<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) OCTOBER 1, 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, HM 11, 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
On October 1, 1998, Tyco International Ltd. (the "Company" or "Tyco")
consummated a merger with United States Surgical Corporation ("USSC"). USSC
develops, manufactures and markets a line of surgical wound closure products and
advanced surgical products to hospitals throughout the world. Shareholders of
USSC received 0.7606 shares of Tyco common stock in exchange for each
outstanding share of USSC. A total of approximately 59.2 million shares were
issued in this transaction.
The supplemental consolidated financial statements filed herewith have been
prepared accounting for the merger using the pooling of interests method of
accounting. Upon publication of the Company's financial statements for a period
which includes October 1, 1998, these supplemental consolidated financial
statements will become the historical financial statements of the Company.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(c) Exhibits
Exhibit
Number Title
- ------- -----
23.1 Consent of PricewaterhouseCoopers
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Deloitte & Touche LLP
99.1 Supplemental Consolidated Financial Statements of Tyco International
Ltd. as of September 30, 1998 and 1997 and for the fiscal year ended
September 30, 1998, the nine month fiscal period ended September 30,
1997 and the year ended December 31, 1996, and Reports of Independent
Accountants thereon.
99.2 Management's Discussion and Analysis of Financial Condition and
Results of Operations.
99.3 Schedule II - Valuation and Qualifying Accounts of Tyco International
Ltd.
1
<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 AND CHIEF
FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
Date: December 10, 1998
2
<PAGE> 4
EXHIBIT INDEX
Exhibit
Number
- -------
23.1 Consent of PricewaterhouseCoopers
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Deloitte & Touche LLP
99.1 Supplemental Consolidated Financial Statements of Tyco International
Ltd. as of September 30, 1998 and 1997 and for the fiscal year ended
September 30, 1998, the nine month fiscal period ended September 30,
1997 and the year ended December 31, 1996, and Reports of Independent
Accountants thereon.
99.2 Management's Discussion and Analysis of Financial Condition and
Results of Operations.
99.3 Schedule II - Valuation and Qualifying Accounts of Tyco International
Ltd.
3
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (File Nos. 333-21425, 333-33779, 333-43333, 333-50855 and
333-50855-01) and on Form S-8 (File Nos. 33-38249, 33-26970, 333-03975,
333-33999 and 333-34001) of Tyco International Ltd. of our report dated November
23, 1998 on our audits of the Supplemental Consolidated Financial Statements and
the Supplemental Consolidated Financial Statement Schedule of Tyco International
Ltd. as of September 30, 1998 and 1997 and for the year ended September 30,
1998, the nine months ended September 30, 1997 and the year ended December 31,
1996, which report is included in this Current Report on Form 8-K.
PricewaterhouseCoopers
Hamilton, Bermuda
December 9, 1998
<PAGE> 1
EXHIBIT 23.2
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, 333-43333,
333-50855 and 333-50855-01) and on Form S-8 (File Nos. 33-38249, 33-26970,
333-03975, 333-33999 and 333-34001) of Tyco International Ltd. of our report
dated January 31, 1997 on our audit of the consolidated statements of income,
changes in shareholders' investment and cash flows of Keystone International,
Inc. and subsidiaries for the year ended December 31, 1996, 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
December 9, 1998
Houston, Texas
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos.
333-33779, 333-43333, 333-50855, 333-50855-01 on Form S-3 and Registration
Statements Nos. 333-33999, 333-34001 on Form S-8 of Tyco International Ltd. and
Registration Statement No. 333-21425 on Form S-3 and Registration Statements
Nos. 33-26970, 33-38249, 333-03975 on Form S-8 of ADT of our report dated
September 30, 1998 (relating to the consolidated balance sheet of United States
Surgical Corporation and its subsidiaries as of September 30, 1997, and the
consolidated statements of operations, changes in stockholders' equity and cash
flows for the nine month period ended September 30, 1997, the twelve month
period ended December 31, 1996 and the related financial statement schedule for
the nine month period ended September 30, 1997 and the twelve month period ended
December 31, 1996, which are not included herein), appearing in this Form 8-K of
Tyco International Ltd.
Deloitte & Touche LLP
December 9, 1998
Stamford, Connecticut
<PAGE> 1
EXHIBIT 99.1
TYCO INTERNATIONAL LTD
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of Tyco International Ltd.
In our opinion, based upon our audits and the reports of other auditors,
the accompanying supplemental consolidated balance sheets and the related
supplemental consolidated statements of operations, shareholders' equity and
cash flows present fairly, in all material respects, the financial position of
Tyco International Ltd. and its subsidiaries at September 30, 1998 and 1997, and
the results of their operations and their cash flows for the year ended
September 30, 1998, the nine months ended September 30, 1997 and the year ended
December 31, 1996, in conformity with generally accepted accounting principles
in the United States. In addition, in our opinion, the accompanying supplemental
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
supplemental consolidated financial statements. These supplemental consolidated
financial statements and supplemental financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these supplemental consolidated financial statements and supplemental
financial statement schedule based on our audits. We did not audit the financial
statements of United States Surgical Corporation, a wholly owned subsidiary, at
September 30, 1997 and for the nine months ended September 30, 1997 and the year
ended December 31, 1996, which statements reflect total assets constituting
14.0% of consolidated total assets as of September 30, 1997 and net sales
constituting 10.3% and 12.1% of consolidated net sales for the nine months ended
September 30, 1997 and the year ended December 31, 1996, respectively. Also, we
did not audit the financial statements of Keystone International, Inc., a wholly
owned subsidiary, for the year ended December 31, 1996, which statements reflect
net sales constituting 7.4% of consolidated net sales for the year ended
December 31, 1996. Those statements were audited by other auditors whose reports
thereon have been furnished to us, and our opinion expressed herein, insofar as
it relates to the amounts included for United States Surgical Corporation and
Keystone International, Inc., as of and for the periods described above, is
based solely on the reports of the other auditors. We conducted our audits of
these statements in accordance with generally accepted auditing standards in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors provide a reasonable basis for the
opinion expressed above.
As described in Note 1, on October 1, 1998, Tyco International Ltd. merged with
United States Surgical Corporation in a transaction accounted for as a pooling
of interests. The accompanying supplemental consolidated financial statements
give retroactive effect to the merger of Tyco International Ltd. with United
States Surgical Corporation.
PRICEWATERHOUSECOOPERS
Hamilton, Bermuda
November 23, 1998
<PAGE> 3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors,
Keystone International, Inc.:
We have audited the consolidated statements of income, changes in
shareholders' investment and cash flows of Keystone International, Inc. (a Texas
corporation) and subsidiaries for the year ended December 31, 1996, 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Keystone International, Inc. and subsidiaries for the year ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
January 31, 1997
Houston, Texas
<PAGE> 4
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors,
United States Surgical Corporation:
We have audited the consolidated balance sheet of United States Surgical
Corporation and subsidiaries (the "Company") as of September 30, 1997 and the
consolidated statements of operations, changes in stockholders' equity and cash
flows for the nine month period ended September 30, 1997, the twelve month
period ended December 31, 1996 and the related financial statement schedules for
the nine month period ended September 30, 1997 and the twelve month period ended
December 31, 1996, which are not included herein. These 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, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Company as of
September 30, 1997, and the consolidated results of its operations and its cash
flows for the nine month period ended September 30, 1997, and the twelve month
period ended December 31, 1996 in conformity with generally accepted accounting
principles. Also, in our opinion, the financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth herein.
DELOITTE & TOUCHE LLP
September 30, 1998
Stamford, Connecticut
<PAGE> 5
TYCO INTERNATIONAL LTD.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
September 30, 1998 and September 30, 1997
(in millions, except share data) 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ........................................................... $ 836.9 $ 411.2
Receivables, less allowance for doubtful accounts of $274.6 in 1998 and $118.7
in 1997 ........................................................................... 2,418.5 1,935.9
Contracts in process ................................................................ 565.3 450.2
Inventories ......................................................................... 1,706.6 1,320.6
Deferred income taxes ............................................................... 646.3 436.3
Prepaid expenses and other current assets ........................................... 316.3 209.8
--------- ---------
Total current assets ................................................................ 6,489.9 4,764.0
PROPERTY, PLANT AND EQUIPMENT, NET .................................................. 4,159.4 3,347.7
GOODWILL AND OTHER INTANGIBLE ASSETS, NET ........................................... 7,006.5 3,297.7
LONG-TERM INVESTMENTS ............................................................... 141.6 177.9
DEFERRED INCOME TAXES ............................................................... 296.7 189.3
OTHER ASSETS ........................................................................ 628.5 365.0
--------- ---------
TOTAL ASSETS ........................................................................ $18,722.6 $12,141.6
========= =========
CURRENT LIABILITIES:
Loans payable and current maturities of long-term debt .............................. $ 355.9 $ 254.9
Accounts payable .................................................................... 1,340.4 1,050.4
Accrued expenses and other current liabilities ...................................... 2,660.7 2,040.6
Contracts in process-- billings in excess of costs .................................. 332.9 293.7
Deferred revenue .................................................................... 260.6 152.3
Income taxes ........................................................................ 591.5 467.7
Deferred income taxes ............................................................... 12.5 28.2
--------- ---------
Total current liabilities ........................................................... 5,554.5 4,287.8
LONG-TERM DEBT ...................................................................... 5,254.3 2,613.2
OTHER LONG-TERM LIABILITIES ......................................................... 631.8 497.5
DEFERRED INCOME TAXES ............................................................... 82.4 83.8
--------- ---------
TOTAL LIABILITIES ................................................................... 11,523.0 7,482.3
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 16)
SHAREHOLDERS' EQUITY:
Common shares, $.20 par value, 1,503,750,000 shares authorized;
645,883,118 shares outstanding in 1998 and 593,937,384 shares outstanding
in 1997, net of 3,371,003 shares owned by subsidiaries in 1998 .................... 129.2 118.8
Capital in excess:
Share premium ..................................................................... 4,032.8 2,448.2
Contributed surplus, net of deferred compensation of $46.3 in 1998 and $2.2
in 1997 ......................................................................... 2,850.5 2,758.7
Currency translation adjustment ..................................................... (212.9) (193.4)
Unrealized gain on marketable securities ............................................ - 6.3
Accumulated earnings (deficit) ...................................................... 400.0 (479.3)
--------- ---------
Total shareholders' equity .......................................................... 7,199.6 4,659.3
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .......................................... $18,722.6 $12,141.6
========= =========
</TABLE>
See Notes to Supplemental Consolidated Financial Statements.
<PAGE> 6
TYCO INTERNATIONAL LTD.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
(IN MILLIONS, EXCEPT PER SHARE DATA) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales ............................................................. $13,537.2 $8,457.8 $9,216.4
Cost of sales ......................................................... 8,621.1 5,455.2 5,935.8
Selling, general and administrative expenses .......................... 3,198.4 1,921.3 2,157.9
Merger, restructuring and other non-recurring charges ................. 92.5 947.9 246.1
Charge for the impairment of long-lived assets ........................ -- 148.4 744.7
Write off of purchased in-process research and development ............ -- 361.0 --
--------- -------- --------
Operating income (loss) ............................................... 1,625.2 (376.0) 131.9
Interest income ....................................................... 38.9 31.2 36.5
Interest expense ...................................................... (270.1) (144.8) (207.3)
Other income less expenses ............................................ -- -- 119.4
--------- -------- --------
Income (loss) before income taxes and extraordinary items ............. 1,394.0 (489.6) 80.5
Income taxes .......................................................... (428.9) (208.1) (268.1)
--------- -------- --------
Income (loss) before extraordinary items .............................. 965.1 (697.7) (187.6)
Extraordinary items, net of taxes ..................................... (2.4) (58.3) (8.4)
--------- -------- --------
Net income (loss) ..................................................... 962.7 (756.0) (196.0)
Dividends on preference shares ........................................ -- (4.7) (19.8)
--------- -------- --------
Net income (loss) available to common shareholders .................... $ 962.7 $ (760.7) $ (215.8)
========= ======== ========
Basic earnings (loss) per common share:
Income (loss) before extraordinary items ........................... $ 1.54 $ (1.23) $ (.40)
Extraordinary items, net of taxes .................................. -- (.10) (.02)
Net income (loss) per common share ................................ 1.54 (1.33) (.41)
Diluted earnings (loss) per common share :
Income (loss) before extraordinary items ........................... $ 1.50 $ (1.23) $ (.40)
Extraordinary items, net of taxes .................................. -- (.10) (.02)
Net income (loss) per common share ................................. 1.50 (1.33) (.41)
Weighted-average number of common shares outstanding:
Basic .............................................................. 627.0 573.4 521.6
Diluted ............................................................ 647.0 573.4 521.6
</TABLE>
See Notes to Supplemental Consolidated Financial Statements.
<PAGE> 7
TYCO INTERNATIONAL LTD.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
1996, THE NINE MONTHS ENDED COMMON UNREALIZED
SEPTEMBER 30, 1997 AND YEAR PREFERRED CONTRIBUTED SHARES CONTRIBUTED CURRENCY GAIN (LOSS) ON ACCUMULATED
ENDED SEPTEMBER 30, 1998 STOCK $5.00 PAR SURPLUS- $0.20 SHARE SURPLUS- TRANSLATION MARKETABLE EARNINGS
(IN MILLIONS) PAR VALUE PREFERRED PAR VALUE PREMIUM COMMON ADJUSTMENT SECURITIES (DEFICIT)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996,
as previously restated....... $ - $ - $ 94.2 $1,052.5 $2,004.9 $ (31.4) $ - $ 222.5
Pooling of interests
with USSC (as defined
in Note 1) ................ .7 190.8 8.7 305.4 2.3 233.2
---- ------- ------ -------- -------- ------- ----- -------
Balance at January 1, 1996,
as restated ................. .7 190.8 102.9 1,052.5 2,310.3 (29.1) - 455.7
Effect of the Former Tyco's
excluded activity (as
described in Note 1) ...... 2.9 (19.6) 121.2
Sale of common shares........ .6 141.2
Exchange of Liquid Yield
Option Notes............... .3
Net loss..................... (196.0)
Dividends.................... (81.9)
Restricted stock grants,
cancellations, tax
benefits and other ........ .2 25.8 .5
Warrants and options
exercised ................. .7 67.6 (.1)
Purchase of treasury
shares .................... (4.4)
Amortization of deferred
compensation .............. 15.7
Minimum pension liability
adjustment ................ 3.6
Issuance of common shares
for acquisition ........... 1.4 129.0
Other treasury stock
transactions .............. (4.7)
Tax benefit from stock
options exercised ......... 49.2
Unrealized gain on
marketable securities ..... 2.8
Currency translation and
other adjustments ......... (.5) 3.1
---- ------- ------ -------- -------- ------- ----- -------
Balance at December 31, 1996 .. .7 190.8 105.8 1,261.3 2,523.5 (45.6) 2.8 303.1
Pooling of interests with
INBRAND (as described
in Note 1) ................ 2.0 15.9 (.2) 27.6
---- ------- ------ -------- -------- ------- ----- -------
Balance at December 31, 1996,
as restated ................. .7 190.8 107.8 1,261.3 2,539.4 (45.8) 2.8 330.7
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 .................... (756.0)
Dividends ................... (56.5)
Restricted stock grants,
cancellations, tax
benefits and other ........ (18.0)
Warrants and options
exercised, net of shares
surrendered for exercises.. 3.5 366.1 (21.1)
Amortization of deferred
compensation .............. 48.5
Minimum pension liability
adjustment ................ .6
Issuance of common shares
for acquisitions .......... .5 92.3
Issuance of common shares
for litigation
settlement ................ 7.0
Conversion of Series A
convertible Preferred
Stock ..................... (.7) (190.8) 1.3 181.6 8.6
Other treasury stock
transactions .............. (.1)
Tax benefit on stock
transactions .............. 9.9
Unrealized gain on
marketable securities ..... 3.5
Currency translation and
other adjustments ......... (.4) (147.6) .2
---- ------- ------ -------- -------- ------- ----- -------
Balance at September 30,
1997 ........................ - - 118.8 2,448.2 2,758.7 (193.4) 6.3 (479.3)
Sale of common shares ....... 5.1 1,239.9
Exchange of Liquid Yield
Option Notes .............. 1.8 153.5
Net income .................. 962.7
Dividends ................... (71.5)
Restricted stock grants,
net of surrenders, and
other ..................... .1 .2
Warrants and options
exercised ................. 4.0 344.7 36.4
Purchase of treasury
shares .................... (.7) (221.9)
Stock compensation expense,
including amortization of
deferred compensation ..... 42.4
Minimum pension liability
adjustment ................ (11.9)
Issuance of common shares
for acquisition ........... .1 19.1
Issuance of common shares
for litigation
settlement ................ 7.8
Tax benefit on stock
transactions .............. 55.1
Unrealized loss on
marketable securities ..... (6.3)
Currency translation and
other adjustments ......... (.8) (19.5)
---- ------- ------ -------- -------- ------- ----- -------
Balance at September 30,
1998 ........................ $ - $ - $129.2 $4,032.8 $2,850.5 $(212.9) $ - $ 400.0
==== ======= ====== ======== ======== ======= ===== =======
</TABLE>
See Notes to Supplemental Consolidated Financial Statements.
<PAGE> 8
TYCO INTERNATIONAL LTD.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................................ $ 962.7 $ (756.0) $ (196.0)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Merger, restructuring and other non-recurring charges ...................... 92.5 207.4 217.4
Charge for the impairment of long-lived assets ............................. -- 148.4 744.7
Write off of purchased in-process research and development ................. -- 361.0 --
Extraordinary items ........................................................ 2.4 58.3 8.4
Depreciation ............................................................... 482.8 333.0 404.4
Goodwill and other intangibles amortization ................................ 233.1 111.2 109.6
Debt and refinancing cost amortization ..................................... 11.3 15.9 25.5
Interest on ITS vendor note ................................................ (11.5) (7.7) (8.9)
Deferred income taxes ...................................................... 5.0 (280.5) 20.3
Gain arising from the ownership of investments ............................. -- -- (53.2)
Settlement gain ............................................................ -- -- (69.7)
Provisions for losses on accounts receivable and inventory ................. 192.0 70.2 66.5
Changes in assets and liabilities:
Receivables .............................................................. (91.2) (178.0) (144.1)
Proceeds from accounts receivable sale ................................... -- 75.0 --
Contracts in process ..................................................... (91.4) (159.7) 17.8
Inventories .............................................................. (184.6) (23.1) (73.4)
Accounts payable, accruals and other liabilities ......................... (20.7) 549.6 (121.8)
Income taxes payable ..................................................... 129.3 278.4 (32.2)
Deferred revenue ......................................................... (12.4) 6.2 4.3
Other, net ............................................................... (12.9) 10.7 5.7
--------- --------- ---------
Net cash provided by operating activities .................................. 1,686.4 820.3 925.3
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment .................................... (846.2) (560.2) (575.2)
Acquisition of businesses .................................................... (4,251.8) (1,415.2) (837.6)
Disposal of other investments ................................................ -- -- 69.5
Capitalized software costs.................................................... (42.0) (4.0) (3.0)
Other ........................................................................ (41.1) (9.0) (5.4)
--------- --------- ---------
Net cash utilized by investing activities .................................. (5,181.1) (1,988.4) (1,351.7)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net receipts of short-term debt .............................................. 202.3 918.5 232.6
Net proceeds from issuance of public debt .................................... 2,744.5 -- --
Repayment of long-term debt, including debt tender ........................... (988.1) (961.6) (374.2)
Proceeds from long-term debt ................................................. 695.9 241.3 386.6
Proceeds from sale of common shares .......................................... 1,245.0 654.5 141.8
Proceeds from exercise of options ............................................ 348.7 351.9 71.6
Dividends paid ............................................................... (68.8) (51.0) (81.0)
Purchase of treasury shares .................................................. (222.6) (4.1) (9.7)
Other ........................................................................ (36.5) (2.2) (30.2)
--------- --------- ---------
Net cash provided by financing activities .................................. 3,920.4 1,147.3 337.5
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ......................... 425.7 (20.8) (88.9)
Cash and cash equivalents at beginning of year ............................... 411.2 430.9 440.3
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 ..................................... $ 836.9 $ 411.2 $ 430.9
========= ========= =========
SUPPLEMENTARY CASH FLOW DISCLOSURE:
Interest paid ................................................................ $ 212.9 $ 161.4 $ 175.5
========= ========= =========
Income taxes paid (net of refunds) ........................................... $ 214.0 $ 161.2 $ 168.4
========= ========= =========
</TABLE>
See Notes to Supplemental Consolidated Financial Statements.
<PAGE> 9
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- The supplemental 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 continuing public company) 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"), Keystone
International, Inc. ("Keystone") and United States Surgical Corporation ("USSC")
on August 27, 1997, August 29, 1997 and October 1, 1998, respectively. These
transactions are referred to herein as the "mergers". These supplemental
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, Keystone and USSC as if they had been combined for
all periods presented and of INBRAND from January 1, 1997. 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 Earnings (Deficit) balance in the Supplemental
Consolidated Statement of Shareholders' Equity has been restated to record the
merger with INBRAND. Prior to the mergers, ADT, Keystone and USSC had calendar
year ends and the Former Tyco had a June 30 fiscal year end. The Supplemental
Consolidated Statements of Operations, Shareholders' Equity and Cash Flows for
the year ended December 31, 1996 reflect the combination of the calendar year
end consolidated results of operations and cash flows for ADT, Keystone, USSC
and 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
historical combined results, are reflected as adjustments in the 1996
Supplemental Consolidated Statements of Shareholders' Equity and Cash Flows.
Upon publication of the Company's consolidated financial statements for a period
which includes October 1, 1998, these supplemental consolidated financial
statements will become the historical consolidated financial statements of the
Company.
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 supplemental 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. Certain subsidiaries (including branches) of USSC, operating
outside the United States, are included in the supplemental consolidated
financial statements on a fiscal-year basis ending one month prior to Tyco's
year end.
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 1998, Fiscal 1997 and 1996 throughout
these supplemental consolidated financial statements refer to the twelve months
ended September 30, 1998, the nine months ended September 30, 1997 and the
calendar year ended December 31, 1996, 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.
<PAGE> 10
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL 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:
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
furniture and fixtures 2 to 20 years
Gains and losses arising on the disposal of property, plant and equipment are
included in the Supplemental 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 Supplemental Consolidated Statements of Operations include the
Company's share of net income of associates less applicable goodwill
amortization.
Goodwill and Other Intangible Assets -- Goodwill, which is being amortized on
a straight-line basis over periods ranging from 10 to 40 years, was $6,039.9
million and $2,856.3 million at September 30, 1998 and 1997, respectively.
Accumulated amortization amounted to $477.4 million at September 30, 1998 and
$340.9 million at September 30, 1997. 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 40 years. At September 30, 1998 and September 30, 1997,
accumulated amortization amounted to $190.5 million and $139.5 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, underwater cable
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.
Accounts receivable include amounts billed under retainage provisions for
fire protection contracts. Retention balances of $38.7 million at September 30,
1998, which become due upon contract completion and acceptance, are expected to
be substantially collected during the fiscal year ending September 30, 1999
("Fiscal 1999").
Share Premium and Contributed Surplus -- In accordance with the Bermuda
Companies Act of 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
supplemental consolidated financial statements or tax returns. Deferred tax
liabilities and assets are determined based on the differences between the
supplemental consolidated financial statements and the 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 provided 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.
<PAGE> 11
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Advertising -- Advertising costs 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 income (loss).
Gains and losses resulting from foreign currency transactions, the amounts of
which are not material, are included in net income (loss).
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 supplemental 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 supplemental consolidated
financial statements and the reported amounts of revenues and expenses during
the reported periods. Significant estimates in these supplemental 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.
Accounting Pronouncements -- In June 1997, the Financial Accounting Standards
Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information", which are both effective for
years beginning after December 15, 1997. Adoption of these standards is not
expected to impact the financial results of the Company.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits", which is effective for fiscal years
beginning after December 15, 1997. This statement revises financial statement
disclosure requirements for pension and other postretirement benefit plans but
does not change the measurement or recognition of those plans. Adoption of this
standard is not expected to impact the financial results of the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective for fiscal years
beginning after June 15, 1999. This statement establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. The Company is currently analyzing this new standard.
Reclassifications -- Certain prior year amounts have been reclassified to
conform with current year presentation.
<PAGE> 12
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Split -- Per share amounts and per share data have been retroactively
adjusted to reflect to the two-for-one stock split described in Note 10.
2. MERGERS
Tyco's Merger with USSC--On October 1, 1998, Tyco merged with United States
Surgical Corporation. Shareholders of USSC received 0.7606 shares of Tyco common
stock in exchange for each outstanding share of USSC. A total of approximately
59.2 million shares were issued in this transaction.
Tyco's Merger with Keystone -- In August 1997, Tyco merged with Keystone
International, Inc. A total of approximately 34.8 million Tyco common shares
were issued to the former shareholders of Keystone.
Tyco's Merger with INBRAND -- In August 1997, Tyco merged with INBRAND
Corporation. A total of approximately 10.2 million Tyco common shares were
issued to the former shareholders of INBRAND.
ADT's Merger with the Former Tyco -- In July 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 or a total of approximately 336.8 million Tyco common shares.
All historical common share and per share data of the Company have been
retroactively restated to reflect the reverse stock split.
Each of the four merger transactions discussed above was accounted for under
the pooling of interests accounting method, which presents 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 supplemental consolidated financial
statements for periods prior to January 1, 1997 do not include INBRAND due to
immateriality.
All fees and expenses related to the merger with USSC in October 1998 and
to the integration of the combined companies will be expensed as required under
the pooling of interests accounting method. These expenses have not been
reflected in the supplemental consolidated statement of operations, except for
approximately $9.6 million in transaction costs, but will be reflected in the
consolidated statement of operations of the Company for the quarter ended
December 31, 1998. Such fees and expenses, which have not yet been estimated,
may include amounts with respect to the elimination of excess facilities, the
write-off of certain goodwill, other intangibles and fixed assets, severance
costs and the satisfaction of certain liabilities.
Combined and separate results of Tyco and USSC for the periods preceding
the merger were as follows:
<TABLE>
<CAPTION>
TYCO USSC COMBINED
--------- -------- ---------
<S> <C> <C> <C>
Year ended September 30, 1998
Net sales .............................. $12,311.3 $1,225.9 $13,537.2
Extraordinary items .................... (2.4) -- (2.4)
Net income (loss) ...................... 1,174.7 (212.0) 962.7
Nine months ended September 30, 1997
Net sales............................... 7,588.2 869.6 8,457.8
Extraordinary items .................... (58.3) -- (58.3)
Net (loss) income ...................... (835.1) 79.1 (756.0)
Year ended December 31, 1996
Net sales .............................. 8,103.7 1,112.7 9,216.4
Extraordinary items .................... (8.4) -- (8.4)
Net (loss) income ...................... (305.1) 109.1 (196.0)
</TABLE>
Aggregate fees and expenses related to the mergers with ADT, Former Tyco,
Keystone and INBRAND in Fiscal 1997 and to the integration of the combined
companies have been expensed in the accompanying supplemental 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
<PAGE> 13
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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)
</TABLE>
- ----------
(i) The restated combined financial statements for periods prior to January 1,
1997 do not include INBRAND due to immateriality (see Note 1).
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 approximately 6.8 million common shares of the
Company.
The consolidated financial statements of ASH have previously been presented
in pounds sterling, ASH's functional currency. For the purposes of these
supplemental 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
supplemental consolidated financial statements, are reflected as adjustments in
the 1997 Supplemental Consolidated Statements of Shareholders' Equity and Cash
Flows.
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)
</TABLE>
- ----------
(i) Income tax adjustment arising on preference share dividends accrued by the
ASH group but not payable following merger.
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.
<PAGE> 14
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITIONS AND DIVESTITURES
During Fiscal 1998 the Company acquired companies in each of its business
segments for an aggregate of $4.65 billion, including $4.25 billion in cash, the
assumption of approximately $260 million in debt and the issuance of 382,772
common shares valued at $19.2 million and 1,254 subsidiary preference shares
valued at $125.4 million. The cash portion of the acquisitions were made
utilizing cash on hand, borrowing under the bank credit agreements, proceeds of
approximately $1.25 billion from the sale of common shares, 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 $3.95 billion in goodwill and other intangibles 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 during Fiscal 1998 include approximately $60.1 million for transaction
and other direct costs, $159.7 million for severance and related costs and
$278.9 million for costs associated with the shut down and consolidation of
certain acquired facilities. At September 30, 1998, accrued liabilities for
approximately $38.8 million in transaction and other costs, $126.3 million in
severance costs and $264.7 million for facility related costs remained on the
balance sheet.
The Fiscal 1998 acquisitions discussed above include the acquisition of the
Sherwood-Davis & Geck division ("Sherwood") of American Home Products
Corporation which was purchased for cash of $1.77 billion. As a result of this
acquisition, approximately $1.44 billion in goodwill and other intangibles was
recorded by the Company. 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. Sherwood is being integrated with Kendall within
Tyco's Disposable and Specialty Products segment.
In July 1998, the Company acquired the U.S. operations of Crosby Valve,
Inc. in exchange for 1,254 cumulative dividend preference shares of a newly
created subsidiary, valued at $125.4 million. The subsidiary has authorized
2,000 cumulative dividend preference shares. The holders of these preference
shares have the option to require the Company to repurchase the preference
shares at par value plus unpaid dividends at any time after July 2001. The
outstanding preference shares were issued at $100,000 par value each and have
been classified in Other Long-Term Liabilities on the accompanying 1998
Supplemental Consolidated Balance Sheet. Cash dividends accumulate on a
preferred basis, whether or not earned or declared, at the rate of $3,750 per
share per annum. Upon liquidation, the holders of shares are entitled to receive
an amount equal to $100,000 per share, plus any unpaid dividends. These
preference shares may be redeemed by the subsidiary at any time on or after
December 31, 2008 at a price per share of $100,000, plus unpaid dividends,
adjusted for certain increases in the value of Tyco's stock, as defined.
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, 1997. 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, 1997 or that may be obtained in the future. The pro forma data do
not give effect to acquisitions completed subsequent to September 30, 1998,
except for USSC which was accounted for as a pooling of interests (Notes 1
and 2).
YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Net Sales ................................. $14,882.2 $10,303.4
Income (loss) before extraordinary items .. 797.7 (803.3)
Net income (loss) ......................... 789.9 (863.1)
Net income (loss) per common share:
Basic ............................. 1.26 (1.51)
Diluted ........................... 1.23 (1.51)
<PAGE> 15
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $1.52
billion, including $1.42 billion in cash, the assumption of approximately $15.7
million in debt and the issuance of approximately 1.9 million shares of the
Company's common shares valued at $92.8 million. The cash portions of the
acquisitions were made utilizing cash on hand, funding from an 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 $708.7 million in goodwill and other
intangibles, net of the 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. At
September 30, 1998, purchase liabilities for approximately $6.9 million in
severance costs and $46.4 million for facility and other 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 the payout for employee severance and its consolidation of facilities
related to these acquisitions will be substantially completed in Fiscal 1999,
excluding certain leases for abandoned facilities.
The Company will potentially pay up to $72 million in common stock as
additional purchase price consideration if and when certain additional
milestones and sales objectives are achieved relative to an acquisition
consummated in Fiscal 1997. Approximately $4 million worth of common shares were
issued for this contingency as of September 30, 1998.
During 1996, the Company acquired companies in each of its business
segments for an aggregate of $1.1 billion, including $837.6 million in cash, 3.5
million shares of the Company's common shares 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 from the
issuance 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. At September
30, 1998, purchase liabilities for approximately $21.5 million in severance
costs and facility related costs remained on the balance sheet. The Company
expects to complete the payout for employee severance and its consolidation of
facilities in Fiscal 1999, excluding certain leases for abandoned facilities.
As a result of the sale of a business in 1995, the Company holds a
subordinated, non-collateralized zero coupon loan note maturing in 2004 ("Vendor
Note"), together with a 10% interest of the ordinary share capital of the
issuer. The Vendor Note has a $205.4 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. As
of September 30, 1998, the Vendor Note is included in Long-Term Investments on
the accompanying Supplemental Consolidated Balance Sheet and has been accounted
for at its amortized cost of $111.1 million (which approximates fair value). The
fair value of the Vendor Note was estimated based on the Company's calculation
of an appropriate fair value interest rate discount. This discount rate was
determined based on an evaluation of current UK market conditions (private
placement rates, discussions with financial sources, etc.) and the continued
risk margin associated with deep discount debentures.
During 1996, the Company entered into a settlement agreement related to a
1990 acquisition and a lawsuit originated by the Company in 1991. After
deducting legal and other settlement costs, 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.
<PAGE> 16
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INDEBTEDNESS
Long-term debt is as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
------------- -------------
(IN MILLIONS)
<S> <C> <C>
Bank and acceptance facilities....................................... $ 0.8 $ 56.4
Bank credit agreement(i)............................................. 1,359.0 1,400.0
Bank credit facilities (viii)........................................ 206.9 30.6
Uncommitted lines of credit(ii)...................................... -- 38.5
Variable rate term loan due 1998(iii)................................ -- 97.1
8.125% public notes due 1999(iv)..................................... 10.5 10.5
8.25% senior notes due 2000(iv)...................................... 9.5 9.5
6.34% senior notes due 2000.......................................... -- 45.0
6.5% public notes due 2001........................................... 299.0 298.7
6.125% public notes due 2001(v)...................................... 747.0 --
Sterling denominated bank facility due 2002(vi) -- 137.5
9.25% senior subordinated notes due 2003(iv) 14.1 14.1
6.375% public notes due 2004......................................... 104.6 104.5
6.375% public notes due 2005 (v) .................................... 742.6 --
7.25% senior notes due 2008 (ix)..................................... 300.0 --
Zero coupon Liquid Yield Option Notes due 2010(vii) 115.3 259.6
6.25% public Dealer Remarketable Securities ("Drs.") due 2013 (v) 762.8 --
9.5% public debentures due 2022(iv).................................. 49.0 49.0
8.0% public debentures due 2023...................................... 50.0 50.0
7.0% public notes due 2028 (v)....................................... 492.1 --
Financing lease obligation (x)....................................... 76.5 75.7
Other................................................................ 270.5 191.4
-------- --------
Total debt........................................................... 5,610.2 2,868.1
Less current portion................................................. 355.9 254.9
-------- --------
Long-term debt....................................................... $5,254.3 $2,613.2
======== ========
</TABLE>
- ----------
(i) In February 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 option
to extend to February 12, 2000, and (b) up to $0.5 billion until
February 12, 2003. 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%. Repayments of amounts outstanding under this
agreement are guaranteed by the Company. In accordance with the terms
of this agreement, in June 1998 Tyco US and Tyco International Group
S.A. ("TIG"), a wholly-owned subsidiary of the Company, elected that
TIG become the borrower and that Tyco US cease to be the borrower under
this agreement. All other terms and conditions in effect remained
unchanged. Substantially all amounts outstanding under this credit
agreement have been classified as long-term based on the Company's
ability and intent to refinance this obligation on a long-term basis.
Simultaneously with the closing of the new credit agreement, Tyco US
reduced aggregate commitments available under the previously existing
credit agreement from $1.75 billion to $950 million. In March 1998,
Tyco US terminated the $950 million credit agreement. Balances
outstanding at the time of termination were repaid with net proceeds
from the sale of common shares (Note 10).
(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 the TIG credit agreement.
(iii) In May 1997, a Tyco subsidiary entered into a (pound)60 million term
loan with a bank to refinance certain intercompany loans with external
debt. Interest payable on borrowings was variable based upon U.K. LIBOR
plus 0.35%. In March 1998, the term loan was repaid and the facility
was terminated.
<PAGE> 17
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 previously existing 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 December 1998, ADT Operations, Inc.
sent a notice of redemption to the holders of these notes, calling the
notes for redemption on December 31, 1998.
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 June 1998, TIG issued $750 million 6 1/8% notes due 2001, $750
million 6 3/8% notes due 2005, $750 million 6 1/4% Dealer Remarketable
Securities(sm) ("Drs.")(sm) due 2013 and $500 million 7.0% notes due
2028 under a $3.75 billion public shelf registration statement.
Interest is payable semi-annually in June and December. Under the terms
of the Drs., the Remarketing Dealer has an option to remarket the Drs.
in June 2003, which if exercised would subject the Drs. to mandatory
tender to the Remarketing Dealer and reset the interest rate to an
adjusted fixed rate until June 2013. If the Remarketing Dealer does not
exercise its option then all Drs. are required to be tendered to the
Company in June 2003. Repayment of amounts outstanding under these debt
securities are fully and unconditionally guaranteed by Tyco (Note 24).
The net proceeds of approximately $2.74 billion were ultimately used to
repay borrowings under the $2.25 billion bank credit facility and
uncommitted lines of credit of Tyco US. During Fiscal 1998, the
effective interest rate on these instruments approximated the coupon
rate.
(vi) In March 1997, ADT Finance entered into a sterling denominated bank
credit facility of which $137.5 million ((pound)85 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. Amounts
outstanding under the term loan facility were repaid as of September
30, 1998 and the facility was terminated.
(vii) 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 1998
amounted to $11.0 million (Fiscal 1997 -- $15.9 million; 1996 -- $20.3
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 Fiscal 1998
and Fiscal 1997, respectively, 342,752 and 188,290 Notes with carrying
values of $155.3 million and $83.0 million were exchanged for 9,314,599
and 5,116,923 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.
(viii) In December 1995, USSC entered into a five year, $325 million
syndicated credit agreement which matures in January 2001. The
syndicated credit facility provides a choice of interest rates based
upon the banks' CD rate, prime rate or the London Interbank Offered
Rate (LIBOR) for US dollar borrowings and Tokyo Interbank Offered Rate
(TIBOR) for yen borrowings. The actual interest charges paid are
determined by a pricing schedule which considers the ratio of
consolidated debt at each calendar quarter end to consolidated earnings
before interest, taxes, depreciation and amortization for the trailing
twelve months. During the third quarter of 1996, USSC entered into an
additional conditional committed bank term loan facility of $175
million, with similar terms and conditions. The effective interest rate
on long-term bank debt outstanding as of September 30, 1998 and 1997
was 5.91% and 1.04% per annum, respectively.
In January 1998, USSC obtained a 364-day bank term loan facility of
$450 million to finance its acquisition of Valleylab. The loan contains
terms and conditions similar to the syndicated bank credit facility.
The interest rate was initially set at LIBOR plus 60 basis points, or
6.26%. Subsequent to the acquisition, the term loan was refinanced with
a combination of the $325 million syndicated credit facility and the
issuance of senior notes, discussed below.
(ix) In March 1998, USSC issued $300 million 7.25% senior notes due March
2008, which are not redeemable prior to maturity and require
semi-annual interest payments.
(x) The financing lease obligation relates to USSC's European headquarters
office building and distribution center complex in Elancourt, France.
The French franc denominated financing lease requires principal
amortization in varying amounts over the remaining eleven year term of
the lease with a balloon payment of approximately 42 million French
francs ($7 million) at the end of the lease. Interest is payable at a
rate approximately 1.4% above Paris Interbank Offered Rate (PIBOR). The
effective interest rate on the financing lease debt was approximately
4.55% and 4.9% per annum at September 30, 1998 and 1997, respectively.
The weighted-average rate of interest on all long-term debt during Fiscal
1998 was 6.5% (Fiscal 1997 -- 7.4%; 1996 -- 7.9%).
The aggregate amounts of total debt maturing during the next five years are
as follows (in millions): $355.9 in Fiscal 1999, $1,255.4 in Fiscal 2000,
$1,320.4 in Fiscal 2001, $69.9 in Fiscal 2002 and $25.6 in Fiscal 2003.
<PAGE> 18
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1998, TIG entered into two interest rate swap agreements with a
financial institution to hedge a portion of the fixed rate terms of its public
notes. The agreements are for notional amounts of $650 million each and expire
in June 2003 and June 2005, respectively. The Company receives payments at fixed
rates of 6.25% and 6.375%, respectively, and makes floating rate payments based
on LIBOR, as defined, but not to exceed 7.0% and 7.125%, respectively. At
September 30, 1998, the floating rates under these agreements were 5.58% and
5.55%, respectively. 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 expense was a reduction of $1.9 million, $0.8 million and
$1.8 million for Fiscal 1998, Fiscal 1997 and 1996, respectively.
Subsequent to September 30, 1998, TIG issued $800 million of debt in a
private placement offering consisting of two series of Notes: $400 million of
5.875% Notes due November 2004 and $400 million of 6.125% Notes due November
2008. Interest on each series of Notes is payable on May 1 and November 1 of
each year, beginning May 1, 1999. The Notes are fully and unconditionally
guaranteed by Tyco. The net proceeds of approximately $791.7 million were used
to repay borrowings under TIG's $2.25 billion bank credit facility. In addition,
TIG entered into an interest rate swap agreement with a notional amount of $400
million to hedge the fixed rate terms of the 6.125% Notes due 2008. Under this
agreement, which expires in November 2008, TIG will receive payments at a fixed
rate of 6.125% and will make floating rate payments based on LIBOR, as defined.
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
financiers 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 accounts has been retained on the Company's
Supplemental Consolidated Balance Sheets. At September 30, 1998 and 1997, the
$300 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 Supplemental Consolidated
Statements 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 $17.3 million, $10.4 million, and $12.1 million during
Fiscal 1998, Fiscal 1997 and 1996, respectively, and has been included in
selling, general and administrative expenses in the Company's Supplemental
Consolidated Statements 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 $153.6 million), as well as interest rate
swaps. At September 30, 1998 and at September 30, 1997, the fair value of
interest rate swaps approximated book value, and the fair value of long-term
debt was approximately $5,646.4 million (book value of $5,254.3 million) and
$2,614.6 million (book value of $2,613.2 million), respectively, 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.
<PAGE> 19
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
The provision (benefit) for income taxes and the reconciliation between the
notional United States federal income taxes at the statutory rate on
consolidated income (loss) before taxes and the Company's income tax provision
are as follows:
<TABLE>
<CAPTION>
Nine
Year ended months ended Year ended
September 30, September 30, December 31,
1998 1997 1996
------------- ------------- ------------
(IN MILLIONS)
<S> <C> <C> <C>
Notional U.S. federal income taxes at the statutory rate ............ $487.9 $(171.3) $ 28.1
Adjustments to reconcile to the Company's income tax provision:
U.S. state income tax provision, net .............................. 18.6 17.8 26.4
SFAS 121 impairment ............................................... -- 49.6 150.2
Non U.S. net (earnings) losses .................................... (84.0) 113.6 71.2
Provision for unrepatriated earnings of subsidiaries ............. -- 64.1 --
Nondeductible charges ............................................. 20.1 112.9 --
Other ............................................................. (13.7) 21.4 (7.8)
------ ------- ------
Provision for income taxes ........................................ 428.9 208.1 268.1
Deferred provision (benefit) ...................................... 3.2 (246.3) 47.1
------ ------- ------
Current provision ................................................. $425.7 $ 454.4 $221.0
====== ======= ======
</TABLE>
The provisions for Fiscal 1998, Fiscal 1997, and 1996 included $162.3
million, $96.7 million and $55.3 million, respectively, for non-U.S. income
taxes. The non-U.S. component of income (loss) before income taxes was $636.8
million, $(198.3) million and $(107.5) million for Fiscal 1998, Fiscal 1997, and
1996, respectively.
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, SEPTEMBER 30,
1998 1997
------------ ------------
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets:
Accrued liabilities and reserves ................................ $ 989.4 $ 731.2
Accrued postretirement benefit obligation ....................... 65.5 59.5
Tax loss and credit carryforwards ............................... 424.5 404.1
Interest ........................................................ 78.9 92.7
Other ........................................................... 29.3 16.2
-------- -------
1,587.6 1,303.7
Deferred tax liabilities:
Property, plant and equipment ................................... (410.6) (480.6)
Patent amortization ............................................. (22.5) (34.2)
Operating lease ................................................. (57.0) (42.9)
Contracts ....................................................... (6.4) (6.1)
Accrued liabilities and reserves ................................ (7.1) (17.0)
Other ........................................................... (55.5) (40.1)
-------- -------
(559.1) (620.9)
-------- -------
Net deferred income tax asset before valuation allowance ........ 1,028.5 682.8
Valuation allowance ............................................. (180.4) (169.2)
-------- -------
Net deferred income tax asset ................................... $ 848.1 $ 513.6
======== ========
</TABLE>
<PAGE> 20
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of September 30, 1998, the Company had approximately $289.5 million of net
operating loss carryforwards in certain non-U.S. jurisdictions. Of these, $223.4
million have no expiration, and the remaining $66.1 million will expire in
future years to 2013. U.S. operating loss carryforwards at September 30, 1998
were approximately $857.7 million and will expire in future years to 2018. A
valuation allowance has been provided for operating loss carryforwards that are
not expected to be utilized.
8. KEY EMPLOYEE LOAN PROGRAM
Loans are made 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 Former Tyco's Restricted Stock Ownership Plans. The loans are
unsecured and bear interest, payable annually, at a rate which approximates the
Company's incremental short-term borrowing rate. Loans are generally repayable
in ten years, except that earlier payments are required under certain
circumstances. During Fiscal 1998, the maximum amount outstanding was $143.5
million. Loans receivable under this program were $22.2 million and $12.3
million at September 30, 1998 and September 30, 1997, respectively.
9. CONVERTIBLE REDEEMABLE PREFERENCE SHARES
The Company has authorized 125,000,000 convertible cumulative redeemable
preference shares of $1 each, of which none was outstanding at September 30,
1998 or September 30, 1997. 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 exercisable 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 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.
<PAGE> 21
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SHAREHOLDERS' EQUITY
During the second quarter of Fiscal 1998, the shareholders approved an
increase in the number of authorized common shares from 750,000,000 to
1,503,750,000.
In December 1997 the Company 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 $2.0 billion. In March 1998, the Company sold 25.3 million common shares
at $50.75 per share. The net proceeds from the sale of approximately $1.25
billion were used to repay indebtedness incurred for previous acquisitions.
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 April 1997, USSC redeemed all of the issued and outstanding shares of
its Series A Convertible Preferred Stock by issuing approximately 6.4 million
shares of common stock.
In March and April 1997, Former Tyco sold an aggregate of 23 million shares
of common stock 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 million. 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, INBRAND and USSC 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, 0.43 and
0.7606 respectively.
Restricted Stock -- The Former Tyco's 1978 Restricted Stock Ownership Plan
(the "1978 Plan") provided for the award of 9.6 million shares of common stock
to key employees through November 30, 1988. Under the 1978 Plan, approximately
9.5 million shares were granted, net of surrenders. The 1983 Restricted Stock
Ownership Plan (the "1983 Plan") provided for the award of 13.6 million shares
of common stock to key employees through October 18, 1993. Under the 1983 Plan,
approximately 13.5 million 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, 1998, there
were 8,540,055 shares available, of which 3,475,624 shares had been granted.
Common shares are awarded subject to certain restrictions with vesting varying
over periods of up to ten years. USSC's Outside Directors Stock Plan provided
restricted stock awards to certain non-employee members of the Board of
Directors of USSC which are exercisable for a period of up to ten years. At
September 30, 1998, 32,317 shares had been granted under this plan.
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.
The total compensation cost expensed for all stock-based compensation awards
was $45.2 million, $48.7 million and $15.9 million for Fiscal 1998, Fiscal 1997
and 1996, respectively, including $29.6 million in Fiscal 1997 related to
accelerated vesting in connection with changes in control provisions.
<PAGE> 22
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employee Stock Purchase Plans -- Substantially all full-time employees of
the Company's U.S. subsidiaries and employees of certain qualified non-U.S.
subsidiaries are eligible to participate in an employee stock purchase plan.
Eligible employees authorize payroll deductions to be made for the purchase of
shares. The Company matches a part of the employee contribution by contributing
an additional 15% of the employee's payroll deduction. All shares purchased
under the plan are purchased on the open market by a designated broker.
Under USSC's Employees 1979 Stock Purchase Plan and the 1994 Employees Stock
Purchase Plan, all eligible employees may authorize payroll deductions of up to
10% of their base earnings, as defined, to purchase shares at 85% of the market
price when such deductions are made.
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 directors, 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 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 prior
years 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. Awards which the Company becomes obligated to make through the
assumption of, or in substitution for, outstanding awards previously granted by
an acquired company do not count against the shareholder approved shares
available for award under the Incentive Plan. At September 30, 1998 there were
4,557,648 shares available for future grant under the Incentive Plan. Subsequent
to yearend, a broad-based option plan for non-officer employees, the Tyco
Long-Term Incentive Plan II ("LTIP II"), was approved by the Board of Directors
on October 21, 1998. The Company has reserved 25.0 million common shares for
issuance under the LTIP II. The terms and conditions of this plan are similar to
the Incentive Plan.
In connection with the acquisition of Holmes Protection in Fiscal 1998,
options outstanding under the Holmes' stock option plans were assumed by Tyco's
Incentive Plan. 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.
USSC provided for grants of options and stock appreciation rights under
various plans to officers, key employees, key consultants and selected
employees, some of which were in lieu of cash bonus payments. Options
outstanding under these various plans were assumed by Tyco's Incentive Plan in
connection with the merger. The exercise period under these plans ranges from
four to fifteen years. Stock option grants vest for periods up to five years
from the date of grant.
USSC's 1997 Stock Option Purchase Agreement provided for a purchase of
1,521,200 shares of common stock by USSC's Chairman of the Board and Chief
Executive Officer with an exercise price of $62.944 per share. The option was
purchased by USSC's Chairman of the Board and Chief Executive Officer at fair
market value.
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
<PAGE> 23
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 is 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.
Share option activity for all plans since January 1, 1996 has been as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
OUTSTANDING PRICE
----------- --------
<S> <C> <C>
At January 1, 1996........................................................... 30,603,806 $29.83
Effect of Former Tyco's excluded activity.................................. 39,500
Assumed from acquisitions.................................................. 1,090,212 16.27
Granted.................................................................... 10,724,727 22.13
Exercised.................................................................. (4,020,471) 16.19
Canceled................................................................... (1,004,932) 21.73
-----------
At December 31, 1996......................................................... 37,432,842 28.89
Adjustment for INBRAND merger (Note 1)..................................... 1,270,954 17.25
Assumed from acquisition................................................... 87,800 20.37
Granted.................................................................... 16,607,782 42.50
Exercised.................................................................. (3,444,849) 18.18
Canceled................................................................... (2,714,287) 54.68
-----------
At September 30, 1997........................................................ 49,240,242 32.31
Assumed from acquisition................................................... 43,616 20.45
Granted.................................................................... 13,893,838 47.81
Exercised.................................................................. (18,765,421) 18.33
Canceled................................................................... (3,543,953) 54.99
-----------
At September 30, 1998........................................................ 40,868,322 49.61
===========
</TABLE>
The following table summarizes information about outstanding and exercisable
options at September 30, 1998:
<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 62,407 $ 4.12 4.6 60,439 $ 4.18
4.96 to 9.97 478,886 9.00 4.7 478,637 9.01
9.98 to 14.88 5,124,374 12.90 6.1 3,123,302 12.73
14.89 to 19.69 1,420,513 17.45 4.8 597,126 17.25
19.70 to 24.82 650,711 21.77 6.1 206,204 21.65
24.83 to 29.75 3,329,818 28.15 6.0 2,279,057 27.98
29.76 to 39.38 12,484,240 37.33 6.7 1,760,891 34.94
39.39 to 46.96 6,449,624 41.79 6.2 3,109,980 41.75
46.97 to 56.24 2,778,947 51.23 6.6 604,158 48.93
56.25 to 68.22 5,975,854 65.13 6.8 4,882,445 65.28
68.23 to 150.04 2,112,948 125.99 1.5 2,112,948 125.99
---------- ----------
Total 40,868,322 19,215,187
========== ==========
</TABLE>
<PAGE> 24
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of the merger with USSC, approximately 7.1 million options
which were not previously exercisable became immediately exercisable on October
1, 1998.
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 recorded. Had the fair
value based method been adopted consistent with the provisions of SFAS 123, the
Company's proforma net income (loss) and proforma net income (loss) per common
share for Fiscal 1998, Fiscal 1997 and 1996 would have been as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------- -------
<S> <C> <C> <C>
Net income (loss) -- proforma (in millions) ......... $875.2 $(786.1) $(232.6)
Net income (loss) per common share -- proforma
Basic ......................................... 1.40 (1.38) (.48)
Diluted........................................ 1.36 (1.38) (.48)
</TABLE>
The estimated weighted average fair value of Tyco and USSC options granted
during Fiscal 1998 was $16.48 and $13.58, respectively, on the date of grant
using the option-pricing model and assumptions referred to below. The estimated
weighted average fair value of Tyco, Former Tyco, INBRAND and USSC options
granted during Fiscal 1997 was $12.15, $9.55, $37.17 and $14.30, 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 1998:
TYCO USSC
------- ---------
Expected stock price volatility..................... 22% 39%
Risk free interest rate............................. 5.62% 5.40%
Expected annual dividends........................... $0.10 $0.21
Expected life of options............................ 5 years 4.2 years
The following weighted average assumptions were used for Fiscal 1997:
<TABLE>
<CAPTION>
TYCO FORMER TYCO INBRAND USSC
------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Expected stock price volatility..................... 22% 22% 55% 34%
Risk free interest rate............................. 6.07% 6.34% 6.26% 6.45%
Expected annual dividends........................... $0.10 $0.10 -- $0.21
Expected life of options............................ 5 years 5 years 6.4 years 3.8 years
</TABLE>
The following weighted average assumptions were used for 1996:
<TABLE>
<CAPTION>
ADT FORMER TYCO KEYSTONE USSC
--------- --------------- -------- ---------------
<S> <C> <C> <C> <C>
Expected stock price volatility 28% 22% 26% 32%
Risk free interest rate........................ 5.9% 5.8% 6.4% 5.27%
Expected annual dividends...................... -- $0.10 per share 3.8% $0.11 per share
Expected life of options....................... 3.7 years 3.7 years 7 years 4.1 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.
<PAGE> 25
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1998, 31,397 A Warrants and 14,539 B Warrants were
exercised. 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.
At September 30, 1998, 91,212 A Warrants and 66,566 B Warrants were outstanding.
In July 1996, as part of an 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.
Treasury Shares -- From time to time the Company, through its subsidiaries,
purchases shares in the open market to satisfy certain stock-based compensation
arrangements. During Fiscal 1998, certain executives sold approximately 2.6
million common shares to the Company at the shares' then fair market value.
Dividends -- Tyco has paid a quarterly cash dividend of $0.025 per common
share since July 1997. Prior to the merger with ADT, Former Tyco paid a
quarterly cash dividend of $0.025 in Fiscal 1997 and 1996. ADT paid no dividends
on its common shares in Fiscal 1997 or 1996. Keystone paid quarterly dividends
of $0.19 per share in Fiscal 1997 and 1996. USSC declared quarterly dividends of
$0.04 per share in Fiscal 1998 and Fiscal 1997 and aggregate dividends of $0.08
per share in 1996.
11. CHARGE FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
Charges for the impairment of long-lived assets are as follows:
1998 1997 1996
----- ------ ------
(IN MILLIONS)
Fire and Security Services.......... $ -- $118.8 $731.7
Flow Control Products............... -- 29.6 --
Disposable and Specialty Products... -- -- 13.0
----- ------ ------
$ -- $148.4 $744.7
===== ====== ======
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and 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.
<PAGE> 26
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
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.
12. OTHER INCOME LESS EXPENSES
Other income less expenses in 1996 consists of a litigation settlement gain
of $65.0 million (See Note 3) and gains on long-term investments of $54.4
million. 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 (Note 3) and other net losses
of $0.2 million principally arising from the disposal of other non-core
investments.
13. EXTRAORDINARY ITEMS
The extraordinary item during Fiscal 1998 was the write off of unamortized
deferred financing costs of $3.6 million related to the LYONS (Note 4) and was
stated net of applicable income tax benefit of $1.2 million. During Fiscal 1997
and 1996 the Company reacquired in the market certain of its long-term debt,
which was financed from cash on hand and new credit agreements. Extraordinary
items during Fiscal 1997 and 1996 included the loss arising on reacquisition of
these notes of $79.7 million and $5.1 million, respectively, and the write off
of unamortized deferred refinancing costs and other related fees of $11.6
million and $4.0 million, respectively, and were stated net of applicable income
tax benefit of $33.0 million and $0.7 million, respectively.
<PAGE> 27
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. EARNINGS (LOSS) PER COMMON SHARE
During the first quarter of Fiscal 1998, the Company was required to adopt
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 common share data have been
restated in accordance with the provisions of this statement.
The reconciliations between basic and diluted earnings (loss) per common
share are as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 DECEMBER 31, 1996
----------------------------------------------------------------------------------------
PER SHARE INCOME PER SHARE INCOME PER SHARE
INCOME SHARES AMOUNT (LOSS) SHARES AMOUNT (LOSS) SHARES AMOUNT
------ ------ --------- ------- ------ --------- ------- ------ ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic income (loss) per common share:
Net income (loss) available to common
shareholders ........................... $962.7 627.0 $1.54 $(760.7) 573.4 $(1.33) $(215.8) 521.6 $(.41)
Stock options and warrants ............. -- 9.8 -- -- -- --
Exchange of LYONs debt.................. 7.2 10.2 -- -- -- --
------ ----- ------- ----- ------- -----
Diluted income (loss) per common share:
Net income (loss) available to common
shareholders plus assumed conversions... $969.9 647.0 $1.50 $(760.7) 573.4 $(1.33) $(215.8) 521.6 $(.41)
====== ===== ======= ===== ======= =====
</TABLE>
The computation of diluted income per common share in Fiscal 1998 excludes
the effect of the assumed exercise of approximately 9.7 million stock options
that were outstanding as of September 30, 1998 because the effect would be
anti-dilutive. The effect on diluted loss per common share in Fiscal 1997 and
1996 resulting from the assumed excercise of all outstanding stock options and
warrants and the exchange of outstanding LYONs is anti-dilutive.
15. MERGER, RESTRUCTURING AND OTHER NON-RECURRING CHARGES
Merger, restructuring and other non-recurring charges are as follows:
1998 Charges
During the fourth quarter of Fiscal 1998, USSC recorded certain charges of
$80.5 million. These charges include $70.9 million of costs to exit certain
businesses. These costs are the write down of assets from earlier purchases of
technology that management presently believes has minimal commercial application
and the adjustment to net realizable value of certain assets. In addition,
merger costs of $9.6 million were recorded that represent legal and insurance
costs related to the merger consummated in the first quarter of Fiscal 1999.
During the first quarter of Fiscal 1998, USSC recorded restructuring charges of
$12.0 million related to employee severance costs, facility disposals and asset
write-downs as part of USSC's cost cutting objectives.
1997 Charges
In connection with the mergers consummated in Fiscal 1997 (Note 2), the
Company recorded merger, restructuring and other non-recurring 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 non-recurring charges. Approximately $137.6
million of accrued merger and restructuring costs are included in other current
liabilities and $49.4 million in other noncurrent
<PAGE> 28
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
liabilities at September 30, 1998. The Company currently anticipates that the
restructurings will be completed during Fiscal 1999, except for certain
long-term contractual obligations.
During Fiscal 1997, USSC recorded restructuring charges of $5.8 million
related primarily to employee severance costs associated with the consolidation
of manufacturing and certain marketing operations, which was substantially
completed during Fiscal 1998. USSC also recorded charges of $24.3 million during
Fiscal 1997 for litigation and other related costs relative to patent
infringement, of which approximately $21.2 million was included in other current
liabilities at September 30, 1998.
1996 Charges
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 and Canadian monitoring center
networks together with all related operations. The charge amounted to $139.5
million and included the write-off of certain property, plant and equipment of
$83.9 million, provision for idle property leases of $20.7 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.
Approximately $17.6 million of costs related to these charges are included
in other current and noncurrent liabilities at September 30, 1998. These
restructurings are substantially complete.
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.
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 $246.6 million, $182.5 million and $218.8 million for Fiscal 1998,
Fiscal 1997, and 1996, respectively. At September 30, 1998, the minimum lease
payment obligations under noncancelable operating leases were as follows: $225.8
million in Fiscal 1999, $216.0 million in Fiscal 2000, $151.0 million in Fiscal
2001, $131.8 million in Fiscal 2002, $83.6 million in Fiscal 2003 and an
aggregate of $278.5 million in Fiscal years 2004 through 2021. USSC's North
Haven lease agreement includes contingent rent provisions based on formulas
utilizing the consumer price index. The North Haven facilities are leased from a
trust, of which the original developer (the "Owner Participant") holds the
beneficial interest. The Owner Participant has the right to require USSC or
USSC's designee to purchase the beneficial interest. This right can be exercised
no earlier than April 2000 and continues for approximately two years. If the
right is exercised, USSC's obligations as lessee under the lease would not
change. USSC also has a right at any time to purchase the property from the
Owner Participant for the greater of fair value or the then outstanding debt
amount. In addition, USSC is obligated to make additional contingent rental
payments. The earliest potential payment of contingent rent of approximately $19
million could be due no earlier than July 2000 if the Owner Participant
exercises the right to sell the facility to USSC, or the Owner Participant
elects the one-time lump sum payment of contingent rent. Otherwise, the
determination of the contingent rental payments will be based upon movements in
the consumer price index during the period September 1997 to September 2000,
subject to the annual cap on the consumer price index movement of 2.5% per year,
and cannot exceed $39 million as stipulated in the agreement. As of
September 30, 1998, the Company has accrued $6.4 million related to contingent
rental payments. In December 1998, USSC made an offer of approximately $211
million to purchase the debt which financed the property for the Owner
Participant.
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
<PAGE> 29
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
incurred with respect to these sites in an aggregate amount in the range of
$16.5 million to $44.6 million. At September 30, 1998, the Company has concluded
that the most probable amount that will be incurred within this range is $21.0
million, and such amount is included in the caption "accrued expenses and other
current liabilities" in the accompanying Supplemental 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 $21.0 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.
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 (benefit) cost for all defined benefit pension plans
includes the following components:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------- ------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost .................................................... $ 31.3 $ 21.4 $ 23.4
Interest cost ................................................... 64.7 46.1 53.6
Actual return ................................................... (47.7) (141.8) (68.4)
Net amortization and deferral ................................... (34.7) 83.9 4.4
Curtailment gain ................................................ (28.4) -- --
------ ------- ------
Net periodic pension (income) expense ........................... $(14.8) $ 9.6 $ 13.0
====== ======= ======
</TABLE>
Accrued (prepaid) pension cost at September 30, 1998 for all 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 .............................................................. $717.3 $229.0 $ 946.3
Non-vested .......................................................... 11.5 15.9 27.4
------ ------ --------
Total ................................................................. 728.8 244.9 973.7
Effect of future salary increases ..................................... 22.0 11.2 33.2
------ ------ --------
Projected benefit obligations ......................................... 750.8 256.1 1,006.9
Plan assets at fair value ............................................. 801.7 145.3 947.0
------ ------ --------
Plan assets (in excess of) less than projected benefit obligations .... (50.9) 110.8 59.9
Unrecognized transition asset (liability) ............................. 11.4 (0.1) 11.3
Unrecognized prior service cost ....................................... (1.6) (16.6) (18.2)
Additional minimum liability .......................................... -- 35.8 35.8
Unrecognized net loss ................................................. (36.2) (25.3) (61.5)
------ ------ --------
Accrued (prepaid) pension cost ........................................ $(77.3) $104.6 $ 27.3
====== ====== ========
</TABLE>
<PAGE> 30
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accrued (prepaid) pension cost at September 30, 1997 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.............................................................. $ 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 and other........................... 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>
Pursuant to the provisions of SFAS 87, "Employers' Accounting for Pensions,"
the Company recorded, in other liabilities, an additional minimum pension
liability adjustment of $35.8 million and $11.0 million as of September 30, 1998
and September 30, 1997, 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
$13.8 million at September 30, 1998 and $1.9 million at September 30, 1997,
respectively.
During Fiscal 1998, the Company recorded a gain of $28.4 million related to
the curtailment of a subsidiary's defined benefit pension plan. In Fiscal 1998,
Fiscal 1997, and 1996, the Company terminated certain defined benefit pension
plans and distributed the plans' assets to the participants. Gains and losses in
Fiscal 1997 and 1996 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 1998, 54% relate to U.S. plans and
46% relate to non-U.S. plans (in Fiscal 1997, 53% and 47%, respectively). The
average discount rate used in determining the actuarial present value of the
projected benefit obligation, weighted in relation to plan obligations, was 6.5%
at September 30, 1998 (7.5 % at September 30, 1997). The average rate of
increase in future compensation levels was 4.0% at September 30, 1998 (4.8% at
September 30, 1997). The weighted average long-term rate of return on assets was
9.3% at September 30, 1998 (9.6% at September 30, 1997). 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 $1.7 million, $1.5 million, and $2.0 million for Fiscal
1998, Fiscal 1997, and 1996, 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 bonus retirement
plans. Pension expense for the defined contribution plans is computed as a
percentage of participants' compensation and was $39.4 million, $30.6 million
and $33.8 million for Fiscal 1998, Fiscal 1997, and 1996, respectively. The
Company also maintains 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 $3.7 million, $2.2 million
and $1.7 million in Fiscal 1998, Fiscal 1997 and 1996, respectively.
<PAGE> 31
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Post-retirement Benefit Plans -- The Company generally does not provide
post-retirement benefits other than pensions for its employees. Certain of
Former Tyco's acquired operations provide these benefits to employees who were
eligible at the date of acquisition. In addition, 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. The Company
recorded a gain of $8.8 million related to the curtailment of this plan in
Fiscal 1998.
Net periodic post-retirement benefit cost reflects the following components:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost ............................................... $ 1.1 $ 0.6 $ 0.9
Interest cost .............................................. 7.5 5.5 6.8
Net amortization and deferral .............................. (4.7) (3.6) (4.2)
Curtailment gain ........................................... (8.8) -- --
----- ----- -----
Net periodic post-retirement benefit (income) cost ......... $(4.9) $ 2.5 $ 3.5
===== ===== =====
</TABLE>
The components of the accrued post-retirement benefit obligation, all of which
are unfunded, are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
(IN MILLIONS)
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees................................................. $ 77.8 $ 73.6
Fully eligible active plan participants.................. 23.4 18.7
Other active plan participants........................... 8.0 8.3
------ ------
109.2 100.6
Unrecognized prior service benefit......................... 21.0 30.1
Unrecognized net gain...................................... 14.2 17.6
------ ------
Accrued post-retirement benefit cost....................... $144.4 $148.3
====== ======
</TABLE>
For measurement purposes, in Fiscal 1998, a 9.1% 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 4.5% 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, 1998 by $4.2
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 6.75% at September 30, 1998 (7.5% at
September 30, 1997).
18. CONSOLIDATED SEGMENT DATA
Selected information by industry segment is presented below.
<TABLE>
<CAPTION>
AS AT AND AS AT AND AS AT AND
FOR THE YEAR FOR THE NINE FOR THE YEAR
ENDED MONTHS ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1998 1997 1996
------------- ------------- ------------
(IN MILLIONS)
<S> <C> <C> <C>
Net sales:
Disposable and Specialty Products........................... $ 4,672.4 $ 2,869.9 $3,113.7
Fire and Security Services.................................. 4,742.2 3,149.1 3,694.9
Flow Control Products....................................... 2,341.8 1,684.1 1,928.8
Electrical and Electronic Components........................ 1,780.8 754.7 479.0
--------- --------- --------
$13,537.2 $ 8,457.8 $9,216.4
========= ========= ========
</TABLE>
<PAGE> 32
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C> <C> <C>
Operating income (loss):
Disposable and Specialty Products...... $ 345.2 (1) $ 297.9 (2) $ 509.6 (6)
Fire and Security Services............. 654.9 (312.4)(3) (621.3)(7)
Flow Control Products.................. 325.9 (92.1)(4) 198.0
Electrical and Electronic Components... 367.5 (224.6)(5) 89.0
Corporate and other expenses........... (68.3) (44.8) (43.4)
--------- --------- --------
$ 1,625.2 $ (376.0) $ 131.9
========= ========= ========
Total Assets:
Disposable and Specialty Products...... $ 7,256.8 $ 3,965.4 $3,476.1
Fire and Security Services............. 6,822.1 4,338.2 4,343.1
Flow Control Products.................. 2,576.2 1,865.9 1,758.8
Electrical and Electronic Components... 1,812.0 1,606.0 283.9
Corporate assets....................... 255.5 366.1 124.2
--------- --------- --------
$18,722.6 $12,141.6 $9,986.1
========= ========= ========
Depreciation and Amortization:
Disposable and Specialty Products...... $ 262.5 $ 130.1 $ 154.5
Fire and Security Services............. 269.8 205.5 254.0
Flow Control Products.................. 120.0 63.8 78.3
Electrical and Electronic Components... 44.7 25.2 11.7
Corporate.............................. 18.9 19.6 15.5
--------- --------- --------
$ 715.9 $ 444.2 $ 514.0
========= ========= ========
Capital Expenditures:
Disposable and Specialty Products...... $ 202.9 $ 160.8 $ 132.8
Fire and Security Services............. 491.4 304.8 362.0
Flow Control Products.................. 92.6 58.3 69.4
Electrical and Electronic Components... 48.9 32.8 9.7
Corporate.............................. 10.4 3.5 1.3
--------- --------- --------
$ 846.2 $ 560.2 $ 575.2
========= ========= ========
</TABLE>
- ----------
(1) Includes non-recurring charges of $80.5 million primarily related to
business exit costs and restructuring charges of $12.0 million related to
USSC's operations.
(2) Includes charges of $131.3 million related to merger, restructuring and
other non-recurring charges in connection with the INBRAND merger and $24.3
million for litigation and other related costs and $5.8 million for
restructuring charges in USSC's operations.
(3) 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.
(4) 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.
(5) Includes a charge of $361.0 million related to the write off of purchased
research and development costs in connection with an acquisition.
(6) Includes a charge of $13.0 million related to the impairment of long-lived
assets in ADT's vehicle auction services operations.
(7) 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.
<PAGE> 33
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. CONSOLIDATED GEOGRAPHIC DATA
Selected information by geographic area is presented below.
<TABLE>
<CAPTION>
AS AT AND AS AT AND AS AT AND
FOR THE YEAR FOR THE NINE FOR THE YEAR
ENDED MONTHS ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1998 1997 1996
------------- ------------- ------------
(IN MILLIONS)
<S> <C> <C> <C>
Net sales:
Americas (primarily U.S.).... $ 9,794.8 $ 5,966.9 $6,305.5
Europe....................... 2,674.7 1,715.4 1,954.1
Asia-Pacific................. 1,067.7 775.5 956.8
--------- --------- --------
$13,537.2 $ 8,457.8 $9,216.4
========= ========= ========
Operating income (loss):
Americas (primarily U.S.).... $ 1,182.5 $ (344.0) $ 135.3
Europe....................... 365.7 (55.4) (91.0)
Asia-Pacific................. 77.0 23.4 87.6
--------- --------- --------
$ 1,625.2 $ (376.0) $ 131.9
========= ========= ========
Total Assets:
Americas (primarily U.S.).... $13,952.6 $ 8,806.7 $7,174.2
Europe....................... 3,615.8 2,291.4 2,068.0
Asia-Pacific................. 898.7 677.4 619.7
Corporate assets............. 255.5 366.1 124.2
--------- --------- --------
$18,722.6 $12,141.6 $9,986.1
========= ========= ========
</TABLE>
20. SUPPLEMENTARY BALANCE SHEET INFORMATION:
Selected supplementary balance sheet information is presented below.
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
(IN MILLIONS)
<S> <C> <C>
Inventories:
Purchased materials and manufactured parts $ 566.0 $ 300.7
Work in process................................. 295.4 322.0
Finished goods.................................. 845.2 697.9
--------- ---------
$ 1,706.6 $ 1,320.6
========= =========
Property, Plant and Equipment:
Land............................................ $ 197.0 $ 185.6
Buildings....................................... 1,021.0 833.1
Subscriber systems.............................. 2,171.5 1,737.6
Machinery and equipment......................... 2,554.6 2,234.5
Leasehold improvements.......................... 264.5 232.8
Construction in progress........................ 269.9 211.6
Accumulated depreciation........................ (2,319.1) (2,087.5)
--------- ---------
$ 4,159.4 $ 3,347.7
========= =========
Accrued payroll and payroll related costs......... $ 226.6 $ 165.7
========= =========
</TABLE>
<PAGE> 34
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21. SUPPLEMENTARY INCOME STATEMENT INFORMATION:
Selected supplementary income statement information is presented below.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1998 1997 1996
------------- ------------- ------------
(IN MILLIONS)
<S> <C> <C> <C>
Research and development..................................... $197.8 $96.9 $97.8
Advertising.................................................. 96.7 71.4 94.9
</TABLE>
22. COMPARATIVE RESULTS (UNAUDITED)
The change in year end resulted in Fiscal 1997 covering the nine month period
ended September 30, 1997. The following unaudited financial information for the
twelve months ended September 30, 1997 is presented to provide comparative
results to those for Fiscal 1998 included in the accompanying Supplemental
Consolidated Statement of Operations (in millions, except per share amounts)
TWELVE MONTHS ENDED
SEPTEMBER 30, 1997
-------------------
Net sales........................................... $10,973.0
Gross profit........................................ 3,873.5
Operating loss...................................... (312.8)
Income taxes........................................ (248.1)
Loss before extraordinary items..................... (597.8)
Extraordinary items, net of taxes................... (60.9)
Net loss............................................ (658.7)
Basic loss per common share:
Loss before extraordinary items................... $ (1.08)
Extraordinary items, net of taxes................. (0.11)
Net loss per common share ........................ (1.19)
Diluted loss per common share:
Loss before extraordinary items................... $ (1.08)
Extraordinary items, net of taxes................. (0.11)
Net loss per common share ........................ (1.19)
SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is presented below.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1998
----------------------------------------------------
1ST QTR.(1) 2ND QTR. 3RD QTR. 4TH QTR.(2)
----------- -------- -------- ------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales .......................................... $2,990.0 $3,169.3 $3,598.9 $3,779.0
Gross profit ....................................... 1,079.7 1,168.1 1,329.0 1,339.3
Income before extraordinary items .................. 255.8 301.2 349.3 58.8
Net income ......................................... 254.9 300.9 348.3 58.6
Basic income per common share:
Income before extraordinary items ................. $ .42 $ .49 $ .54 $ .09
Net income per common share ....................... .49 .42 .54 .09
Diluted income per common share:
Income before extraordinary items ................. $ .41 $ .47 $ .53 $ .09
Net income per common share ....................... .41 .47 .53 .09
</TABLE>
<PAGE> 35
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
----------------------------------------------
1ST QTR.(3) 2ND QTR.(3)(4) 3RD QTR.(3)(5)(6)
----------- -------------- -----------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales .................................... $2,617.4 $2,836.6 $ 3,003.8
Gross profit ................................. 935.9 1,038.3 1,028.4
Income (loss) before extraordinary items ..... 177.0 156.4 (1,031.1)
Net income (loss) ............................ 177.0 156.4 (1,089.4)
Basic income (loss) per common share:
Income (loss) before extraordinary items .... $ .31 $ .27 $ (1.76)
Net income (loss) per common share .......... .31 .27 (1.86)
Diluted income (loss) per common share:
Income (loss) before extraordinary items .... $ .30 $ .26 $ (1.76)
Net income (loss) per common share .......... .30 .26 (1.86)
</TABLE>
- ------
(1) Includes charges of $12.0 million for restructuring charges in USSC's
operations.
(2) Includes non-recurring charges of $80.5 million primarily related to
business exit costs in USSC's operations.
(3) 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 non-recurring charges primarily in connection with
the merger of ADT and Former Tyco and the Keystone and INBRAND Mergers.
(4) Includes charges of $24.3 million for litigation and other related costs
and $5.8 million for restructuring charges in USSC's operations.
(5) Includes charges of $148.4 million for the impairment of long-lived assets
and $361.0 million for the write-off of purchased in-process research and
development costs.
(6) 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.
24. TYCO INTERNATIONAL GROUP S.A.
As discussed in Note 4, TIG issued $2.75 billion of debt securities, which
are fully and unconditionally guaranteed by Tyco. TIG, a Luxembourg holding
company, is the parent company of substantially all the operating subsidiaries
of the Company. The Company has not included separate financial statements and
footnotes for TIG, because of the full and unconditional guarantee by Tyco and
the Company's belief that such information is not material to holders of the
debt securities. The following presents consolidated summary financial
information for TIG and its subsidiaries, as if TIG and its current
organizational structure were in place for all periods presented.
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
(IN MILLIONS)
Total current assets ........................ $ 6,609.5 $4,673.5
Total non-current assets .................... 12,120.0 7,275.6
Total current liabilities ................... 5,519.5 4,201.2
Total non-current liabilities ............... 6,401.5 4,166.8
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1998 1997 1996
------------- ------------- ------------
(IN MILLIONS)
<S> <C> <C> <C>
Net sales ................................................ $13,535.3 $8,457.8 $9,216.4
Gross profit ............................................. 4,901.2 3,002.6 3,280.6
Income (loss) before extraordinary items(1)(2)(3) ........ 693.9 (642.2) (291.4)
Net income (loss)(4) ..................................... 691.5 (700.5) (299.8)
</TABLE>
<PAGE> 36
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ----------
(1) Income before extraordinary items in Fiscal 1998 includes non-recurring
charges of $80.5 million and restructuring charges of $12.0 million related
to USSC's operations. (See Note 15)
(2) 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 and
charges of $24.3 million for litigation and other related costs and $5.8
million for restructuring charges in USSC's operations.
(3) 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 $8.8 million
of fees and expenses related to the ASH merger. (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.
25. SUBSEQUENT EVENTS
In November 1998, the Company announced the completion of its acquisition of
Graphic Controls Corporation for approximately $460 million, including the
assumption of certain outstanding debt. Graphic Controls, a leading designer,
manufacturer, marketer and distributor of disposable medical products, will be
integrated with Ludlow Technical Products within the Tyco Healthcare Group. The
Company intends to account for the acquisition as a purchase.
In November 1998, the boards of directors of Tyco and AMP Incorporated
("AMP") approved a definitive merger agreement pursuant to which AMP will merge
with an indirect subsidiary of Tyco. It is estimated that Tyco will issue up to
approximately 186.0 million common shares for delivery by its subsidiary to the
former shareholders of AMP in the merger. The actual number of shares will be
based on Tyco's weighted average stock price for a fifteen day trading period
prior to AMP's shareholder vote on the merger.
AMP, with annual revenues of approximately $5.5 billion, designs,
manufactures and markets a broad range of electronic, electrical, fiber-optic
and wireless interconnective devices and systems. AMP serves customers in the
consumer and industrial, communications, automotive, computer and power
industries. The merger is subject to the approval of both companies'
shareholders and customary regulatory approvals. The transaction is expected to
be accounted for as a pooling of interests.
<PAGE> 1
EXHIBIT 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
<PAGE> 2
TYCO INTERNATIONAL LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion and analysis relates to the Supplemental
Consolidated Financial Statements of Tyco International Ltd and its subsidiaries
("Tyco" or the "Company") as of September 30, 1998 and 1997, and for the year
ended September 30, 1998, the nine months ended September 30, 1997 and the year
ended December 31, 1996 ("Supplemental Consolidated Financial Statements").
On October 1, 1998, Tyco consummated a merger with United States Surgical
Corporation ("USSC"). This transaction was accounted for as a pooling of
interests and, accordingly, the Supplemental Consolidated Financial Statements
reflect the combined financial position and results of operations and cash flows
of Tyco and USSC for all periods presented. Upon publication of the Company's
consolidated financial statements for a period which includes October 1, 1998,
the Supplemental Consolidated Financial Statements will become the historical
consolidated financial statements of the Company. See Notes 1 and 2 to the
Supplemental Consolidated Financial Statements.
RESULTS OF OPERATIONS
Information for all periods presented below reflects the grouping of the
Company's businesses into four business segments consisting of Disposable and
Specialty Products, Fire and Security Services, Flow Control Products, and
Electrical and Electronic Components.
In September 1997, the Company changed its fiscal year end from December 31
to September 30. References to Fiscal 1998, Fiscal 1997 and 1996 refer to the
twelve month fiscal year ended September 30, 1998, the transitional nine month
fiscal year ended September 30, 1997 and the calendar year ended December 31,
1996, respectively. In the discussions below, the results of operations for
Fiscal 1998 compare the fiscal year ended September 30, 1998 with the twelve
months ended September 30, 1997 (unaudited), and the results of operations for
Fiscal 1997 compare the nine months ended September 30, 1997 with the nine
months ended September 30, 1996 (unaudited).
Overview
Income (loss) before extraordinary items was $965.1 million, or $1.50 per
share on a diluted basis for Fiscal 1998, as compared to ($597.8) million, or
($1.08) per share, for the twelve months ended September 30, 1997. During Fiscal
1998, the Company incurred an after-tax charge of $81.1 million ($.13 per share)
primarily related to costs incurred by USSC to exit certain businesses. During
the twelve months ended September 30, 1997, the Company recorded an after-tax
charge of $1.42 billion ($2.39 per share) for merger and transaction costs,
writeoffs and integration costs associated with acquisitions (see Notes 2 and 3
to the Supplemental Consolidated Financial Statements). Excluding these
non-recurring charges, income before extraordinary items rose 27.1% to $1.05
billion, or $1.63 per diluted share for Fiscal 1998, as compared to $823.4
million, or $1.39 per diluted share in the twelve months ended September 30,
1997. The increase was attributable to margin improvements, increased sales and
results of acquired companies in each of the Company's business segments.
After each acquisition, acquired companies are immediately integrated and
Tyco does not separately track post-acquisition financial results. Accordingly,
amounts in the following analysis related to the impact of acquired companies
are estimates based on pre-acquisition results.
Sales
Sales increased 23% during Fiscal 1998 to $13.54 billion from $10.97 billion
in the twelve months ended September 30, 1997. Sales of the Disposable and
Specialty Products group increased $938.4 million to $4.67 billion, or 25%,
principally due to increased sales at Kendall, and to a lesser extent USSC, ADT
Automotive and Tyco Plastics and Adhesives. The increase at Kendall was
primarily due to the inclusion of Sherwood-Davis & Geck ("Sherwood") and CONFAB,
which were acquired in February 1998 and April 1998, respectively. Excluding the
impact of these acquisitions, sales increased an estimated $286.2 million, or
6%. Sales of the Fire and Security Services group increased $574.1 million, or
14%, to $4.74 billion primarily due to increased sales in the Company's
electronic security services business in the United States. This increase
relates to increased volume of recurring service revenues and to a lesser
extent, the inclusion of the results of companies acquired during Fiscal 1998.
Additionally, sales increased in the European security and fire protection
businesses due to an increase in service and recurring revenues and the
inclusion of the results of acquired
<PAGE> 3
companies. Sales of the Flow Control Products group increased $146.2 million to
$2.34 billion, or 7%, reflecting increased demand for the Company's valve
products in North America and Europe, higher volume at existing businesses at
Allied Tube & Conduit and Mueller and the inclusion of companies acquired in
Fiscal 1998. Sales of the Electrical and Electronic Components group increased
$905.5 million to $1.78 billion, or 103%, principally due to increased sales at
Tyco Submarine Systems Ltd. ("TSSL"), as well as increased sales at Tyco Printed
Circuit Group, offset slightly by decreased sales at Allied Electrical Conduit.
The increased sales at TSSL resulted principally from the acquisition of AT&T's
submarine systems business in July 1997. Excluding the impact of this
acquisition, sales increased an estimated $273.9 million, or 18%.
Sales increased 26% during the nine month fiscal period ended September 30,
1997 to $8.46 billion from $6.70 billion in the nine months ended September 30,
1996. Sales of the Disposable and Specialty Products group increased $620.3
million to $2.87 billion, or 28%, due to increased sales at Kendall, Tyco
Plastics, USSC and ADT Automotive. At Kendall and Tyco Plastics, the increase in
sales resulted principally from the INBRAND and Carlisle acquisitions,
respectively, as well as internal growth at Kendall's Healthcare and Polyken
businesses. Sales of the Fire and Security Services group increased $473.2
million, or 18%, to $3.15 billion due to increased sales in each geographic
region of the Company's fire protection operations, primarily as a result of an
increase in the volume of service business, as well as increases in the
Company's electronic security services businesses. Additionally, the results
include Thorn Security ("Thorn") which was acquired in July 1996. Sales of the
Flow Control Products group increased $266.8 million to $1.68 billion, or 19%,
reflecting higher volume at European Flow Control, including businesses acquired
in the last quarter of 1996 and first quarter of Fiscal 1997, from Mueller,
including businesses acquired in the third quarter of 1996, as well as increased
volume in existing businesses at Allied, including businesses acquired in the
first quarter of Fiscal 1997, and Grinnell's distribution operations, where
sales increased due to price increases. Sales were relatively unchanged at
Keystone, where growth in international operations was offset by reduced U.S.
dollar equivalents due to currency fluctuations. Sales of the Electrical and
Electronic Components group increased $396.4 million to $754.7 million, or 111%,
resulting principally from the acquisition of AT&T's submarine systems business
in July 1997 and increased sales at Simplex. Increased sales at the Printed
Circuit Group businesses were largely due to the acquisition of ElectroStar in
January 1997, and increased unit volume. Allied's electrical conduit operations
also increased sales.
Income (Loss) Before Income Taxes and Extraordinary Items
Pre-tax income (loss) before extraordinary items was $1.39 billion in
Fiscal 1998, as compared to ($597.8) million in the twelve months ended
September 30, 1997. Pre-tax income for Fiscal 1998 included charges of $92.5
million primarily related to costs incurred by USSC to exit certain businesses.
Pre-tax income for the twelve months ended September 30, 1997 included charges
of $1.57 billion for merger, restructuring and other non-recurring charges. See
Notes 11 and 15 to the Supplemental Consolidated Financial Statements. Excluding
these non-recurring charges, pre-tax income (loss) increased $263.8 million, or
22%, to $1.49 billion in Fiscal 1998. Amortization expense for goodwill and
other intangible assets was $233.1 million for Fiscal 1998 and $140.2 million
for the twelve months ended September 30, 1997. The following analysis is
presented exclusive of these non-recurring charges to better portray the
comparability of recurring operations.
Operating profits of the Disposable and Specialty Products group decreased
$160.0 million to $437.7 million in Fiscal 1998, or 26.8%. Operating profits
were 9.4% of sales in Fiscal 1998 and 16.0% in the twelve months ended September
30, 1997. The net decrease was principally due to a decrease in the operating
margin at USSC, partially offset by increased sales at Kendall, including the
effect of the acquisition of Sherwood, fixed cost reductions due to the
integration of Sherwood and increased volume and better margins at Tyco Plastics
and Adhesives. The decrease in the operating margin at USSC was primarily due to
reduced sales during the year of higher margin products in an attempt to lower
excess inventory levels at distributors and increased costs, principally related
to the accrual of approximately $105.8 million related to a commitment for
special hospital educational programs. Operating profits of the Fire and
Security Services group increased $217.5 million to $654.9 million, or 50%.
Operating profits as a percentage of sales were 13.8% in Fiscal 1998, as
compared to 10.5% in the twelve months ended September 30, 1997. The overall
increase was principally due to increases in service volume, including recurring
monitoring revenue, in the security and fire protection businesses and higher
margins in each geographic region of the Company's security services business.
The operating profits of the Flow Control Products group increased $80.3 million
to $325.9 million, or 33%. Operating profits were 13.9% of sales in Fiscal 1998,
as compared to 11.2% in the twelve months ended September 30, 1997. The increase
was due to increased volume and margins in the Company's North American and
European Flow Control Products operations, including Keystone's valve products,
which have been integrated into the Company's operations. In addition, there
were higher sales and margins at Allied Tube & Conduit. Operating profits of the
Electrical and Electronic Components group increased $208.6 million to $367.5
million, or 131%, principally due to the acquisition of AT&T's submarine systems
business in July 1997. Operating profits as a percentage of sales were 20.6% in
Fiscal 1998, as compared to 18.2% in the twelve months ended September 30, 1997.
Operating margins increased due to sales increasing at a higher rate than
expenses at Tyco Printed Circuit Group and improved operating efficiencies at
Allied Electrical Conduit, offset by slightly decreased margins at Tyco
Submarine Systems Ltd.
The effect of changes in foreign exchange rates during Fiscal 1998, as
compared to the twelve months ended September 30, 1997, was not material to the
Company's sales and operating profits.
<PAGE> 4
Operating profits of the Disposable and Specialty Products group increased
$90.9 million to $459.3 million in Fiscal 1997, or 24.7%, reflecting higher
earnings at USSC and Kendall, including improved manufacturing efficiencies and
the earnings of INBRAND, Tyco Plastics, which, in addition to internal growth in
volume and prices, includes the results of Carlisle from September 1996, and ADT
Automotive. Operating profits of the Fire and Security Services group increased
$77.9 million to $336.7 million, or 30%, due to higher margins in each
geographic region of the Company's fire protection operations and electronic
security businesses as well as the inclusion of Thorn. The higher margins in
fire protection were the result of a higher mix of service work within the
contracting business. The operating profits of the Flow Control Products group
increased $47.2 million to $193.7 million, or 32%, resulting principally from
increases in each of Company's operations, and the results of businesses
acquired in Fiscal 1997. Increases in the Company's European Flow Control
businesses were primarily due to increased margins as well as the inclusion of
acquisitions. Increases at Allied and Mueller were a combination of stronger
operating profits resulting from improved operating efficiencies as well as the
inclusion of acquisitions. Operating profits of the Electrical and Electronic
Components group increased $69.9 million to $136.4 million, or 105%, due to
increased earnings at TSSL, principally due to the acquisition of AT&T's
submarine systems business and increased operating levels. Earnings were also up
at the Printed Circuit Group businesses, including ElectroStar, and at Allied's
Electrical Conduit operations.
The effect of changes in foreign exchange rates during Fiscal 1997, as
compared to the nine months ended September 30, 1996 was not material to the
Company's sales and operating profits.
Corporate and other expenses were $68.3 million in Fiscal 1998 compared to
$56.8 million in the twelve months ended September 30, 1997. Corporate and other
expenses were $44.8 million in Fiscal 1997 and $31.4 million in the nine months
ended September 30, 1996. These increases were due principally to higher
compensation expense under the Company's performance-related, incentive
compensation plans.
Interest Expense
Interest expense increased $71.0 million to $270.1 million in Fiscal 1998,
as compared to the twelve months ended September 30, 1997, due to higher average
debt balances, as a result of monies borrowed to pay for acquisitions, partially
offset by lower average interest rates. The weighted average rate of interest on
all long-term debt during Fiscal 1998, Fiscal 1997 and 1996 was 6.5%, 7.4% and
7.9%, respectively. Interest expense decreased $8.2 million to $144.8 million
during Fiscal 1997, as compared to the nine months ended September 30, 1996, due
to lower average interest rates partially offset by higher average debt
balances, as a result of monies borrowed to make acquisitions.
Extraordinary Items
Extraordinary items in Fiscal 1998, Fiscal 1997 and 1996 included net losses
amounting to $2.4 million, $58.3 million and $8.4 million, respectively, arising
on the reacquisition of certain of the Company's senior, senior subordinated and
public notes and the write off of net unamortized deferred financing costs
related to the LYONS. Further details are provided in Notes 4 and 13 to the
Supplemental Consolidated Financial Statements.
Income Tax Expense
The effective income tax rate was 29.6% during Fiscal 1998 as compared to
32.7% in the twelve months ended September 30, 1997, and 33.5% in the nine
months ended September 30, 1997 as compared to 34.5% in the nine months ended
September 30, 1996. The decreases in the effective income tax rates were due to
higher earnings in domiciles with lower income tax rates. The effective income
tax rates for 1998, 1997 and 1996 exclude the impact of non-recurring charges.
Management believes that the Company will generate sufficient future income to
realize the tax benefits related to its deferred tax asset. A valuation
allowance has been maintained due to continued uncertainties of realization of
certain tax attributes, primarily tax loss carryforwards. See Note 7 to the
Supplemental Consolidated Financial Statements.
<PAGE> 5
LIQUIDITY AND CAPITAL RESOURCES
As presented in the Supplemental Consolidated Statement of Cash Flows, net
cash provided by operating activities was $1.69 billion in Fiscal 1998. The
significant changes in working capital were a $184.6 million increase in
inventories, a $129.3 million increase in income taxes payable, a 91.4 million
increase in contracts in process and a $91.2 million increase in accounts
receivable. The impact of changes in foreign exchange rates during Fiscal 1998
did not materially affect net working capital. Working capital requirements are
not anticipated to increase substantially in Fiscal 1999.
During Fiscal 1998, the Company used cash of $4.25 billion to acquire
companies in its four business segments, $846.2 million to purchase property,
plant and equipment, $222.6 million to purchase treasury shares and $68.8
million to pay dividends to shareholders.
The level of capital expenditures is expected to increase moderately in
Fiscal 1999, and the primary source of funds for such expenditures is expected
to be cash from operations.
Expenditures for environmental matters are not expected to have a material
effect on the Company in Fiscal 1999. See Note 16 to the Supplemental
Consolidated Financial Statements.
The source of the cash used for acquisitions was an increase in total debt,
proceeds from the sale of common shares and cash flows from operations. At
September 30, 1998, the Company's total debt was $5.61 billion, as compared to
$2.87 billion at September 30, 1997. The increase resulted principally from net
proceeds received of approximately $2.74 billion from the issuance of public
debt, discussed below, and the issuance of $300.0 million 7.25% senior notes due
2008, partially offset by the repayment of amounts outstanding under the
sterling denominated bank facility and the exchange of $155.3 million principal
balance of LYON's for common shares. Goodwill and other intangible assets were
$7.01 billion at September 30, 1998, compared to $3.30 billion at September 30,
1997. Shareholder's equity was $7.20 billion, or $11.15 per share, at September
30, 1998, compared to $4.66 billion, or $7.84 per share, at September 30, 1997.
The increase in shareholders' equity was due primarily to net proceeds of
approximately $1.25 billion from the sale of 25.3 million common shares, net
income of $962.7 million and proceeds of $348.7 million from the exercise of
options. Total debt as a percent of total capitalization (total debt and
shareholders' equity) was 44% at September 30, 1998 and 38% at September 30,
1997.
In February 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. 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%. Repayments of amounts outstanding under this
agreement are guaranteed by the Company. In accordance with the terms of this
agreement, in June 1998 Tyco US and Tyco International Group S.A. ("TIG"), a
wholly-owned subsidiary of the Company, elected that TIG become the borrower and
that Tyco US cease to be the borrower under this agreement. All other terms and
conditions in effect remained unchanged. Substantially all amounts outstanding
under this credit agreement have been classified as long-term, based on the
Company's ability and intent to refinance this obligation on a long-term basis.
Simultaneous with the closing of the new credit agreement, Tyco US reduced
aggregate commitments available under the previously existing credit agreement
from $1.75 billion to $950 million. In March 1998, Tyco US terminated the $950
million credit agreement. Balances outstanding at the time of termination were
repaid with net proceeds from the sale of common shares, discussed below.
In March 1998, the Company sold 25.3 million common shares for approximately
$1.25 billion under a $2.0 billion public shelf registration statement. The net
proceeds from the sale were used to repay indebtedness incurred for previous
acquisitions.
In June 1998, TIG issued $750 million 6 1/8% notes due 2001, $750 million 6
3/8% notes due 2005, $750 million 6 1/4% Dealer Remarketable Securities(sm)
("Drs.")(sm) due 2013 and $500 million 7.0% notes due 2028 under a $3.75 billion
public shelf registration statement. Under the terms of the Drs., the
Remarketing Dealer has an option to remarket the Drs. in June 2003, which if
exercised would subject the Drs. to mandatory tender to the Remarketing Dealer
and reset the interest rate to an adjusted fixed rate until June 2013. If the
Remarketing Dealer does not exercise its option then all Drs. are required to be
tendered to the Company in June 2003. Repayment of amounts outstanding under
these debt
<PAGE> 6
securities are fully and unconditionally guaranteed by Tyco. The net proceeds of
approximately $2.74 billion were used to repay borrowings under the $2.25
billion bank credit facility and uncommitted lines of credit of Tyco US. In
connection with the offering of these debt securities, TIG has entered into two
interest rate swap agreements to hedge a portion of the fixed interest rate
terms. These two swap agreements are each based on a notional amount of $650
million and are for a five and seven year term, respectively. Under the terms of
the agreements, TIG receives payments based on fixed interest rates and pays
variable rates, based on LIBOR, not to exceed a specified maximum. Interest is
received or paid semi-annually in June and December. During Fiscal 1998, the
effective interest rate on these instruments approximated the coupon rate.
In October 1998, TIG issued $800 million of debt in a private placement
offering consisting of two series of Notes: $400 million of 5.875% Notes due
November 2004 and $400 million of 6.125% Notes due November 2008. The Notes are
fully and unconditionally guaranteed by Tyco. The net proceeds of approximately
$791.7 million were used to repay borrowings under TIG's $2.25 billion bank
credit facility. In addition, TIG entered into an interest rate swap agreement
to hedge the fixed rate terms of the $400 million Notes due 2008. Under this
agreement, which expires in November 2008, TIG will receive payments at a fixed
rate of 6.125% and will make floating rate payments based on LIBOR, as defined.
See Note 4 to Supplemental Consolidated Financial Statements.
In December 1998, USSC made an offer of approximately $211 million to
purchase the debt which financed the property for the Owner Participant of the
USSC North Haven facilities.
The Company believes that its funding sources are adequate for its
anticipated requirements through expected cash flow from operations.
Backlog
Backlog at September 30, 1998 amounted to $XX billion, compared to $XX
billion at September 30, 1997. Backlog increased in the Company's Electrical and
Electronic Components, Flow Control Products and Fire and Security Services
segments [and Disposable and Specialty Products segments]. Within the Electrical
and Electronic Components group, backlog increased principally due to contracts
awarded to the Company's submarine systems business. Within the Flow Control
Products group, backlog increased principally due to an increase in backlog at
Earth Tech, including backlog related to acquisitions, and in the Company's
European flow control operations. Within the Fire and Security Services group,
backlog increased principally due to an increase in backlog at the Company's
worldwide security and North American fire protection businesses.
YEAR 2000 COMPLIANCE
Year 2000 compliance programs and systems modifications were initiated by the
Company in Fiscal 1997 in an attempt to ensure that these systems and key
processes will remain functional. The Company is continuing its assessment of
the potential impact of the Year 2000 on date-sensitive information in computer
software programs and operating systems in its product development, financial
business systems and administrative functions, and has begun implementing
strategies to avoid adverse implications. This objective is expected to be
achieved either by modifying present systems using existing internal and
external programming resources or by installing new systems, and by monitoring
supplier, customer and other third-party readiness. Review of the systems
affecting the Company is progressing. The costs of the Company's Year 2000
program to date have not been material and the Company does not anticipate that
the costs of any required modifications to its information technology or
embedded technology systems will have a material adverse effect on its financial
position, results of operations or liquidity.
In the event that the Company or material third parties fail to complete
their Year 2000 compliance programs successfully and on time, the Company's
ability to operate its businesses, service customers, bill or collect its
revenues or purchase products in a timely manner could be adversely affected.
Although there can be no assurance that the conversion of the Company's systems
will be successful or that the Company's key third-party relationships will have
successful conversion programs, management does not expect that any such failure
would have a material adverse effect on the financial position, results of
operations or liquidity of the Company. The Company has day-to-day operational
contingency plans, and management is in the process of updating these plans for
possible Year 2000 specific operational requirements.
ACCOUNTING AND TECHNICAL PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which is effective for fiscal years
beginning after June 15, 1999. This statement establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. The Company is currently analyzing this new standard.
<PAGE> 7
FORWARD LOOKING INFORMATION
Certain statements in this report are "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. All forward
looking statements involve risks and uncertainties. In particular, any statement
contained herein, in press releases, written statements or other documents filed
with the Securities and Exchange Commission, or in the Company's communications
and discussions with investors and analysts in the normal course of business
through meetings, phone calls and conference calls, regarding the consummation
and benefits of future acquisitions, as well as expectations with respect to
future sales, operating efficiencies and product expansion, are subject to known
and unknown risks, uncertainties and contingencies, many of which are beyond the
control of the Company, which may cause actual results, performance or
achievements to differ materially from anticipated results, performances or
achievements. Factors that might affect such forward looking statements include,
among other things, overall economic and business conditions; the demand for the
Company's goods and services; competitive factors in the industries in which the
Company competes; changes in government regulation; changes in tax requirements
(including tax rate changes, new tax laws and revised tax law interpretations);
interest rate fluctuations and other capital market conditions, including
foreign currency rate fluctuations; economic and political conditions in
international markets, including governmental changes and restrictions on the
ability to transfer capital across borders; the ability to achieve anticipated
synergies and other cost savings in connection with acquisitions; the timing,
impact and other uncertainties of future acquisitions; and the Company's ability
and its customers' and suppliers' ability to replace, modify or upgrade computer
programs in order to adequately address the Year 2000 issue.
<PAGE> 1
EXHIBIT 99.3
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, 1996:
Allowances for doubtful accounts(1)............... $ 60.8 $52.0 $ (.5) $(16.4) $ 95.9
Nine Months Ended September 30, 1997:
Allowances for doubtful accounts(1)............... 95.9 31.3 23.5 (32.0) 118.7
Fiscal Year Ended September 30, 1998:
Allowances for doubtful accounts(1)............... 118.7 88.7 108.4 (41.2) 274.6
</TABLE>
- ----------
(1) Deducted from assets.
(2) Write-off of accounts receivable considered uncollectible.
