts
receivable of $11.9 million and inventories and other assets of $15.0 million
and a net decrease in liabilities of $5.8 million, principally relating to
increases in accounts payable and deferred revenue and a decrease in other
liabilities. The movement in accounts receivable was principally due to an
increase in accounts receivable in the vehicle auction services division. The
movement in deferred revenue was principally due to the timing of billings
within the electronic security services division.
Net cash utilized by investing activities of $328.4 million was principally due
to capital expenditures of $314.2 million and $25.7 million in the electronic
security services and vehicle auction services divisions, respectively, $25.5
million relating to the acquisition of the minority interest in Alert and $34.6
million relating to the purchase of customer contracts to provide electronic
security monitoring. These were principally offset by $15.4 million received on
the disposal of certain investments in and loans to associates and $54.1 million
received on the disposal of other investments, principally Limelight Group plc.
32
<PAGE>
Net cash utilized by financing activities of $116.7 million was principally due
to the repayments of long-term debt of $209.9 million, principally relating to
the ASH group, and the purchase of $23.1 million of the Company's senior
subordinated notes at a cost of $24.0 million. These were principally offset by
$86.8 million relating to the proceeds from long-term debt and $24.7 million
realized on the issue of common shares.
Cash, liquid resources and sources of finance
Liquid assets available to the Company at December 31, 1996 represented cash and
cash equivalents of $215.9 million. At December 31, 1996 the Company had
available but undrawn facilities of $35.9 million under its revolving bank
credit agreement.
In July 1996, as part of the then agreement to combine with Republic Industries,
Inc. ("Republic"), ADT Limited granted to Republic a warrant to acquire 15
million common shares of ADT Limited 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. On March 21, 1997 the warrant was exercised by
Republic and the Company received $300 million in cash.
Future commitments and cash requirements
Capital expenditures during 1997 are estimated to be approximately $487 million
which represent normal replacement needs and the purchase of additional
equipment, facilities and customer contracts necessary to meet planned increases
in sales. Approximately 90 per cent of the capital expenditures projected for
electronic security services relates to installation of subscriber systems at
customers' premises. This amount does not include any amounts for acquisitions
which the Company may pursue from time to time.
The Company believes that the working capital at December 31, 1996, its
available credit facilities and the current cash flows from operations are
adequate for the Company's normal growth and operating needs, the funding of its
capital expenditures budget and the current servicing of its debt requirements.
ADT Limited has no present intention to pay any dividends on its common shares
but will keep its dividend policy under review in the light of prevailing
circumstances. Under the terms of the senior notes and revolving bank credit
agreement ADT Limited may not declare, pay or make any dividend or distribution
with respect to its common shares, except in certain defined circumstances. See
note 23 of the notes to consolidated financial statements for further details.
Forward looking information
Certain statements in this Form 10-K constitute "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. In
particular any statements contained herein regarding the consummation and
benefits of future acquisitions, as well as expectations with respect to future
sales, operating efficiencies and product expansion, are subject to known and
unknown risks, uncertainties and contingencies, many of which are beyond the
control of the Company, which may cause actual results, performance or
achievements to differ materially from anticipated results, performance or
achievements. Factors that might affect such forward looking statements
included, among others, overall economic and business conditions, the demand for
the Company's service, competitive factors in the industry, regulatory approvals
and the uncertainty of consummation of future acquisitions.
33
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ADT Limited's consolidated financial statements are included on pages F-1 to
F-77 and its consolidated financial statement schedules are included on pages
F-78 and F-79. Information required by Item 302 of Regulation S-K is included in
note 35 of the notes to consolidated financial statements and under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
Set forth below are the names, ages, positions and certain other information
concerning the current directors and executive officers of the Company and three
executive officers of subsidiaries of the Company as at December 31, 1996.
Name Age Position with Company
- ---- --- ---------------------
Michael A. Ashcroft 50 Chairman of the Board; Chief Executive
Officer
John E. Danneberg 50 Director
Raymond A. Gross 47 Senior Vice President of ADT Security
Services, Inc.
Alan B. Henderson 63 Director
Ronnie G. Lakey 42 Director of ADT (UK) Holdings PLC
James S. Pasman, Jr. 66 Director
Michael J. Richardson 60 President and Chief Executive Officer of
ADT Automotive, Inc.
Stephen J. Ruzika 41 Chief Financial Officer; Executive Vice
President; Director
W. Peter Slusser 67 Director
William W. Stinson 63 Director
Raymond S. Troubh 70 Director
- -------------------------
Mr. Ashcroft has been Chairman and Chief Executive Officer of the Company since
1984 and is Chairman of the Executive Committee. He was Chairman and Chief
Executive Officer of the Company's predecessor company, Hawley Group PLC, from
1977 to 1984. He is the non- executive Chairman of BHI Corporation.
Mr. Danneberg has been a director of the Company since December 1991 and was
previously a director of the Company from 1984 to June 1991. He was the
President of Foliage Plant Systems, Inc., an interior landscape contractor, from
1988 to October 1995 and has been Chief Executive Officer of Sonitrol
Corporation since August 1996, under a consulting agreement with ADT, Inc.
Mr. Gross has been a Senior Vice President of ADT Security Services, Inc. since
March 1, 1996. From August 1993, he was President and Chief Executive Officer of
Alert Centre, Inc., which was acquired by ADT in December 1995, and prior to
that he was President/General Manager of Cellular One of Ohio from November
1988.
34
<PAGE>
Mr. Henderson has been a director of the Company since 1992 and is a member of
the Audit and Remuneration Committees. He is Chairman of Ranger Oil (UK)
Limited, an oil exploration and production company, and has been a director of
Ranger Oil (UK) Limited since 1972. He is also Chairman of Abtrust Emerging
Economies Investment Trust Plc and Abtrust New Thai Investment Trust Plc, and is
a director of Abtrust New Dawn Investment Trust Plc, Energy Capital Investment
Company PLC and Greenfriar Investment Company PLC.
Mr. Lakey has been a director of ADT (UK) Holdings PLC since its incorporation
in 1996. He has operational responsibility for the Company's electronic security
services operations in Canada and Europe. He has held various positions with the
Company since joining in 1987.
Mr. Pasman has been a director of the Company since 1992 and is a member of the
Audit and Remuneration Committees. He was President and Chief Operating Officer
of National Intergroup, Inc., an industrial holding company, from 1989 to 1991
and was Chairman and Chief Executive Officer of Kaiser Aluminum and Chemical
Corp., an aluminum and chemical company, from 1987 to 1989. He is a director of
BEA Income Fund, Inc., BEA Strategic Income Fund, Inc. and BT Insurance Funds
Trust.
Mr. Richardson has been the President and Chief Executive Officer of ADT
Automotive, Inc., which supervises the United States vehicle auction services
business, since 1982.
Mr. Ruzika has been a director and Executive Vice President of the Company since
1987, has been Chief Financial Officer since 1989 and President of ADT Security
Services, Inc. since 1996. He is a member of the Executive Committee. He was
previously Chief Financial Officer of the Company's United States operations.
He is also a non-executive director of BHI Corporation.
Mr. Slusser has been a director of the Company since 1992 and is a member of the
Audit and Remuneration Committees. He has been the President of Slusser
Associates, Inc., a private investment banking firm in New York City, since 1988
and was previously a managing director and head of mergers and acquisitions at
PaineWebber Incorporated. He is a director of Ampex Corporation, a leading
producer of high performance television and data storage recording systems.
Mr. Stinson has been a director of the Company since 1991. He retired as
Chairman and Chief Executive Officer of Canadian Pacific Limited in 1996 after
serving as Chief Executive Officer for 11 years. He remains a director of that
company. He is also a director of Laidlaw, Inc., Western Star Trucks Inc., Sun
Life Assurance Company of Canada, and a number of other corporations.
Mr. Troubh has been a director of the Company since 1991 and is a member of the
Audit and Remuneration Committees. He has been an independent financial
consultant since 1974. He is a director of America West Airlines, Inc., ARIAD
Pharmaceuticals, Inc., Becton, Dickinson and Company, Diamond Offshore Drilling,
Inc., Foundation Health Corporation, General American Investors Company, Inc.,
Olsten Corporation, Petrie Stores Corporation, Time Warner Inc., Triarc
Companies, Inc. and WHX Corporation.
Each director is currently serving a term which expires at the next annual
general meeting. Each such director is eligible for re-election. Under the
Bye-Laws of the Company, no person other than a director retiring at a General
Meeting of the Company shall, unless recommended by the directors, be eligible
for election to the office of director unless, between six and 28 days before
the meeting date, the Secretary of the Company has been given, by a shareholder
of the Company (other than the person to be proposed) entitled to attend and
vote at the annual general meeting or special general meeting, written notice of
his intention to propose such person for election and also written notice,
signed by the person to be proposed, of his willingness to be elected. A
director may hold any other office or position of profit under the Company
(other than the office of Auditor) in conjunction with this office of director
for such period and on such terms as the Company may from time to time determine
in general meeting.
35
<PAGE>
Meetings and Committees of the Board
During 1996, there were eleven meetings of the Board. All directors attended at
least 75 per cent of the meetings of the Board and of the committees of which
they were members.
The Board has several committees, including an Audit Committee and a
Remuneration Committee. The Audit Committee, formed in 1991, and the
Remuneration Committee, formed in 1992, consist of Messrs. Henderson, Pasman,
Slusser and Troubh each of whom is an independent director. During 1996, there
were four meetings of the Audit Committee and four meetings of the Remuneration
Committee. The function of the Audit Committee is to review the services
performed by the Company's independent accountants and to review and act or
report to the Board with respect to the scope of audit procedures and accounting
practices. The function of the Remuneration Committee is to review and approve
compensation and other employment benefits afforded certain executive officers.
The Company has no standing nominating committee. Compensation of Directors
Directors who are not employees of the Company are paid an annual director's fee
of $25,000 each and are reimbursed for reasonable and customary travel and other
expenses incurred in performing their duties. In addition, Messrs. Henderson,
Pasman, Slusser and Troubh are each paid an annual sum of $15,000 for their
services on the Audit and Remuneration Committees.
36
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
Summary Compensation Table
Shown below is information concerning the annual and long-term compensation for
services in all capacities to the Company for the fiscal years ended December
31, 1996, 1995 and 1994, of those persons who were, at December 31, 1996 (i) the
Chief Executive Officer and (ii) the other four most highly compensated
executive officers of the Company, including three executive officers of a
subsidiaries of the Company (the "Named Officers").
<TABLE>
Long-Term
<CAPTION>
Compensation
Annual Compensation(1) Awards
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Securities
Underlying
Stock Options All Other
Name and principal position Year Salary Bonus (#) Compensation
- --------------------------- ---- ---------- ---------- ------------- ------------
Michael A. Ashcroft(2) 1996 $1,143,844 $2,344,880 5,000,000 $1,330,380(3)
Chairman of the Board; Chief 1995 $1,089,375 $2,233,219 1,500,000 $1,921,939
Executive Officer 1994 $1,037,500 1,945,313 750,000 $ 783,403
Raymond A. Gross 1996 $ 183,353(4) $ 82,500 100,000 -0-
Senior Vice President of ADT 1995 -0- -0- -0- -0-
Security Services, Inc. 1994 -0- -0- -0- -0-
Ronnie G. Lakey 1996 $ 248,962 $ 125,000 100,000 $ 27,020(5)
Director of ADT (UK) Holdings 1995 $ 195,866 $ 140,000 20,000 $ 14,822
PLC 1994 $ 188,827 $ 135,000 25,000 $ 14,138
Michael J. Richardson(6) 1996 $ 335,000 $ 222,705 40,000 $ 6,461(7)
Chief Executive Officer of ADT 1995 $ 314,000 $ 145,245 50,000 $ 6,461
Automotive, Inc. 1994 $ 300,000 $ 115,000 45,000 $ 6,480
Stephen J. Ruzika(8) 1996 $ 686,306 $1,100,000(9) 208,333 $ 40,323(10)
Chief Financial Officer; Executive 1995 $ 653,625 $ 250,000 500,000 $ 37,432
Vice President; Director 1994 $ 622,500 $ 200,000 250,000 $ 35,639
- ---------------------
(1) While officers enjoy certain perquisites, such perquisites did not exceed
the lesser of $50,000 or 10 per cent of each officer's salary and
bonus. Except as set forth below under "Employment Contracts,
Termination of Employment and Change in Control Arrangements", a
change in control of the Company does not of itself require the
payment of any moneys to any of the Named Officers. However, such an
event does accelerate the vesting of certain pension rights and the
exercisability of certain stock options.
37
<PAGE>
(2) The salary, bonus and all other compensation shown in respect of 1994 and
1995 represent Mr. Ashcroft's entitlement to those amounts. Mr.
Ashcroft utilized $2,500,000 of the compensation due to him for 1995,
being the whole of his bonus entitlement of $2,233,219 and $266,781 of
his other compensation to subscribe for options, at the rate of $2.50
per option, to subscribe for Common Shares. Mr. Ashcroft also
utilized $2,500,000 of the compensation due to him for 1994, being the
whole of his bonus entitlement of $1,945,313 and $554,687 of his other
compensation entitlement to subscribe for these options.
(3) The other compensation due to Mr. Ashcroft in respect of 1996 represents
the US dollar equivalent of Pound Sterling 851,344 being an amount in lieu
of providing Mr. Ashcroft with retirement and death benefits under a
defined pension plan. The amounts in respect of 1995 and 1994, and which
are referred to in note (2) above, were the equivalents of Pound Sterling
1,217,341 and Pound Sterling 511,126, respectively.
(4) Represents salary since joining ADT Security Services, Inc. in March
1996. Mr. Gross' annualized salary for 1996 was $220,000.
(5) Represents the amount contributed to Mr. Lakey's retirement income plan
(1995 - $14,822, 1994 - $14,138).
(6) The salary amount shown for 1996 represents Mr. Richardson's entitlement to
salary in the year. Prior to becoming entitled to receive certain salary,
however, Mr. Richardson elected to receive options at the rate of $2.50 per
option, to subscribe for Common Shares at an exercise price of $8.625 per
share, in lieu of receiving $69,444 in salary (1995 - $83,333, 1994 -
$97,222).
(7) Represents $4,500 contributed to a defined contribution 401(k) pension
benefit plan (1995 - $4,500, 1994 - $4,500) and $1,961 which is the
aggregate incremental cost to the Company of providing Mr. Richardson with
enhanced group term life insurance benefits (1995 - $1,961, 1994 - $1,980).
(8) The salary amount shown for 1996 represents Mr. Ruzika's entitlement to
salary in the year. Prior to becoming entitled to receive certain salary,
however, Mr. Ruzika elected to receive options at the rate of $2.50 per
option, to subscribe for Common Shares at an exercise price of $8.625 per
share, in lieu of receiving $80,136 in salary (1995 - $104,167, 1994 -
$128,198).
(9) Mr. Ruzika earned a bonus for 1996 of $1,100,000 (1995 - $250,000) under a
bonus arrangement by which payments are related directly to the performance
of the Common Share price.
(10) Represents $37,639 contributed to Mr. Ruzika's retirement income plan (1995
- $35,777, 1994 - $34,003) and $2,684 which is the estimated aggregate
incremental cost to the Company of providing Mr. Ruzika with supplemental
term life insurance (1995 - $1,655, 1994 - $1,636).
</TABLE>
38
<PAGE>
Option Grants in Last Fiscal Year
Shown below are all grants of share options to the Named Officers during the
fiscal year ended December 31, 1996. The following table shows, along with
certain information, hypothetical realizable values of share options granted for
the last fiscal year, at assumed rates of cumulative share price appreciation
over the ten-year life of such options. These assumed rates of appreciation are
set by the rules of the SEC and are not intended to forecast appreciation of the
price of the Common Shares. These hypothetical values have not been discounted
to reflect their present values.
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------------
Potential Realizable Value
% of at Assumed Annual Rates
Total Options Exercise of Share Price Appreciation
Granted or for Option Term(2)
Options to Employees Base Price Expiration
Name Granted(1) in Fiscal Year ($/share) Date 5% 10%
- ---- --------- -------------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Michael A. Ashcroft 5,000,000 78.3% $15.00 Aug 4, 2003 $30,968,000 $74,713,000
Raymond A. Gross 100,000 1.6% $16.50 May 6, 2006 $ 1,017,000 $ 2,597,000
Ronnie G. Lakey 100,000 1.6% $16.50 May 6, 2006 $ 1,017,000 $ 2,597,000
Michael J. Richardson 40,000 0.6% $16.50 May 6, 2006 $ 407,000 $ 1,039,000
Stephen J. Ruzika 208,333 3.3% $15.00 April 29, 2004 $ 1,452,000 $ 3,567,000
- -------------------
(1) The options granted to Mr. Ashcroft and Mr. Ruzika represent the net
increase in the number of options which were received by Mr. Ashcroft and
Mr. Ruzika in connection with an amendment to a previously granted option on
3,000,000 and 125,000 Common Shares, respectively. At the same time as the
number of options was increased, the exercise price was also increased from
$8.625 to $15.00. All the other terms and conditions of the options,
including the expiry dates, remained unchanged.
Of the options granted to Mr. Gross, Mr. Lakey and Mr. Richardson, 50 per
cent are exercisable after three years from the date of grant, 25 per cent
are exercisable after 4 years from the date of grant and 25 per cent are
exercisable after five years from the date of grant.
(2) Gains are reported net of the option exercise price but before taxes
associated with exercise. The amounts shown represent certain assumed rates
of appreciation only. Actual gains, if any, on option exercises are
dependent on the future price performance of the Common Shares as well as
the option holders' continued employment through the vesting period. The
potential realizable values reflected in this table may not necessarily be
achieved.
</TABLE>
39
<PAGE>
Aggregate Option Exercises in Last Fiscal Year and Year-End Option Values
Shown below is information with respect to aggregate option exercises by the
Named Officers in the fiscal year ended December 31, 1996 and with respect to
unexercised options to purchase Common Shares granted in fiscal 1996 and prior
years to the Named Officers and held by them at December 31, 1996.
<TABLE>
<CAPTION>
Value of Unexercised In-the-
Shares Value Number of Unexercised Money Options at Fiscal Year
Acquired on Realized on Options at Fiscal Year End End(1)(2)
Exercise of Exercise of -------------------------------------------------------------------
Options in Options in
Name Fiscal Year Fiscal Year Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael A. Ashcroft 825,000 $6,626,250 9,700,000 1,550,000 $78,437,190 $17,493,125
Raymond A. Gross -0- -0- -0- 100,000 -0- $ 637,500
Ronnie G. Lakey 32,000 $ 256,016 15,000 145,000 $ 208,125 $ 1,209,375
Michael J. Richardson 45,000 $ 318,125 270,000 135,000 $ 3,496,750 $ 1,441,875
Stephen J. Ruzika 12,000 $ 54,900 1,141,663 516,670 $12,951,731 $ 5,831,080
- --------------------
(1) Based on the closing price of $22.875 per Common Share on December 31, 1996.
(2) Messrs. Ashcroft, Richardson and Ruzika were granted certain options for
which they have paid a subscription price of $2.50 per option which has been
taken into account for the purpose of valuing these options.
</TABLE>
Certain Defined Benefit Plans
The Company does not maintain any defined benefit or actuarial retirement plans
("pension plans"). However, Mr. Lakey, Mr. Richardson and Mr. Ruzika
participate in pension plans that are maintained by indirect, wholly owned
subsidiaries of the Company. Certain information is set forth below regarding
the pension plans in which Mr. Lakey, Mr. Richardson and Mr. Ruzika, as well
as other employees of the Company's subsidiaries, participate.
Mr. Richardson is a participant in the ADT Pension Plan maintained by ADT Group
PLC ("ADT Group"). Mr. Richardson is the only Named Officer who participates in
the ADT Group's Pension Plan (the "ADT Group Plan"). The ADT Group Plan provides
Mr. Richardson an annual benefit payable for life beginning at age 60. The
annual benefit is equal to 66.7 per cent of base salary for the three years of
the most recent ten years prior to retirement that produce the highest average.
Mr. Richardson's annual benefit payable at age 60 for life is Pound
Sterling146,095. Since Mr. Richardson has already attained age 60, the benefit
payable to him upon his actual retirement will be adjusted based upon his actual
retirement date. Benefits payable under the ADT Group Plan are not offset by
Social Security benefits.
ADT, Inc. maintains a supplemental executive retirement plan (the "ADT SERP").
Mr. Lakey and Mr. Ruzika are the only Named Officers who participate in the
ADT SERP. Benefits for Mr. Ruzika under the ADT SERP are also supplemented
under a Supplemental Benefit Agreement between Mr. Ruzika and ADT Management
Services Limited (the "Supplemental Benefit Agreement").
40
<PAGE>
The ADT SERP provides benefits to Mr. Lakey for a total of 20 years, beginning
at age 60. This annual benefit is equal to 60 per cent of Mr. Lakey's base
salary for the three consecutive years that produce the highest average. This
benefit is reduced by the value of any benefits derived from employer
contributions under any other retirement plan maintained by ADT, Inc. or its
affiliates. Mr. Lakey's estimated annual benefit payable at age 60 for a total
of 20 years, net of the estimated offset attributable to employer contributions
under certain defined contribution plans, is $30,764. The estimated offset is
based on the assumption that Mr. Lakey will have 27 years of service at age 60.
Benefits are not offset by Social Security benefits.
The ADT SERP and Supplemental Benefit Agreement together provide benefits
payable to Mr. Ruzika for a total of 20 years beginning at age 55. This annual
benefit is equal to 65 per cent of base salary and bonuses for the three
consecutive years that produce the highest average. Effective for benefits
accrued after December 31, 1994, the benefit is calculated using base salary
including, for this purpose, the purchase price of any options to purchase the
Company's shares received in lieu of base salary. This benefit is reduced by the
value of any benefits derived from employer contributions under any other
retirement plan maintained by ADT, Inc. or its affiliates.
Mr. Ruzika's estimated annual benefit payable at age 55 for a total of 20 years,
net of the estimated offset attributable to employer contributions under certain
defined contribution plans, is $361,802. The estimated offset is based upon the
assumption that Mr. Ruzika will have 28 years of service at age 55. Benefits are
not offset by Social Security benefits.
Compliance with Reporting Requirements
The Company believes that, during 1996, all filing requirements under Section
16(a) of the Exchange Act applicable to its officers, directors and beneficial
owners of more than 10 per cent of equity securities were complied with on a
timely basis.
41
<PAGE>
Employment Contracts, Termination of Employment and Change in Control
Arrangements
The Company has entered into a written employment agreement with Mr. Ashcroft,
dated as of May 8, 1993. An amendment to the agreement was approved on November
4, 1996, which provides that Mr. Ashcroft shall serve as Chairman of the Board
and Chief Executive Officer until March 31, 2000, subject to renewal for
additional two-year terms thereafter. Mr. Ashcroft's initial base salary was
$1,000,000 per annum subject to annual review and adjustment by the Board but
may only be reduced by a maximum of 15 per cent during the term of the agreement
without Mr. Ashcroft's consent. During 1996, Mr. Ashcroft's base salary was
increased to $1,157,625 per annum. Mr. Ashcroft is also eligible for annual
bonus payments based upon an earnings-per-share target for the Common Shares set
each year, subject to a maximum bonus of $4,000,000. The maximum bonus is
payable upon attaining 117.5 per cent of the targeted earnings per share. As a
term of the contract, Mr. Ashcroft was granted options to purchase 1,000,000
Common Shares under the ADT 1993 Long Term Incentive Plan, with 50 per cent of
such options exercisable at market value on the date of grant, as defined, 25
per cent exercisable at 110 per cent of market value, and 25 per cent
exercisable at 120 per cent of market value, vesting in equal annual
installments over a three-year period commencing one year from the date of grant
and exercisable over a ten-year period. The Company will make annual payments to
Mr. Ashcroft calculated to provide him with retirement and death benefits no
less favorable than if he were a member of ADT Group Plan. Such annual payments
will not be less than $450,000. The Company may terminate the agreement upon Mr.
Ashcroft's death, when Mr. Ashcroft attains the age of 60, if Mr. Ashcroft is
unable to perform his duties for 180 days due to ill heath, accident or
otherwise, if Mr. Ashcroft fails to discharge his duties or engages in conduct
that is materially injurious to the Company, or if Mr. Ashcroft willfully and
continually commits a material breach of the agreement. Mr. Ashcroft may
terminate the agreement upon, among other reasons, a breach by the Company which
breach (except for a material breach) is not cured within 30 days, if he is
removed from his position as Chairman of the Board or his position as Chief
Executive Officer, or if the scope of his duties and responsibilities becomes
inconsistent with his position as an officer of the Company. Mr. Ashcroft may
also terminate the agreement without cause at any time upon 90 days notice. In
the event the agreement is terminated pursuant to its terms by the Company or
without cause by Mr. Ashcroft upon 90 days notice, Mr. Ashcroft will be entitled
to the pro rata portion of his base salary, bonus payment, pension payment and
other benefits but will not be entitled to any additional payments. If the
agreement is terminated due to a disability, Mr. Ashcroft will be entitled to an
additional payment equal to two times his highest base salary. In the event the
agreement is terminated by the Company without cause or by Mr. Ashcroft with
cause, Mr. Ashcroft will be entitled to a severance payment equal to two times
his highest base salary and average bonus payment, annual pension payments for
the year of termination and the following two years, and one year of any other
benefits previously provided.
Mr. Ruzika entered into an employment agreement with ADT as of February 26,
1997. The agreement provides that Mr. Ruzika will serve as Chief Financial
Officer of ADT and as President of ADT Security Services, Inc., ADT Operations,
Inc. and ADT, Inc., subsidiaries of ADT, from March 1, 1997 until February 28,
1999, subject to renewal for additional two-year terms thereafter. Mr. Ruzika's
initial annual base salary will be $694,500 and will be subject to annual review
for possible adjustments. Mr. Ruzika will also be eligible for annual bonus
payments at the discretion of the Company as well as other compensation and
benefit plans of the Company including stock option plans. The termination
provisions of this agreement provide that in the event that agreement is
terminated by ADT without cause or by Mr. Ruzika with cause, Mr. Ruzika will be
entitled to receive a severance payment equal to twice his base salary and
certain fringe benefits.
Mr. Lakey entered into an employment agreement with ADT, Inc. as of January 16,
1997. The agreement provides that Mr. Lakey will have operational responsibility
for ADT's electronic security operations in Canada and Europe from January 16,
1997 until December 31, 1999, subject to renewal for additional two-year terms
thereafter. Mr. Lakey's initial annual base salary will be $265,000. Mr. Lakey
will also be eligible for annual bonus payments at the discretion of the Company
as well as certain other enumerated benefits and relocation expenses. The
termination provisions of this agreement include a term to the effect that, in
the event that agreement is terminated by ADT without cause or by Mr. Lakey with
cause, Mr. Lakey will be entitled to receive his base salary and certain fringe
benefits for two years.
42
<PAGE>
Under the ADT SERP (and, in the case of Mr. Ruzika, the Supplemental Benefit
Agreement), Mr. Ruzika and Mr. Lakey become fully vested in the accrued benefits
thereunder upon a Change in Control (as defined below) of the Company or ADT,
Inc. Mr. Ruzika also becomes fully vested upon a Change in Control (as defined
below) of ADT Management Services Limited. If Mr. Ruzika or Mr. Lakey's
employment is terminated within one year from the date of a Change in Control,
the terminated executive will receive, in lieu of all other amounts due to him
under the ADT SERP (and, in Mr. Ruzika's case, the Supplemental Benefit
Agreement), a lump-sum distribution equal to the present value of his accrued
benefit and an additional amount calculated under a formula intended to put him
in the same after-tax position that he would have been in if he had received a
lump-sum distribution of his accrued benefit on his normal retirement date.
Under this formula Mr. Ruzika would currently receive an additional amount of
approximately $653,295 and Mr. Lakey would currently receive an additional
amount of approximately $54,253.
A "Change in Control" is deemed to have occurred under the ADT SERP if : (1) any
person (other than Laidlaw, Inc. or its affiliates, collectively the "Laidlaw
Group") acquires more than 40 per cent of the Company's voting stock (the
triggering percentage has been reduced from 40 per cent to 35 per cent because
the Laidlaw Group's beneficial ownership of the Company's voting stock is less
than 20 per cent); (2) the Laidlaw Group becomes the beneficial owner of more
than 45 per cent of the Company's outstanding voting stock; (3) there is a
change of 50 per cent or more in the composition of the Company's directors
during any 3-year period (unless the change in directors was approved by two
thirds of the directors in office at the beginning of such 3-year period or
directors who had previously been elected with the requisite two thirds
approval); (4) a person acquires the legal right to direct the management and
policies of the Company (other than by virtue of membership on the board of
directors or a committee of the board); (5) the Company ceases to own, directly
or indirectly through subsidiaries, at least 80 per cent of the voting stock of
ADT, Inc. or (6) the shareholders of either the Company or ADT, Inc. approve a
merger, consolidation or a sale or disposition of all, or substantially all, of
the assets of the Company or ADT, Inc. as the case may be, with the relevant
company not surviving. In the case of Mr. Ruzika, the provisions of (4), (5),
and (6) above include a change in the ownership of ADT Management Services
Limited (as well as the Company or ADT, Inc.).
Mr. Richardson entered into an employment agreement with ADT Automotive
Holdings, Inc. ("ADT Automotive Holdings"), the corporate parent of ADT
Automotive, Inc., as of November 30, 1993. The agreement provides that Mr.
Richardson will serve as Chief Executive Officer of ADT Automotive Holdings and
its subsidiaries from December 1, 1993 until July 31, 1996, subject to renewal
for additional one-year terms thereafter. The agreement was renewed on a
year-to-year basis as of July 31, 1996. The agreement provides that the term
will be extended for an additional one year period thereafter unless either ADT
Automotive Holdings or Mr. Richardson shall have given the other notice of
intention not to extend the term six months prior to July 31, 1997. On January
29, 1997, ADT Automotive Holdings and Mr. Richardson entered into an agreement
which provides that Mr. Richardson's time to give such notice is extended to and
including April 30, 1997. Mr. Richardson's initial annual base salary will be
$300,000 and will be subject to annual review for possible increases. Mr.
Richardson will also be eligible for annual bonus payments at the discretion of
the Company. The termination provisions of this agreement include a term to the
effect that, in the event that agreement is terminated by ADT Automotive
Holdings without cause or by Mr. Richardson with cause, Mr. Richardson will be
entitled to receive his base salary and certain fringe benefits for two years or
the remaining term of the agreement, whichever is longer.
43
<PAGE>
Mr. Richardson has also entered into an incentive compensation agreement for
payment upon the successful sale of ADT Automotive Holdings by the Company. To
the extent that the gross consideration for such sale exceeds $430 million, on
completion of the sale, ADT has agreed to pay Mr. Richardson one-half of one per
cent of such excess. Gross consideration is deemed to be the aggregate of
proceeds received by ADT and debt remaining in the auctions group which is
assumed by the purchaser other than debt considered to be a component of working
capital, including bank overdrafts. The Remuneration Committee of the Board has
considered the recommendations of the Company's outside independent human
resources consultants, and has reviewed industry practices concerning change in
control severance benefits. In view of the need to minimize employee
distractions and to retain employee loyalty and dedication to the Company and to
assure attention to the Company's performance pending resolution of the Western
Offer, on February 27, on the recommendation of the Remuneration Committee, the
Board unanimously approved a severance agreement between Mr. Gross and ADT
Security Services, Inc. in the event of a change of control, which severance
arrangement it has determined is fair and consistent with industry practices.
The agreement provides that in the event that there is a "Severance Change in
Control" (as defined below) of ADT prior to February 9, 2000, and either (x) Mr.
Gross's employment is terminated without cause or (y) Mr. Gross terminates his
employment for good reason, Mr. Gross shall be entitled to (a) an amount of
severance pay equal to twice the total of (i) the higher of his annual full base
salary as of the date of termination or as of the date of the Severance Change
in Control, calculated on an annualized basis, plus (ii) the amount of the bonus
awarded to Mr. Gross, if any, in the year prior to the date of termination and
(b) for the twelve-month period following such termination, benefits
substantially similar to the higher of those which Mr. Gross is receiving
immediately prior to the date of termination or as of the date of the Severance
Change in Control. A "Severance Change in Control" is deemed to have occurred
under the severance agreement if: (1) any person becomes the beneficial owner of
more than 50 per cent of ADT's then-outstanding voting securities; (2) there is
a change of 50 per cent or more in the composition of the Company's directors
during the term of the agreement (unless the change in directors was approved by
two thirds of the directors in office at the beginning of such term or directors
who had previously been elected with the requisite two thirds approval); (3) a
person acquires the legal right to direct the management and policies of the
Company (other than by virtue of membership on the board of directors or a
committee of the board); or (4) the shareholders of ADT approve a merger,
consolidation or a sale or disposition of all, or substantially all, of the
assets of ADT in which ADT is not the surviving entity.
In 1996, the Remuneration Committee of the Board resolved to increase the
subscription price and size of certain share options held by Mr. Ashcroft and
Mr. Ruzika. In 1993, Mr. Ashcroft and Mr. Ruzika were granted options to
subscribe for 3,000,000 and 125,000 Common Shares respectively at an exercise
price of $8.625 per share for which each was required to pay $2.50 per option,
representing a total payment of $7,500,000 and $312,500 respectively, as a
condition of vesting. In 1996, the exercise price of these options was increased
to $15 and the number of related shares was increased to 8,000,000 and 333,333
respectively. All the other material terms and conditions remained unchanged.
These changes were approved by the shareholders of the Company. At the time that
the Remuneration Committee approved these changes, the closing price of the
Common Shares was $14.75. In November 1996, the Remuneration Committee resolved
that the options of Mr. Ashcroft be transferable and, at the same time, in
return, Mr. Ashcroft agreed to extend the termination date of his employment
agreement from March 31, 1998 to March 31, 2000.
44
<PAGE>
In November 1996, the Remuneration Committee also approved a bonus plan under
which Mr. Ruzika is to receive a bonus of $200,000 when the Common Share price
exceeds $21.00 for a continuous period of 30 trading days and $200,000 each time
the Common Share price exceeds by $1.00 for a continuous period of 30 trading
days the share price level at which a bonus payment was previously made. The
plan is due to expire in 2001 or such earlier date as the Common Share price
exceeds $30.00 for a continuous period of 30 trading days. Should the share
price exceed $30.00 within two and one half years, Mr.
Ruzika will receive an additional payment of $1,000,000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners and Management The following
table sets forth certain information, with respect to beneficial ownership
(determined in accordance with Rule 13d-3 under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) of Common Shares by any person known by
the Company to beneficially own more than five per cent of the outstanding
Common Shares (i) as at December 31, 1996 by FMR Corp. ("FMR"); (ii) as at
March 17, 1997 by WCI; (iii) as at March 21, 1997 by Republic; and (iv) as at
March 24, 1997 by (a) all directors of the Company, (b) the named directors
and officers of the Company, including three executive officers of
subsidiaries of the Company and (c) all directors and executive officers of
the Company as a group. An asterisk indicates ownership of less than one per
cent of outstanding Common Shares.
Number of
Name of Beneficial Owner Common Shares Per cent of
or Identity of Group Beneficially Owned(1),(2) Class(3)
- --------------------------- ------------------------- -----------
Westar Capital, Inc. (4)
818 Kansas Avenue
Topeka, Kansas 66601 38,287,111 24.9%
FMR Corp.(5)
82 Devonshire Street
Boston, Massachusetts 02109 8,416,744 5.4%
Republic Industries, Inc.(6)
450 East Las Olas Boulevard
Fort Lauderdale, Florida 33301 15,000,000 9.8%
M.A. Ashcroft(6)(7) 11,525,718 7.0%
J.E. Danneberg 102 *
R.A. Gross 2,000 *
A.B. Henderson 621 *
R.G. Lakey 25,000 *
J.S. Pasman, Jr. 2,000 *
M.J. Richardson 327,837 *
S.J. Ruzika 1,307,407 *
W.P. Slusser 2,800 *
W.W. Stinson 3,010 *
R.S. Troubh 2,500 *
All directors and executive officers
as a group, 11 persons(8) 13,198,995 8.0%
45
<PAGE>
(1) Includes Common Shares which may be acquired upon exercise of the following
number of options to purchase Common Shares from the Company exercisable on
or within 60 days of March 24, 1997 held by the following persons: M.A.
Ashcroft, 10,150,000 (excluding 15,000,000 Common Shares owned by Republic
for which Mr. Ashcroft, as Chairman of ADT, holds a proxy as described in
footnote 6, but as to which Mr. Ashcroft disclaims beneficial ownership);
R.A. Gross, nil; R.G. Lakey, 25,000; M.J. Richardson, 315,000 and S.J.
Ruzika, 1,291,665.
(2) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any Common Shares which such person has the right
to acquire on or within 60 days after March 24, 1997. For purposes of
computing the percentage of outstanding Common Shares held by each person or
group of persons named above, any security which such person or persons has
or have the right to acquire on or within 60 days after March 24, 1997 is
deemed to be outstanding, but is not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person.
(3) Based upon Common Shares outstanding on March 24, 1997, but excluding
3,182,787 Common Shares owned by a subsidiary of the Company.
(4) The Company has received an Amendment No. 10 to Schedule 13D dated March 17,
1997 filed with the SEC by WCI, a wholly owned subsidiary of Western
Resources Inc., in respect of ownership of 38,287,111 Common Shares. The
Company has not attempted to verify independently any of
the information contained in the Schedule 13D.
(5) The Company has received an Amendment No. 4 to Schedule 13G dated February
14, 1997 filed with the by SEC in respect of ownership of 8,416,744 of
Common Shares at December 31, 1996 by accounts under the discretionary
investment management of its wholly owned subsidiaries Fidelity Management
Research Company and Fidelity Management Trust Company. As of December 31,
1996, FMR exercised sole voting power with respect to 112,714 Common Shares
and sole dispositive power with respect to 8,416,744 Common Shares. The
Company has not attempted to independently verify any of the information
contained in the Schedule 13G.
(6) The Company has received an Amendment No. 2 to Schedule 13D dated March 26,
1997, describing that on March 21, 1997, Republic, through Triangle
Corporation, a Delaware corporation and a wholly owned subsidiary of
Republic ("Triangle"), purchased 15,000,000 Common Shares by exercise of the
Republic Warrant. Under the terms of the Republic Warrant, Triangle has
granted the Chairman of ADT an irrevocable proxy to vote, at any meeting of
ADT's shareholders, the 15,000,000 Common Shares issued under the Republic
Warrant, with respect to any matter which shall be voted upon by ADT's
shareholders. The proxy expires as to any such Common Shares on the earlier
of (i) September 27, 1998 and (ii) the date such shares are no longer held
by Republic or any of its affiliates or nominees. Mr. Ashcroft, the current
Chairman of ADT, disclaims beneficial ownership of the Common Shares held by
Triangle.
46
<PAGE>
(7) The number of Common Shares beneficially owned by Mr. Ashcroft includes
718 Common Shares owned by Mr. Ashcroft's wife.
(8) The address for these officers and directors is the address of the
Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Relationships and Related Transactions
ADT, Inc., a wholly owned subsidiary of ADT, entered into a consulting agreement
with John E. Danneberg, one of ADT's directors, as of August 28, 1996. The
agreement provides that Mr. Danneberg, as an independent consultant, will serve
as Chief Executive Officer of Sonitrol Corporation ("Franchisor") and certain
franchisees of Franchisor owned or acquired by affiliates of ADT, Inc. The
agreement provides that the initial term of such engagement shall be for a
period of six months commencing on September 1, 1996 and shall be automatically
renewed on a month to month basis unless written notice is given by ADT, Inc. or
Mr. Danneberg not to renew the agreement at least 30 days before the end of such
initial term, which notice was not given. Under the terms of the agreement, ADT,
Inc. pays Mr. Danneberg a monthly fee of $15,000 and Mr. Danneberg is reimbursed
directly for all reasonable out-of-pocket business expenses.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Consolidated Financial Statements
Report of Independent Accountants
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Consolidated Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
47
<PAGE>
(b) Exhibits
2.1 Agreement and Plan of Merger by and among ADT Limited, Limited Apache,
Inc. and Tyco International Ltd. dated as of March 17, 1997.(6)
3.1 Memorandum of Association (as altered) and Bye-Laws of ADT Limited
(incorporating all amendments to May 26, 1992).(1)
3.2 Certified copy of a resolution approved at the Annual General Meeting of
common shareholders of ADT Limited held on October 12, 1993, approving an
increase in the authorized common share capital of ADT Limited from $19.5
million to $22.0 million.(4)
4.1 Indenture relating to the senior notes dated August 4, 1993 among ADT
Operations, as issuer, and ADT Limited and certain subsidiaries of ADT
Operations, as guarantors, and The Chase Manhattan Bank (National
Association), as trustee, and the form of senior note included
therein.(2)
4.2 Indenture relating to the senior subordinated notes dated August 4, 1993
among ADT Operations, as issuer, and ADT Limited, as guarantor, and
NationsBank of Georgia, National Association, as trustee, and the form of
senior subordinated note included therein.(2)
4.3 Indenture dated as of July 1, 1995 among ADT Operations, Inc., ADT
Limited and Bank of Montreal Trust Company, as trustee and the form of
note included therein. (5)
4.4 Rights Agreement between ADT Limited and Citibank, N.A. dated as of
November 6, 1996.(9)
4.5 First Amendment between ADT Limited and Citibank, N.A. dated as of March
3, 1997 to Rights Agreement between ADT Limited and Citibank, N.A. dated
as of November 6, 1996.(9)
10.1 Rules of the ADT UK Executive Share Option Scheme (1984), amended to
reflect the reverse split of Common Shares effective June 17, 1991.(1)*
10.2 Rules of the ADT International Executive Share Option Plan, amended to
reflect the reverse split of Common Shares effective June 17, 1991.(1)*
10.3 Rules of the ADT UK and International Executive Share Option Schemes
(1984) New Section, amended to reflect the reverse split of Common Shares
effective June 17, 1991.(1)*
48
<PAGE>
10.4 Rules of the ADT Senior Executive Share Option Plan, amended to reflect
the reverse split of Common Shares effective June 17, 1991.(1)*
10.5 US (1990) Stock Option Plan of ADT Limited, amended to reflect the reverse
split of Common Shares effective June 17, 1991.(1)*
10.6 Employment Agreement dated May 8, 1993 between ADT Limited and Michael
Anthony Ashcroft.(2)*
10.7 Amendment to Employment Agreement dated December 18, 1996 between ADT
Limited and Michael Anthony Ashcroft.(9)*
10.8 Employment agreement between ADT Limited and Stephen J. Ruzika dated as
of February 26, 1997.(9)*
10.9 Employment agreement between ADT, Inc. and Ron G. Lakey dated as of
January 16, 1997.(9)*
10.10 Agreement between ADT Automotive Holdings, Inc. and Michael J.
Richardson dated as of January 29, 1997.(9)*
10.11 Incentive Compensation Agreement between ADT, Inc. and Michael J.
Richardson dated as of February 10, 1997.(9)*
10.12 Severance Agreement between ADT Security Services, Inc. and Raymond
Gross dated as of February 26, 1997.(9)*
10.13 Consulting Agreement between ADT, Inc. and John E. Danneberg dated as of
August 28, 1996.(9)*
10.14 Form of Indemnification Agreement.(9)*
10.15 The ADT 1993 Long-Term Incentive Plan (as amended February 29,
1996).(3)*
10.16 Purchase Agreement dated June 29, 1995 among ADT Operations, Inc., ADT
Limited and Merrill Lynch & Co., Inc. and the related pricing agreement
(5)
10.17 US$200,000,000 Credit Agreement dated as of January 9, 1997, among ADT
Operations, Inc., as the Borrower, and Certain Commercial Lending
Institutions as the Lenders, and the Bank of Nova Scotia as the Agent
for the Lenders.
10.18 Guaranty, dated as of January 9, 1997, made by ADT Limited in favor of
each of the Lender Parties (as defined therein).
10.19 Subsidiary Guarantor Guaranty, dated as of January 9, 1997, made by each
Subsidiary Guarantor (as defined therein) in favor of each of the Lender
Parties (as defined therein).
10.20 Pound Sterling 90,000,000 Facility Agreement dated March 17, 1997, among
ADT Finance Plc, as the Borrower, ADT (UK) Holdings PLC and Others as
Guarantors, The Bank of Nova Scotia as Arranger and as Agent and Others.
10.21 ADT Limited Guarantee dated as of March 25, 1997, in respect of a Pound
Sterling 90,000,000 facility made available to ADT Finance Plc.
10.22 Pound Sterling 27,000,000 On Demand Facility Letter dated January 3, 1997,
between ADT Finance Plc and The Bank of Nova Scotia.
10.23 ADT Limited Guarantee in respect of the obligations of ADT Finance Plc
under a Pound Sterling 27,000,000 Facility Letter dated January 3,
1997.
10.24 Agreement dated December 29, 1995 among ADT (UK) Limited, ADT Holdings BV,
Ruskin Limited, ADT Limited, Loanoption Limited and Integrated Transport
Systems Limited for the sale and purchase of European
Auctions.(7)
10.25 Agreement among ADT Limited, Thomas J. Gibson and Integrated Transport
Systems Limited dated December 29, 1995.(8)*
10.26 Agreement among ADT Limited, David B. Hammond and Integrated Transport
Systems Limited dated December 29, 1995.(8)*
10.27 Common Share Purchase Warrant issued by ADT Limited on July 1, 1996 to
Republic Industries, Inc.(10)
49
<PAGE>
11.1 Statement regarding the computation of earnings per common share.
21.1 List of subsidiaries of ADT Limited
23.1 Consent of independent accountants to the incorporation by reference of
this Annual Report into Form S-3 and Forms S-8.
27 Financial Data Schedule (for SEC use only).
- --------------
(1) Previously filed as an Exhibit to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1992.
(2) Previously filed as an Exhibit to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1993.
(3) Previously filed as an Exhibit to the Registrant's Registration
Statement dated May 16, 1996, on Form S-8 filed May 17, 1996.
(4) Previously filed as an Exhibit to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993.
(5) Previously filed as an Exhibit to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1995.
(6) Previously filed as an Exhibit to the Registrant's Current Report
dated March 24, 1997 on Form 8-K filed March 25, 1997.
(7) Previously filed as an Exhibit to the Registrant's Current Report
dated December 29, 1995 on Form 8-K filed January 16, 1996.
(8) Previously filed as an Exhibit to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995.
(9) Previously filed as an Exhibit to the Registrant's Schedule 14D-9
dated March 3, 1997.
(10) Previously filed as an Exhibit to the Registrant's Current Report
dated July 10, 1996 on Form 8-K filed July 11, 1996.
* Management contract or compensatory plan.
50
<PAGE>
(c) Reports on Form 8-K
Current Reports on Form 8-K were filed by ADT Limited on September 19, 1996,
October 21, 1996 and November 12, 1996 regarding the acquisition of and merger
with Automated Security (Holdings) PLC.
A Current Report on Form 8-K was filed by ADT Limited on March 25, 1997,
regarding the Agreement and Plan of Merger with Tyco International Ltd.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ADT LIMITED
By: /s/ Stephen J. Ruzika
----------------------
Stephen J. Ruzika
Director and Executive
Vice President
Date: March 26, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
SIGNATURE TITLE DATE
/s/ Michael A. Ashcroft Chairman of the Board and Chief March 26, 1997
- -------------------------- Executive Officer (Principal Executive
Michael A. Ashcroft Officer)
/s/ Stephen J. Ruzika Chief Financial Officer, Executive Vice March 26, 1997
- -------------------------- President and Director
Stephen J. Ruzika (Principal Financial Officer and
Principal Accounting Officer)
/s/ John E. Danneberg Director March 26, 1997
- --------------------------
John E. Danneberg
/s/ Alan B. Henderson Director March 26, 1997
- --------------------------
Alan B. Henderson
/s/ James S. Pasman, Jr. Director March 26, 1997
- --------------------------
James S. Pasman, Jr.
/s/ W. Peter Slusser Director March 26, 1997
- --------------------------
W. Peter Slusser
/s/ William W. Stinson Director March 26, 1997
- --------------------------
William W. Stinson
/s/ Raymond S. Troubh Director March 26, 1997
- --------------------------
Raymond S. Troubh
</TABLE>
52
<PAGE>
ADT LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Page
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
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>
<TABLE>
<CAPTION>
ADT LIMITED
Consolidated Statements of Income
Year ended December 31 1996 1995 1994
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
======= ======= =======
See notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
ADT LIMITED
Consolidated Balance Sheets
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
======= =======
See notes to consolidated financial statements
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
ADT LIMITED
Consolidated Statements of Cash Flows
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
----- ----- -----
See notes to consolidated financial statements
F-5
<PAGE>
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)
----- ----- -----
Year ended December 31 1996 1995 1994
$m $m $m
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 (135.0) 129.0 (40.3)
cash equivalents
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)
===== ===== =====
See notes to consolidated financial statements
F-6
<PAGE>
Year ended December 31 1996 1995 1994
$m $m $m
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
=== ===== ====
See notes to consolidated financial statements
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
ADT LIMITED
Consolidated Statements of Changes in Shareholders' Equity
Cumulative
Accum- currency
Common Share Contributed Treasury ulated translation
shares premium surplus shares deficit adjustments Total
$m $m $m $m $m $m $m
<S> <C> <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) 957.3
Pooling of interests with
ASH (note 3) 0.7 133.1 126.5 - 77.1 (29.9) 307.5
----- ----- ------- ------ ------- ----- -------
At January 1, 1994 -
as restated 13.7 843.9 1,569.2 (102.9) (983.8) (75.3) 1,264.8
Common shares issued 0.1 7.2 - - - - 7.3
Exchange of non-voting
exchangeable shares - - (8.1) 23.1 - - 15.0
Reversal of redemption
premium on convertible
preference shares - - 1.8 - - - 1.8
Net income - - - - 79.3 - 79.3
Dividends on ADT preference
shares - - - - (13.3) - (13.3)
Dividends on ASH
preference shares (i) - - - - (4.3) - (4.3)
Currency translation
adjustments - - - - - 25.9 25.9
----- ----- ------- ------ ------- ----- -------
At December 31, 1994 13.8 851.1 1,562.9 (79.8) (922.1) (49.4) 1,376.5
Common shares issued 0.1 6.9 - - - - 7.0
Conversion of convertible
preference shares - - 0.3 - - - 0.3
Exchange of non-voting
exchangeable shares - - (0.1) 0.1 - - -
Net income - - - - 21.2 - 21.2
Dividends on ADT
preference shares - - - - (0.3) - (0.3)
Dividends on ASH
preference shares (i) - - - - (2.2) - (2.2)
Currency translation
adjustments - - - - - (0.5) (0.5)
Currency translation
adjustments transferred
on disposal of businesses
and associates - - - - - 23.3 23.3
----- ----- ------- ------ ------- ----- -------
At December 31, 1995 13.9 858.0 1,563.1 (79.7) (903.4) (26.6) 1,425.3
Common shares issued 0.2 24.5 - - - - 24.7
Exchange of Liquid Yield
Option Notes - - 0.3 - - - 0.3
Net loss - - - - (695.1) - (695.1)
Dividends on ADT
preference shares - - - - (0.3) - (0.3)
Currency translation and
other adjustments - - (0.3) - - 5.2 4.9
----- ----- ------- ------ ------- ----- ------
At December 31, 1996 14.1 882.5 1,563.1 (79.7) (1,598.8) (21.4) 759.8
===== ===== ======= ====== ======= ===== ======
See notes to consolidated financial statements
</TABLE>
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>
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:
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%
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>
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>
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:
ADT Group ASH Group Adjustments Combined
$m $m $m $m
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
------ ------ ------ ------
(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>
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.
Year ended December 31 1996 1995 1994
$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
======= ======= =======
(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>
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.
Year ended December 31 1996 1995 1994
$m $m $m
Net sales 0.7 62.7 97.4
Operating loss (0.9) (5.3) (1.0)
(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.
Year ended December 31 1996 1995 1994
$m $m $m
Net sales - 163.1 122.8
Operating income - 35.9 29.0
(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>
Year ended December 31 1996 1995 1994
$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
======= ======= =======
F-16
<PAGE>
Note 5 - Restructuring and other non-recurring charges
Year ended December 31 1996 1995 1994
$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)
====== ===== ====
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>
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>
Note 6 - Charge for the impairment of long-lived assets
Year ended December 31 1996 1995 1994
$m $m $m
Electronic security services (i) (731.7) - -
Vehicle auction services (ii) (13.0) - -
------ ------ ------
(744.7) - -
====== ====== ======
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>
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>
Note 7 - Gain (loss) on disposal of businesses
Year ended December 31 1996 1995 1994
$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)
==== ===== ====
(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>
Note 8 - Other income less expenses
Year ended December 31 1996 1995 1994
$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)
===== ==== ====
(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>
(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:
Year ended December 31 1996 1995 1994
$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)
===== ===== =====
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>
(ii) (Loss) income before income taxes included the following components:
Year ended December 31 1996 1995 1994
$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
====== ==== =====
(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:
Year ended December 31 1996 1995 1994
$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)
====== ==== =====
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>
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>
Note 13 - Accounts receivable - net
At December 31 1996 1995
$m $m
Trade accounts receivable 229.2 213.4
Less: allowance for doubtful receivables (18.5) (17.0)
----- -----
210.7 196.4
===== =====
Note 14 - Inventories
At December 31 1996 1995
$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
===== =====
Note 15 - Prepaid expenses and other current assets
At December 31 1996 1995
$m $m
Prepaid expenses 10.9 11.6
Other current assets 106.1 22.9
----- -----
117.0 34.5
===== =====
At December 31, 1996 other current assets included $77.5 million of settlement
gain proceeds (note 8(iii)).
F-26
<PAGE>
Note 16 - Property, plant and equipment - net
At December 31 1996 1995
$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
======= =======
Note 17 - Goodwill and other intangibles - net
1996 1995
$m $m
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
======= =======
(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>
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
At December 31 1996 1995
$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
===== =====
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>
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>
The movement in the carrying value of investment in and loans to associate since
January 1, 1995 has been as follows:
1996 1995
$m $m
At January 1 88.8 12.6
Acquisitions - 88.8
Disposals (14.2) (12.6)
Reclassifications (74.6) -
----- -----
At December 31 - 88.8
===== =====
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
At December 31 1996 1995
$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
===== =====
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>
Note 20 - Other long-term assets
At December 31 1996 1995
$m $m
Deferred refinancing costs 19.4 27.1
Other long-term assets 56.0 57.1
----- -----
75.4 84.2
===== =====
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
At December 31 1996 1995
$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
===== =====
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>
Note 22 - Other current liabilities
At December 31 1996 1995
$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
======= =======
Note 23 - Long-term debt
At December 31 1996 1995
$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
======= =======
(
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>
(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>
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 Pound Sterling 1 each and they are also
exchangeable, at the option of the holder, for fully paid common shares of ADT
at a price of Pound Sterling 76.66 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>
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>
The maturities and installments with respect to long-term debt outstanding at
December 31, 1996 are as follows:
$m
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
=======
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:
1996 1995 1994
$m $m $m
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
===== ===== =====
F-36
<PAGE>
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:
US Non US Total
$m $m $m
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
====== ====== ======
The US tax operating loss carryforwards at December 31, 1996 expire as follows:
$m
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
=====
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>
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:
US Non US Total
$m $m $m
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
====== ====== =======
Note 26 - Other long-term liabilities
At December 31 1996 1995
$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
===== =====
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>
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
At December 31 1996 1995 1994
$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
===== ===== =====
The movement in convertible redeemable preference shares since January 1, 1994
has been as follows:
5 3/4% shares 6% shares
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 - - - -
======= ======= ======= =======
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>
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:
Year ended December 31 1996 1995 1994
$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
===== ===== =====
F-40
<PAGE>
(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>
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:
Number $m
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 - -
======== =====
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>
Note 30 - Common shares
At December 31 1996 1995 1994
$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
====== ====== ======
The movement in common shares since January 1, 1994 has been as follows:
1996 1995 1994
Number Number Number
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
=========== =========== ===========
(i) The number of common shares at January 1, 1994 has been restated for
the pooling of interests with ASH (note 3).
Number
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
===========
(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>
The movement in executive share options outstanding since January 1, 1994 has
been as follows:
1996 1995 1994
Number Number Number
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
========== ========== ==========
The number of executive share options exercisable and available for future grant
at December 31 was as follows:
1996 1995 1994
Number Number Number
Exercisable 12,787,060 5,423,423 3,454,935
Available for future grant 2,593,335 401,668 3,385,000
---------- --------- ---------
The weighted average executive share options exercise price information since
January 1, 1994 has been as follows:
1996 1995 1994
$ $ $
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
----- ----- -----
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>
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:
Year ended December 31 1996 1995
Net (loss) income-proforma ($717.1m) $17.8m
-------- ------
Net (loss) income per common share-proforma ($5.23) $0.13
======== ======
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.
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
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>
(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:
Number
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 -
===========
(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:
Number $m
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
========= =====
F-46
<PAGE>
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:
$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
=====
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>
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>
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:
Year ended December 31 1996 1995 1994
$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
===== ===== =====
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: At December 31 1996 1995
$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%
------ ------
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>
(ii) United Kingdom plans
The aggregate net pension (income) expense for the United Kingdom plans included
the following components:
Year ended December 31 1996 1995 1994
$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
===== ===== =====
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:
At December 31 1996 1995
$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%
----- -----
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>
(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:
Year ended December 31 1996 1995 1994
$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
==== ==== ====
The following table sets forth the components of the plan's accumulated
post-retirement benefit obligations and benefit liability:
At December 31 1996 1995
$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
==== ====
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>
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>
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>
<TABLE>
<CAPTION>
Note 35 - Quarterly financial data (unaudited)
1996 1996 1996 1996 1996
First Second Third Fourth
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)
====== ====== ====== ====== =======
F-54
<PAGE>
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.
</TABLE>
F-55
<PAGE>
<TABLE>
<CAPTION>
Note 35 - Quarterly financial data (unaudited) (continued)
1995 1995 1995 1995 1995
First Second Third Fourth
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
====== ====== ====== ====== =======
F-56
<PAGE>
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.
</TABLE>
F-57
<PAGE>
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
Year ended December 31 1996 1995 1994
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
====== ======= ======
F-58
<PAGE>
Consolidated balance sheets
At December 31 1996 1995
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
======== ========
F-59
<PAGE>
Consolidated statements of cash flows
Year ended December 31 1996 1995 1994
$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
----- ----- -----
F-60
<PAGE>
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 -
===== ===== =====
F-61
<PAGE>
Year ended December 31 1996 1995 1994
$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
===== ===== =====
Consolidated statements of changes in shareholder's equity
Common Contributed Accumulated
shares surplus deficit Total
$m $m $m $m
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)
====== ====== ======= ======
(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>
Note (i) - Segment information
Year ended December 31 1996 1995 1994
$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
======= ======= =======
(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.
Year ended December 31 1996 1995 1994
$m $m $m
Net sales 6.1 6.1 12.7
Operating income 0.2 0.4 2.5
(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>
(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).
Year ended December 31 1996 1995 1994
$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
======= ======= =======
Note (ii) - Restructuring and other non-recurring charges
Year ended December 31 1996 1995 1994
$m $m $m
Electronic security services (131.6) (19.4) -
Corporate (0.5) - -
------ ------ ------
(132.1) (19.4) -
====== ====== ======
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>
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-affiliate
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
Year ended December 31 1996 1995 1994
$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)
==== ==== ====
F-65
<PAGE>
Note (vii) - Income taxes
(a) The provision for income taxes in the consolidated statements of
income was as follows:
Year ended December 31 1996 1995 1994
$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)
==== ===== =====
(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:
Year ended December 31 1996 1995 1994
$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)
====== ====== ======
F-66
<PAGE>
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
At December 31 1996 1995
$m $m
Trade accounts receivable 160.2 144.7
Less: allowance for doubtful receivables (10.8) (11.9)
----- -----
149.4 132.8
===== =====
Note (x) - Inventories
At December 31 1996 1995
$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
===== =====
F-67
<PAGE>
Note (xi) - Prepaid expenses and other current assets
At December 31 1996 1995
$m $m
Prepaid expenses 4.5 4.1
Other current assets 18.4 2.8
----- -----
22.9 6.9
===== =====
Note (xii) - Property , plant and equipment - net
At December 31 1996 1995
$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
======= =======
F-68
<PAGE>
Note (xiii) - Goodwill and other intangibles - net
1996 1995
$m $m
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
======= =======
(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>
(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
At December 31 1996 1995
$m $m
Deferred refinancing costs 19.5 24.7
Other long-term assets 11.7 4.2
---- ----
31.2 28.9
==== ====
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>
Note (xvi) - Short-term debt - non-affiliates
At December 31 1996 1995
$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
===== ====
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
At December 31 1996 1995
$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
===== =====
Note (xviii) - Long-term debt - affiliates
At December 31 1996 1995
$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
===== =====
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>
Note (xix) - Long-term debt - non-affiliates
At December 31 1996 1995
$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
===== =====
(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>
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:
$m
Year ending December 31 1997 83.0
1998 0.9
1999 1.6
2000 251.7
2001 0.9
Thereafter 622.1
-----
960.2
=====
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>
Note (xx) - Deferred income taxes
The movement in deferred income taxes since January 1, 1994 has been as follows:
1996 1995 1994
$m $m $m
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
==== ==== ====
The significant temporary timing differences and tax loss carryforwards that
gave rise to the deferred income tax balance were as follows:
At December 31 1996 1995
$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
===== =====
F-74
<PAGE>
The tax operating loss carryforwards at December 31, 1996 expire as follows:
$m
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
=====
Note (xxi) - Other long-term liabilities - affiliates
At December 31 1996 1995
$m $m
Deferred gain 117.4 129.8
===== =====
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>
Note (xxii) - Other long-term liabilities - non-affiliates
At December 31 1996 1995
$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
===== ====
Note (xxiii) - Common shares
At December 31 1996 1995 1994
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
====== ====== ======
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:
$m
Year ending December 31 1997 37.5
1998 35.2
1999 28.3
2000 20.3
2001 12.7
Thereafter 12.2
-----
146.2
=====
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>
(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>
<TABLE>
ADT LIMITED
Consolidated Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
<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>
<TABLE>
ADT OPERATIONS, INC.
Consolidated Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
<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 INDEX
2.1 Agreement and Plan of Merger by and among ADT Limited, Limited Apache,
Inc. and Tyco International Ltd. dated as of March 17, 1997.(6)
3.1 Memorandum of Association (as altered) and Bye-Laws of ADT Limited
(incorporating all amendments to May 26, 1992).(1)
3.2 Certified copy of a resolution approved at the Annual General Meeting of
common shareholders of ADT Limited held on October 12, 1993, approving an
increase in the authorized common share capital of ADT Limited from $19.5
million to $22.0 million.(4)
4.1 Indenture relating to the senior notes dated August 4, 1993 among ADT
Operations, as issuer, and ADT Limited and certain subsidiaries of ADT
Operations, as guarantors, and The Chase Manhattan Bank (National
Association), as trustee, and the form of senior note included
therein.(2)
4.2 Indenture relating to the senior subordinated notes dated August 4, 1993
among ADT Operations, as issuer, and ADT Limited, as guarantor, and
NationsBank of Georgia, National Association, as trustee, and the form of
senior subordinated note included therein.(2)
4.3 Indenture dated as of July 1, 1995 among ADT Operations, Inc., ADT
Limited and Bank of Montreal Trust Company, as trustee and the form of
note included therein. (5)
4.4 Rights Agreement between ADT Limited and Citibank, N.A. dated as of
November 6, 1996.(9)
4.5 First Amendment between ADT Limited and Citibank, N.A. dated as of March
3, 1997 to Rights Agreement between ADT Limited and Citibank, N.A. dated
as of November 6, 1996.(9)
10.1 Rules of the ADT UK Executive Share Option Scheme (1984), amended to
reflect the reverse split of Common Shares effective June 17, 1991.(1)*
10.2 Rules of the ADT International Executive Share Option Plan, amended to
reflect the reverse split of Common Shares effective June 17, 1991.(1)*
10.3 Rules of the ADT UK and International Executive Share Option Schemes
(1984) New Section, amended to reflect the reverse split of Common Shares
effective June 17, 1991.(1)*
10.4 Rules of the ADT Senior Executive Share Option Plan, amended to reflect
the reverse split of Common Shares effective June 17, 1991.(1)*
10.5 US (1990) Stock Option Plan of ADT Limited, amended to reflect the reverse
split of Common Shares effective June 17, 1991.(1)*
10.6 Employment Agreement dated May 8, 1993 between ADT Limited and Michael
Anthony Ashcroft.(2)*
10.7 Amendment to Employment Agreement dated December 18, 1996 between ADT
Limited and Michael Anthony Ashcroft.(9)*
10.8 Employment agreement between ADT Limited and Stephen J. Ruzika dated as
of February 26, 1997.(9)*
10.9 Employment agreement between ADT, Inc. and Ron G. Lakey dated as of
January 16, 1997.(9)*
10.10 Agreement between ADT Automotive Holdings, Inc. and Michael J.
Richardson dated as of January 29, 1997.(9)*
10.11 Incentive Compensation Agreement between ADT, Inc. and Michael J.
Richardson dated as of February 10, 1997.(9)*
10.12 Severance Agreement between ADT Security Services, Inc. and Raymond
Gross dated as of February 26, 1997.(9)*
<PAGE>
10.13 Consulting Agreement between ADT, Inc. and John E. Danneberg dated as of
August 28, 1996.(9)*
10.14 Form of Indemnification Agreement.(9)*
10.15 The ADT 1993 Long-Term Incentive Plan (as amended February 29,
1996).(3)*
10.16 Purchase Agreement dated June 29, 1995 among ADT Operations, Inc., ADT
Limited and Merrill Lynch & Co., Inc. and the related pricing agreement
(5)
10.17 US$200,000,000 Credit Agreement dated as of January 9, 1997, among ADT
Operations, Inc., as the Borrower, and Certain Commercial Lending
Institutions as the Lenders, and the Bank of Nova Scotia as the Agent
for the Lenders.
10.18 Guaranty, dated as of January 9, 1997, made by ADT Limited in favor of
each of the Lender Parties (as defined therein).
10.19 Subsidiary Guarantor Guaranty, dated as of January 9, 1997, made by each
Subsidiary Guarantor (as defined therein) in favor of each of the Lender
Parties (as defined therein).
10.20 Pound Sterling 90,000,000 Facility Agreement dated March 17, 1997, among
ADT Finance Plc, as the Borrower, ADT (UK) Holdings PLC and Others as
Guarantors, The Bank of Nova Scotia as Arranger and as Agent and Others.
10.21 ADT Limited Guarantee dated as of March 25, 1997, in respect of a Pound
Sterling 90,000,000 facility made available to ADT Finance Plc.
10.22 Pound Sterling 27,000,000 On Demand Facility Letter dated January 3, 1997,
between ADT Finance Plc and The Bank of Nova Scotia.
10.23 ADT Limited Guarantee in respect of the obligations of ADT Finance Plc
under a Pound Sterling 27,000,000 Facility Letter dated January 3,
1997.
10.24 Agreement dated December 29, 1995 among ADT (UK) Limited, ADT Holdings BV,
Ruskin Limited, ADT Limited, Loanoption Limited and Integrated Transport
Systems Limited for the sale and purchase of European
Auctions.(7)
10.25 Agreement among ADT Limited, Thomas J. Gibson and Integrated Transport
Systems Limited dated December 29, 1995.(8)*
10.26 Agreement among ADT Limited, David B. Hammond and Integrated Transport
Systems Limited dated December 29, 1995.(8)*
10.27 Common Share Purchase Warrant issued by ADT Limited on July 1, 1996 to
Republic Industries, Inc.(10)
11.1 Statement regarding the computation of earnings per common share.
21.1 List of subsidiaries of ADT Limited
23.1 Consent of independent accountants to the incorporation by reference of
this Annual Report into Form S-3 and Forms S-8.
27 Financial Data Schedule (for SEC use only).
- --------------
(1) Previously filed as an Exhibit to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1992.
(2) Previously filed as an Exhibit to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1993.
(3) Previously filed as an Exhibit to the Registrant's Registration
Statement dated May 16, 1996, on Form S-8 filed May 17, 1996.
<PAGE>
(4) Previously filed as an Exhibit to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993.
(5) Previously filed as an Exhibit to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1995.
(6) Previously filed as an Exhibit to the Registrant's Current Report
dated March 24, 1997 on Form 8-K filed March 25, 1997.
(7) Previously filed as an Exhibit to the Registrant's Current Report
dated December 29, 1995 on Form 8-K filed January 16, 1996.
(8) Previously filed as an Exhibit to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995.
(9) Previously filed as an Exhibit to the Registrant's Schedule 14D-9
dated March 3, 1997.
(10) Previously filed as an Exhibit to the Registrant's Current Report
dated July 10, 1996 on Form 8-K filed July 11, 1996.
* Management contract or compensatory plan.
<PAGE>
Exhibit 99.4
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2)
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[X] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
ADT Limited
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3)Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
FOR IMMEDIATE RELEASE
MARCH 3, 1997 [ADT LOGO]
ADT Limited ("ADT")
ADT ANNOUNCES EARNINGS FOR THE FOURTH QUARTER AND FOR THE YEAR TO DECEMBER 31,
1996
- ------------------------------------------------------------------
Hamilton, Bermuda, March 3, 1997 -- ADT Limited (NYSE - ADT), through its
subsidiaries, a leading provider of electronic security services and vehicle
auction services, announced today that net income, before non-recurring items,
<PAGE>
for the three months and twelve months ended December 31, 1996 was $45.2m and
$140.3m, respectively.
In the third quarter of 1996 ADT acquired Automated Security (Holdings) PLC
("ASH"). The acquisition of ASH has been accounted for using the pooling of
interests method of accounting which assumes that ADT and ASH have been merged
from their inception and requires all consolidated financial statements to be
restated and presented accordingly. In the fourth quarter of 1996, ADT announced
its intention to sell its United States vehicle auction division, its European
vehicle auction division having been sold in 1995, and, accordingly, the vehicle
auction services segment is now treated as a discontinued operation.
Results for the three months ended and twelve months ended December 31, 1996 are
therefore as follows:
1996
Fourth 1996
Quarter Year
$m $m
------- ----
$ $
Continuing operations:
Net sales 367.4 1,406.2
Net income before non-recurring items 44.3 120.9
Non-recurring items - net of tax:
SFAS 121 charge - (720.9)
Restructuring charges (195.0) (195.0)
Sale of investments and other 45.1 43.5
Settlement gain 69.7 69.7
Merger costs - (11.3)
Net loss after non-recurring items (35.9) (693.1)
Extraordinary items (2.6) (8.4)
Net loss from continuing operations (38.5) (701.5)
Discontinued operations:
Net sales 75.0 297.8
Net income after non-recurring items: 0.9 6.4
Per share information (fully diluted):
$ $
Net income before non-recurring items:
Continuing operations 0.28 0.81
Discontinued operations 0.01 0.12
----- -----
0.29 0.93
Non-recurring items (0.54) (5.94)
Extraordinary items (0.02) (0.06)
Net (loss) income per common share (0.27) (5.07)
The fully diluted weighted average number of common shares outstanding during
the fourth quarter of 1996 was 167.4m and for the twelve months to December 31,
1996 was 165.3m.
Non-recurring items, net of tax, in respect of 1996 include: i) a non-cash
charge of $720.9m arising in the first quarter of 1996, relating to the
write-down of specific assets to their estimated fair values in accordance with
the requirements of SFAS 121; ii) a charge of $195.0m 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 of $53.4m, represented by cash, arising on the sale of the
Company's entire interest in Limelight Group plc, which was recorded in the
balance sheet at a nominal value; and iv) a gain of $69.7m represented by cash
receivable as a result of the settlement of the Company's litigation against
Binder Hamlyn.
Commenting, Mr. Michael A. Ashcroft, Chairman and Chief Executive Officer,
said:
"1996 was a year both of successful growth and of transition for ADT. In
addition to strong internal growth in security system sales, we expanded through
the acquisition of ASH, by growing our dealer network and through employing new
channels of distribution. We also extended our service
<PAGE>
offerings to include mobile security and launched an advertising campaign
focussed on the ADT brand."
"I am pleased to report that ADT has taken another significant step in expanding
its channels of distribution and has signed a marketing agreement with AT&T
under which ADT and AT&T will promote each other's services. This promises to be
a highly efficient and cost effective method of adding new customers."
"Our goal is to ensure the highest level of customer service and to maintain the
momentum we have established in expanding our business in an increasingly
security-conscious marketplace. To help us achieve our goal, we undertook, and
successfully completed, a major internal restructuring in 1996."
"In 1997, we are taking a further initiative to secure our status as market
leader by investing in a significant technological restructuring. This will
enable us to make wholesale changes to the way in which we arrange our hardware
and support services, eventually reducing the number of US customer monitoring
centers to four, and positioning ADT to become a major gateway in premises
control."
"ADT remains firmly focused on increasing shareholder value and has a sound
strategy to secure long-term business growth in a changing environment. We
remain comfortable with analyst's earnings estimates for the year 1997, which
will see us continuing to invest in the business to ensure that ADT retains and
builds on its leadership position."
Electronic Security Services
Net sales and operating income before non-recurring items from the Electronic
Security Services division for the fourth quarter of 1996 amounted to $367.4m
and $48.6m, respectively.
Net sales and operating income before non-recurring items from the Electronic
Security Services division for the twelve months ended December 31, 1996
amounted to $1,406.2m and $207.7m, respectively.
ADT's annualized service revenues as of December 31, 1996 amounted to $920m,
representing an annualized growth rate of approximately 10 per cent.
Residential
During the fourth quarter, ADT contracted to install and monitor 75,000 new
residential security systems bringing the total for 1996 to more than 280,000, a
30 per cent increase over the 215,000 systems sold in 1995 ADT's residential
customer base is now approximately 1,100,0000 of which approximately 85 per cent
is located in the United States.
Competition in the residential marketplace continues to keep the per system cost
to the consumer down, however, ADT's recurring revenue base is continuing to
benefit from the increases in average monthly monitoring fees which were
introduced for new customers in early 1996.
ADT's strategic relationships with RadioShack, USAA Insurance and HFS
(ERA/Century 21) opened up new channels of distribution in 1996 and are all
producing results. Sales through these channels are expected to benefit from the
ADT branding campaign in 1997.
The ADT authorized dealer program continues to expand. ADT had 124 authorized
dealers throughout the United States at the end of 1996, compared with 58 at the
beginning of the year. During the fourth quarter of 1996 approximately 23 per
cent of residential unit sales in the United States were attributable to the
dealer program and the momentum built up in the dealer network in 1996 is
expected to continue in 1997 when dealer sales should also benefit from ADT's
investment in branding.
Vehicle Security and Tracking
CarCop, a major advance in personal protection and vehicle security, developed
by Mobile Security Communications ("MSC") and monitored by ADT, is being test
marketed in Atlanta and Miami. CarCop is being distributed primarily through
mobile electronic speciality retail channels and MSC is currently exploring the
distribution of CarCop through chain electronic and cellular retailers. Direct
marketing of CarCop to ADT's commercial customers has begun and direct mail
marketing of CarCop to residential customers will begin in selected markets
during the second quarter of 1997.
<PAGE>
National Accounts/Core Commercial
In the commercial market, sales in the small business segment were strong during
the fourth quarter and outright sales to national account customers also
improved. CCTV was the product segment growth leader in 1996, driven in part by
the migration of CCTV sales to small and medium sized businesses. Sales to the
public sector also remained strong during the quarter. New business included
significant orders for CCTV systems from Emerson Electric and Amoco; a contract
renewal with Darden Restaurants for ADT services to Red Lobster and Olive Garden
restaurants; and an integrated alarm and CCTV system for a video
arcade/restaurant concept being developed by Sega Gameworks, a new customer for
ADT.
The market in Canada is showing some signs of improvement. ADT has signed
contracts with several new customers, including Vancouver-based Lowen Group, an
operator of funeral homes throughout North America. An ADT authorized dealer
program, similar to that in the United States, is to be established in Canada
and the Company expects to have approximately 30 authorized dealers there by the
end of 1997.
In the United Kingdom, the CCTV and integrated systems markets continue to drive
growth. ADT was also successful in increasing its market share in the
slower-growing intruder alarm market. New business included additional orders
from Railtrack, including a large contract for CCTV systems on train platforms
and a significant order from SmithKline Beecham covering access control, fire
detection, intruder alarms and CCTV at various sites in southern England. The
integration of ASH's operations in the United Kingdom with ADT is progressing
and the resulting improvements in service levels and operating efficiencies
should be seen as 1997 progresses.
Vehicle Auction Services
Net sales and operating income from the United States Vehicle Auction division
for the fourth quarter of 1996 amounted to $75.0m and $6.7m, respectively.
Net sales and operating income before non-recurring items from the United States
Vehicle Auction division for the twelve months ended December 31, 1996 amounted
to $297.8m and $40.1m, respectively.
1996 was a record year for ADT Automotive. The total number of vehicles sold at
ADT Automotive auctions in the fourth quarter of 1996 increased by approximately
10 per cent over the fourth quarter of 1995, bringing the total number of
vehicles sold in 1996 to 1,064,000 compared with 994,000 in 1995. The
fleet/lease sector accounted for this growth with an increase of 35 per cent in
vehicles sold, partly offset by lower program car volumes and lower sales of
consignment vehicles.
Background
ADT, through its subsidiaries, is the largest provider of electronic security
services in North America and the United Kingdom, providing continuous
monitoring of commercial and residential security systems to over 1.8 million
customers in North America and Europe.
Forward Looking Information
ADT may occasionally make statements regarding its business and the markets for
its services, including projections of future performance, statements of
management's plans and objectives, forecasts of market trends and other matters
which, to the extent that they are not historical fact, may constitute "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995.
Certain statements contained herein constitute "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. In
particular, statements contained herein regarding the consummation and benefits
of future acquisitions as well as expectations with respect to future sales,
operating efficiencies and product expansion, are subject to known and unknown
risks, uncertainties and contingencies, many of which are beyond the control of
ADT, which may cause actual results, performance or achievements to differ
materially from anticipated results, performance or achievements. Factors that
might affect such forward looking statements include, among others overall
economic and business conditions, the demand for ADT's services, competitive
factors in the industry, regulatory approvals, and uncertainty about the
consummation of future acquisitions.
CERTAIN ADDITIONAL INFORMATION. ADT Limited (the "Company") will be
<PAGE>
soliciting proxies against the proposal of Western Resources, Inc. (together
with its subsidiaries, "Western") and revocations of proxies previously given to
Western for such proposals. The following individuals may be deemed to be
participants in the solicitation of proxies and revocations of proxies by the
Company: ADT Limited, Michael A. Ashcroft, John E. Danneberg, Alan B. Henderson,
James S. Pasman, Jr., Stephen J. Ruzika, W. Peter Slusser, William W. Stinson,
Raymond S. Troubh and Angela E. Entwistle. As of February 28, 1997 Mr. Ashcroft
is the beneficial owner of 11, 075,718 of the Company's common shares, Mr.
Danneberg is the beneficial owner of 102 of the Company's common shares, Mr.
Hendersen is the beneficial owner of 621 of the Company's common shares, Mr.
Pasman is the beneficial owner of 2,000 of the Company's common shares, Mr.
Ruzika is the beneficial owner of 1,157,405 of the Company's common shares, Mr.
Slusser is the beneficial owner of 2,800 of the Company's common shares, Mr.
Stinson is the beneficial owner of 3,010 of the Company's common shares, Mr.
Troubh is the beneficial owner of 2,500 the Company's's common shares and Ms.
Entwistle is the beneficial owner of 29,500 of the Company's common shares. The
Company has retained Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") to act as its financial advisor in connection with Western's
proposals. Merrill Lynch is an investment banking firm that provides a full
range of financial services for institutional and individual clients. Merrill
Lynch does not admit that it or any of its directors, officers or employees is a
"participant" as defined in Schedule 14A ("Schedule 14A") promulgated by the
Commission under the Securities Exchange Act of 1934, as amended in the proxy
solicitation, or that such Schedule 14A requires the disclosure of certain
financial information concerning Merrill Lynch. In connection with Merrill
Lynch's role as financial advisor to the Company, Merrill Lynch and the
following investment banking employees of Merrill Lynch may communicate in
person, by telephone or otherwise with a limited number of institutions, brokers
or other persons who are shareholders of the Company: Richard Johnson (Managing
Director), Huston McCollough (Managing Director), Hugh O'Hare (Vice President),
Robert Simensky (Vice President), Paul Bastone (Associate) and Eric Evans
(Analyst). In the normal course of its business, Merrill Lynch regularly buys
and sells securities issued by the company and its affiliates ("ADT Securities")
for its own account and the accounts of its customers, which may result from
time to time in Merrill Lynch and its associates having a net "long" or net
"short" position in ADT Securities or option contracts or other derivatives in
or relating to ADT Securities. As of February 28, 1997, Merrill Lynch held
positions in ADT Securities as principal as follows: (i) net "short" 769,995 of
the Company's common shares; (ii) net "long" 51,000 par amount of 9.25%
Guaranteed Senior Subordinated Notes of ADT Operations, Inc. due August 1, 2003;
and (iii) net "long" 31,509 Liquid Yield Option [Trademark]Notes of ADT
Operations, Inc. due 2010, exchangeable for 889,499 of the Company's common
shares. As of February 28, 1997, Merrill Lynch held positions in ADT Securities
as agent as follows: (i) net "long" 2,195,181 of the Company's common shares;
(ii) net "long" $4,717,000 par amount of 8.25% Guaranteed Senior Notes of ADT
Operations, Inc. due August 1, 2000; (iii) net "long" $2,830,000 par amount of
9.25% Guaranteed Senior Subordinated Notes of ADT Operations, Inc. due August 1,
2003; and (iv) net "long" 31,820 Liquid Yield Option[Trademark] Notes of ADT
Operations, Inc. due 2010, exchangeable for 898,278 of the Company's common
shares. None of the investment banking employees of Merrill Lynch who are
referred to above or their associates owned of record or beneficially any ADT
Securities as of February 28, 1997. None of such Merrill Lynch investment
banking employees or their associates purchased or sold for their own account
any ADT Security within the past two years.
Note:
This and other press releases are available through Company News On-Call by fax;
call 800-758-5804, extension 112511, or at http://www.prnewswire.com/
Contact:
ADT
561-988-3600
<PAGE>
ADT LIMITED
Summarized Consolidated Statements of Income
1996 1995
Fourth Fourth 1996 1995
Quarter Quarter Year Year
Period ended December 31 $m $m $m $m
- - ------------------------ ------- ------- ------- -------
Net sales 367.4 354.6 1,406.2 1,350.9
Cost of sales (203.6) (194.9) (762.8) (750.5)
Selling, general and
administrative expenses (116.9) (112.4) (465.1) (435.6)
Restructuring charges and
other non-recurring items (237.3) (34.2) (237.3) (34.2)
Charge for the impairment
of long-lived assets - - (731.7) -
Operating (loss) income (190.4) 13.1 (790.7) (130.6)
------ ------ ------- -------
Interest expense - net (9.4) (15.0) (58.9) (65.7)
Gain on disposal of
businesses - 34.6 1.7 29.2
Other income less expenses 127.4 (0.1) 128.8 (5.0)
------- ------- ------- -------
(Loss) income before
income taxes (72.4) 32.6 (719.1) 89.1
Income taxes 36.5 1.9 26.0 (20.2)
------- ------ ------- -------
(Loss) income from
continuing operations (35.9) 34.5 (693.1) 68.9
Income (loss) from
discontinued operations 0.9 (64.4) 6.4 (37.9)
------- ------ ------- -------
(Loss) income before
extraordinary items (35.0) (29.9) (686.7) 31.0
Extraordinary items
(net of income taxes) (2.6) (1.8) (8.4) (9.8)
------- ------ ------- -------
Net (loss) income (37.6) (31.7) (695.1) 21.2
Dividends on preference shares (0.1) - (0.3) (0.3)
------- ------ ------- -------
Net (loss) income available to
common shareholders (37.7) (31.7) (695.4) 20.9
======= ====== ======= =======
Primary and fully diluted
(loss) earnings per common
share: $ $ $ $
(Loss) income from
continuing operations (0.26) 0.25 (5.06) 0.49
Income (loss) from
discontinued operations 0.01 (0.47) 0.05 (0.27)
Extraordinary items (0.02) (0.01) (0.06) (0.07)
-------- ------- -------- --------
Net (loss) income per
common share (0.27) (0.23) (5.07) 0.15
======== ======= ======== ========
ADT LIMITED
Summarized Consolidated Balance Sheets
1996 1995
At December 31 $m $m
-------------- ------- -------
Assets
Current Assets:
Cash and cash equivalents 165.7 317.9
Accounts receivable - net 132.5 134.0
Inventories 36.7 35.7
Prepaid expenses and other current assets 114.7 32.5
------- -------
Total current assets 449.6 520.1
Property, plant and equipment - net 1,285.7 1,353.3
Goodwill and other intangibles - net 356.9 936.3
Net assets of discontinued operations 349.2 341.7
Long-term investments 100.6 2.0
Investment in and loans to associate - 88.8
Other long-term assets 72.5 81.1
------- -------
Total assets 2,614.5 3,323.3
======= =======
<PAGE>
Liabilities and shareholders' equity Current liabilities:
Short-term debt 175.9 27.2
Accounts payable 77.7 55.5
Other current liabilities 278.6 214.0
------- -------
Total current liabilities 532.2 296.7
Long-term debt 903.7 1,168.4
Deferred revenue 146.1 137.4
Deferred income taxes 96.8 147.1
Other long-term liabilities 175.9 127.9
Minority interests - 15.6
------- -------
Total liabilities 1,854.7 1,893.1
------- -------
Convertible redeemable preference shares - 4.9
Shareholders' equity 759.8 1,425.3
------- -------
Total liabilities and shareholders' equity 2,614.5 3,323.3
======= =======
ADT LIMITED
Summarized Consolidated Statements of Cash Flows
1996 1995
Year ended December 31 $m $m
---------------------- ------ ------
Cash flows from operating activities
Net (loss) income (695.1) 21.2
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Charge for the impairment of long-lived assets 744.7 -
Depreciation and amortization 224.8 247.9
Restructuring and other non-recurring charges 217.4 32.7
Interest on ITS Vendor Note (8.9) -
Liquid Yield Option Notes discount amortization 20.3 9.4
Deferred income taxes (39.5) 18.4
Extraordinary items 8.4 9.8
(Gain) loss on disposal of businesses (1.7) 36.6
(Gain) loss on disposal of investment in associates (1.2) 5.1
Gain arising from ownership of investments (53.2) (0.1)
Settlement gain (69.7) -
Other (4.9) 4.9
Changes in assets and liabilities (32.7) (48.9)
------ ------
Net cash provided by operating activities 308.7 337.0
------ ------
Cash flows from investing activities
Purchase of property, plant and equipment - net (334.4) (317.8)
Acquisition of businesses (25.5) (68.3)
Disposal of businesses 3.0 254.8
Purchase of customer contracts (34.6) (0.5)
Purchase of other investments (6.8) (0.4)
Disposal of other investments 54.1 0.2
Disposal of investment in and loans to associates 15.4 7.8
Other 0.4 5.6
------ ------
Net cash utilized by investing activities (328.4) (118.6)
------ ------
Cash flows from financing activities
Net receipts (repayments) of short-term debt 10.9 (103.9)
Repayments of long-term debt (209.9) (216.9)
Repayment of long-term acquisition debt - (39.6)
Proceeds from long-term debt 86.8 314.0
Debt refinancing costs - (12.0)
Purchase of senior subordinated notes (24.0) (33.7)
Proceeds from issue of common shares 24.7 7.0
Redemption of convertible redeemable preference shares (4.9) -
Other (0.3) (5.1)
------ ------
Net cash utilized by financing activities (116.7) (90.2)
------ ------
Effect of currency translation on cash and cash
equivalents 1.4 0.8
------ ------
Net (decrease) increase in cash and cash
equivalents (135.0) 129.0
Cash and cash equivalents at beginning of
year 350.9 221.9
------ ------
Cash and cash equivalents at end of year:
continuing operations 165.7 317.9
discontinued operations 50.2 33.0
------ ------
215.9 350.9
====== ======
<PAGE>
