<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 DATE
OF REPORT (DATE OF EARLIEST EVENT REPORTED)
APRIL 23, 1998
0-16979
(Commission File Number)
--------------------
TYCO INTERNATIONAL LTD.
(Exact name of registrant as specified in its charter)
BERMUDA NOT APPLICABLE
(Jurisdiction of Incorporation) (IRS Employer
Identification Number)
THE GIBBONS BUILDING, 10 QUEEN STREET, SUITE 301 HAMILTON HM11, BERMUDA
(Address of registrant's principal executive office)
441-292-8674
(Registrant's telephone number)
----------------
*The executive offices of the Registrant's principal United States subsidiary,
Tyco International (US) Inc., are located at One Tyco Park, Exeter, New
Hampshire 03833. The telephone number there is (603) 778-9700.
<PAGE> 2
ITEM 5. OTHER EVENTS
Tyco International Ltd. (the "Company") intends to file a shelf
registration statement to register debt securities for issuance by its
wholly-owned subsidiary, Tyco International Group S.A. The Company intends to
issue a full and unconditional parent guarantee with respect to the debt
securities. The purpose of this filing is to resubmit the most recent audited
financial statements for the Company to include a subsequent event footnote
disclosing summarized financial information for Tyco International Group S.A.,
in anticipation of filing the registration statement. The audited financial
statements being resubmitted were previously included in the Company's
Transition Report on Form 10-K for the period ended September 30, 1997. The
unaudited interim financial statements being resubmitted were previously
included in the Company's Quarterly Report on Form 10-Q for the period ended
December 31, 1997.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(c) Exhibits
Exhibit
Number Title
- ------- -----
23.1 Consent of Coopers & Lybrand
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of Arthur Andersen LLP
99.1 Consolidated balance sheets of Tyco International Ltd. as of September
30, 1997 and December 31, 1996, the related consolidated statements of
operations, stockholders' equity and cash flows for the nine months
ended September 30, 1997 and for each of the two years in the period
ended December 31, 1996, and Independent Auditors' Reports.
99.2 Consolidated balance sheets of Tyco International Ltd. as of December
31, 1997 and September 30, 1997 and the related consolidated statements
of operations and cash flows for the quarters ended December 31, 1997
and 1996.
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Tyco International Ltd.
By: /s/ Mark H. Swartz
------------------------------------------------
Mark H. Swartz
Executive Vice President-Chief Financial Officer
Date: April 23, 1998
<PAGE> 4
EXHIBIT INDEX
Exhibit
Number
- ------
23.1 Consent of Coopers & Lybrand
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of Arthur Andersen LLP
99.1 Consolidated balance sheets of Tyco International Ltd. as of
September 30, 1997 and December 31, 1996, the related consolidated
statements of operations, stockholders' equity and cash flows for the
nine months ended September 30, 1997 and for each of the two years
in the period ended December 31, 1996, and Independent Auditors'
Reports.
99.2 Consolidated balance sheets of Tyco International Ltd. as of
December 31, 1997 and September 30, 1997 and the related consolidated
statements of operations and cash flows for the quarters ended
December 31, 1997 and 1996.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements on
Form S-3 (File Nos. 333-21425, 333-33779 and 333-43333) and on Form S-8 (File
Nos. 33-38249, 33-26970 and 333-03975) of Tyco International Ltd. (formerly
named ADT Limited) of our report dated November 21, 1997, except as to the
information presented in Note 25(b) for which the date is April 21, 1998, on
our audits of the Consolidated Financial Statements and the Consolidated
Financial Statement Schedule of Tyco International Ltd. as of September 30,
1997 and December 31, 1996 and for the nine months ended September 30, 1997 and
for each of the two years in the period ended December 31, 1996, which report
is included in this Current Report on Form 8-K.
COOPERS & LYBRAND
Hamilton, Bermuda
April 21, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements on
Form S-3 (File Nos. 333-21425, 333-33779 and 333-4333) and on Form S-8 (File
Nos. 33-38249, 33-26970, and 333-03975) of Tyco International Ltd. of our
report dated July 10, 1997, our audits of the Consolidated Financial Statements
and the Consolidated Financial Statement Schedule of Tyco International Ltd.
(subsequently renamed Tyco International (US) Inc.) as of December 31, 1996 and
for the years ended December 31, 1996 and June 30, 1995 (not presented
separately herein), which report is included in this Current Report on Form
8-K.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
April 21, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in this
Current Report on Form 8-K and to the incorporation by reference in the
Registration Statements on Form S-3 (File Nos. 333-21425, 333-33779 and
333-43333) and on Form S-8 (file Nos. 33-38249, 33-26970 and 333-03975) of Tyco
International Ltd. of our report dated January 31, 1997 on our audits of the
Consolidated Financial Statements of Keystone International, Inc. and
subsidiaries as of December 31, 1996 and for each of the two years in the period
then ended, which financial statements are not included herein. It also should
be noted that we have not audited any financial statements of Keystone
International, Inc. and subsidiaries subsequent to December 31, 1996 or
performed any audit procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
April 21, 1998
Houston, Texas
<PAGE> 1
EXHIBIT 99.1
Tyco International Ltd.
Financial Statements
September 30, 1997
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of Tyco International Ltd.
We have audited the consolidated balance sheets of Tyco International Ltd.
(the "Company", formerly known as ADT Limited) as of September 30, 1997 and
December 31, 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows and the related consolidated financial
statement schedule for the nine months ended September 30, 1997 and for each of
the two years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based upon our audits. We did not audit the financial statements of
Tyco International (US) Inc. (formerly known as Tyco International Ltd. prior to
the merger with ADT Limited), a wholly-owned subsidiary, as of December 31, 1996
and for the year ended December 31, 1996 and the year ended June 30, 1995, which
statements reflect total assets constituting 61.4 % of consolidated total assets
as of December 31, 1996 and net sales constituting 70.6% and 65.6% of
consolidated net sales for the years ended December 31, 1996 and 1995,
respectively, and of Keystone International, Inc., a wholly owned-subsidiary, as
of December 31, 1996 and for each of the two years in the period ended December
31, 1996, which statements reflect total assets constituting 6.4% of
consolidated total assets as of December 31, 1996 and net sales constituting
8.4%, and 8.6% of consolidated net sales for the years ended December 31, 1996
and 1995, respectively. Those statements were audited by other auditors whose
reports have been furnished to us, and our opinion, insofar as it relates to
data included in the consolidated financial statements for such entities, is
based solely on the reports of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and
perform our audits 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 and the reports of
other auditors provide a reasonable basis for our opinion.
In our opinion, based upon our audits and the reports of other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Tyco International Ltd., as of
September 30, 1997 and December 31, 1996, and the consolidated results of its
operations and its cash flows for the nine months ended September 30, 1997, and
for each of the two 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 schedule
referred to above, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND
Hamilton, Bermuda
November 21, 1997, except
as to the information
presented in Note 25(b)
for which the date is
April 21, 1998
1
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of Tyco International Ltd.
We have audited the consolidated balance sheet of Tyco International Ltd.
(since renamed Tyco International (US) Inc.) as of December 31, 1996 and the
related consolidated statements of income, shareholders' equity and cash flows
and the related consolidated financial statement schedule for the years ended
December 31, 1996 and June 30, 1995 (not presented separately herein). These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule 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.
Subsequent to the balance sheet date, the company merged with and became a
wholly-owned subsidiary of ADT Limited (subsequently renamed Tyco International
Ltd.).
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Tyco
International Ltd. as of December 31, 1996 and the consolidated results of its
operations and its cash flows for the years ended December 31, 1996, and June
30, 1995, in conformity with generally accepted accounting principles. In
addition, in our opinion, the consolidated financial statement schedule referred
to above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
July 10, 1997
2
<PAGE> 4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors,
Keystone International, Inc.:
We have audited the consolidated balance sheet of Keystone International,
Inc. (a Texas corporation) and subsidiaries as of December 31, 1996, and the
related consolidated statements of income, changes in shareholders' investment
and cash flows for each of the two years in the period then ended, which are not
included herein. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Keystone
International Inc. and subsidiaries as of December 31, 1996, and the results of
their operations and their cash flows for each of the two years in the period
then ended, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
January 31, 1997
Houston, Texas
3
<PAGE> 5
TYCO INTERNATIONAL LTD.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(IN MILLIONS, EXCEPT SHARE DATA) 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............................................. $ 369.8 $ 324.2
Receivables, less allowance for doubtful accounts of $107.7 in 1997
and $84.2 in 1996.................................................... 1,912.3 1,288.4
Contracts in progress.................................................. 138.3 131.6
Inventories............................................................ 1,124.8 946.5
Deferred income taxes.................................................. 389.4 144.9
Prepaid expenses and other current assets.............................. 174.2 217.4
--------- --------
Total current assets................................................... 4,108.8 3,053.0
PROPERTY, PLANT AND EQUIPMENT, NET..................................... 2,924.0 2,590.9
GOODWILL AND OTHER INTANGIBLE ASSETS, NET.............................. 2,933.2 2,439.0
LONG-TERM INVESTMENTS.................................................. 108.5 100.6
DEFERRED INCOME TAXES.................................................. 144.0 67.2
OTHER ASSETS........................................................... 228.5 220.6
--------- --------
TOTAL ASSETS........................................................... $10,447.0 $8,471.3
========= ========
CURRENT LIABILITIES:
Loans payable and current maturities of long-term debt................. $ 250.0 $ 587.9
Accounts payable....................................................... 1,012.0 722.0
Accrued expenses and other current liabilities......................... 2,005.7 1,016.9
Contracts in process -- billings in excess of costs.................... 141.4 153.3
Deferred revenue....................................................... 152.3 146.1
Income taxes........................................................... 403.5 121.2
Deferred income taxes.................................................. 26.9 12.9
--------- --------
Total current liabilities.............................................. 3,991.8 2,760.3
LONG-TERM DEBT......................................................... 2,480.6 1,878.4
OTHER LONG-TERM LIABILITIES............................................ 497.5 419.6
DEFERRED INCOME TAXES.................................................. 47.7 124.4
--------- --------
TOTAL LIABILITIES...................................................... 7,017.6 5,182.7
--------- --------
COMMITMENTS AND CONTINGENCIES
CONVERTIBLE REDEEMABLE PREFERENCE SHARES............................... -- --
SHAREHOLDERS' EQUITY:
Common shares, $.20 par value, 750,000,000 shares authorized:
536,357,498 shares outstanding in 1997 and 481,045,721 shares
outstanding in 1996.................................................. 107.3 96.2
Capital in excess:
Share premium........................................................ 2,041.3 1,081.0
Contributed surplus, net of deferred compensation of $2.2 in 1997 and
$31.4 in 1996..................................................... 2,305.7 2,168.8
Currency translation adjustment........................................ (161.6) (42.5)
Accumulated deficit.................................................... (863.3) (14.9)
--------- --------
Total shareholders' equity............................................. 3,429.4 3,288.6
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $10,447.0 $8,471.3
========= ========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 6
TYCO INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ---------------------
(IN MILLIONS EXCEPT PER SHARE DATA) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales............................................. $7,588.2 $8,103.7 $6,915.6
Cost of sales......................................... 5,102.6 5,475.2 4,665.3
Selling, general and administrative expenses.......... 1,534.9 1,656.5 1,495.4
Merger, restructuring and other nonrecurring
charges............................................. 917.8 246.1 97.1
Charge for the impairment of long-lived assets........ 148.4 744.7 8.2
Write off of purchased in-process research and
development......................................... 361.0 -- --
-------- -------- --------
Operating (loss) income............................... (476.5) (18.8) 649.6
Interest income....................................... 24.2 31.5 19.0
Interest expense...................................... (137.5) (193.3) (187.5)
Other income less expenses............................ -- 119.4 (5.0)
-------- -------- --------
(Loss) income before income taxes and extraordinary
items............................................... (589.8) (61.2) 476.1
Income taxes.......................................... (187.0) (235.5) (208.6)
-------- -------- --------
(Loss) income before extraordinary items.............. (776.8) (296.7) 267.5
Extraordinary items, net of taxes..................... (58.3) (8.4) (12.4)
-------- -------- --------
Net (loss) income..................................... (835.1) (305.1) 255.1
Dividends on preference shares........................ -- (.3) (.3)
-------- -------- --------
Net (loss) income available to common shareholders.... $ (835.1) $ (305.4) $ 254.8
======== ======== ========
(Loss) earnings per common share:
(Loss) income before extraordinary items.............. $ (1.50) $ (.62) $ .57
Extraordinary items................................... (.11) (.02) (.03)
-------- -------- --------
Net (loss) income per common share.................... $ (1.61) $ (.64) $ .54
======== ======== ========
Weighted average common and common equivalent shares
outstanding......................................... 519.5 475.6 469.6
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 7
TYCO INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, COMMON CURRENCY ACCUMULATED
1997 SHARES $0.20 SHARE CONTRIBUTED TRANSLATION (DEFICIT)
(IN MILLIONS, EXCEPT PER SHARE DATA) PAR VALUE PREMIUM SURPLUS ADJUSTMENT EARNINGS
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995, as previously
reported, reflecting the pooling of interests
with ASH and Former Tyco (see Note 2)........ $ 82.8 $ 997.9 $ 1,870.4 $ (90.3) $(117.2)
Pooling of interests with Keystone (as
described in Note 2)....................... 6.8 128.3 5.2 146.1
------ -------- -------- ------- -------
Balance at January 1, 1995, as restated........ 89.6 997.9 1,998.7 (85.1) 28.9
Conversion of convertible preference
shares..................................... .3
Net income................................... 255.1
Dividends.................................... (56.2)
Restricted stock grants, cancellations, tax
benefits and other......................... 1.4 16.6 .8
Warrants and options exercised............... 3.6 54.6 (1.2)
Purchase of treasury stock................... (.4) (19.0)
Amortization of deferred compensation........ 9.5
Minimum pension liability adjustment......... (6.1)
Currency translation adjustments............. 30.4
Currency translation adjustments transferred
on disposal of businesses and associates... 23.3
------ -------- -------- ------- -------
Balance at December 31, 1995................... 94.2 1,052.5 2,004.9 (31.4) 222.5
Effect of the Former Tyco's excluded activity
(as described in Note 1)................... 2.9 (19.6) 121.2
Exchange of Liquid Yield Option Notes........ .3
Net loss..................................... (305.1)
Dividends.................................... (57.6)
Restricted stock grants, cancellations, tax
benefits and other......................... .2 25.8 .5
Warrants and options exercised............... .4 28.5 (.2)
Purchase of treasury stock................... (4.4)
Amortization of deferred compensation........ 15.7
Minimum pension liability adjustment......... 3.6
Issuance of stock for acquisition............ 1.4 129.0
Other treasury stock transactions............ (4.7)
Currency translation and other adjustments... (.5) 8.5
------ -------- -------- ------- -------
Balance at December 31, 1996................... 96.2 1,081.0 2,168.8 (42.5) (14.9)
Pooling of interests with INBRAND (as
described in Note 1)....................... 2.0 15.9 (.2) 27.6
------ -------- -------- ------- -------
Balance at December 31, 1996, as restated...... 98.2 1,081.0 2,184.7 (42.7) 12.7
Effect of ASH's excluded activity (as
described in Note 2)....................... (.8)
Liquidation of ASH's ESOP.................... 2.5
Sale of common shares........................ 4.7 639.2 10.6
Exchange of Liquid Yield Option Notes........ 1.0 82.0
Net loss..................................... (835.1)
Dividends.................................... (43.4)
Restricted stock grants, cancellations, tax
benefits and other......................... (18.0)
Warrants and options exercised............... 3.3 321.1 (1.5)
Amortization of deferred compensation........ 48.5
Minimum pension liability adjustment......... .6
Other treasury stock transactions............ (.1)
Currency translation and other adjustments... .1 (.5) (118.9) .2
------ -------- -------- ------- -------
Balance at September 30, 1997.................. $107.3 $2,041.3 $ 2,305.7 $(161.6) $(863.3)
====== ======== ======== ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE> 8
TYCO INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ----------------------
(IN MILLIONS) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income....................................................... $ (835.1) $ (305.1) $ 255.1
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Merger, restructuring and other non-recurring charges................. 207.4 217.4 47.1
Charge for the impairment of long-lived assets........................ 148.4 744.7 8.2
Write off of purchased in-process research and development............ 361.0 -- --
Extraordinary items................................................... 91.3 8.4 12.4
Depreciation.......................................................... 286.3 339.0 320.7
Goodwill and other intangibles amortization........................... 92.3 88.3 89.5
Debt and refinancing cost amortization................................ 15.9 25.5 15.8
Interest on ITS vendor note........................................... (7.7) (8.9) --
Deferred income taxes................................................. (295.7) 32.7 35.9
(Gain) loss on disposal of businesses................................. -- (1.7) 36.6
(Gain) loss on disposal of investment in associates................... -- (1.2) 0.5
Gain arising from the ownership of investments........................ -- (53.2) (0.1)
Settlement gain....................................................... -- (69.7) --
Gain on currency transactions......................................... -- (9.7) (0.9)
Provisions for losses on accounts receivable and inventory............ 58.1 36.2 21.4
Other noncash items................................................... -- .6 (.8)
Changes in assets and liabilities:
Receivables......................................................... (110.1) (99.8) (115.7)
Proceeds from accounts receivable sale.............................. 75.0 -- 75.0
Contracts in process................................................ (159.7) 17.8 (9.4)
Inventories......................................................... (6.2) (33.3) (55.6)
Accounts payable, accruals and other liabilities.................... 542.8 (135.8) 32.0
Income taxes payable................................................ 269.3 (13.0) (7.1)
Deferred revenue.................................................... 6.2 4.3 2.7
Other, net.......................................................... 37.9 34.6 16.4
--------- --------- -------
Net cash provided by operating activities............................. 777.4 818.1 779.7
--------- --------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment............................... (519.1) (532.9) (469.9)
Acquisition of businesses............................................... (1,344.8) (822.6) (218.5)
Purchase of other investments........................................... -- (6.8) (.4)
Disposal of business.................................................... -- 3.0 259.6
Disposal of other investments........................................... -- 69.5 8.0
--------- --------- -------
Net cash utilized by investing activities............................. (1,863.9) (1,289.8) (421.2)
--------- --------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net receipts (repayments) of short-term debt............................ 918.5 232.6 (400.3)
Repayment of long-term debt, including debt tender...................... (961.6) (269.6) (266.1)
Proceeds from long-term debt............................................ 234.6 386.6 483.2
Debt refinancing costs.................................................. -- -- (12.0)
Purchase of senior subordinated notes................................... -- (24.0) (33.7)
Proceeds from sale of common shares..................................... 654.5
Proceeds from exercise of options and warrants.......................... 322.9 32.3 58.1
Redemption of convertible redeemable preference shares.................. -- (4.9) --
Dividends paid.......................................................... (37.9) (56.7) (54.6)
Purchase of treasury stock and warrant.................................. -- (9.7) (19.4)
Other................................................................... -- -- (.3)
--------- --------- -------
Net cash provided (utilized) by financing activities.................. 1,131.0 286.6 (245.1)
--------- --------- -------
Net increase (decrease) in cash and cash equivalents.................... 44.5 (185.1) 113.4
Cash and cash equivalents at beginning of year.......................... 324.2 429.8 316.4
Adjustment for INBRAND's cash and cash equivalents at January 1, 1997
(as described in Note 1).............................................. 1.9 -- --
Effect of the excluded results of ASH and Former Tyco (as described in
Notes 1 and 2)........................................................ (0.8) 79.5 --
--------- --------- -------
Cash and cash equivalents at end of year................................ $ 369.8 $ 324.2 $ 429.8
========= ========= =======
SUPPLEMENTARY CASH FLOW DISCLOSURE:
Interest paid........................................................... $ 161.0 $ 166.0 $ 173.8
========= ========= =======
Income taxes paid (net of refunds)...................................... $ 139.6 $ 152.9 $ 125.5
========= ========= =======
</TABLE>
See Notes to Consolidated Financial Statements.
7
<PAGE> 9
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- The consolidated financial statements have been
prepared in United States dollars in accordance with generally accepted
accounting principles in the United States. As described more fully in Note 2,
on July 2, 1997 a wholly-owned subsidiary of what was formerly called ADT
Limited ("ADT") merged with Tyco International Ltd. (the "Former Tyco"). Upon
consummation of the merger, ADT (the surviving corporation) changed its name to
Tyco International Ltd. (the "Company" or "Tyco"). Former Tyco became a
wholly-owned subsidiary of the Company and changed its name to Tyco
International (US), Inc. ("Tyco US"). In addition, as more fully described in
Note 2, Tyco merged with INBRAND Corporation ("INBRAND") and Keystone
International, Inc. ("Keystone") on August 27, 1997 and August 29, 1997,
respectively. These transactions are referred to herein as the "mergers". These
consolidated financial statements include the consolidated accounts of Tyco, a
company incorporated in Bermuda, and its subsidiaries. They have been prepared
following the pooling of interests method of accounting for the mergers and
therefore reflect the combined financial position, operating results and cash
flows of ADT, Former Tyco and Keystone as if they had been combined for all
periods presented. The restated combined financial statements do not include the
financial position, operating results and cash flows of INBRAND prior to January
1, 1997, due to immateriality. In accordance with the pooling of interests
method of accounting, the Fiscal 1997 beginning Accumulated (Deficit) Earnings
balance in the Consolidated Statement of Shareholders' Equity has been restated
to record the merger with INBRAND. Prior to the mergers, ADT and Keystone had
calendar year ends and the Former Tyco had a June 30 fiscal year end. The
Consolidated Balance Sheets, Statements of Operations, Shareholders' Equity and
Cash Flows as of and for the year ended December 31, 1996 reflect the
combination of the calendar year end consolidated financial position, results of
operations and cash flows for ADT, Keystone and the Former Tyco. The
Consolidated Statements of Operations, Shareholders' Equity and Cash Flows for
of the year ended December 31, 1995 reflect the combination of the calendar year
end financial position, results of operations and cash flows of ADT and Keystone
and the June 30, 1995 fiscal year end financial position and results of
operations and cash flows of the Former Tyco. The results of operations and cash
flows for the Former Tyco from July 1, 1995 to December 31, 1995, which have
been excluded from these consolidated financial statements, are reflected as
adjustments in the 1996 Consolidated Statements of Shareholders' Equity and Cash
Flows.
Principles of Consolidation -- Tyco is a holding company whose assets
consist of its investments in its subsidiaries, intercompany balances and
holdings of cash and cash equivalents. The businesses of the consolidated group
are conducted through the Company's subsidiaries. The Company consolidates
companies in which it owns or controls more than fifty percent of the voting
shares unless control is likely to be temporary. The results of companies
acquired or disposed of during the fiscal 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 (see Note 2). All
significant intercompany balances and transactions have been eliminated in
consolidation.
Change in Year End -- In September 1997 the Company changed its fiscal year
end from December 31 to September 30. The change in year end resulted in a short
fiscal year covering the nine month transition period from January 1 to
September 30, 1997. References to Fiscal 1997, 1996 and 1995 throughout these
consolidated financial statements refer to the nine months ended September 30,
1997 and the calendar years ended December 31, 1996 and 1995, respectively.
Cash Equivalents -- All highly liquid investments purchased with a maturity
of three months or less are considered to be cash equivalents.
Inventories -- Inventories are recorded at the lower of cost (primarily
first in, first out) or market value.
8
<PAGE> 10
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property, Plant and Equipment -- Property, plant and equipment are
principally recorded at cost less accumulated depreciation. Maintenance and
repair expenditures are charged to expense when incurred. The straight-line
method of depreciation is used over the estimated useful lives of the related
assets as follows:
<TABLE>
<S> <C>
Buildings and related improvements 2 to 50 years
Leasehold improvements remaining term of the lease
Subscriber systems 10 to 14 years
Other plant, machinery, equipment and 2 to 20 years
furniture and fixtures
</TABLE>
Gains and losses arising on the disposal of property, plant and equipment
are included in the consolidated statements of operations.
Associates -- For investments in which the Company owns or controls more
than twenty percent of the voting shares, or over which it exerts significant
influence over operating and financial policies, the equity method of accounting
is used. The consolidated statements of operations include the Company's share
of net income of associates less applicable goodwill amortization.
Goodwill and Other Intangible Assets -- Goodwill is being amortized on a
straight-line basis over periods ranging from 10 to 40 years. Accumulated
amortization amounted to $332.5 million at September 30, 1997 and $275.1 million
at December 31, 1996. Impairment of goodwill, if any, is measured periodically
on the basis of whether anticipated undiscounted operating cash flows generated
by the acquired businesses will recover the recorded net goodwill balances over
the remaining amortization period.
Other intangible assets include patents, trademarks, customer contracts and
other items which are being amortized on a straight-line basis over lives
ranging from 2 to 30 years. At September 30, 1997 and December 31, 1996,
accumulated amortization amounted to $76.9 million and $60.9 million,
respectively.
Revenue Recognition -- Revenue from the sale of services or products is
recognized as services are rendered or shipments are made. Subscriber billings
for services not yet rendered are deferred and taken into income as earned, and
the deferred element is included in current liabilities. Revenue from the
installation of electronic security systems is recognized when installations are
completed.
Contract sales for installation of fire protection systems and other
construction related projects are recorded on the percentage-of-completion
method. Profits recognized on contracts in process are based upon estimated
contract revenue and related cost to completion. Revisions in cost estimates as
contracts progress have the effect of increasing or decreasing profits in the
current period. Provisions for anticipated losses are made in the period in
which they first become determinable. Contract sales for the installation of
underwater cable systems are also recorded on the percentage-of-completion
method.
Accounts receivable include amounts billed under retainage provisions for
fire protection contracts. Retention balances of $29.2 million at September 30,
1997 which become due upon contract completion and acceptance are expected to be
substantially collected during the fiscal year ending September 30, 1998
("Fiscal 1998").
Share Premium and Contributed Surplus -- In accordance with the Bermuda
Companies Act 1981, when the Company 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 the Company 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 the Company is credited, where applicable, to
contributed surplus, which is, subject to certain conditions, a distributable
reserve.
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
9
<PAGE> 11
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
liabilities and assets are determined based on the differences between the
consolidated financial statements and tax basis of assets and liabilities, using
tax rates in effect for the years in which the differences are expected to
reverse. A valuation allowance is required to offset any net deferred tax assets
if, based upon the available evidence, it is more likely than not that some or
all of the deferred tax assets will not be realized.
Research and Development -- Research and development expenditures are
expensed when incurred.
Translation of Foreign Currency -- Assets and liabilities of the Company's
subsidiaries operating outside of the United States which account in a
functional currency other than U.S. dollars, other than those operating in
highly inflationary environments, are translated into U.S. dollars using
year-end exchange rates. Revenues and expenses are translated at the average
exchange rates effective during the year. Foreign currency translation gains and
losses are included as a separate component of shareholders' equity. For
subsidiaries operating in highly inflationary environments, inventories and
property, plant and equipment, including related expenses, are translated at the
rate of exchange in effect on the date the assets were acquired, while other
assets and liabilities are translated at year-end exchange rates. Translation
adjustments for these operations are included in net (loss) income.
Gains and losses resulting from foreign currency transactions, the amounts
of which are not material, are included in net (loss) income.
Interest Rate Swaps, Currency Options and Other Contracts -- From time to
time the Company enters into a variety of interest rate swaps, interest rate
locks of future fundings, currency options and cross-currency swaps in its
management of interest costs and foreign currency exposures.
Interest rate swaps and interest rate locks hedge interest rates on certain
indebtedness and involve the exchange of fixed and floating rate interest
payment obligations over the life of the related agreement without the exchange
of the notional amount. The interest differentials to be paid or received under
interest rate swaps or locks are recognized over the life of the underlying
agreement or indebtedness, respectively, as an adjustment to interest expense.
Currency options, acquired for the purpose of hedging foreign operating
income generally for periods not exceeding twelve months, are marked to market
with any realized and unrealized gains or losses reflected in selling, general
and administrative expenses. Under cross-currency swaps, which hedge certain net
foreign investments, changes in valuation are recorded in the currency
translation adjustment account. The interest differentials from swaps are
recorded in interest expense.
Use of Estimates -- The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make extensive use of certain estimates and assumptions that affect the reported
amount 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 reported periods.
Significant estimates in these consolidated financial statements include
allowances for doubtful accounts receivable, estimates of future cash flows
associated with assets, asset impairments, useful lives for depreciation and
amortization, loss contingencies, net realizable value of inventories, estimated
contract revenues and related costs, environmental liabilities, income taxes and
tax valuation reserves, and the determination of discount and other rate
assumptions for pension and post-retirement employee benefit expenses. Actual
results could differ from those estimates.
Net (Loss) Income Per Share -- Net (loss) income per share is calculated on
the basis of net (loss) income available to common shareholders divided by the
weighted average number of shares outstanding, which includes common equivalents
shares to reflect stock options and warrants using the treasury stock method
except where their effect would be anti-dilutive.
Accounting Pronouncements -- In February 1997, the Financial Accounting
Standards Board (the "FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share",
10
<PAGE> 12
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which is effective for fiscal years ending after December 15, 1997, including
interim periods. Earlier adoption is not permitted. The statement requires
restatement of all prior period earnings per share data presented after the
effective date. SFAS No. 128 specifies the computation, presentation and
disclosure requirements for earnings per share and is substantially similar to
the standard recently issued by the International Accounting Standards Committee
entitled International Accounting Standards, "Earnings Per Share". The Company
will adopt SFAS No. 128 in Fiscal 1998 and the impact is not expected to be
material.
In June 1997, the FASB issued two additional statements. SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information" are both effective for years beginning
after December 15, 1997. Adoption of these standards are not expected to impact
the financial results of the Company.
Reclassifications -- Certain prior year amounts have been reclassified to
conform with current year presentation.
2. MERGERS
Tyco's Merger with Keystone -- On August 29, 1997 Tyco consummated a merger
with Keystone International, Inc. Shareholders of Keystone received 0.48726
shares of Tyco common stock in exchange for each share of Keystone outstanding.
A total of approximately 17.4 million shares were issued, prior to the effect of
the two-for-one stock split, as described in Note 10.
Tyco's Merger with INBRAND -- On August 27, 1997 Tyco merged with INBRAND
Corporation. Shareholders of INBRAND received 0.43 shares of Tyco common stock
in exchange for each share of INBRAND outstanding. A total of approximately 5.1
million shares were issued, prior to the effect of the two-for-one stock split.
ADT's Merger with the Former Tyco -- On July 2, 1997 a wholly-owned
subsidiary of ADT merged with the Former Tyco. Shareholders of ADT, through a
reverse stock split, received 0.48133 shares of the Company's common stock for
each share of ADT common stock outstanding, and the Former Tyco shareholders
received one share of the Company's common stock for each share of the Former
Tyco common stock outstanding. A total of approximately 168.4 million shares
were issued, prior to the effect of the two-for-one stock split.
Each of the three merger transactions discussed above qualifies for pooling
of interests accounting treatment, which is intended to present as a single
interest, common shareholder interests which were previously independent. The
historical consolidated financial statements for periods prior to the
consummation of the combination are restated as though the companies had been
combined during such periods. As discussed in Note 1, the consolidated financial
statements for periods prior to January 1, 1997 do not include INBRAND due to
immateriality. In addition, all historical common share and per share data of
the Company have been retroactively restated to reflect the reverse stock split
and two-for-one stock split discussed above.
Aggregate fees and expenses related to the three mergers discussed above
and to the integration of the combined companies have been expensed in the
accompanying consolidated statement of operations for the nine months ended
September 30, 1997 as required under the pooling of interests accounting method.
This includes transaction costs of approximately $239.8 million relating to
legal, printing, accounting, financial advisory services, severance costs
payable at the effective time of the merger and other direct expenses. It also
includes charges of approximately $678.0 million to reflect the combination of
the four companies, including severance costs, integration costs, the costs
associated with the elimination of excess facilities and the satisfaction of
certain liabilities. In addition the Company recorded a charge of $148.4 million
for the impairment of long-lived assets. See Notes 11 and 15 to the Consolidated
Financial Statements.
11
<PAGE> 13
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Combined and separate results of ADT, Former Tyco, Keystone and INBRAND for
the periods preceding the merger were as follows:
<TABLE>
<CAPTION>
FORMER
ADT TYCO KEYSTONE INBRAND(I) COMBINED
-------- -------- -------- ---------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Six Months ended June 30, 1997 (unaudited)
Net sales.................................. $ 923.9 $3,505.6 $331.2 $118.7 $4,879.4
Net income (loss).......................... 47.2 244.6 22.9 (28.9) 285.8
Year ended December 31, 1996
Net sales.................................. 1,704.0 5,721.8 677.9 -- 8,103.7
Extraordinary items, net of taxes.......... (8.4) -- -- -- (8.4)
Net (loss) income.......................... (695.1) 348.1 41.9 -- (305.1)
Year ended December 31, 1995(ii)
Net sales.................................. 1,783.8 4,534.7 597.1 -- 6,915.6
Extraordinary items, net of taxes.......... (9.8) (2.6) -- -- (12.4)
Net income................................. 21.2 214.0 19.9 -- 255.1
</TABLE>
- ---------------
(i) The restated combined financial statements for periods prior to January 1,
1997 do not include INBRAND due to immateriality (see Note 1).
(ii) Prior to the mergers, ADT and Keystone had calendar year ends and the
Former Tyco had a June 30 fiscal year end. The historical results have been
combined using a calendar year end for ADT, Former Tyco and Keystone for
the year ended December 31, 1996. For 1995 the results reflect the
combination of ADT and Keystone with a calendar year end and the Former
Tyco with a June 30 fiscal year end. Net sales and net income for the
Former Tyco for the period July 1, 1995 through December 31, 1995 (which
results are not included in the historical combined results) were $2.46
billion and $136.4 million, respectively.
ADT's Merger with Automated Security (Holdings) PLC ("ASH")
In September 1996, ADT merged with and acquired the whole of the issued
capital of ASH, a United Kingdom quoted company (the "ASH merger"). ASH is
engaged in the provision of electronic security services in North America and
Europe. The total consideration in respect of the whole of the issued capital of
ASH consisted of the issue of 6,772,255 ADT common shares. The ASH merger was
accounted for as a pooling of interests.
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 fiscal year end was November 30. ASH has been accounted for as a
pooling of interests and its results have been combined with ADT's using the
November year end. The results of operations and cash flows for ASH for the
month of December 1996, which have been excluded from these consolidated
financial statements, are reflected as adjustments in the 1997 consolidated
statements of shareholders' equity and cash flows.
12
<PAGE> 14
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Combined and separate results of ADT and ASH for the periods preceding the
ADT and ASH merger were as follows:
<TABLE>
<CAPTION>
ADT ASH ADJUSTMENTS COMBINED
-------- ------- ----------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Six months ended June 30, 1996 (unaudited)
Net sales...................................... $ 715.6 $ 118.1 $-- $ 833.7
Extraordinary items, net of taxes.............. (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, net of taxes.............. (9.8) -- -- (9.8)
Net income (loss).............................. 41.5 (18.7) (1.6)(ii) 21.2
</TABLE>
- ---------------
(i) Income tax adjustment arising on preference share dividends accrued by the
ASH group but not payable following merger.
(ii) Income tax adjustment of $0.6 million credit referred to in (i) above, and
a $2.2 million charge relating to cumulative currency translation
adjustments on the disposal of businesses and associates by the ASH group
whose consolidated financial statements were prepared in pounds
sterling -- its functional currency.
All fees and expenses related to the ASH merger have been expensed as
required under the pooling of interests accounting method. Such fees and
expenses amounted to $8.8 million in 1996.
Former Tyco's Merger with Kendall International, Inc. -- On October 19, 1994,
a wholly-owned subsidiary of the Former Tyco merged with Kendall International,
Inc. ("Kendall"). Shareholders of Kendall received 1.29485 shares of the Former
Tyco common stock for each share of Kendall common stock. The transaction was
accounted for as a pooling of interests. Accordingly, the historical financial
statements of the Former Tyco and Kendall for periods prior to the consummation
of the combination were restated as though the companies had been combined
during such periods. Revenues and net income for the quarter ended September 30,
1994 (the most recent interim period prior to the pooling) were $827.6 million
and $32.6 million, respectively, for the Former Tyco and $226.6 million and
$20.7 million, respectively, for Kendall.
All fees and expenses related to the Kendall merger and to the integration
of the combined companies have been expensed as required under the pooling of
interests accounting method. Such fees and expenses amounted to $37.2 million in
1995.
3. ACQUISITIONS AND DIVESTITURES
In addition to the mergers discussed in Note 2, in Fiscal 1997 the Company
acquired companies in each of its business segments for an aggregate of $1.36
billion, including $1.34 billion in cash and the assumption of approximately
$15.7 million in debt. The cash portion of the acquisitions were made utilizing
cash on hand, funding from equity offering of $645.2 million as well as
borrowings under the Company's uncommitted lines of credit. Each of these
acquisitions was accounted for as a purchase and the results of operations of
the acquired companies were included in the consolidated results of the Company
from their respective acquisition dates. As a result of the acquisitions,
approximately $531.7 million in goodwill and other intangibles, net of write off
of purchased in-process research and development, was recorded by the Company,
which reflects the adjustments necessary to allocate the individual purchase
prices to the fair value of assets acquired, liabilities assumed and additional
purchase liabilities recorded. Additional purchase liabilities recorded include
approximately $13.8 million for transaction and other direct costs, $42.2
million for severance and related costs and $20.6 million for costs associated
with the shut down and consolidation of
13
<PAGE> 15
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
certain acquired facilities. At September 30, 1997 liabilities for approximately
$2.2 million in transaction and other costs, $19.7 million in severance costs
and $15.5 million for facility related costs remained on the balance sheet. In
connection with the acquisition of AT&T's submarine systems business the Company
allocated $361.0 million of the purchase price to in-process research and
development projects that had not reached technological feasibility and had no
probable alternative future uses. The Company expects that its termination of
employees and consolidation of facilities related to these acquisitions will be
substantially complete by the end of Fiscal 1998.
The following unaudited pro forma data summarize the results of operations
for the periods indicated as if these acquisitions had been completed on January
1, 1996. The pro forma data give effect to actual operating results prior to the
acquisitions and adjustments to interest expense, goodwill amortization and
income taxes. These pro forma amounts do not purport to be indicative of the
results that would have actually been obtained if the acquisitions had occurred
on January 1, 1996 or that may be obtained in the future. The pro forma data do
not give effect to acquisitions completed subsequent to September 30, 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Sales...................................... $8,267.1 $ 9,530.4
Loss before extraordinary item............. (792.3) (332.9)
Net loss................................... (850.6) (341.6)
Net loss per share......................... (1.64) (0.72)
</TABLE>
During 1996, the Company acquired companies in each of its business
segments for an aggregate of $1.1 billion, including $822.6 million in cash, 3.5
million shares of the Company's common stock valued at $130.4 million and the
assumption of approximately $155.0 million in debt. The cash acquisitions were
made utilizing cash on hand, proceeds of approximately $300 million of 6 1/2%
public notes, as well as borrowings under the Company's uncommitted lines of
credit. Each of the acquisitions was accounted for as a purchase and the results
of operations of the acquired companies were included in the consolidated
results of the Company from their respective acquisition dates. As a result of
the acquisitions, approximately $859.2 million in goodwill was recorded by the
Company, which reflects the adjustments necessary to allocate the individual
purchase prices to the fair value of assets acquired, liabilities assumed and
additional purchase liabilities recorded. Additional purchase liabilities
recorded include approximately $27.0 million for transaction and other direct
costs, $44.0 million for severance and related costs and $23.5 million for costs
associated with the shut down and consolidation of certain acquired facilities.
At September 30, 1997 liabilities for approximately $1.1 million in transaction
and other costs, $10.4 million in severance costs and $10.9 million for facility
related costs remained on the balance sheet. The Company expects to complete its
termination of employees and consolidation of facilities in fiscal 1998.
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. The net gain is included in other income (Note 12).
During 1995, the Company acquired companies in its flow control products,
disposable and specialty products, and fire and safety services segments for an
aggregate of $218.0 million in cash. The acquisitions were accounted for as
purchases, and the results of operations of the acquired companies were included
in the consolidated results of the Company from their respective acquisition
dates. The effect of these transactions on the Company's financial position and
results of operations in the year of acquisition was not significant.
During 1995, the Company disposed of an interest in its United Kingdom and
Continental European vehicle auction services businesses ("European Auctions"),
its entire European electronic article surveillance business and certain
European electronic security services operations for net cash proceeds of $254.8
million,
14
<PAGE> 16
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
notes receivable of $87.9 million, shares received of $0.9 million and deferred
consideration of $5.6 million. The loss on the sale of these businesses was
$36.6 million. European Auctions was sold to Integrated Transport Systems
("ITS"). As a result of this transaction the Company now holds a 10.0% interest
in the ordinary share capital of ITS, valued and accounted for by the Company at
a nominal amount, together with a subordinated, non-collateralized deep discount
zero coupon loan note issued by ITS maturing in 2004 ("Vendor Note"). The Vendor
Note has a $187.6 million aggregate principal amount at maturity with an issue
price of $83.9 million, reflecting a yield to maturity of 10.0% per annum, and
was originally valued by the Company at $74.6 million. There are no periodic
payments of interest. As of September 30, 1997, the Vendor Note is included in
long-term investments on the balance sheet and has been accounted for at its
amortized cost of $94.6 million (the fair market value of the Vendor Note at
September 30, 1997 amounted to $83.4 million).
On December 29, 1995, the Company sold certain assets, including trademarks
and patents, of the Curad(R) and Futuro(R) consumer healthcare products business
owned by its Kendall subsidiary. Under the agreements, Kendall will continue to
manufacture certain Curad(R) and Futuro(R) products for the buyer under
long-term supply agreements. The Company received net cash proceeds of $49.8
million on the sale of the brand names and certain domestic assets. The Company
will continue to receive other payments, including payments under royalty and
noncompete agreements, through 2000. The Company has also granted to the buyer
options to acquire certain additional trademarks, patents and other
international assets.
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 the Company 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. In December 1996 the Company
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 the Company of $77.5 million in cash 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 and $4.7 million was included in interest income in 1996.
15
<PAGE> 17
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INDEBTEDNESS
Long-term debt is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(IN MILLIONS)
<S> <C> <C>
Bank and acceptance facilities............................. $ 56.4 $ 50.6
Bank credit agreement(i)................................... 1,400.0 100.0
Bank credit agreement -- ADT(i)............................ -- 83.0
Uncommitted lines of credit(ii)............................ 38.5 254.7
Variable rate term loan due 1998(iii)...................... 97.1 --
8.125% public notes due 1999(iv)........................... 10.5 144.9
8.25% senior notes due 2000(iv)............................ 9.5 250.0
6.34% senior notes due 2000 -- Keystone.................... 45.0 45.0
6.5% public note due 2001(v)............................... 298.7 298.5
Sterling denominated bank facility due 2002(vi)............ 137.5 --
9.25% senior subordinated notes due 2003(iv)............... 14.1 294.1
6.375% public notes due 2004............................... 104.5 104.4
9.5% convertible capital bonds due 2006(vii)............... -- 75.6
Zero coupon Liquid Yield Option Notes due 2010(viii)....... 259.6 326.8
9.5% public debentures due 2022(iv)........................ 49.0 199.6
8.0% public debentures due 2023............................ 50.0 50.0
Other...................................................... 160.2 189.1
-------- --------
Total debt................................................. 2,730.6 2,466.3
Less current portion....................................... 250.0 587.9
-------- --------
Long-term debt............................................. $ 2,480.6 $1,878.4
======== ========
</TABLE>
- ---------------
(i) In June 1997, Former Tyco renegotiated its $300 million credit agreement
with a group of commercial banks and increased it to $1.75 billion giving
it the right to borrow (a) up to $500 million until December 1997, (b) up
to $750 million until June 1998 and (c) up to $500 million until June
2002. The principal amounts then outstanding will be due and payable at
those times. Interest payable on borrowings is variable based upon Former
Tyco's option of selecting a Eurodollar rate plus margins ranging from
0.175% to 0.195%, a certificate of deposit rate plus margins ranging from
0.30% to 0.32% or a base rate, as defined. In July 1997, Former Tyco
borrowed $600 million under the new credit agreement to partially fund the
acquisitions discussed in Note 3. Also in July 1997, Former Tyco borrowed
$800 million under the new credit agreement to fund the debt tenders
discussed below. The weighted average interest rate for these borrowings
was 5.93%. Repayment of amounts outstanding under this agreement is
guaranteed by Tyco.
Subsequent to fiscal year end, Former Tyco terminated the $500 million
component of the agreement due in December 1997. The balance outstanding
was repaid through the issuance of $475 million private placement notes,
of which $225 million are due in March 1998 and $250 million are due in
June 1998. These notes bear interest at LIBOR plus 0.25%. The $475 million
private placement notes, in addition to the remainder of the $1.4 billion
credit agreement which become due in fiscal 1998 have been classified as
long term liabilities based on the Company's ability and intent to
refinance these obligations on a long term basis. The specific terms of
the refinancing have not been finalized.
During Fiscal 1997, ADT Operations, Inc., a wholly-owned subsidiary of the
Company, canceled its $200 million senior, revolving bank credit
agreement.
16
<PAGE> 18
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ii) Uncommitted lines of credit are borrowings by Tyco US from commercial
banks on an "as offered" basis. Borrowings and repayments occur daily and
contain no specific terms other than due dates and interest rates. The due
dates generally range from overnight to 90 days, and interest rates
approximate those available under Tyco US's credit agreement. The weighted
average interest rate was 6.0% at September 30, 1997.
(iii) In May 1997, a Tyco subsidiary entered into a L60 million term loan, due
in March 1998, with a bank to refinance certain intercompany loans with
external debt. Interest payable on borrowings are variable based upon
U.K. LIBOR plus 0.35%. The interest rate at September 30, 1997 was 7.60%.
(iv) In July 1997, Tyco US tendered for its $145.0 million 8.125% public notes
due 1999 and $200.0 million 9.5% public debentures due 2022, and ADT
Operations, Inc. tendered for its $250.0 million 8.25% senior notes due
2000 and $294.1 million 9.25% senior subordinated notes due 2003. The
percentage of debt tendered was 92.8% of the 8.125% notes, 75.5% of the
9.5% debentures, 96.2% of the 8.25% notes and 95.2% of the 9.25% notes.
The two companies paid an aggregate amount, including accrued interest, of
approximately $900.8 million to the note holders, of which $800.0 million
was financed from the new credit agreement discussed above. In connection
with the tender, the Company recorded an after-tax charge of approximately
$58.3 million, net of related income tax benefit of $33.0 million,
primarily representing unamortized debt issuance fees and the premium
paid, which was reported as an extraordinary loss (Note 13).
The $250.0 million 8.25% senior notes due August 2000 were issued in
August 1993, through a public offering, by ADT Operations, Inc. and are
guaranteed on a senior basis by the Company and certain subsidiaries of
ADT Operations, Inc. The senior notes are not redeemable prior to
maturity.
The $294.1 million 9.25% 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 the Company. The
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%, (b)
August 1999 at 102.50%, (c) August 2000 at 101.25%, and thereafter at
100.00% of the principal amount. During 1996 the Company reacquired in the
market $23.1 million face value of the senior subordinated notes at a
purchase cost of $24.0 million which was financed from cash on hand. The
loss arising on reacquisition of $0.9 million, and related costs of $0.5
million, were included in extraordinary items (Note 13).
In conjunction with the tenders described above, ADT Operations, Inc.,
through consent of the holders of the senior and senior subordinated
notes, eliminated in the indentures pursuant to which such notes were
issued (a) certain restrictive covenants and provisions and references to
such restrictive covenants, (b) certain events of default to the extent
relating to such restrictive covenants and (c) certain definitions to the
extent relating to such restrictive covenants and events of default.
(v) In October 1996, Tyco US issued $300.0 million principal amount of 6.5%
notes due 2001. The net proceeds were used to redeem debt assumed with the
acquisition of Carlisle Plastics, Inc. as well as to reduce certain
amounts outstanding under Tyco US' credit agreement and uncommitted lines
of credit.
(vi) In March 1997, ADT Finance entered into a sterling denominated bank credit
facility of which $137.5 million (L85 million) is a term loan facility and
$8 million is a revolving credit facility. The term loan facility was
fully drawn down and was used to repay in part the $26 million drawn down
under another sterling denominated bank credit facility entered into in
January 1997. The new facility has a term of five years and is guaranteed
by the Company and certain of its subsidiaries. Interest is payable at
LIBOR plus a margin. The interest rate at September 30, 1997 was 7.73%.
(vii) 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.
17
<PAGE> 19
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(viii) In July 1995, ADT Operations, Inc. issued $776.3 million aggregate
principal amount at maturity of its zero coupon subordinated Liquid Yield
Option Notes ("LYONs") 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 canceled. The issue price per LYON was $383.09,
being 38.309% of the principal amount of $1,000 per LYON at maturity,
reflecting a yield to maturity of 6.5% per annum (computed on a
semi-annual bond equivalent basis). The discount amortization on the
LYONs is being charged as interest expense through the consolidated
statements of operations on a basis linked to the yield to maturity. The
LYONs discount amortization for Fiscal 1997 amounted to $15.9 million
(1996 -- $20.3 million; 1995 -- $9.4 million). Each LYON is exchangeable
for common shares of the Company 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 27.176 common shares per
LYON. During 1997 and 1996, respectively, 188,290 and 619 Notes with
carrying values of $83.0 and $0.3 million were exchanged for 5,116,923
and 16,820 common shares of the Company. Any LYON will be purchased by
ADT Operations, Inc., at the option of the holder, as of July 2002 for a
purchase price per LYON of $599.46. At this time, if the holder exercises
the option, the Company has the right to deliver all or a portion of the
purchase price in the form of common shares of the Company. Beginning
July 2002, the LYONs 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 LYONs are guaranteed on a subordinated basis by the
Company. If, on or prior to maturity, there is a change in control, as
defined, the holder has the right to require ADT Operations, Inc. to
purchase the LYONs at the change in control purchase price, as defined.
The average rate of interest on all long-term debt during the nine months
ended September 30, 1997 was 7.6% (1996 -- 8.0%; 1995 -- 8.3%).
The aggregate amounts of total debt maturing during the next five years are
as follows (in millions): $250.0 in Fiscal 1998, $932.6 in Fiscal 1999, $93.5 in
Fiscal 2000, $817.1 in Fiscal 2001 and $56.9 in Fiscal 2002.
At September 30, 1997, the Company had an interest rate swap agreement with
a financial institution having a total notional amount of $50 million, which
effectively converts fixed rate debt to variable rate debt. Under this
agreement, the Company will receive payments at an average fixed rate of 5.56%
and will make payments based on six month LIBOR, which, at September 30, 1997,
was 5.84%. This agreement expires in March 1998. The impact of the Company's
interest rate swap activities on its weighted average borrowing rate was not
material in any year. The impact on reported interest was a reduction of $0.8
million, a reduction of $1.8 million, and an increase of $1.0 million for Fiscal
1997, 1996, and 1995, respectively.
At September 30, 1997, the Company had interest rate lock agreements with a
financial institution for a total notional amount of $500 million. These
instruments hedge the cost of indebtedness and any resulting interest
differentials to be paid or received will be recognized over the term of the
indebtedness. At September 30, 1997, the fair value of the interest rate locks
was $12.3 million in excess of the notional amount.
5. SALE OF ACCOUNTS RECEIVABLE
The Company has an agreement under which one of its operating subsidiaries
sells a defined pool of trade accounts receivable to a limited purpose
subsidiary of the Company. The subsidiary, a separate corporate entity, owns all
of its assets and sells participating interests in such accounts receivable to
creditors who, in turn, purchase and receive ownership and security interests in
those assets. As collections reduce accounts receivable included in the pool,
the operating subsidiary sells new receivables. The limited purpose subsidiary
has the risk of credit loss on the receivables and, accordingly, the full amount
of the allowance for doubtful
18
<PAGE> 20
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounts has been retained on the Company's consolidated balance sheet. At
September 30, 1997, the $300 million available under the program was fully
utilized. At December 31, 1996 the $225 million available under the program was
fully utilized. The proceeds from the sales were used to reduce borrowings under
uncommitted lines of credit and are reported as operating cash flows in the
Company's Consolidated Statement of Cash Flows. The proceeds of sale are less
than the face amount of accounts receivable sold by an amount that approximates
the purchaser's financing costs of issuing its own commercial paper backed by
these accounts receivable. The discount from the face amount is accounted for as
a loss on the sale of receivables of $10.4 million, $12.1 million, and $8.2
million during Fiscal 1997, 1996 and 1995, respectively, and has been included
in selling, general and administrative expense in the Company's Consolidated
Statement of Operations. The operating subsidiary, as servicing agent for the
purchaser, retains collection and administrative responsibilities for the
participating interests in the defined pool.
6. FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash in banks,
temporary investments, accounts receivable and debt. The Company also has
currency options (notional amount of $54.0 million), as well as interest rate
swaps. At September 30, 1997 and at December 31, 1996 the fair value of interest
rate swaps approximated book value, and the fair value of long-term debt was
approximately $2,482.6 million (book value of $2,480.6 million), based on
current interest rates. The fair value of financial instruments included in
working capital approximated book value.
None of the Company's financial instruments represent a concentration of
credit risk as the Company deals with a variety of major banks worldwide and its
accounts receivable are spread among a number of major industries, customers and
geographic areas. None of the Company's off-balance sheet financial instruments
would result in a significant loss to the Company if a counterparty failed to
perform according to the terms of its agreement.
7. INCOME TAXES
The (benefit) provision for income taxes and the reconciliation between the
notional United States federal income taxes at the statutory rate on
consolidated (loss) income before taxes and the Company's income tax provision
are as follows:
<TABLE>
<CAPTION>
NINE
MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------- -----------------
1997 1996 1995
------------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Notional U.S. federal income taxes at the
statutory rate................................. $(206.4) $(21.5) $166.6
Adjustments to reconcile to the Company's income
tax provision:
U.S. state income tax provision, net........... 16.2 22.4 19.1
SFAS 121 impairment............................ 49.6 150.2 --
Non U.S. net losses (earnings)................. 121.4 75.5 14.4
Provision for unrepatriated earnings of
subsidiaries................................ 64.1 -- --
Nondeductible restructuring charges............ 112.9 -- --
Other.......................................... 29.2 8.9 8.5
------ ------ ------
Provision for income taxes..................... 187.0 235.5 208.6
Deferred benefit (provision)................... 257.4 (38.6) (43.4)
------ ------ ------
Current provision.............................. $ 444.4 $196.9 $165.2
====== ====== ======
</TABLE>
19
<PAGE> 21
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provisions for Fiscal 1997, 1996, and 1995 included $101.1 million,
$45.3 million and $38.8 million, respectively, for non-U.S. income taxes. The
non-U.S. component of (loss) income before income taxes was $(183.9) million,
$(117.7) million and $69.5 million, for Fiscal 1997, 1996, and 1995,
respectively. In accordance with Accounting Principals Board Opinion No. 23, a
provision of $64.1 million has been made for undistributed earnings of
subsidiaries. The remaining earnings are expected to be permanently reinvested.
The deferred income tax balance sheet accounts result from temporary
differences between the amount of assets and liabilities recognized for
financial reporting and tax purposes. The components of the net deferred income
tax asset are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets:
Accrued liabilities and reserves......................... $ 603.4 $ 228.8
Accrued postretirement benefit obligation................ 59.5 60.2
Tax loss carryforwards................................... 284.7 319.7
Interest................................................. 92.7 51.8
Other.................................................... 5.1 21.6
------ ------
1,045.4 682.1
------ ------
Deferred tax liabilities:
Property, plant and equipment............................ (433.4) (393.2)
Contracts................................................ (6.1) (6.8)
Accrued liabilities and reserves......................... (17.0) (12.2)
Other.................................................... (14.7) (38.8)
------ ------
(471.2) (451.0)
------ ------
Net deferred income tax asset before valuation
allowance............................................. 574.2 231.1
Valuation allowance...................................... (115.4) (156.3)
------ ------
Net deferred income tax asset............................ $ 458.8 $ 74.8
====== ======
</TABLE>
As of September 30, 1997, the Company had approximately $223.6 million of
net operating loss carryforwards in certain non-U.S. jurisdictions. Of these,
$204.1 million have no expiration, and the remaining $19.5 million will expire
in future years to 2004. U.S. operating loss carryforwards at September 30, 1997
were approximately $578.8 million and will expire in future years to 2011. A
valuation allowance has been provided for operating loss carryforwards that are
not expected to be utilized. During Fiscal 1997, the Company had a $37.8 million
reduction of its valuation allowance, as a result of a change in estimate as to
realization, with a corresponding reduction in intangible assets.
In the normal course, the Company and its subsidiaries' income tax returns
are examined by the regulatory tax authorities and, in connection with such
examinations, significant assessments could arise. During 1995, the United
States Internal Revenue Service ("IRS") examined the Former Tyco's 1991 and 1992
income tax returns. In connection with such examination, one item is currently
under review by the IRS National Office which could result in a significant
assessment of additional taxes. Ultimate resolution of this matter is not
expected to have a material adverse effect on the Company's financial position,
results of operations or liquidity.
20
<PAGE> 22
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. KEY EMPLOYEE LOAN PROGRAM
Loans are made by the Former Tyco to employees of the Company under the
Former Tyco 1983 Key Employee Loan Program for the payment of taxes upon the
vesting of shares granted under the Former Tyco's Restricted Stock Ownership
Plans. The loans are unsecured and bear interest, payable annually, at a rate
which approximates the Former Tyco's incremental short-term borrowing rate.
Loans are generally repayable in ten years, except that earlier payments are
required under certain circumstances. Loans under this program were $12.3
million and $15.3 million at September 30, 1997 and December 31, 1996,
respectively.
9. CONVERTIBLE REDEEMABLE PREFERENCE SHARES
The Company has authorized (a) 225,000 5 3/4% convertible cumulative
redeemable preference shares of $1 each, (b) 500,000 6% convertible cumulative
redeemable preference shares of $1 each and (c) 125,000,000 convertible
cumulative redeemable preference shares of $1 each, of which none was
outstanding at September 30, 1997 or December 31, 1996. Of the 125,000,000
convertible cumulative redeemable preference shares authorized, 7,500,000 have
been classified as Series A First Preference Shares and are reserved for
issuance pursuant to the Shareholder Rights Plan described below. Rights as to
dividends, return of capital, redemption, conversion, voting and otherwise of
the remaining 117,500,000 convertible cumulative redeemable preference shares of
$1 each, none of which are issued and outstanding, may be determined by the
Company on or before the time of allotment.
In November 1996, the Board of Directors of ADT adopted a Shareholder
Rights Plan, which was amended in March 1997 and July 1997 (the "Plan"). Under
the Plan, each common shareholder has received a distribution of rights for each
common share held. After giving effect to the exchange ratio related to the
merger between ADT and Former Tyco and the two-for-one stock split distributed
on October 22, 1997, the number of Rights associated with each common share is
1.03879. Each right entitles the holder to purchase from the Company 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% or more of the Company's common
shares, or commences a tender or exchange offer which, if consummated, would
result in any person becoming the beneficial owner of 15% or more of the
Company's common shares. Once exerciseable each right will entitle the holder,
other than the acquiring person, to purchase, for the rights purchase price,
common shares having a market value of twice the rights purchase price.
If, following an acquisition of 15% or more of the Company's common shares,
the Company is involved in any mergers or other business combinations or sells
or transfers more than 50% 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. The merger between ADT and the Former Tyco (see Note 2) was
specifically excluded from these provisions by an amendment to the Plan in July
1997.
The Company 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% or more of the Company's common shares. The rights will expire in
November 2005 unless exercised or redeemed earlier.
In the event of liquidation of the Company, the holders of all of the
Company'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 dividend, prior to any payment to the common shareholders.
21
<PAGE> 23
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SHAREHOLDERS' EQUITY
During the last quarter of Fiscal 1997, the Board of Directors declared a
two-for-one stock split effected in the form of a 100% stock dividend on the
Company's common shares. Per share amounts and share data have been
retroactively adjusted to reflect the stock split.
In January 1997, the Former Tyco filed a shelf registration to enable it to
offer from time to time unsecured debt securities or shares of common stock, or
any combination of the foregoing, at an aggregate initial offering price not to
exceed $900 million. In March and April 1997, the Former Tyco sold an aggregate
of 23,000,000 shares of common stock off the shelf at $28.88 per share. The net
proceeds from the sale of $645.2 million were used to repay indebtedness
incurred for previous acquisitions.
Prior to the merger of ADT with the Former Tyco, the shareholders of ADT
approved the consolidating of $0.10 par value common shares into new $0.20 par
value common shares and an increase in the number of authorized common shares to
750,000,000. Per share amounts and per share data have been retroactively
adjusted to reflect the consolidation into new par value shares. Information
with respect to ADT common shares and options has been retroactively restated in
connection with the merger on July 2, 1997 to reflect the reverse stock split in
the ratio of 0.48133 share of ADT for each share or option outstanding and the
issuance of one share for each share of the Former Tyco outstanding (see Note
2). Information with respect to Keystone and INBRAND common shares and options
have been retroactively restated in connection with their mergers with Tyco to
reflect their applicable merger exchange ratios of 0.48726 and 0.43,
respectively.
All treasury shares held were retired in Fiscal 1997.
Restricted Stock -- The Former Tyco's 1978 Restricted Stock Ownership Plan
(the "1978 Plan") provided for the award of 9,600,000 shares of common stock to
key employees through November 30, 1988. Under the 1978 Plan, 9,547,400 shares
were granted, net of surrenders. The 1983 Restricted Stock Ownership Plan (the
"1983 Plan") provided for the award of 13,600,000 shares of common stock to key
employees through October 18, 1993. Under the 1983 Plan, 13,465,200 shares were
awarded, net of surrenders. The Former Tyco's 1994 Restricted Stock Ownership
Plan (the "1994 Plan"), which was assumed by the Company, provides for the award
of an initial amount of shares of common stock plus an amount equal to one-half
of one percent of the total shares outstanding at the beginning of each fiscal
year. At September 30, 1997, there were 5,858,268 shares available, of which
2,744,424 shares had been granted. Common shares are awarded subject to certain
restrictions with vesting varying over periods of up to ten years.
For grants which vest based on certain specified performance criteria, the
fair market value of the shares at the date of vesting is expensed over the
period the performance criteria are measured. For grants that vest through
passage of time, the fair market value of the shares at the time of the grant is
amortized (net of tax benefit) to expense over the period of vesting. The
unamortized portion of deferred compensation expense is recorded as a reduction
of shareholders' equity. Recipients of all restricted shares have the right to
vote such shares and receive dividends. Income tax benefits resulting from the
vesting of restricted shares, including a deduction for the excess, if any, of
the fair market value of restricted shares at the time of vesting over their
fair market value at the time of the grants and from the payment of dividends on
unvested shares are credited to contributed surplus.
Keystone also issued restricted shares under its incentive stock plans.
Shares issued under the stock grant plans are owned by the employees at the time
of grant, subject to certain restrictions, principally continued employment with
Keystone for a period set by the committee, typically ranging from one to ten
years. Upon consummation of the merger between Tyco and Keystone, all such
restrictions on the Keystone restricted stock grants lapsed.
22
<PAGE> 24
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The total compensation cost expensed for these stock-based compensation
awards was $48.5 million, $15.8 million and $9.3 million for fiscal 1997, 1996
and 1995, respectively, including $29.6 million in Fiscal 1997 related to
accelerated vesting in connection with changes in control provisions.
Tyco Stock Options -- The Company has granted employee share options which
were 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 Tyco International Ltd. Long Term Incentive
Plan (formerly known as 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 and July 1997. The Incentive Plan
is administered by the compensation committee of the Board of Directors of the
Company, which consists exclusively of independent non-executive directors of
the Company. Options are generally granted to purchase the Company 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. The Company has reserved 44.0 million common
shares for issuance under the Incentive Plan. At September 30, 1997 there were
10,869,346 shares available for future grant.
In connection with the mergers occurring in Fiscal 1997 (see Note 2), all
of the options outstanding under the Former Tyco, Keystone and INBRAND stock
option plans were assumed by Tyco's Incentive Plan. These options are
administered under the Incentive Plan but retain all of the rights, terms and
conditions of the respective plans under which they were originally granted.
During 1995, the Former Tyco established a stock option plan under which
certain employees, excluding officers and directors, have been granted options
to purchase common stock at a price equal to fair market value on the date of
grant. The options vest on a pro-rata basis over five years, with 50% becoming
exercisable at the end of the third year and the remaining exercisable at the
end of the fifth year. Grants are for periods generally not in excess of ten
years.
Keystone granted share options under its incentive stock option plans for
the benefit of its key employees and directors. Stock options were generally
issued at exercise prices which are not less than the fair market value at the
date of grant. The options vest after one to five years and expire after five to
ten years from the date of grant.
During 1993, INBRAND adopted The INBRAND Corporation Stock Incentive Plan
("the INBRAND Incentive Plan"). Awards under the INBRAND Incentive Plan were in
the form of qualified and non-qualified stock options and/or stock appreciation
rights (SAR's). Grants under the INBRAND Incentive Plan could be made to any
employee of INBRAND, any Director of the company, or any other person to whom
the Compensation Committee determines that making such a grant is in the best
interests of the company. The INBRAND Incentive Plan provides for a
performance-based stock option format which governs the vesting of option
awards. The INBRAND Incentive Plan provided that the exercise price shall not be
less than the fair market value of the common stock as of the determination or
grant date. Each option granted will be exercisable only during the term fixed
by the Compensation Committee, with such term ending from five to ten years
after the grant date. If an option holder is still employed by the company
thirty days prior to the option's expiration date, the options will fully vest.
The INBRAND Incentive Plan contains provisions that restrict the transferability
of grants and limit their exercise in the event of termination of employment or
the disability or death of the grantee.
23
<PAGE> 25
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The movement in share options outstanding for all plans since January 1,
1995 has been as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
OUTSTANDING PRICE
----------- --------
<S> <C> <C>
At January 1, 1995............................................ 18,713,144 $ 9.35
Granted..................................................... 9,315,522 13.26
Exercised................................................... (6,701,240) 3.96
Canceled.................................................... (1,153,649) 10.59
----------
At December 31, 1995.......................................... 20,173,777 12.91
Effect of Former Tyco's excluded activity................... 39,500
Assumed from acquisitions................................... 1,090,212 16.27
Granted..................................................... 7,896,075 17.14
Exercised................................................... (2,765,668) 10.57
Canceled.................................................... (832,694) 16.65
----------
At December 31, 1996.......................................... 25,601,202 14.49
Adjustment for INBRAND merger (Note 1)...................... 895,128 20.37
Granted..................................................... 8,524,470 36.31
Exercised................................................... (2,111,636) 11.01
Canceled.................................................... (594,442) 18.64
----------
At September 30, 1997......................................... 32,314,722 20.22
==========
</TABLE>
The following table summarizes information about outstanding and
exercisable options at September 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- -------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
RANGE OF NUMBER EXERCISE CONTRACTUAL NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING PRICE LIFE -- YEARS EXERCISABLE PRICE
- ---------------- ----------- -------- ------------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.00 to $ 4.95 24,098 $ 2.32 3.4 24,098 $ 2.32
6.93 to 7.60 31,390 7.59 4.7 31,390 7.59
8.31 to 8.97 766,769 8.50 6.2 766,769 8.50
9.14 to 13.35 11,048,080 12.17 7.2 5,068,663 10.91
13.58 to 16.56 8,530,673 15.55 6.1 8,303,451 15.54
17.14 to 29.06 4,287,157 21.98 8.0 1,530,119 23.85
29.25 to 38.31 7,123,011 37.16 9.6 22,511 29.74
40.42 to 52.82 503,544 41.04 9.3 30,344 50.61
---------- ----------
32,314,722 15,777,345
========== ==========
</TABLE>
Stock-Based Compensation -- During 1996, the Company was required to adopt
SFAS 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
24
<PAGE> 26
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Fiscal 1997, 1996 and 1995 would have
been as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net (loss) income -- proforma (in millions)... $(854.0) $(335.0) $ 250.9
Net (loss) income per common
share -- proforma........................... (1.64) (.70) .53
</TABLE>
The estimated weighted average fair value of Tyco, Former Tyco and INBRAND
options granted during Fiscal 1997 was $12.15, $9.55 and $37.17, respectively,
on the date of grant using the option-pricing model and assumptions referred to
below. There were no stock option grants for Keystone in Fiscal 1997.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model. The following weighted average
assumptions were used for Fiscal 1997:
<TABLE>
<CAPTION>
TYCO FORMER TYCO INBRAND
-------- ------------ ----------
<S> <C> <C> <C>
Expected stock price volatility................... 22% 22% 55%
Risk free interest rate........................... 6.07% 6.34% 6.26%
Expected annual dividends......................... $0.10 $0.10 --
Expected life of options.......................... 5 years 5 years 6.4 years
</TABLE>
The following weighted average assumptions were used for 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
--------------------------------------- ---------------------------------------
ADT FORMER TYCO KEYSTONE ADT FORMER TYCO KEYSTONE
---------- ---------------- -------- ---------- ---------------- --------
<S> <C> <C> <C> <C> <C> <C>
Expected stock price
volatility.............. 28% 22% 26% 28% 22% 26%
Risk free interest rate... 5.9% 5.8% 6.4% 5.9% 5.8% 6.1%
Expected annual
dividends............... -- $0.10 per share 3.8% -- $0.10 per share 3.8%
Expected life of
options................. 3.7 years 3.7 years 7 years 3.7 years 3.7 years 6 years
</TABLE>
The effects of applying SFAS 123 in this proforma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995
and additional awards in future years are anticipated.
Stock Warrants -- The Company has outstanding warrants to purchase common
stock at per share exercise prices of $2.99 (the "A Warrants") and $3.98 (the "B
Warrants"), respectively (together, the "Warrants"). The Warrants expire on July
7, 1999. During fiscal 1997, 36,532 A warrants and 25,000 B warrants were
exercised. During 1996, 30,240 A Warrants and 25,120 B Warrants were exercised.
During 1995, 5,198,256 A Warrants and 5,438,868 B Warrants were exercised. At
September 30, 1997, 234,136 A Warrants and 150,542 B Warrants were outstanding.
In July 1996, as part of the then agreement to combine with Republic
Industries, Inc. ("Republic"), ADT granted to Republic a warrant (the "Warrant")
to acquire 14,439,900 common shares of the Company at an exercise price of
$20.78 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. In March 1997, the Warrant was exercised
by Republic and the Company received $300 million in cash.
Dividends -- In the third quarter of Fiscal 1997 the Company declared a
cash dividend of $0.025 per share. The dividend was paid on November 11, 1997 to
shareholders of record on October 1, 1997. Former Tyco declared cash dividends
of $0.025 per Former Tyco common share in each of the first two quarters in
Fiscal 1997 preceding the merger and Former Tyco declared cash dividends of
$0.10 per Former Tyco
25
<PAGE> 27
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common share in 1996 and 1995. ADT paid no dividends on its common shares in
Fiscal 1997, 1996, and 1995. Keystone declared quarterly dividends of $0.19 per
share in each of the three quarters in Fiscal 1997 and $0.76 per share in 1996
and 1995.
11. CHARGE FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
Charges for the impairment of long-lived assets are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ----
(IN MILLIONS)
<S> <C> <C> <C>
Fire and Security Services......................... $118.8 $731.7 $--
Flow Control Products.............................. 29.6 -- 8.2
Disposable and Specialty Products.................. -- 13.0 --
------ ------ ----
$148.4 $744.7 $8.2
====== ====== ====
</TABLE>
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets
to Be Disposed Of" ("SFAS 121"). 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 impairment losses are
recognized when expected future cash flows are less than the assets' carrying
value. When indicators of impairment are present, the carrying values of the
assets are evaluated in relation to the operating performance and future
undiscounted cash flows of the underlying business. The net book value of the
underlying assets are adjusted if the sum of expected future cash flows is less
than book value.
1997 Charges
The Company recorded charges of $148.4 million for the impairment of
long-lived assets in Fiscal 1997.
The Fire and Security Services group recorded a charge of $118.8 million.
This includes $98.8 million related to subscriber security systems installed at
customers' premises in the United States and Canada, determined following a
review of the carrying value of the assets. It also includes an impairment in
the carrying value of goodwill of $20.0 million resulting from the combination
of ADT's electronic security business with that of Former Tyco.
The Flow Control Products group recorded a charge of $29.6 million
reflecting an impairment in the carrying value of goodwill resulting from the
combination of Keystone's valve manufacturing and distribution business with
that of Former Tyco.
1996 Charges
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, the Company recorded a charge of $731.7
million in the Fire and Security Services segment relating to the electronic
security services business of ADT. 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.
Of this charge, $397.1 million related to an impairment in the carrying
value of subscriber systems, principally in the commercial sector, including the
related goodwill, which principally arose on the acquisition of ADT Security
Services in 1987. 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,
26
<PAGE> 28
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
have now been complemented by a significant residential electronic security
services operation and operations have been reorganized along separate
commercial and residential business lines, rather than on an aggregate
geographic basis. When the financial projections and estimated cash flows of the
commercial sector were analyzed separately, they indicated that the carrying
value of the related assets may not be fully recoverable. The impairment charge
amounted to $303.4 million in the United States, $56.7 million in Canada and
$37.0 million in Europe.
The remaining $334.6 million impairment charge relates to the electronic
security services of the ASH Group 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. After a review of the carrying
value of subscriber systems and related goodwill and other intangibles in
connection 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, an impairment charge in the carrying values of the assets was recorded.
In addition, the aggregate fair value of ADT common shares issued to ASH
shareholders was significantly less than ASH's consolidated net asset value. It
was for all of these reasons that the Company reviewed the assets for impairment
upon adoption of SFAS 121. The impairment charge amounted to $211.2 million in
the United Kingdom and $123.4 million in the United States.
An impairment charge of $13.0 million was recorded in the Company's vehicle
auction business, included in the Disposable and Specialty Products segment,
relating 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.
1995 Charges
In connection with the divestiture of underperforming assets associated
with their 1995 restructuring charge (see Note 15), Keystone recognized a charge
of $8.2 million relating to the impairment of certain long-lived assets held for
sale as part of the divestiture.
12. OTHER INCOME LESS EXPENSES
Other Income Less Expenses consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
Gains and losses arising from the ownership of:
Long-term investments(i).......................... $ -- $ 54.4 $(5.0)
Settlement gain (See Note 3)...................... -- 65.0 --
------ ------ ----
$ -- $119.4 $(5.0)
====== ====== ====
</TABLE>
- ---------------
(i) Realized gains and losses arising from the ownership of short-term and
long-term investments are 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 ADT's entire investment in
Limelight Group plc, a United Kingdom quoted company, which was previously
valued and accounted for by ADT at a nominal amount, a net gain of $1.2
million relating to the disposal of ADT's equity investment in Integrated
Transport Systems Limited (Notes 3 and 18) and other net losses of $0.2
million principally arising from the disposal of other non-core investments.
27
<PAGE> 29
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 ADT's entire equity investments in Compagnie
General de Protection et Securite SA ("CGPS") and Microtech Security (UK)
Limited ("Microtech") which were held by the ASH group, and other net gains
of $0.1 million principally arising from the disposal of other investments.
13. EXTRAORDINARY ITEMS
During Fiscal 1997, 1996 and 1995 the Company reacquired in the market
certain of its senior, senior subordinated and public notes, which was financed
from cash on hand and new credit agreements (See Note 4). Extraordinary items
included the loss arising on reacquisition of these notes of $79.7 million
(1996 -- $0.9 million; 1995 -- $0.9 million) and the write off of net
unamortized deferred refinancing costs and other related fees of $11.6 million
(1996 -- $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 $33.0 million
(1996 -- $0.2 million; 1995 -- $0.2 million).
In September 1996, ADT repaid in full all amounts owed by the ASH group
under its senior notes and bank credit agreement, which were subsequently
canceled, 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, ADT 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 ADT, and subsequently canceled, and which was financed from cash on
hand and amounts drawn down under the sterling denominated bank credit facility.
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, ADT 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 canceled. 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, ADT repaid in full all amounts owed by the ADT group under
its previous bank credit agreement, which was subsequently canceled. ADT funded
the repayment from the net proceeds of the issue of its Liquid Yield Option
Notes. 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.
In connection with the refinancing of Kendall's subordinated notes, the
Former Tyco recorded a charge of $4.3 million ($2.6 million after-tax),
representing unamortized debt issuance fees and a call premium, as an
extraordinary loss during 1995.
14. (LOSS) EARNINGS PER COMMON SHARE
The calculation of primary (loss) earnings per common share was based on
the weighted average of 519,487,853 (1996 -- 475,552,956; 1995 -- 469,626,634)
common shares in issue during the year which in Fiscal 1997 and 1996 did not
allow for the allotment of common shares under executive share option and
28
<PAGE> 30
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
restricted stock plans, which are considered common stock equivalents, because
their effect was anti-dilutive as a consequence of the net loss for those years.
Common stock equivalents included in the weighted average number of common
shares in issue during 1995 were 9.0 million. Primary (loss) earnings per common
share from continuing operations was based on adjusted net loss from continuing
operations available to common shareholders of $776.8 million (1996 -- $297.0
million net loss; 1995 -- $267.2 million net income).
15. MERGER, RESTRUCTURING AND OTHER NON-RECURRING CHARGES
Merger, Restructuring and Other Non-recurring Charges are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
Fire and Security Services................................ $530.3 $246.1 $34.2
Flow Control Products..................................... 256.2 -- 25.7
Disposable and Specialty Products......................... 131.3 -- 37.2
------ ------ -----
$917.8 $246.1 $97.1
====== ====== =====
</TABLE>
1997 Charges
In connection with the mergers consummated in Fiscal 1997 (Note 2), the
Company recorded merger, restructuring and other nonrecurring charges of $917.8
million. Transaction costs of $239.8 million to effect the mergers relate to
legal, accounting, financial advisory services, severance and other costs
payable at the effective time of the mergers as well as other direct expenses.
These were expensed as is required under the pooling of interests accounting
method. Also incurred were costs required to combine ADT's electronic security
business, Keystone's valve manufacturing and distribution business and INBRAND's
disposable medical products business with the related businesses of Former Tyco.
These costs include the cost of workforce reductions of $130.3 million including
the elimination of approximately 4,000 positions, the combination of certain
facilities of $194.2 million involving the closure of 18 manufacturing
facilities and the consolidation of sales and service offices, electronic
security system monitoring centers, warehouses and other locations, disposing of
excess equipment and other assets of $133.5 million and other costs of $220.0
million relating to the consolidation of certain product lines, the satisfaction
of certain liabilities and other nonrecurring charges. Approximately $456.4
million of accrued merger and restructuring costs are included in other current
liabilities and $84.5 million in other noncurrent liabilities of September 30,
1997. The Company currently anticipates that the restructurings will be
substantially completed by September 30, 1998, except for certain long-term
contractual obligations.
1996 Charges
During 1995, ADT commenced a strategic review of its electronic security
services business operation and ADT's related corporate organizational structure
with a view to developing a business strategy which would place ADT in a
stronger position to deal with the changing electronic security business
environment and challenges facing its electronic security service businesses in
the late 1990's. During 1996, this strategic review process continued and was
extended to include a significantly expanded agenda including an evaluation of
the administrative, accounting, management information systems and technological
infrastructures of its United States electronic security businesses which is
ongoing. This project is intended to modify and improve the entire structure of
the business operations.
During 1996, a charge was recorded which was principally attributable to
planned technological infrastructure enhancements to facilitate further
consolidation of ADT's entire United States monitoring center network together
with all related operations. The charge amounted to $136.4 million and included
the write-off of certain property, plant and equipment of $82.6 million,
provision for idle property leases of $18.9
29
<PAGE> 31
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
million, the termination of certain contractual obligations and other settlement
costs of $9.4 million and other integration and restructuring costs of $25.5
million.
Also in 1996, ADT commenced a strategic and detailed review of the
electronic security services businesses acquired as part of the acquisition of
ASH in September 1996. This review was intended to integrate fully the ASH group
into ADT's existing electronic security service businesses in the United Kingdom
and the United States. A restructuring charge of $97.8 million was recorded
which 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.
As part of the strategic review, ADT also commenced an evaluation of the
customer monitoring network in its Canadian electronic security services
business, which resulted in a charge for restructuring and other nonrecurring
items of $3.1 million which included the writeoff of certain property, plant and
equipment of $1.3 million and provision for idle property leases of $1.8
million.
Approximately $61.8 million of costs related to these charges are included
in other current and noncurrent liabilities at September 30, 1997. These
restructurings are anticipated to be completed by September 30, 1998.
The fees and expenses related to the ASH merger were expensed as required
under the pooling of interests accounting method. Such fees and expenses
amounted to $8.8 million in 1996.
1995 Charges
In 1995, ADT recorded a restructuring charge for its United States
electronic security businesses, principally attributable to the closure of its
Parsippany, New Jersey facility and associated corporate offices. The charge
amounted to $19.4 million and included employee severance and other associated
costs of $13.6 million, the write-off of certain property, plant and equipment
of $1.9 million and other integration and restructuring costs of $3.9 million.
In 1995, ADT also evaluated its group corporate structure, particularly in
the United Kingdom and recorded a restructuring charge of $12.8 million which
included a provision for idle property leases of $5.6 million, employee
severance for four executives and other associated costs of $2.4 million,
certain contractual obligations and other settlement costs of $4.8 million. ADT
also commenced an evaluation of the management information systems in the United
Kingdom electronic security services business which resulted in a charge for
restructuring and other nonrecurring items of $2.0 million principally relating
to the write-off of certain property, plant and equipment.
During 1995, Keystone recorded a charge of $22.8 million for restructuring
and severance related costs in connection with a worldwide workforce reduction
at Keystone and restructuring plans aimed at further streamlining operations and
the divestiture of underperforming assets. The charge includes severance and
related costs of $17.7 million, the write down of certain assets totaling $2.7
million and other costs associated with divesting assets of $2.4 million.
Keystone also recorded plant closure costs of $2.9 million in connection with
the closure of a manufacturing facility in Indiana. All of these actions were
completed in 1996 and 1997.
Approximately $10.1 million of costs related to these charges are included
in other current and noncurrent liabilities at September 30, 1997. These
restructurings are substantially complete.
The fees and expenses related to the merger of Former Tyco with Kendall
were expensed as is required under the pooling of interests accounting method.
Such fees and expenses amounted to $37.2 million in 1995.
30
<PAGE> 32
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. COMMITMENTS AND CONTINGENCIES
The Company occupies certain facilities under leases that expire at various
dates through the year 2021. Rental expense under these leases and leases for
equipment was $153.5 million, $178.8 million and $151.8 million for fiscal 1997,
1996, and 1995, respectively. At September 30, 1997, the minimum lease payment
obligations under noncancelable operating leases were as follows: $199.2 million
in Fiscal 1998, $164.0 million in Fiscal 1999, $105.5 million in Fiscal 2000,
$96.5 million in Fiscal 2001, $53.6 million in Fiscal 2002 and an aggregate of
$149.2 million in years Fiscal 2003 through 2021.
In the normal course of business, the Company is liable for contract
completion and product performance. In the opinion of management, such
obligations will not significantly affect the Company's financial position or
results of operations.
The Company is involved in various stages of investigation and cleanup
related to environmental remediation matters at a number of sites. The ultimate
cost of site cleanup is difficult to predict given the uncertainties regarding
the extent of the required cleanup, the interpretation of applicable laws and
regulations and alternative cleanup methods. Based upon the Company's experience
with the foregoing environmental matters, the Company has concluded that there
is at least a reasonable possibility that remedial costs will be incurred with
respect to these sites in an aggregate amount in the range of $9.8 million to
$38.0 million. At September 30, 1997, the Company has concluded that the most
probable amount that will be incurred within this range is $17.6 million, and
such amount is included in the caption "accrued expenses and other current
liabilities" in the accompanying consolidated balance sheet. Based upon
information available to the Company, at those sites where there has been an
allocation of the liability for cleanup costs among a number of parties,
including the Company, and such liability could be joint and several, management
believes it is probable that other responsible parties will fully pay the cost
allocated to them, except with respect to one site for which the Company has
assumed that one of the identified responsible parties will be unable to pay the
cost apportioned to it and that such party's cost will be reapportioned among
the remaining responsible parties. In view of the Company's financial position
and reserves for environmental matters of $17.6 million, the Company has
concluded that its payment of such estimated amounts will not have a material
effect on its financial position, results of operations or liquidity.
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 its financial position,
results of operations or liquidity.
31
<PAGE> 33
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. RETIREMENT PLANS
Defined Benefit Pension Plans -- The Company has a number of
noncontributory and contributory defined benefit retirement plans covering
certain of its U.S. and non-U.S. employees, 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 operations 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 the purpose. The Company's funding policy is to
make annual contributions to the extent such contributions are tax deductible as
actuarially determined. The benefits under the defined benefit plans are based
on years of service and compensation.
The net periodic pension cost for all defined benefit pension plans
includes the following components:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost............................................ $ 21.4 $ 23.4 $ 21.7
Interest cost........................................... 46.1 53.6 50.4
Actual return........................................... (141.8) (68.4) (73.9)
Net amortization and deferral........................... 83.9 4.4 17.5
------- ------ ------
Net periodic pension expense............................ $ 9.6 $ 13.0 $ 15.7
======= ====== ======
</TABLE>
Accrued (prepaid) pension cost at September 30, 1997 for defined benefit
plans is as follows:
<TABLE>
<CAPTION>
ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS TOTAL
------------- ------------- ------
(IN MILLIONS)
<S> <C> <C> <C>
Actuarial present value of accumulated benefit
obligations:
Vested......................................... $ 682.0 $ 127.6 $809.6
Non-vested..................................... 12.1 14.1 26.2
------- ------ ------
Total............................................ 694.1 141.7 835.8
Effect of future salary increases................ 61.1 8.2 69.3
------- ------ ------
Projected benefit obligations.................... 755.2 149.9 905.1
Plan assets at fair value........................ 863.2 62.7 925.9
------- ------ ------
Plan assets (in excess of) less than projected
benefit obligations............................ (108.0) 87.2 (20.8)
Unrecognized transition asset (liability)........ 12.3 (0.8) 11.5
Unrecognized prior service cost.................. (4.4) (13.7) (18.1)
Additional minimum liability..................... -- 11.0 11.0
Unrecognized net gain............................ 51.7 1.7 53.4
------- ------ ------
Accrued (prepaid) pension cost................... $ (48.4) $ 85.4 $ 37.0
======= ====== ======
</TABLE>
32
<PAGE> 34
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accrued (prepaid) pension cost at December 31, 1996 for defined benefit
plans is as follows:
<TABLE>
<CAPTION>
ASSETS ACCUMULATED
EXCEED BENEFITS
ACCUMULATED EXCEED
BENEFITS ASSETS TOTAL
----------- ----------- ------
(IN MILLIONS)
<S> <C> <C> <C>
Actuarial present value of accumulated benefit
obligations:
Vested............................................ $ 450.4 $ 271.0 $721.4
Non-vested........................................ 9.2 24.2 33.4
------ ------ ------
Total............................................... 459.6 295.2 754.8
Effect of future salary increases and other......... 15.2 28.2 43.4
------ ------ ------
Projected benefit obligations....................... 474.8 323.4 798.2
Plan assets at fair value........................... 549.2 251.2 800.4
------ ------ ------
Plan assets (in excess of) less than projected
benefit obligations............................... (74.4) 72.2 (2.2)
Unrecognized transition asset (liability)........... 13.2 (0.8) 12.4
Unrecognized prior service cost..................... (1.8) (7.5) (9.3)
Additional minimum liability........................ -- 10.6 10.6
Unrecognized net (loss) gain........................ (8.8) 27.3 18.5
------ ------ ------
Accrued (prepaid) pension cost...................... $ (71.8) $ 101.8 $30.0
====== ====== ======
</TABLE>
Pursuant to the provisions of SFAS 87, "Employers' Accounting for
Pensions," the Company recorded, in other liabilities, an Additional Minimum
Pension Liability Adjustment of $11.0 million and $10.6 million as of September
30, 1997 and December 31, 1996, respectively, representing the amount by which
the accumulated benefit obligation exceeded the fair value of plan assets plus
accrued amounts previously recorded. The additional liability has been offset by
an intangible asset, included in goodwill and other intangible assets, to the
extent of previously unrecognized prior service cost. The amount in excess of
previously unrecognized prior service cost is recorded, net of the related
deferred tax benefit, as a reduction of shareholders' equity in the amount of
$1.9 million at September 30, 1997 and $2.5 million at December 31, 1996,
respectively.
In fiscal 1997, 1996, and 1995, the Company terminated certain defined
benefit pension plans and distributed the plans' assets to the participants.
Gains and losses resulting from terminations were not material. In addition the
Company recognized liabilities for certain plans related to business
acquisitions in each of the years presented, the amounts of which were not
material.
Of the total plan obligations in fiscal 1997, 53% relate to U.S. plans and
47% relate to non-U.S. plans (in 1996, 55% and 45%, respectively). The average
discount rate used in determining the actuarial present value of the projected
benefit obligation, weighted in relation to plan obligations, was 7.5% at
September 30, 1997 (7.5 -- 8.5% at December 31, 1996). The average rate of
increase in future compensation levels was 4.8% at September 30, 1997
(4.0 -- 7.0% at December 31, 1996). The weighted average long-term rate of
return on assets was 9.6% at September 30, 1997 (9.5 -- 10.0% at December 31,
1996). Plan assets are invested principally in equity and fixed income
instruments.
The Former Tyco also participates in a number of multi-employer defined
benefit plans on behalf of certain employees. Pension expense related to
multi-employer plans was $1.5 million, $2.0 million, and $2.5 million for fiscal
1997, 1996, and 1995, respectively.
Defined Contribution Retirement Plans -- The Company maintains several defined
contribution retirement plans, which include 401(k) matching programs, as well
as qualified and nonqualified profit sharing and stock
33
<PAGE> 35
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
bonus retirement plans. Pension expense for the defined contribution plans is
computed as a percentage of participants' compensation and was $28.0 million,
$31.2 million and $23.5 million for fiscal 1997, 1996, and 1995, respectively.
During 1995, the Former Tyco established an unfunded Supplemental Executive
Retirement Plan ("SERP"). This plan is nonqualified and restores the employer
match that certain employees lose due to IRS limits on eligible compensation
under the defined contribution plans. Expense related to the SERP was $2.2
million, $1.7 million and $0.4 million in fiscal 1997, 1996 and 1995,
respectively.
Post-retirement Benefit Plans -- The Company generally does not provide
post-retirement benefits other than pensions for its employees. ADT's electronic
security services operation in the United States 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.
In addition, certain of Former Tyco's acquired operations provide these benefits
to employees who were eligible at the date of acquisition.
Net periodic post-retirement benefit cost reflects the following
components:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost................................................ $ 0.6 $ 0.9 $ .9
Interest cost............................................... 5.5 6.8 7.1
Net amortization and deferral............................... (3.6) (4.2) (4.2)
----- ----- -----
Net periodic post-retirement benefit cost................... $ 2.5 $ 3.5 $ 3.8
===== ===== =====
</TABLE>
The components of the accrued post-retirement benefit obligation, all of
which are unfunded, are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(IN MILLIONS)
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees......................................... $ 73.6 $ 71.3
Fully eligible active plan participants.......... 18.7 16.1
Other active plan participants................... 8.3 7.6
------ ------
100.6 95.0
Unrecognized prior service benefit................. 30.1 31.0
Unrecognized net gain.............................. 17.6 13.7
------ ------
Accrued post-retirement benefit cost............... $148.3 $139.7
====== ======
</TABLE>
For measurement purposes, in Fiscal 1997, a 9.3% composite annual rate of
increase in the per capita cost of covered health care benefits was assumed. The
rate was assumed to decrease gradually to 4.75% by the year 2008 and remain at
that level thereafter. The health care cost trend rate assumption may have a
significant effect on the amounts reported. To illustrate, increasing the
assumed health care cost trend rate by one percentage point would increase the
accumulated post-retirement benefit obligation as of September 30, 1997 by $5.2
million and the aggregate of the service and interest cost component of net
periodic post-retirement benefit cost for the year then ended by $0.3 million.
The weighted average discount rate used in determining the accumulated
post-retirement benefit obligation was 7.5% at September 30, 1997 (7.5 -- 7.75%
at December 31, 1996).
During 1992, ADT 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
34
<PAGE> 36
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
over a period of approximately twenty years beginning January 1992. Effective
January 1995 ADT implemented a defined dollar benefit cap for all current and
future retirees under the ADT plan, regardless of age.
18. RELATED PARTY TRANSACTIONS
In December 1995, ADT 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 ADT
disposed of an interest in European Auctions (see Note 3). The aggregate
consideration received on closing was comprised of cash of $235.1 million, a
$187.6 million Vendor Note with an issue price of $83.9 million and valued at
$74.6 million, $31.1 million Shareholder Loan Notes with an issue price of $13.9
million and valued at $13.3 million, and a 43.1% interest in the ordinary share
capital of ITS at an issue price of $2.0 million and valued at $0.9 million.
In February 1996, ADT disposed of its entire interest in Shareholder Loan
Notes and 33.1% of the ordinary share capital of ITS for an aggregate cash
consideration of $15.4 million. As a result, the Company now holds a 10.0%
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. D.B. Hammond and 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% and 1.7%, 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% of the ordinary share
capital of ITS. In addition, at closing, M.A. Ashcroft, who was, until July
1997, 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% of the ordinary share capital of
ITS.
Upon the disposal by ADT 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 totaling
$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 totaling $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 totaling $1.1 million, based on ADT's
common share price on December 19, 1995, which would otherwise have been
exercisable in March 1996.
Upon the disposal by ADT 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 totaling
$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 ADT 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
35
<PAGE> 37
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, ADT entered into an agreement with the ITS group whereby ADT
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, ADT entered into an option agreement with Mr. Ashcroft which,
if exercised, would have required Mr. Ashcroft to purchase from ADT, for cash
fifty days after closing, Shareholder Loan Notes with an issue price of up to
$8.2 million and up to 19.6% of the ordinary share capital of ITS. In addition,
at closing, ITS entered into an agreement with ADT 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 ADT and Mr. Ashcroft, and under
which ADT 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, ADT and Mr. Ashcroft agreed that the mutual obligations under the
option agreement be released.
At December 31, 1995, ADT'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, ADT and Mr. Ashcroft limiting the voting rights of
each of ADT and Mr. Ashcroft to 15.0% of the voting rights of ITS and due to the
fact that Mr. Hammond did not 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.
R.A. Gilleland, former President of Kendall and a Company director, sold
870,140 and 595,112 shares respectively, of its common stock to Former Tyco at
$13.24 and $13.11 per share, respectively, the shares then fair market value,
for an aggregate purchase price of $19.3 million pursuant to his rights under
the Kendall restricted stock grant to provide for his required income tax
withholdings.
19. CONSOLIDATED SEGMENT DATA
Selected information by industry segment is presented below.
<TABLE>
<CAPTION>
AS AT AND
AS AT AND FOR THE YEAR
FOR THE NINE ENDED
MONTHS ENDED DECEMBER 31,
SEPTEMBER 30, -----------------------
1997 1996 1995
------------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Sales:
Disposable and Specialty Products..... $ 2,000.3 $2,001.0 $1,819.7
Fire and Security Services............ 3,149.1 3,694.9 3,054.3
Flow Control Products................. 1,684.1 1,928.8 1,611.5
Electrical and Electronic
Components......................... 754.7 479.0 430.1
--------- -------- --------
$ 7,588.2 $8,103.7 $6,915.6
========= ======== ========
</TABLE>
36
<PAGE> 38
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AS AT AND AS AT AND
FOR THE NINE FOR THE YEAR
MONTHS ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996 1995
------------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Operating (loss) income:
Disposable and Specialty Products..... $ 197.4 (1) $ 358.9 (5) $ 265.6 (7)
Fire and Security Services............ (312.4)(2) (621.3)(6) 247.2 (8)
Flow Control Products................. (92.1)(3) 198.0 126.6 (9)
Electrical and Electronic
Components......................... (224.6)(4) 89.0 76.4
Corporate and other expenses.......... (44.8) (43.4) (66.2)(10)
--------- -------- --------
$ (476.5) $ (18.8) $ 649.6
========= ======== ========
Total Assets:
Disposable and Specialty Products..... $ 2,270.8 $1,961.3 $1,281.7
Fire and Security Services............ 4,338.2 4,343.1 4,238.1
Flow Control Products................. 1,865.9 1,758.8 1,587.0
Electrical and Electronic
Components......................... 1,606.0 283.9 165.6
Corporate Assets...................... 366.1 124.2 85.4
--------- -------- --------
$10,447.0 $8,471.3 $7,357.8
========= ======== ========
Depreciation and Amortization:
Disposable and Specialty Products..... $ 64.5 $ 67.8 $ 65.3
Fire and Security Services............ 205.5 254.0 254.3
Flow Control Products................. 63.8 78.3 71.0
Electrical and Electronic
Components......................... 25.2 11.7 11.0
Corporate............................. 19.6 15.5 8.6
--------- -------- --------
$ 378.6 $ 427.3 $ 410.2
========= ======== ========
Capital Expenditures:
Disposable and Specialty Products..... $ 119.7 $ 90.5 $ 78.2
Fire and Security Services............ 304.8 362.0 318.4
Flow Control Products................. 58.3 69.4 61.7
Electrical and Electronic
Components......................... 32.8 9.7 10.9
Corporate............................. 3.5 1.3 0.7
--------- -------- --------
$ 519.1 $ 532.9 $ 469.9
========= ======== ========
</TABLE>
- ---------------
(1) Includes charges of $131.3 million related to merger, restructuing and
other non-recurring charges in connection with the INBRAND merger.
(2) Includes charges of $530.3 million related to merger, restructuring and
other non-recurring charges and $118.8 million related to the impairment of
long-lived assets in connection with the merger of ADT and Former Tyco.
(3) Includes charges of $256.2 million related to merger restructuring and
other non-recurring charges and $29.6 million related to the impairment of
long-lived assets in connection with the Keystone merger.
(4) Includes a charge of $361.0 million related to the write off of purchased
research and development costs in connection with an acquisition.
37
<PAGE> 39
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) Includes a charge of $13.0 million related to the impairment of long-lived
assets in ADT's vehicle auction services operations.
(6) Includes charges of $731.7 million related to the impairment of long-lived
assets and $237.3 million relating to restructuring and other non-recurring
items in ADT's electronic security services operations and $8.8 million
related to professional and other transaction costs in connection with the
ASH merger.
(7) Includes a loss of $65.8 million on the disposal of the European Auto
Auctions business.
(8) Includes charges of $34.2 million related to restructuring and other
non-recurring items in ADT's electronic security services operations.
(9) Includes charges of $22.8 million for restructuring and severance costs,
$8.2 million for the impairment of assets held for sale and $2.9 million
related to plant closures and related costs in connection with Keystone's
work force reduction and divestiture of underperforming assets in 1995.
(10) Includes a charge of $37.2 million related to professional and other
transaction costs in connection with the Kendall merger.
20. CONSOLIDATED GEOGRAPHIC DATA
Selected information by geographic area is presented below.
<TABLE>
<CAPTION>
AS AT AND
FOR THE NINE AS AT AND FOR THE YEAR
MONTHS ENDED ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------
1997 1996 1995
----------------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Sales:
Americas (primarily U.S.).......... $ 5,447.5 $5,675.6 $4,785.0
Europe............................. 1,457.1 1,587.8 1,488.2
Asia-Pacific....................... 683.6 840.3 642.4
--------- -------- --------
$ 7,588.2 $8,103.7 $6,915.6
========= ======== ========
Operating (loss) income:
Americas (primarily U.S.).......... $ (371.6) $ 125.6 $ 551.4
Europe............................. (104.0) (194.0) 63.3
Asia-Pacific....................... (0.9) 49.6 34.9
--------- -------- --------
$ (476.5) $ (18.8) $ 649.6
========= ======== ========
Total Assets:
Americas (primarily U.S.).......... $ 7,498.6 $6,070.5 $4,931.5
Europe............................. 1,992.8 1,740.1 1,873.6
Asia-Pacific....................... 589.5 536.5 467.3
Corporate assets................... 366.1 124.2 85.4
--------- -------- --------
$10,447.0 $8,471.3 $7,357.8
========= ======== ========
</TABLE>
38
<PAGE> 40
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21. SUPPLEMENTARY BALANCE SHEET INFORMATION:
Selected supplementary balance sheet information is presented below.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(IN MILLIONS)
<S> <C> <C>
Inventories:
Purchased materials and manufactured parts............... $ 262.7 $ 243.9
Work in process.......................................... 294.4 153.4
Finished goods........................................... 567.7 549.2
-------- --------
$ 1,124.8 $ 946.5
======== ========
Property, Plant and Equipment:
Land..................................................... $ 160.3 $ 214.7
Buildings................................................ 679.7 579.5
Subscriber systems....................................... 1,737.6 1,977.5
Machinery and equipment.................................. 1,860.3 1,546.7
Leasehold improvements................................... 74.8 61.0
Construction in progress................................. 211.6 99.2
Accumulated depreciation................................. (1,800.3) (1,887.7)
-------- --------
$ 2,924.0 $ 2,590.9
======== ========
Accrued payroll and payroll related costs.................. $ 147.9 $ 182.2
======== ========
</TABLE>
22. SUPPLEMENTARY INCOME STATEMENT INFORMATION:
Selected supplementary income statement information is presented below.
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ---------------
1997 1996 1995
------------- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Research and development............................. $45.0 $39.8 $40.2
Advertising.......................................... 71.1 94.5 98.2
</TABLE>
39
<PAGE> 41
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
23. COMPARATIVE RESULTS (UNAUDITED)
The change in year end resulted in a short fiscal year covering the nine
month transition period from January 1, 1997 to September 30, 1997. The
following unaudited financial information for the nine months ended September
30, 1996 is presented to provide comparative interim results to those for Fiscal
1997 included in the accompanying Statement of Operations (in millions, except
per share amounts).
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1996
------------------
<S> <C>
Net sales............................................. $5,871.6
Gross profit.......................................... 1,925.2
Operating loss........................................ (37.3)
Income taxes.......................................... (205.0)
Loss before extraordinary item........................ (364.8)
Extraordinary item, net of taxes...................... (5.8)
Net loss.............................................. (370.6)
Loss per share:
Loss before extraordinary item...................... $ (0.76)
Extraordinary item.................................. (0.01)
Net loss............................................ (0.77)
</TABLE>
24. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is presented below.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
--------------------------------------
1ST(1) 2ND(1) 3RD(1)(2)(5)
--------- --------- ------------
(IN MILLIONS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Sales............................................... $2,332.8 $2,546.6 $ 2,708.8
Gross profit........................................ 765.2 864.8 855.6
Income (loss) before extraordinary item............. 147.3 138.5 (1,062.6)
Net income (loss)................................... 147.3 138.5 (1,120.9)
Income (loss) per share before extraordinary
items............................................. .28 .25 (2.00)
Net income (loss) per share......................... .28 .25 (2.11)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------
1ST(3)(4) 2ND(4)(5) 3RD(4)(5) 4TH(5)(6)(7)
--------- --------- --------- ------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales.................................... $1,833.1 $1,968.1 $2,070.4 $ 2,232.1
Gross profit............................. 598.3 658.5 668.4 703.3
(Loss) income before extraordinary
item................................... (616.8) 135.6 116.4 68.1
Net (loss) income........................ (616.8) 134.4 111.8 65.5
(Loss) income per share before
extraordinary items.................... (1.30) 0.28 0.24 0.14
Net (loss) income per share.............. (1.30) 0.28 0.23 0.13
</TABLE>
- ---------------
(1) Includes charges of $9.6 million in the first quarter, $47.0 million in the
second quarter and $861.2 million in the third quarter related to merger,
restructuring and other nonrecurring charges primarily in connection with
the merger of ADT and Former Tyco and the Keystone and INBRAND Mergers.
40
<PAGE> 42
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) Includes a charge for the impairment of long-lived assets of $148.4 million
and $361.0 million for the write-off of purchased in-process research and
development costs.
(3) Includes a charge of $744.7 million related to the impairment of long-lived
assets.
(4) Includes a charge of $0.7 million in the first quarter, $1.3 million in the
second quarter and $10.9 million in the third quarter related to
professional and other transaction costs arising in connection with the
merger of ADT and ASH, the terminated merger with Republic and refinancing
charges incurred by ASH prior to the merger.
(5) Extraordinary items were comprised principally of losses on repayment and
the write off of net unamoritized deferred refinancing costs relating to the
early extinguishment of debt.
(6) Includes a charge of $237.3 million in 1996 related to restructuring and
other non-recurring charges in ADT's electronic security services and
corporate operations.
(7) Includes a net gain arising from the sale of ADT's investment on Limelight
Group plc of $53.4 million and a net gain on litigation settlement of $65.0
million.
25. SUBSEQUENT EVENTS
(a) The Company has entered into an agreement to acquire the Sherwood-Davis &
Geck ("Sherwood") division of American Home Products Corporation ("AHP") for
cash of $1.77 billion. Sherwood is a manufacturer of medical and surgical
devices, such as catheters, needles and syringes, sutures, thermometers and
other specialized disposable medical products with annual revenues of
approximately $1.0 billion. The Company intends to account for the acquisition
as a purchase. The acquisition is subject to approval of various regulatory
agencies and certain other conditions. The transaction has been approved by
Tyco's and AHP's respective boards of directors and is expected to close in the
second quarter of Fiscal 1998.
The acquisition will be financed initially with bank debt through a new
credit facility currently being arranged by the Company. Terms and conditions
are expected to be similar to Former Tyco's existing $1.75 billion agreement.
The Company expects to promptly file a $2.0 billion universal shelf registration
statement with the Securities and Exchange Commission to be used to refinance
the purchase price of the acquisition with a combination of equity and public
debt.
(b) The Company anticipates filing a registration statement for debt securities
through its wholly-owned subsidiary, Tyco International Group S.A. ("TIG").
Repayment of amounts outstanding under these debt securities will be fully and
unconditionally guaranteed by Tyco, the parent company. TIG was incorporated as
a Luxembourg holding company in March 1998. The following presents consolidated
summary financial information for TIG and its subsidiaries, as if TIG and its
current organizational structure was in place for all periods presented.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
(IN MILLIONS) 1997 1996
------------- ------------
<S> <C> <C>
Total current assets $4,018.3 $2,880.2
Total noncurrent assets 6,236.2 5,314.7
Total current liabilities 3,905.2 2,735.3
Total noncurrent liabilities 3,998.1 3,605.0
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, ------------------------
1997 1996 1995
------------- ------------------------
<S> <C> <C> <C>
Net Sales $7,588.2 $8,103.7 $6,915.6
Gross Profit 2,485.6 2,628.5 2,250.3
(Loss) income before extraordinary
items(1)(2)(3) (721.3) (400.5) 217.3
Net (loss) income(4) (779.6) (408.9) 204.9
</TABLE>
- ------------
(1) Loss before extraordinary items in Fiscal 1997 includes charges related
to merger, restructuring and other non-recurring costs of $816.8 million and
impairment of long-lived assets of $148.4 million primarily related to the
mergers and integration of ADT, Former Tyco, Keystone, and INBRAND. (See Notes
11 and 15). Fiscal 1997 also includes a charge of $361.0 million for the
write-off of purchased in-process research and development costs.
(2) Loss before extraordinary items in 1996 includes non-recurring charges of
$744.7 million related to the adoption of SFAS No. 121, $237.3 million related
principally to the restructuring of ADT's electronic security services business
in the United States and United Kingdom and $3.8 million of fees and expenses
related to the ASH merger. (See Notes 11 and 15).
(3) Income before extraordinary items in 1995 included a loss of $65.8 million
on the disposal of the European auto auction business and a gain of $31.4
million from the disposal of the European electronic article surveillance
business. (See Note 3). Income before extraordinary items also includes
non-recurring charges of $97.1 million for restructuring charges at ADT and at
Keystone and for the fees and expenses related to the Kendall merger, as well
as a charge of $8.2 million relating to the divestiture of certain assets by
Keystone. (See Notes 11 and 15).
(4) Extraordinary items were comprised principally of losses on repayment and
the write off of net unamortized deferred refinancing costs relating to the
early extinguishment of debt.
41
<PAGE> 43
TYCO INTERNATIONAL LTD.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in millions)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
ADDITIONS
BALANCE AT CHARGED ACQUISITIONS
BEGINNING TO DISPOSALS, BALANCE AT
DESCRIPTION OF YEAR INCOME AND OTHER DEDUCTIONS(2) END OF YEAR
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1995:
Allowances for doubtful
accounts(1)................. 51.2 15.2 (1.9) (11.9) 52.6
Year Ended December 31, 1996:
Allowances for doubtful
accounts(1)................. 52.6 47.2 (.5) (15.1) 84.2
Fiscal Year Ended
September 30, 1997:
Allowances for doubtful
accounts(1)................ 84.2 31.0 23.5 (31.0) 107.7
</TABLE>
- ------------
(1) Deducted from assets.
(2) Write-off of accounts receivable considered uncollectible.
42
<PAGE> 1
EXHIBIT 99.2
Tyco International Ltd.
Quarterly Financial Statements
December 31, 1997
<PAGE> 2
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(UNAUDITED)
(IN MILLIONS) DECEMBER 31, 1997 SEPTEMBER 30, 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................... $ 364.8 $ 369.8
Receivables, less allowance for doubtful accounts of $111.1
in fiscal 1998 and $107.7 in fiscal 1997................... 1,983.8 1,912.3
Contracts in process......................................... 141.8 138.3
Inventories.................................................. 1,121.4 1,124.8
Deferred income taxes........................................ 368.0 389.4
Prepaid expenses and other current assets.................... 201.6 174.2
--------- ---------
4,181.4 4,108.8
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land......................................................... 155.9 160.3
Buildings.................................................... 681.0 679.7
Subscriber systems........................................... 1,801.0 1,737.6
Machinery and equipment...................................... 1,828.3 1,860.3
Leasehold improvements....................................... 74.3 74.8
Construction in progress..................................... 238.8 211.6
Accumulated depreciation..................................... (1,851.4) (1,800.3)
--------- ---------
2,927.9 2,924.0
--------- ---------
GOODWILL AND OTHER INTANGIBLE ASSETS......................... 2,952.3 2,933.2
DEFERRED INCOME TAXES........................................ 119.3 144.0
OTHER ASSETS................................................. 333.1 337.0
--------- ---------
TOTAL ASSETS................................................. $10,514.0 $10,447.0
========= =========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 3
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(UNAUDITED)
(IN MILLIONS, EXCEPT SHARE DATA) DECEMBER 31, 1997 SEPTEMBER 30, 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Loans payable and current maturities of long-term debt....... $ 259.0 $ 250.0
Accounts payable............................................. 876.2 1,012.0
Accrued expenses and other current liabilities............... 1,691.3 1,853.4
Contracts in process - billings in excess of costs........... 372.6 293.7
Deferred revenue............................................. 145.8 152.3
Income taxes................................................. 397.6 403.5
Deferred income taxes........................................ 26.9 26.9
--------- ---------
3,769.4 3,991.8
--------- ---------
LONG-TERM DEBT............................................... 2,382.2 2,480.6
OTHER LONG-TERM LIABILITIES.................................. 460.8 497.5
DEFERRED INCOME TAXES........................................ 58.8 47.7
COMMITMENTS AND CONTINGENCIES................................
CONVERTIBLE REDEEMABLE PREFERENCE SHARES..................... -- --
SHAREHOLDERS' EQUITY:
Common shares, $.20 par value, 750,000,000 shares authorized;
issued 549,940,006 shares in fiscal 1998 and 536,357,498
shares
in fiscal 1997, net of 100,000 shares owned by a subsidiary
in
fiscal 1998 (at cost)...................................... 110.0 107.3
Capital in excess:
Share premium.............................................. 2,188.8 2,041.3
Contributed surplus, net of deferred compensation of $2.1
in fiscal 1998 and $2.2 in fiscal 1997.................. 2,392.5 2,305.7
Currency translation adjustment.............................. (211.4) (161.6)
Accumulated deficit.......................................... (637.1) (863.3)
--------- ---------
3,842.8 3,429.4
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................... $10,514.0 $ 10,447.0
========= =========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
FOR THE QUARTER ENDED DECEMBER 31,
(IN MILLIONS EXCEPT PER SHARE DATA) 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
NET SALES................................................................. $2,687.5 $2,232.1
Cost of sales............................................................. 1,791.7 1,528.8
Selling, general and administrative expenses.............................. 500.9 444.8
Restructuring and other non-recurring charges............................. -- 237.3
-------- --------
OPERATING INCOME.......................................................... 394.9 21.2
Interest income........................................................... 6.8 10.3
Interest expense.......................................................... (49.8) (51.3)
Other income less expenses................................................ 7.5 118.4
-------- --------
Income before income taxes and extraordinary items........................ 359.4 98.6
Income taxes.............................................................. (118.6) (30.5)
-------- --------
Income before extraordinary items......................................... 240.8 68.1
Extraordinary items, net of taxes......................................... (0.9) (2.6)
-------- --------
NET INCOME................................................................ 239.9 65.5
Dividends on preference shares............................................ -- (0.1)
-------- --------
Net income available to common shareholders............................... $ 239.9 $ 65.4
======== ========
BASIC EARNINGS PER SHARE:
Income before extraordinary items......................................... $ .44 $ .14
Extraordinary items, net of taxes......................................... -- --
-------- --------
Net Income................................................................ $ .44 $ .14
======== ========
DILUTED EARNINGS PER SHARE:
Income before extraordinary items......................................... $ .43 $ .14
Extraordinary items, net of taxes......................................... -- (.01)
-------- --------
Net Income................................................................ $ .43 $ .13
======== ========
CASH DIVIDENDS PER COMMON SHARE (SEE NOTE 5).............................. $ 0 .025
========
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic..................................................................... 545.1 479.6
======== ========
Diluted................................................................... 568.3 487.1
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................... $239.9 $ 65.5
Adjustments to reconcile net income to net cash provided by
operating activities:
Restructuring and other non-recurring charges................... -- 217.4
Depreciation.................................................... 102.6 91.6
Goodwill and other intangible amortization...................... 26.9 23.5
Deferred income taxes........................................... 54.1 (39.7)
Gain arising from the ownership of investments.................. -- (53.2)
Settlement gain................................................. -- (69.7)
Other non-cash items............................................ 2.1 (0.6)
Changes in assets and liabilities net of the effects of
acquisitions:
Accounts receivable and contracts in process............... 10.1 42.4
Inventory.................................................. 4.9 (22.5)
Accounts payable and accrued expenses...................... (237.1) (65.3)
Income taxes payable....................................... (7.7) (6.7)
Deferred revenue........................................... (6.5) (8.8)
Other...................................................... (46.7) 15.3
------ ------
Net cash provided by operating activities....................... 142.6 189.2
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment............................ (148.5) (164.4)
Acquisition of businesses, net of cash acquired...................... (93.1) (96.2)
Disposal of other investments, net................................... -- 63.5
------ ------
Net cash used in investing activities........................... (241.6) (197.1)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) proceeds from long-term debt and lines of credit........ (37.8) 108.2
Dividends paid....................................................... (13.2) (14.1)
Exercise of options.................................................. 149.5 --
Other................................................................ (4.5) 1.0
------ ------
Net cash provided by financing activities....................... 94.0 95.1
------ ------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................. (5.0) 87.2
CASH AND CASH EQUIVALENTS AT BEGINNING OF QUARTER.................... 369.8 237.0
------ ------
CASH AND CASH EQUIVALENTS AT END OF QUARTER.......................... $364.8 $324.2
====== ======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited financial statements presented herein have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Transition Report on Form
10-K for the nine months ended September 30, 1997. The accompanying financial
statements have not been examined by independent accountants in accordance with
generally accepted auditing standards, but in the opinion of management such
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary to summarize fairly the Company's financial
position and results of operations. Certain prior year amounts have been
reclassified to conform with current year presentation.
On July 2, 1997 a wholly-owned subsidiary of what was formerly called ADT
Limited ("ADT") merged with Tyco International Ltd. ("Former Tyco"). Upon
consummation of the merger, ADT (the surviving corporation) changed its name to
Tyco International Ltd. (the "Company" or "Tyco"). Former Tyco became a
wholly-owned subsidiary of the Company and changed its name to Tyco
International (US) Inc. ("Tyco US"). In addition, subsidiaries of Tyco merged
with INBRAND Corporation ("INBRAND") and Keystone International, Inc.
("Keystone") on August 27, 1997 and August 29, 1997, respectively. These
consolidated financial statements include the consolidated accounts of Tyco, a
company incorporated in Bermuda, and its subsidiaries. They have been prepared
using the pooling of interests method of accounting for the mergers and
therefore reflect the combined financial position, operating results and cash
flows of ADT, Former Tyco and Keystone as if they had been combined for all
periods presented. The restated combined financial statements do not include the
financial position, operating results and cash flows of INBRAND prior to January
1, 1997, due to immateriality.
2. ACQUISITIONS AND DIVESTITURES
During the first quarter of fiscal 1998, the Company purchased businesses
with cash payments of $93.1 million. The cash portion of the acquisitions were
made utilizing cash on hand. Each of these acquisitions was accounted for as a
purchase and, as a result of the acquisitions, approximately $30.7 million in
goodwill was recorded by the Company. Additional purchase liabilities were
recorded totaling $3.0 million for severance, relocation, facilities related and
direct transaction costs.
In addition, during the first quarter, the Company entered into an
agreement to purchase the Sherwood-Davis & Geck division ("Sherwood") of
American Home Products Corporation ("AHP") for cash of $1.77 billion. Sherwood
is a manufacturer of medical and surgical devices, such as catheters, needles
and syringes, sutures, thermometers and other specialized disposable medical
products with annual revenues of approximately $1.0 billion. The Sherwood
acquisition is subject to approval of various regulatory agencies and certain
other conditions. The transaction is expected to close in the second quarter of
fiscal 1998. On February 3, 1998, the Company completed its acquisition of
Holmes Protection Group, Inc. ("Holmes") for $104.0 million in cash. Holmes
provides electronic security systems to commercial and residential customers
throughout the United States and will be integrated with Tyco's Fire and
Security Services Division. The Company intends to account for these
acquisitions as purchases.
In connection with purchase acquisitions consummated during and prior to
the quarter ended December 31, 1997, liabilities for approximately $22.9 million
for severance and related costs and $23.0 million for the shutdown and
consolidation of acquired facilities remained on the balance sheet at December
31, 1997. The Company expects that the termination of employees and
consolidation of facilities related to these acquisitions will be substantially
complete by the end of fiscal 1998.
5
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
3. LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
(IN MILLIONS) 1997 1997
-------------------------------------------------- ------------ -------------
<S> <C> <C>
Bank and acceptance facilities.................... $ 55.0 $ 56.4
Bank credit agreement............................. 900.0 1,400.0
Private placement notes........................... 475.0 --
Uncommitted lines of credit....................... 185.2 38.5
Variable rate term loan due 1998.................. -- 97.1
8.125% public notes due 1999...................... 10.5 10.5
8.25% senior notes due 2000....................... 9.5 9.5
6.34% senior notes due 2000 - Keystone............ -- 45.0
6.5% public note due 2001......................... 298.8 298.7
Sterling denominated bank facility due 2002....... 140.3 137.5
9.25% senior subordinated notes due 2003.......... 14.1 14.1
6.375% public notes due 2004...................... 104.5 104.5
Zero coupon Liquid Yield Option Notes due 2010.... 208.0 259.6
9.5% public debentures due 2022................... 49.0 49.0
8.0% public debentures due 2023................... 50.0 50.0
Other............................................. 141.3 160.2
-------- --------
Total debt........................................ 2,641.2 2,730.6
Less current portion.............................. 259.0 250.0
-------- --------
Long-term debt.................................... $2,382.2 $2,480.6
======== ========
</TABLE>
In December 1997, Tyco US terminated a $500 million portion of its existing
credit agreement and thereafter had the right to borrow (a) up to $750 million
until June 1998 and (b) up to $500 million until June 2002. Balances outstanding
at the time of termination were repaid through the issuance of private placement
notes, $225 million due in March 1998 and $250 million due in June 1998, all of
which bear interest at LIBOR plus 0.25%. The $475 million of private placement
notes and the $400 million drawn under the portion of the existing credit
agreement due in June 1998 have been classified as long term liabilities, based
on the Company's ability and intent to refinance these obligations on a long
term basis.
On February 13, 1998, Tyco US entered into a new $2.25 billion credit
agreement with a group of commercial banks, giving it the right to borrow (a) up
to $1.75 billion until February 12, 1999, with the ability to extend, at the
option of Tyco US, to February 12, 2000, and (b) up to $0.5 billion until
February 12, 2003, such term converting from a 364-day term to a five year term
upon termination of the existing credit agreement. Interest payable on
borrowings is variable based upon the borrower's option of selecting a
Eurodollar rate plus margins ranging from 0.17% to 0.19%, a certificate of
deposit rate plus margins ranging from 0.295% to 0.315%, or a base rate, as
defined. If the outstanding principal amount of loans equals or exceeds
one-third of the commitments, the Eurodollar and certificate of deposit margins
are increased by 0.10%. Repayment of amounts outstanding under this agreement is
guaranteed by the Company.
Simultaneous with the closing of the new credit agreement, Tyco US reduced
aggregate commitments available under its existing credit agreement to $950
million by reducing the $750 million portion to $450 million due in June 1998
and amended the terms and conditions, including interest rates, of the existing
credit agreement to conform to the new credit agreement.
Uncommitted lines of credit are borrowings by Tyco US from commercial banks
on an "as offered" basis. Borrowings and repayments occur daily and contain no
significant terms other than due dates and interest rates. The due dates
generally range from overnight to 90 days and interest rates approximate those
available under the Tyco US credit agreement.
6
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Under its various loan agreements, the Company is required to meet certain
covenants, none of which is considered restrictive to the operations of the
Company.
During the quarters ended December 31, 1997 and 1996, respectively, 124,264
and 100 of the Liquid Yield Option Notes ("LYONs") with a carrying value of
$55.1 and $0.3 million were exchanged for 3,376,990 and 2,717 common shares of
the Company. Extraordinary items in the quarter ended December 31, 1997 include
the write-off of net unamortized deferred refinance costs and other related fees
of $0.9, which were recorded upon the early extinguishment of the related LYONs.
The extraordinary items in 1996 includes $2.6 million for the write-off of
deferred financing costs upon the early extinguishment of debt agreements by
ADT.
4. EARNINGS PER SHARE
During the first quarter of fiscal 1998, the Company was required to adopt
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." SFAS No. 128 specifies the computation, presentation and disclosure
requirements for earnings per share and is substantially similar to the
standards recently issued by the International Accounting Standards Committee
entitled "International Accounting Standards Earnings Per Share". Prior period
earnings per share data has been restated in accordance with the provisions of
this statement.
The reconciliations between basic and diluted earnings per share are as
follows:
<TABLE>
<CAPTION>
QUARTER ENDED DECEMBER 31, 1997
-------------------------------
PER SHARE
INCOME SHARES AMOUNT
------ ------ ---------
(IN MILLIONS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Basic Income Per Share --
Net income available to common shareholders.................. $239.9 545.1 $.44
Restricted stock, options and warrants....................... -- 10.1
Exchange of LYONs............................................ 2.2 13.1
------ -----
Diluted Income Per Share --
Net income available to common shareholders plus assumed
conversions................................................ $242.1 568.3 $.43
====== =====
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED DECEMBER 31, 1996
-------------------------------
PER SHARE
INCOME SHARES AMOUNT
------ ------ ---------
(IN MILLIONS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Basic Income Per Share --
Net income available to common shareholders.................. $ 65.4 479.6 $.14
Restricted stock, options and warrants....................... -- 7.5
------ -----
Diluted Income Per Share --
Net income available to common shareholders plus assumed
conversions................................................ $ 65.4 487.1 $.13
====== =====
</TABLE>
The effects on diluted earnings per common share resulting from the assumed
exchange of LYONs and from the assumed conversion of convertible redeemable
preference shares, which were redeemed during fiscal 1997, are anti-dilutive in
the quarter ended December 31, 1996. Income before extraordinary items in the
quarter ended December 31, 1996 was adjusted for the dividends on preference
shares in the calculation of earnings per share.
7
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
5. CASH DIVIDENDS PER COMMON SHARE
Tyco declared a dividend of $0.025 per share in the first quarter of fiscal
1998. Prior to the merger with Former Tyco, ADT had not declared any dividends
on its common shares since 1991. Former Tyco and Keystone declared dividends of
$0.025 and $0.19 per Former Tyco and Keystone common share, respectively, in the
quarter ended December 31, 1996.
6. MERGER RESTRUCTURING AND OTHER NON-RECURRING CHARGES
During the quarter ended December 31, 1996, ADT recorded a charge of $237.3
million related to restructuring and other non-recurring charges in its
electronic security services and corporate operations. During fiscal 1997 the
Company also recorded merger, restructuring and other non-recurring charges
related to the mergers between ADT, Former Tyco, Keystone and INBRAND.
Approximately $329.7 million of accrued merger and restructuring costs
remain in other current liabilities and $106.9 million in other non-current
liabilities as of December 31, 1997. The Company currently anticipates that the
restructurings will be substantially completed by September 30, 1998, except for
certain long-term obligations.
7. CONSOLIDATED SEGMENT DATA
Selected information for the Company's four industry segments is as follows
(in millions):
<TABLE>
<CAPTION>
QUARTER ENDED
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
SALES:
Disposable and Specialty Products..................... $ 676.6 $ 581.0
Fire and Security Services............................ 1,126.6 1,019.0
Flow Control Products................................. 550.0 511.5
Electrical and Electronic Components.................. 334.3 120.6
-------- --------
$2,687.5 $2,232.1
======== ========
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS:
Disposable and Specialty Products..................... $ 123.6 $ 96.4
Fire and Security Services............................ 146.4 (19.2)(1)
Flow Control Products................................. 71.9 51.9
Electrical and Electronic Components.................. 71.6 22.5
-------- --------
Total operations................................. 413.5 151.6
Interest expense, net................................. (43.0) (41.0)(2)
Corporate and other amounts........................... (11.1) (12.0)
-------- --------
$ 359.4 $ 98.6
======== ========
</TABLE>
(1) Includes net charges of $119.9 million for non-recurring items in ADT's
electronic security services operations, principally comprised of a $237.3
million charge related to restructuring and other non-recurring items, a
$65.0 million net gain on litigation settlement and a net gain of $53.4
million arising from the sale of ADT's investment in Limelight Group plc.
(2) Includes non-recurring interest income of $4.8 million associated with the
non-recurring items for ADT.
8
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
8. INVENTORIES
Inventories are classified as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Purchased materials and manufactured
parts.................................. $ 298.4 $ 262.7
Work in process.......................... 274.2 294.4
Finished goods........................... 548.8 567.7
-------- --------
$ 1,121.4 $1,124.8
======== ========
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is liable for contract
completion and product performance. In addition, the Company is in receipt of
notifications from various environmental agencies that conditions at a number of
sites where hazardous wastes were disposed of by the Company and other persons
may require cleanup and other possible remedial action. In the opinion of
management, these obligations will not materially affect the Company's financial
position or results of operations.
10. SUBSEQUENT EVENT
The Company anticipates filing a registration statement for debt securities
through its wholly-owned subsidiary, Tyco International Group S.A. ("TIG").
Repayment of amounts outstanding under these debt securities will be fully and
unconditionally guaranteed by Tyco, the parent company. TIG was incorporated as
a Luxembourg holding company in March 1998. The following presents consolidated
summary financial information for TIG and its subsidiaries, as if TIG and its
current organizational structure was in place for all periods presented.
<TABLE>
<CAPTION>
(IN MILLIONS)
DECEMBER 31, SEPTEMBER 30,
1997 1997
----------- ------------
<S> <C> <C>
Total current assets $4,261.5 $4,018.3
Total noncurrent assets 6,226.0 6,236.2
Total current liabilities 3,742.4 3,905.2
Total noncurrent liabilities 3,898.4 3,998.1
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
---------------------------
1997 1996
--------- ---------
<S> <C> <C>
Net Sales $2,687.5 $2,232.1
Gross profit 895.8 703.3
Income (loss) before
extraordinary items(1) 226.5 (11.7)
Net income (loss)(2) 225.6 (14.3)
</TABLE>
- ---------------
(1) Loss before extraordinary items in the quarter ended December 31, 1996
includes non-recurring charges of $237.3 million related principally to the
restructuring of ADT's electronic securities services business in the United
States and United Kingdom.
(2) Extraordinary items were comprised principally of losses on repayment and
the write off of net unamortized deferred refinancing costs relating to the
early extinguishment of debt.
9
