<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 8-K
--------------
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) APRIL 2, 1999
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.
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<PAGE> 2
ITEM 5. OTHER EVENTS
As previously reported, on April 2, 1999, Tyco International Ltd. (the
"Company" or "Tyco") consummated a merger with AMP Incorporated ("AMP"). AMP,
with annual revenues of approximately $5.5 billion, designs, manufactures and
markets electronic, electrical and electro-optic connection devices and
associated application tools and machines. Pursuant to the merger agreement,
shareholders of AMP received 0.7507 Tyco common shares in exchange for each
outstanding share of AMP. A total of approximately 164 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 April 2, 1999, 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 (Houston)
23.3 Consent of Deloitte & Touche LLP
23.4 Consent of Arthur Andersen LLP (Philadelphia)
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 year 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 -- September 30, 1998.
99.3 Schedule II -- Valuation and Qualifying Accounts for Tyco
International Ltd.
99.4 Supplemental Consolidated Financial Statements of Tyco International
Ltd. as of March 31, 1999 (unaudited) and September 30, 1998 and for
the quarters and six months ended March 31, 1999 and 1998
(unaudited).
99.5 Management's Discussion and Analysis of Financial Condition and
Results of Operations -- March 31, 1999.
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: June 3, 1999
2
<PAGE> 4
EXHIBIT INDEX
EXHIBIT
NUMBER
- -------
23.1 Consent of PricewaterhouseCoopers
23.2 Consent of Arthur Andersen LLP (Houston)
23.3 Consent of Deloitte & Touche LLP
23.4 Consent of Arthur Andersen LLP (Philadelphia)
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 year 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 -- September 30, 1998.
99.3 Schedule II -- Valuation and Qualifying Accounts for Tyco
International Ltd.
99.4 Supplemental Consolidated Financial Statements of Tyco International
Ltd. as of March 31, 1999 (unaudited) and September 30, 1998 and for
the quarters and six months ended March 31, 1999 and 1998
(unaudited).
99.5 Management's Discussion and Analysis of Financial Condition and
Results of Operations -- March 31, 1999.
<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 and 333-73223)
and on Form S-8 (File Nos. 33-38249, 33-26970, 333-03975, 333-33999, 333-34001,
333-69323, 333-74397, 333-75037 and 333-75713) of Tyco International Ltd. of our
report dated May 28, 1999 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
May 28, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC 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
and 333-73223) and on Form S-8 (File Nos. 33-38249, 33-26970, 333-03975,
333-33999, 333-34001, 333-69323, 333-74397, 333-75037 and 333-75713) 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
May 28, 1999
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, 333-73223 on Form S-3 and Registration Statements
Nos. 333-33999, 333-34001, 333-69323, 333-74397, 333-75037, 333-75713 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 Current Report on Form 8-K of Tyco International Ltd.
DELOITTE & TOUCHE LLP
May 28, 1999
Stamford, Connecticut
<PAGE> 1
EXHIBIT 23.4
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
and 333-73223) and on Form S-8 (File Nos. 33-38249, 33-26970, 333-03975,
333-33999, 333-34001, 333-69323, 333-74397, 333-75037 and 333-75713) of Tyco
International Ltd. of our report dated February 12, 1999 (except with respect to
the matter disclosed in Note 18 -- Merger with Tyco International Ltd., as to
which the date is April 2, 1999) on our audit of the consolidated balance sheets
of AMP Incorporated and subsidiaries as of September 30, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity and cash flows
for the year ended September 30, 1998, the nine months ended September 30, 1997,
and the year ended December 31, 1996, and the related financial statement
schedule, which are not included herein.
ARTHUR ANDERSEN LLP
May 28, 1999
Philadelphia, Pennsylvania
<PAGE> 1
EXHIBIT 99.1
TYCO INTERNATIONAL LTD.
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
<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 AMP Incorporated, a wholly owned subsidiary, at 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 statements
reflect total assets constituting 20.1% and 28.4% of consolidated total assets
as of September 30, 1998 and 1997, respectively, and net sales constituting
29.0%, 33.6% and 37.2% of consolidated net sales for the year ended September
30, 1998, the nine months ended September 30, 1997 and the year ended December
31, 1996, respectively. 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 10.0% of consolidated
total assets as of September 30, 1997 and net sales constituting 6.8% and 7.6%
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
4.6% 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 AMP Incorporated, 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 and April 2, 1999, Tyco International
Ltd. merged with United States Surgical Corporation and AMP Incorporated,
respectively, which were each 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 and AMP Incorporated. United States generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial statements that do
not include the date of consummation. These financial statements do not extend
through the date of consummation of the AMP Incorporated business combination;
however, they will become the historical consolidated financial statements of
Tyco International Ltd. and subsidiaries after financial statements covering the
date of consummation of the AMP Incorporated business combination are issued.
PRICEWATERHOUSECOOPERS
HAMILTON, BERMUDA
MAY 28, 1999
1
<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
2
<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
3
<PAGE> 5
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of AMP Incorporated:
We have audited the consolidated balance sheets of AMP Incorporated (a
Pennsylvania corporation) and subsidiaries as of September 30, 1998 and 1997,
and the related consolidated statements of income, shareholders' equity and cash
flows for the year ended September 30, 1998, the nine months ended September 30,
1997, and the year 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 financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
AMP Incorporated and subsidiaries as of September 30, 1998 and 1997, and the
consolidated 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.
As explained in Note 1 to the consolidated financial statements, effective
January 1, 1997, the Company changed its method of accounting for costing its
inventories.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The attached Schedule II, which is not
included herein, is presented for purposes of complying with the Securities and
Exchange Commission rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Philadelphia, PA
February 12, 1999
(except with respect to the matter disclosed in
Note 18 -- Merger with Tyco International Ltd.,
as to which the date is April 2, 1999)
4
<PAGE> 6
TYCO INTERNATIONAL LTD.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------
1998 1997
----------- -----------
(IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................... $ 1,072.9 $ 707.8
Receivables, less allowance for doubtful accounts
of $317.6 in 1998 and $158.9 in 1997...................... 3,478.4 3,022.7
Contracts in process........................................ 565.3 450.2
Inventories................................................. 2,610.0 2,190.7
Deferred income taxes....................................... 797.6 609.9
Prepaid expenses and other current assets................... 430.7 362.6
--------- ---------
Total current assets........................................ 8,954.9 7,343.9
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 6,104.3 5,289.5
GOODWILL AND OTHER INTANGIBLE ASSETS, NET................... 7,105.5 3,393.1
LONG-TERM INVESTMENTS....................................... 228.4 273.1
DEFERRED INCOME TAXES....................................... 320.9 214.6
OTHER ASSETS................................................ 726.7 446.6
--------- ---------
TOTAL ASSETS....................................... $23,440.7 $16,960.8
========= =========
CURRENT LIABILITIES:
Loans payable and current maturities of long-term debt...... $ 815.0 $ 677.6
Accounts payable............................................ 1,733.4 1,492.1
Accrued expenses and other current liabilities.............. 3,069.3 2,455.9
Contracts in process -- billings in excess of costs......... 332.9 293.7
Deferred revenue............................................ 266.5 152.3
Income taxes................................................ 773.9 702.7
Deferred income taxes....................................... 15.2 38.0
--------- ---------
Total current liabilities................................... 7,006.2 5,812.3
LONG-TERM DEBT.............................................. 5,424.7 2,785.9
OTHER LONG-TERM LIABILITIES................................. 976.8 737.8
DEFERRED INCOME TAXES....................................... 131.2 146.1
--------- ---------
TOTAL LIABILITIES.................................. 13,538.9 9,482.1
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 17)
SHAREHOLDERS' EQUITY:
Common shares, $.20 par value, 1,503,750,000 shares
authorized; 810,231,714 shares outstanding in 1998 and
758,990,887 shares outstanding in 1997, net of 3,371,003
shares owned by subsidiaries in 1998...................... 162.0 151.8
Capital in excess:
Share premium............................................. 4,035.0 2,450.2
Contributed surplus, net of deferred compensation of $67.3
in 1998 and $14.3 in 1997............................... 2,746.1 2,711.3
Currency translation adjustment............................. (173.8) (137.1)
Unrealized (loss) gain on marketable securities............. (4.8) 10.8
Accumulated earnings........................................ 3,137.3 2,291.7
--------- ---------
Total shareholders' equity......................... 9,901.8 7,478.7
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......... $23,440.7 $16,960.8
========= =========
</TABLE>
See Notes to Supplemental Consolidated Financial Statements.
5
<PAGE> 7
TYCO INTERNATIONAL LTD.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1998 1997 1996
------------- ------------- ------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales............................................ $19,061.7 $12,742.5 $14,671.0
Cost of sales........................................ 12,694.8 8,523.6 9,949.5
Selling, general and administrative expenses......... 4,161.9 2,635.8 3,045.3
Merger, restructuring and other non-recurring
charges............................................ 256.9 947.9 344.1
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..................................... 1,948.1 125.8 587.4
Interest income...................................... 62.6 43.8 50.5
Interest expense..................................... (307.9) (170.0) (238.5)
Other income less expenses........................... -- -- 119.4
--------- --------- ---------
Income (loss) before income taxes, extraordinary
items and cumulative effect of accounting
changes............................................ 1,702.8 (0.4) 518.8
Income taxes......................................... (534.2) (348.1) (469.4)
--------- --------- ---------
Income (loss) before extraordinary items and
cumulative effect of accounting changes............ 1,168.6 (348.5) 49.4
Extraordinary items, net of taxes.................... (2.4) (58.3) (8.4)
Cumulative effect of accounting changes, net of
taxes.............................................. -- 15.5 --
--------- --------- ---------
Net income (loss).................................... 1,166.2 (391.3) 41.0
Dividends on preference shares....................... -- (4.7) (19.8)
--------- --------- ---------
Net income (loss) available to common shareholders... $ 1,166.2 $ (396.0) $ 21.2
========= ========= =========
Basic earnings (loss) per common share:
Income (loss) before extraordinary items and
cumulative effect of accounting changes......... $ 1.48 $ (0.48) $ 0.04
Extraordinary items, net of taxes.................. -- (0.08) (0.01)
Cumulative effect of accounting changes, net of
taxes........................................... -- 0.02 --
Net income (loss) per common share................. 1.47 (0.54) 0.03
Diluted earnings (loss) per common share:
Income (loss) before extraordinary items and
cumulative effect of accounting changes......... $ 1.45 $ (0.48) $ 0.04
Extraordinary items, net of taxes.................. -- (0.08) (0.01)
Cumulative effect of accounting changes, net of
taxes........................................... -- 0.02 --
Net income (loss) per common share................. 1.44 (0.54) 0.03
Weighted -- average number of common shares
outstanding:
Basic.............................................. 791.7 738.3 686.1
Diluted............................................ 812.4 738.3 703.5
</TABLE>
See Notes to Supplemental Consolidated Financial Statements.
6
<PAGE> 8
TYCO INTERNATIONAL LTD.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED COMMON
FOR THE YEAR ENDED DECEMBER 31, 1996, THE NINE STOCK CONTRIBUTED SHARES CONTRIBUTED CURRENCY
MONTHS ENDED SEPTEMBER 30, 1997 AND THE YEAR $5.00 SURPLUS -- $0.20 SHARE SURPLUS -- TRANSLATION
ENDED SEPTEMBER 30, 1998 PAR VALUE PREFERRED PAR VALUE PREMIUM COMMON ADJUSTMENT
- ---------------------------------------------- --------- ----------- --------- -------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996, as previously
restated...................................... $ -- $ -- $ 94.2 $1,052.5 $2,004.9 $ (31.4)
Pooling of interests with USSC (as defined in
Note 1)..................................... .7 190.8 8.7 305.4 2.3
Pooling of interests with AMP (as defined in
Note 1)..................................... 32.7 (108.6) 156.8
---- ------- ------ -------- -------- -------
Balance at January 1, 1996, as restated........ .7 190.8 135.6 1,052.5 2,201.7 127.7
Effect of the Former Tyco's excluded activity
(as described in Note 1).................... 2.9 (19.6)
Sale of common shares......................... .6 141.2
Exchange of Liquid Yield Option Notes......... .3
Net income....................................
Dividends.....................................
Restricted stock grants, cancellations, tax
benefits and other.......................... .2 25.8
Warrants and options exercised................ .7 68.5 4.3
Purchase of treasury shares................... (4.8)
Amortization of deferred compensation......... 16.9
Minimum pension liability adjustment..........
Issuance of common shares for acquisition..... 1.4 129.0
Issuance of treasury shares in pooling of
interests................................... 0.3 0.4.... 44.8
Other treasury stock transactions............. (4.7)
Tax benefit from stock options exercised...... 49.2
Unrealized loss on marketable securities......
Currency translation and other adjustments.... (.5) (41.6)
---- ------- ------ -------- -------- -------
Balance at December 31, 1996................... .7 190.8 138.8 1,262.6 2,464.9 66.5
Pooling of interests with INBRAND (as
described in Note 1)........................ 2.0 15.9 (.2)
---- ------- ------ -------- -------- -------
Balance at December 31, 1996, as restated...... .7 190.8 140.8 1,262.6 2,480.8 66.3
Effect of ASH's excluded activity (as
described in Note 2)........................
Liquidation of ASH's ESOP.....................
Sale of common shares......................... 4.7 639.2 10.6
Exchange of Liquid Yield Option Notes......... 1.0 82.0
Net loss......................................
Dividends.....................................
Restricted stock grants, cancellations, tax
benefits and other.......................... (18.0)
Warrants and options exercised, net of shares
surrendered for exercises................... 3.5 366.8 (9.9)
Purchase of treasury shares................... (2.6)
Amortization of deferred compensation......... 51.1
Minimum pension liability adjustment..........
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......
Currency translation and other adjustments.... (.4) (203.4)
---- ------- ------ -------- -------- -------
Balance at September 30, 1997.................. -- -- 151.8 2,450.2 2,711.3 (137.1)
Sale of common shares......................... 5.1 1,239.9
Exchange of Liquid Yield Option Notes......... 1.8 153.5
Net income....................................
Dividends.....................................
Restricted stock grants, net of surrenders,
and other................................... .1 .2
Warrants and options exercised................ 4.0 344.9 39.5
Purchase of treasury shares................... (.9) (283.0)
Stock compensation expense, including
amortization of deferred compensation....... 43.4
Minimum pension liability adjustment..........
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......
Currency translation and other adjustments.... (.8) (36.7)
---- ------- ------ -------- -------- -------
Balance at September 30, 1998.................. $ -- $ -- $162.0 $4,035.0 $2,746.1 $(173.8)
==== ======= ====== ======== ======== =======
<CAPTION>
UNREALIZED
GAIN (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 1996, THE NINE ON
MONTHS ENDED SEPTEMBER 30, 1997 AND THE YEAR MARKETABLE ACCUMULATED
ENDED SEPTEMBER 30, 1998 SECURITIES EARNINGS
- ---------------------------------------------- ----------- -----------
(IN MILLIONS)
<S> <C> <C>
Balance at January 1, 1996, as previously
restated...................................... $ -- $ 222.5
Pooling of interests with USSC (as defined in
Note 1)..................................... 233.2
Pooling of interests with AMP (as defined in
Note 1)..................................... 19.4 2,608.1
------ --------
Balance at January 1, 1996, as restated........ 19.4 3,063.8
Effect of the Former Tyco's excluded activity
(as described in Note 1).................... 121.2
Sale of common shares.........................
Exchange of Liquid Yield Option Notes.........
Net income.................................... 41.0
Dividends..................................... (300.8)
Restricted stock grants, cancellations, tax
benefits and other.......................... .5
Warrants and options exercised................
Purchase of treasury shares...................
Amortization of deferred compensation.........
Minimum pension liability adjustment.......... 3.6
Issuance of common shares for acquisition.....
Issuance of treasury shares in pooling of
interests................................... (39.9)
Other treasury stock transactions.............
Tax benefit from stock options exercised......
Unrealized loss on marketable securities...... (10.5)
Currency translation and other adjustments....
------ --------
Balance at December 31, 1996................... 8.9 2,889.4
Pooling of interests with INBRAND (as
described in Note 1)........................ 27.6
------ --------
Balance at December 31, 1996, as restated...... 8.9 2,917.0
Effect of ASH's excluded activity (as
described in Note 2)........................ (.8)
Liquidation of ASH's ESOP..................... 2.5
Sale of common shares.........................
Exchange of Liquid Yield Option Notes.........
Net loss...................................... (391.3)
Dividends..................................... (227.7)
Restricted stock grants, cancellations, tax
benefits and other..........................
Warrants and options exercised, net of shares
surrendered for exercises...................
Purchase of treasury shares...................
Amortization of deferred compensation.........
Minimum pension liability adjustment.......... (8.2)
Issuance of common shares for acquisitions....
Issuance of common shares for litigation
settlement..................................
Conversion of Series A convertible Preferred
Stock.......................................
Other treasury stock transactions.............
Tax benefit on stock transactions.............
Unrealized gain on marketable securities...... 1.9
Currency translation and other adjustments.... .2
------ --------
Balance at September 30, 1997.................. 10.8 2,291.7
Sale of common shares.........................
Exchange of Liquid Yield Option Notes.........
Net income.................................... 1,166.2
Dividends..................................... (305.9)
Restricted stock grants, net of surrenders,
and other...................................
Warrants and options exercised................
Purchase of treasury shares...................
Stock compensation expense, including
amortization of deferred compensation.......
Minimum pension liability adjustment.......... (14.7)
Issuance of common shares for acquisition.....
Issuance of common shares for litigation
settlement..................................
Tax benefit on stock transactions.............
Unrealized loss on marketable securities...... (15.6)
Currency translation and other adjustments....
------ --------
Balance at September 30, 1998.................. $ (4.8) $3,137.3
====== ========
</TABLE>
See Notes to Supplemental Consolidated Financial Statements.
7
<PAGE> 9
TYCO INTERNATIONAL LTD.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1998 1997 1996
------------- ------------- ------------
(IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 1,166.2 $ (391.3) $ 41.0
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Merger, restructuring and other non-recurring charges..... 253.7 207.4 315.4
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
Effect of accounting changes.............................. -- (22.9) --
Depreciation.............................................. 895.1 650.5 814.7
Goodwill and other intangibles amortization............... 242.6 123.7 123.4
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..................................... (8.2) (259.2) (22.6)
Gain arising from the ownership of investments............ -- -- (53.2)
Settlement gain........................................... -- -- (69.7)
Provisions for losses on accounts receivable and
inventory.............................................. 192.9 76.5 141.3
Other non-cash items...................................... 2.5 24.8 54.1
Changes in assets and liabilities, net of the effects of
acquisitions:
Receivables............................................ (88.9) (297.1) (177.6)
Proceeds from accounts receivable sale................. -- 75.0 --
Contracts in process................................... (91.4) (159.7) 17.8
Inventories............................................ (226.2) (115.6) (154.4)
Accounts payable, accrued expenses and other current
liabilities.......................................... (96.4) 642.5 (60.8)
Income taxes payable................................... 66.3 232.5 (25.9)
Deferred revenue....................................... (6.5) 6.2 4.3
Other, net............................................. (22.1) 10.0 (4.8)
--------- --------- ---------
Net cash provided by operating activities................. 2,281.8 1,379.2 1,712.7
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment................... (1,317.5) (866.6) (1,162.4)
Acquisition of businesses, net of cash acquired............. (4,251.8) (1,415.2) (887.6)
Decrease (increase) in investments.......................... 6.4 (29.4) 67.1
Capitalized software costs.................................. (42.0) (4.0) (3.0)
Other....................................................... (41.1) (5.5) (4.6)
--------- --------- ---------
Net cash utilized by investing activities................. (5,646.0) (2,320.7) (1,990.5)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net receipts of short-term debt............................. 287.1 945.7 338.0
Net proceeds from issuance of public debt................... 2,744.5 -- --
Repayment of long-term debt, including debt tender.......... (1,074.6) (980.7) (407.8)
Proceeds from long-term debt................................ 802.0 253.2 396.8
Proceeds from sale of common shares......................... 1,245.0 654.5 141.8
Proceeds from exercise of options and warrants.............. 348.7 351.9 71.6
Dividends paid.............................................. (303.0) (222.2) (299.9)
Purchase of treasury shares................................. (283.9) (6.7) (10.1)
Other....................................................... (36.5) (2.2) (30.2)
--------- --------- ---------
Net cash provided by financing activities................. 3,729.3 993.5 200.2
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ 365.1 52.0 (77.6)
Cash and cash equivalents at beginning of year.............. 707.8 654.7 652.8
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.................... $ 1,072.9 $ 707.8 $ 654.7
========= ========= =========
SUPPLEMENTARY CASH FLOW DISCLOSURE:
Interest paid............................................... $ 250.7 $ 186.6 $ 206.7
========= ========= =========
Income taxes paid (net of refunds).......................... $ 345.9 $ 309.5 $ 337.0
========= ========= =========
</TABLE>
See Notes to Supplemental Consolidated Financial Statements.
8
<PAGE> 10
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, a Bermuda company ("ADT") merged with Tyco International Ltd., a
Massachusetts corporation, ("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"), United
States Surgical Corporation ("USSC") and AMP Incorporated ("AMP") on August 27,
1997, August 29, 1997, October 1, 1998 and April 2, 1999, 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, USSC and AMP as if they had been combined
for all periods presented and of INBRAND from January 1, 1997. The supplemental
consolidated 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 balance in the accompanying
Supplemental Consolidated Statement of Shareholders' Equity has been restated to
record the merger with INBRAND. Prior to the mergers, ADT, Keystone, USSC and
AMP had calendar year ends and the Former Tyco had a June 30 fiscal year end.
The accompanying 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, AMP 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 accompanying 1996 Supplemental Consolidated Statements of
Shareholders' Equity and Cash Flows. Upon publication of the Company's
consolidated financial statements for a period which includes April 2, 1999, the
date of the AMP merger, these supplemental consolidated financial statements
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 (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.
9
<PAGE> 11
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH EQUIVALENTS -- All highly liquid investments purchased with a maturity
of three months or less are considered to be cash equivalents.
INVESTMENTS -- The Company accounts for its long-term investments that
represent less than twenty percent ownership using Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." This standard requires that certain debt and equity
securities be adjusted to market value at the end of each accounting period.
Unrealized market gains and losses are charged to earnings if the securities are
traded for short-term profit. Otherwise, such unrealized gains and losses are
charged or credited to shareholders' equity. Management determines the proper
classifications of investments in obligations with fixed maturities and
marketable equity securities at the time of purchase and reevaluates such
designations as of each balance sheet date. Realized gains and losses on sales
of investments, as determined on a specific identification basis, are included
in the accompanying Supplemental Consolidated Statements of Operations.
INVENTORIES -- Inventories are recorded at the lower of cost (primarily
first-in, first-out) or market value.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are
principally recorded at cost less accumulated depreciation. Maintenance and
repair expenditures are charged to expense when incurred. The straight-line
method of depreciation is used over the estimated useful lives of the related
assets as follows:
<TABLE>
<S> <C>
Buildings and related improvements........................ 2 to 50 years
Leasehold improvements.................................... Remaining term of the lease
Subscriber systems........................................ 10 to 14 years
Other plant, machinery, equipment and furniture and
fixtures................................................ 2 to 20 years
</TABLE>
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 twenty
percent or more 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 $6,104.1
million and $2,923.4 million, net, at September 30, 1998 and 1997, respectively.
Accumulated amortization amounted to $499.7 million at September 30, 1998 and
$368.9 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 1997, accumulated
amortization amounted to $207.1 million and $160.3 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.
10
<PAGE> 12
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and are included in cost of sales in the accompanying
Supplemental Consolidated Statements of Operations.
ADVERTISING -- Advertising costs are expensed when incurred.
TRANSLATION OF FOREIGN CURRENCY -- Assets and liabilities of the Company's
subsidiaries operating outside 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, cross-currency swaps and commodity
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.
11
<PAGE> 13
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. The Company adopted
SFAS No. 130 during the first quarter of Fiscal 1999. As SFAS No. 131 only
relates to disclosure requirements, adoption of this standard 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. As SFAS
No. 132 only relates to disclosure requirements, 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. In June 1999, the FASB issued an exposure draft to defer the effective date
to all fiscal years beginning after June 15, 2000. The Company is currently
analyzing this new standard.
RECLASSIFICATIONS -- Certain prior year amounts have been reclassified to
conform with current year presentation.
STOCK SPLIT -- Per share amounts and per share data have been retroactively
adjusted to reflect the two-for-one stock split in the last quarter of Fiscal
1997 (Note 10).
2. MERGERS
TYCO'S MERGER WITH AMP -- On April 2, 1999, Tyco merged with AMP.
Shareholders of AMP received 0.7507 shares of Tyco common stock in exchange for
each outstanding share of AMP. A total of approximately 164 million shares were
issued in this transaction.
TYCO'S MERGER WITH USSC -- On October 1, 1998, Tyco merged with USSC.
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. 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. A
total of approximately 10.2 million Tyco common shares were issued to the former
shareholders of INBRAND.
12
<PAGE> 14
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 five 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 AMP in April 1999 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 accompanying supplemental consolidated statement of operations, but will
be reflected in the consolidated statement of operations of the Company for the
nine months ended June 30, 1999. Such fees and expenses 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.
Aggregate fees and expenses related to the merger with USSC in October 1998
and to the integration of the combined companies have been expensed in the
consolidated statement of operations of the Company for the quarter ended
December 31, 1998, as required under the pooling of interests method of
accounting. These included transaction costs of approximately $53.3 million
consisting of legal, printing, accounting, financial advisory services and other
direct expenses. These also included charges of approximately $368.5 million to
reflect the combination of the companies, including severance costs, integration
costs, the costs associated with the elimination of excess facilities and the
satisfaction of certain liabilities, and $71.5 million for the impairment of
long-lived assets.
13
<PAGE> 15
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Combined and separate results of Tyco, USSC and AMP for the periods
preceding the mergers were as follows:
<TABLE>
<CAPTION>
TYCO USSC AMP ADJUSTMENTS COMBINED
--------- -------- -------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1998
Net sales.............................. $12,311.3 $1,225.9 $5,524.5 $ -- $19,061.7
Extraordinary items, net of taxes...... (2.4) -- -- -- (2.4)
Net income (loss)...................... 1,174.7 (212.0) 208.5 (5.0)(i) 1,166.2
Nine months ended September 30, 1997
Net sales.............................. 7,588.2 869.6 4,284.7 -- 12,742.5
Extraordinary items, net of taxes...... (58.3) -- -- -- (58.3)
Cumulative effect of accounting
changes, net of taxes............... -- -- 15.5 -- 15.5
Net (loss) income...................... (835.1) 79.1 345.7 19.0(i) (391.3)
Year ended December 31, 1996
Net sales.............................. 8,103.7 1,112.7 5,454.6 -- 14,671.0
Extraordinary items, net of taxes...... (8.4) -- -- -- (8.4)
Net (loss) income...................... (305.1) 109.1 287.0 (50.0)(i) 41.0
</TABLE>
- ---------------
(i) As a result of the combination of Tyco and AMP, an income tax adjustment was
recorded to conform tax accounting.
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 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 16.
Combined and separate results of ADT, Former Tyco, Keystone and INBRAND for
the periods preceding the mergers 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 supplemental consolidated financial statements for periods prior to
January 1, 1997 do not include INBRAND due to immateriality (Note 1).
14
<PAGE> 16
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 were previously 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.
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 portions of the acquisition costs were funded
utilizing cash on hand, borrowings 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.
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
15
<PAGE> 17
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
revenues of approximately $1.0 billion. Sherwood has been integrated with
Kendall within Tyco's Healthcare and Specialty Products segment.
Total 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. The $159.7
million of severance and related costs covers employee termination benefits for
approximately 4,800 employees located throughout the world, consisting of
primarily manufacturing employees to be terminated as a result of the shut down
and consolidation of production facilities and, to a lesser extent, technical,
sales and administrative employees. At September 30, 1998, approximately 1,600
employees had been terminated and $126.3 million in severance costs remained on
the balance sheet. The Company has communicated with the employees of the
acquired companies to announce the termination and benefit arrangements, even
though all individuals have not been specifically told of their termination. The
Company expects that the remaining employee terminations will be completed in
Fiscal 1999.
The $278.9 million of exit costs are associated with the shutdown and
consolidation of facilities involve approximately 90 facilities located
primarily in the United States and Europe. These facilities include
manufacturing plants, warehouses, office buildings and sales offices. Included
within these costs are accruals for non-cancelable leases associated with
certain of these facilities. Approximately 70 facilities, mainly office
buildings and sales offices, had been shut down as of September 30, 1998. The
remaining facilities primarily include large manufacturing plants, which are
expected to be shut down in Fiscal 1999. The shutdown of these remaining
facilities, as well as the expiration of non-cancelable leases (less any
expected sublease income in facilities already closed), comprise the
approximately $264.7 million for facility related costs remaining on the balance
sheet as of September 30, 1998.
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.
16
<PAGE> 18
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma data summarize the results of operations
for the periods indicated as if the Fiscal 1998 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 and AMP, which were accounted
for under the pooling of interests accounting method (Notes 1 and 2).
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Net sales................................................. $20,406.7 $14,588.1
Income (loss) before extraordinary items and cumulative
effect of accounting changes............................ 1,001.2 (454.1)
Net income (loss)......................................... 993.4 (498.4)
Net income (loss) per common share:
Basic................................................... 1.25 (.68)
Diluted................................................. 1.23 (.68)
</TABLE>
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 common shares
valued at $92.8 million. The cash portions of the acquisition costs were funded
utilizing cash on hand, proceeds from the sale of common shares 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 assumed USSC's agreement to potentially pay up to approximately
$70 million in common stock as of September 30, 1998 as additional purchase
price consideration relative to an acquisition consummated by USSC in Fiscal
1997, if and when certain additional milestones and sales objectives are
achieved.
During 1996, the Company acquired companies in each of its business
segments for an aggregate of $1.18 billion, including $887.6 million in cash,
3.5 million common shares valued at $130.4 million and the assumption of
approximately $159.2 million in debt. The cash portions of the acquisition costs
were funded 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 $894.7 million in goodwill
and other intangibles was recorded by the Company, which reflects the
adjustments
17
<PAGE> 19
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 the United Kingdom in 1995, the
Company holds a subordinated, non-collateralized zero coupon loan note maturing
in 2004 ("Vendor Note"), together with a 10% interest in 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 less expenses and $4.7 million was included in interest income in
1996.
18
<PAGE> 20
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
International overdrafts and demand loans(xi)............... 429.7 376.9
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
International bank loans, repayable through 2013(xii)....... 188.6 204.4
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....................................................... 281.7 205.5
-------- --------
Total debt.................................................. 6,239.7 3,463.5
Less current portion........................................ 815.0 677.6
-------- --------
Long-term debt.............................................. $5,424.7 $2,785.9
======== ========
</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
19
<PAGE> 21
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 L60 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.
(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., a wholly-owned subsidiary of the Company, 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 debt holders, of which $800.0 million was financed from the
previously existing credit agreement discussed above. In connection with
the tenders, 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
20
<PAGE> 22
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 25). 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, a wholly-owned subsidiary of the Company,
entered into a sterling denominated bank credit facility of which $137.5
million (L85 million) is a term loan facility and $8 million is a
revolving credit facility. The term loan facility was fully drawn down
and was used to repay in part the $26 million drawn down under another
sterling denominated bank credit facility entered into in January 1997.
The new facility has a term of five years and is guaranteed by the
Company and certain of its subsidiaries. Interest is payable at LIBOR
plus a margin. 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 supplemental
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.
21
<PAGE> 23
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(xi) International overdrafts and demand loans represent borrowings by AMP
from various banks and other holders. All overdrafts and loans mature
within one year from the balance sheet date. The weighted-average
interest rate on all international overdrafts and demand loans during
Fiscal 1998 and Fiscal 1997 was 4.2% and 4.1%, respectively.
(xii) International bank loans represent term borrowings by AMP from various
commercial banks. Borrowings are repayable in varying amounts through
2013. The weighted-average interest rate on all international bank loans
during Fiscal 1998 and Fiscal 1997 was 5.0% and 4.2%, respectively.
The weighted-average rate of interest on all long-term debt during Fiscal
1998 was 6.4% (Fiscal 1997 -- 7.2%; 1996 -- 7.7%).
The aggregate amounts of total debt maturing during the next five years are
as follows (in millions): $815.0 in Fiscal 1999, $1,292.8 in Fiscal 2000,
$1,343.0 in Fiscal 2001, $97.7 in Fiscal 2002 and $53.2 in Fiscal 2003.
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.
AMP maintains a commercial paper program for maximum borrowing of $200.0
million and a $150.0 million five year revolving credit facility, which is used
primarily to support the commercial paper program. The credit facility was
amended in August 1997 to extend the term until September 1, 2002 and lower the
minimum facility fee to 5 basis points from 6.25 basis points annually.
Effective September 28, 1998, under the terms of the agreement the facility fee
was increased to 7.5 basis points. Interest rate options on the facility include
the higher of the Federal funds rate plus 1/2 of 1% or the prime commercial
lending rate of the lead bank, LIBOR, or rates determined as part of a
competitive bidding process. This formal syndicated credit facility has a
minimum shareholders' equity requirement for AMP of approximately $2.0 billion.
AMP also maintained additional letters of credit and an uncommitted line of
credit in the amount of $42.0 million at September 30, 1998. None of these
funding sources was in use at September 30, 1998 or 1997.
22
<PAGE> 24
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In August 1998, AMP entered into a $120.0 million letter of credit
agreement related to a trust used to fund non-qualified benefits in connection
with the defense of an unsolicited bid by Allied Signal Incorporated
("AlliedSignal") (Note 26). Subsequently, in March 1999, the letter of credit
was terminated.
Subsequent to September 30, 1998, TIG issued $800 million of debt in a
private placement offering consisting of two series of restricted 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 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 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, equity securities, accounts receivable and debt. The
Company also has currency options (notional amount of $153.6 million), commodity
swap agreements (notional amount of $79.2 million), currency swaps and interest
rate swaps. Commodities swap agreements are utilized to hedge anticipated
purchases of certain metals used in manufacturing operations. Under these swap
agreements, payments are made or received based on the differential between a
specified price and the actual price of the metals.
In March 1994, AMP entered into a foreign currency swap with an AAA-rated
counterparty to hedge a portion of its net investment in its Japanese
subsidiary. Under the terms of the currency swap agreement, the Company is
obligated to swap 15.9 billion yen for $150.0 million in 2004 based on the
exchange rate on the day the contract became effective. Additionally, the
contract provides for the Company to make semi-annual interest payments of 4.61%
on the 15.9 billion yen, while receiving semi-annual interest payments of 6.71%
on the $150.0 million. The Company has the unilateral right to unwind the swap
prior to maturity.
From time to time, AMP also utilizes forward foreign currency exchange
contracts to minimize the impact of currency movements, principally on
anticipated intercompany royalties, inventory purchases, loans and dividends
denominated in currencies other than their functional currencies. At September
30, 1998, AMP had open foreign currency agreements totaling $307.4 million.
23
<PAGE> 25
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
While it is not the Company's intention to terminate any of the above
financial instruments, fair values were estimated by obtaining quotes from
brokers which represented the amounts that the Company would receive or pay if
the agreements were terminated at the balance sheet dates. These fair values
indicated that the termination of the commodities swap agreements, the forward
foreign currency exchange contracts and the foreign currency swap agreement at
September 30, 1998 would have resulted in a $4.2 million loss, a $7.6 million
loss and a $22.3 million gain, respectively, and at September 30, 1997 would
have resulted in a $.1 million loss, a $1.5 million loss and a $1.1 million
loss, respectively. At September 30, 1998 and 1997, the fair value of interest
rate swaps approximated book value, and the fair value of long-term debt was
approximately $5,816.8 million (book value of $5,424.7 million) and $2,787.3
million (book value of $2,785.9 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 represents a concentration of
credit risk as the Company deals with a variety of major banks worldwide and its
accounts receivable are spread among a number of major industries, customers and
geographic areas. None of the Company's off-balance sheet financial instruments
would result in a significant loss to the Company if a counterparty failed to
perform according to the terms of its agreement.
7. INCOME TAXES
The 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
MONTHS
YEAR ENDED 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............................. $596.0 $ (0.1) $181.5
Adjustments to reconcile to the Company's
income tax provision:
U.S. state income tax provision, net....... 15.8 20.2 27.3
SFAS 121 impairment........................ -- 49.6 150.2
Non U.S. net (earnings) losses............. (67.9) 118.0 79.1
Provision for unrepatriated earnings of
subsidiaries............................ -- 64.1 --
Nondeductible charges...................... 20.1 112.9 --
Other...................................... (29.8) (16.6) 31.3
------ ------- ------
Provision for income taxes................. 534.2 348.1 469.4
Deferred (benefit) provision............... (10.0) (225.0) 4.2
------ ------- ------
Current provision.......................... $544.2 $ 573.1 $465.2
====== ======= ======
</TABLE>
The provisions for Fiscal 1998, Fiscal 1997, and 1996 included $210.5
million, $130.0 million and $189.9 million, respectively, for non-U.S. income
taxes. The non-U.S. component of income (loss) before income taxes was $640.6
million, $(67.5) million and $70.9 million for Fiscal 1998, Fiscal 1997, and
1996, respectively.
24
<PAGE> 26
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
Inventories............................................... $ 80.6 $ 91.8
Accrued liabilities and reserves.......................... 1,042.5 793.4
Accrued postretirement benefit obligation................. 146.5 108.5
Tax loss and credit carryforwards......................... 431.6 420.2
Interest.................................................. 78.9 92.7
Other..................................................... 94.0 65.4
-------- --------
1,874.1 1,572.0
-------- --------
Deferred tax liabilities:
Property, plant and equipment............................. (451.8) (520.7)
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)
Undistributed earnings of subsidiaries.................... (83.4) (61.4)
Other..................................................... (93.4) (80.1)
-------- --------
(721.6) (762.4)
-------- --------
Net deferred income tax asset before valuation
allowance.............................................. 1,152.5 809.6
Valuation allowance....................................... (180.4) (169.2)
-------- --------
Net deferred income tax asset............................. $ 972.1 $ 640.4
======== ========
</TABLE>
As of September 30, 1998, the Company had approximately $361.5 million of
net operating loss carryforwards in certain non-U.S. jurisdictions. Of these,
$250.4 million have no expiration, and the remaining $111.1 million will expire
in future years through 2013. U.S. operating loss carryforwards at September 30,
1998 were approximately $857.7 million and will expire in future years through
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
25
<PAGE> 27
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
convertible cumulative redeemable preference shares authorized, 7,500,000
(increased to 15,000,000 subsequent to September 30, 1998) have been classified
as Series A 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
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 issuance.
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 Series A 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 (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.
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 accordance with the pooling of interests method of accounting,
the common shares outstanding presented in the accompanying supplemental
consolidated financial statements have been retroactively restated as if Tyco,
USSC and AMP had been combined for all periods presented (Note 2). On April 1,
1999, the shareholders approved an increase in the number of authorized common
shares from 1,503,750,000 to 2,500,000,000.
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.
26
<PAGE> 28
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, USSC and AMP common shares
and options has been retroactively restated in connection with their mergers
with Tyco to reflect their applicable merger per share exchange ratios of
0.48726, 0.43, 0.7606 and 0.7507, respectively.
Prior to the merger with AMP, the Board of Directors of AMP adopted a
Shareholder Rights Plan in October 1989, which declared a dividend of one Common
Stock Purchase Right ("Right") for each outstanding share of common stock. Under
the original terms of the plan, such Rights only become exercisable, or
transferable apart from the common stock, ten business days after any person
acquires beneficial ownership of, or commences a tender or exchange offer for,
20% or more of the Company's common stock. Thereafter, upon the occurrence of
certain events (for example, AMP is acquired in a merger and is not the
surviving corporation), the Rights entitle holders, other than the acquiring
person, to acquire common stock of the acquiring person having a value twice the
exercise price of the Rights. The merger between Tyco and AMP was specifically
excluded from these provisions by an amendment to the Shareholder Rights Plan in
November 1998.
RESTRICTED STOCK -- 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. 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 common shares 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 for grant, 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. AMP's 1993
Long-Term Equity Incentive Plan provided for the issuance of performance
restricted stock to key executives which vest over a three year period based on
the attainment of specified targets. At September 30, 1998, 403,276 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
27
<PAGE> 29
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $37.1 million, $59.9 million and $17.0 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.
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 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 year end, 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.
AMP's 1993 Long-Term Equity Incentive Plan provided for grants of stock
options and stock bonus units to key employees. Options expire no later than ten
years from the date of grant and may not be exercised earlier than twelve months
from the date of grant.
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
28
<PAGE> 30
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
share. The option was purchased by USSC's Chairman of the Board and Chief
Executive Officer at fair market value.
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.
During 1995, Former Tyco established a stock option plan under which
certain employees, excluding officers and directors, were 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 becoming exercisable
at the end of the fifth year. Grants are for periods generally not in excess of
ten years.
Keystone granted share options under its incentive stock option plans for
the benefit of its key employees and directors. Stock options were generally
issued at exercise prices which are not less than the fair market value at the
date of grant. The options vest after one to five years and expire after five to
ten years from the date of grant.
During 1993, INBRAND adopted The INBRAND Corporation Stock Incentive Plan
("the INBRAND Incentive Plan"). Awards under the INBRAND Incentive Plan were in
the form of qualified and non-qualified stock options and/or stock appreciation
rights (SAR's). Grants under the INBRAND Incentive Plan could be made to any
employee of INBRAND, any Director of the company, or any other person to whom
the Compensation Committee determines that making such a grant is in the best
interests of the company. The INBRAND Incentive Plan provides for a
performance-based stock option format which governs the vesting of option
awards. The INBRAND Incentive Plan further provides 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.
29
<PAGE> 31
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Share option activity for all plans since January 1, 1996 has been as
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE
----------- ----------------
<S> <C> <C>
At January 1, 1996..................................... 32,510,223 $30.94
Effect of Former Tyco's excluded activity............ 39,500
Assumed from acquisitions............................ 1,090,212 16.27
Granted.............................................. 12,104,664 25.17
Exercised............................................ (4,081,052) 16.46
Canceled............................................. (1,058,199) 23.44
-----------
At December 31, 1996................................... 40,605,348 30.45
Adjustment for INBRAND merger (Note 1)............... 1,270,954 17.25
Assumed from acquisition............................. 87,800 20.37
Granted.............................................. 18,098,297 44.15
Exercised............................................ (3,632,354) 19.45
Canceled............................................. (2,799,509) 54.58
-----------
At September 30, 1997.................................. 53,630,536 34.06
Assumed from acquisition............................. 43,616 20.45
Granted.............................................. 16,005,707 47.03
Exercised............................................ (18,813,308) 18.39
Canceled............................................. (3,640,973) 54.96
-----------
At September 30, 1998.................................. 47,225,578 49.65
===========
</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 12,527,446 37.31 6.7 1,800,369 34.83
39.39 to 46.96 8,721,542 41.45 7.0 3,440,213 41.63
46.97 to 56.24 4,648,929 50.18 6.9 1,168,296 48.44
56.25 to 68.22 8,113,472 63.99 7.2 5,587,728 64.28
68.23 to 150.04 2,147,480 125.07 1.6 2,112,948 125.99
---------- ----------
Total 47,225,578 20,854,319
========== ==========
</TABLE>
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. Upon consummation of the merger with AMP on April 2, 1999, AMP had a
total of approximately 6.2 million options which were exercisable, of which
approximately 3.9 million became immediately exercisable due to the change in
ownership of AMP resulting from the merger with Tyco.
30
<PAGE> 32
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 pro forma net income (loss) and pro forma 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) -- pro forma (in millions)............ $1,063.3 $(428.7) $(1.2)
Net income (loss) per common share -- pro forma
Basic................................................. 1.34 (.59) (.03)
Diluted............................................... 1.32 (.59) (.03)
</TABLE>
The estimated weighted average fair value of Tyco, USSC and AMP options
granted during Fiscal 1998 was $16.48, $13.58 and $11.95, 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, USSC
and AMP options granted during Fiscal 1997 was $12.15, $9.55, $37.17, $14.30 and
$18.53, 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:
<TABLE>
<CAPTION>
TYCO USSC AMP
--------------- --------------- ---------
<S> <C> <C> <C>
Expected stock price volatility........... 22% 39% 27%
Risk free interest rate................... 5.62% 5.40% 5.50%
Expected annual dividends................. $0.10 per $0.21 per 2.5%
share share
Expected life of options.................. 5 years 4.2 years 6.5 years
The following weighted average assumptions were used for Fiscal 1997:
<CAPTION>
FORMER
TYCO TYCO INBRAND USSC AMP
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Expected stock price 22% 22% 55% 34% 25%
volatility...................
Risk free interest rate........ 6.07% 6.34% 6.26% 6.45% 6.49%
Expected annual dividends...... $0.10 per $0.10 per -- $0.21 per 2.5%
share share share
Expected life of options....... 5 years 5 years 6.4 years 3.8 years 6.5 years
The following weighted average assumptions were used for 1996:
<CAPTION>
FORMER
ADT TYCO KEYSTONE USSC AMP
--------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Expected stock price 28% 22% 26% 32% 25%
volatility..................
Risk free interest rate....... 5.9% 5.8% 6.4% 5.27% 6.43%
Expected annual dividends..... -- $0.10 per 3.7% $0.11 per 2.5%
share share
Expected life of options...... 3.7 years 3.7 years 7 years 4.1 years 6.5 years
</TABLE>
31
<PAGE> 33
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995
and additional awards in future years are anticipated.
STOCK WARRANTS -- The Company has outstanding warrants to purchase common
stock at per share exercise prices of $2.99 (the "A Warrants") and $3.98 (the "B
Warrants"), respectively (together, the "Warrants"). The Warrants expire on July
7, 1999. During Fiscal 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 "Republic 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 Republic Warrant vested and was exercisable by Republic in the six
month period commencing September 27, 1996. In March 1997, the Republic 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 $0.185 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. AMP paid dividends of $0.26 per share in the first
quarter of Fiscal 1998 and $0.27 per share in the last three quarters of Fiscal
1998, $0.26 per share in each of the three quarters in Fiscal 1997 and aggregate
dividends of $1.00 per share in 1996.
11. CHARGE FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
Charges for the impairment of long-lived assets are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Fire and Security Services........................ $-- $118.8 $731.7
Flow Control Products............................. -- 29.6 --
Healthcare and Specialty Products................. -- -- 13.0
--- ------ ------
$-- $148.4 $744.7
=== ====== ======
</TABLE>
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 is adjusted if the sum of
expected future undiscounted cash flows is less than book value.
32
<PAGE> 34
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997 Charges
The Company recorded charges of $148.4 million for the impairment of
long-lived assets in Fiscal 1997.
The Fire and Security Services group recorded a charge of $118.8 million.
This includes $98.8 million related to subscriber security systems installed at
customers' premises in the United States and Canada, determined following a
review of the carrying value of the assets. It also includes an impairment in
the carrying value of goodwill of $20.0 million resulting from the combination
of ADT's electronic security business with that of Former Tyco.
The Flow Control Products group recorded a charge of $29.6 million
reflecting an impairment in the carrying value of goodwill resulting from the
combination of Keystone's valve manufacturing and distribution business with
that of Former Tyco.
1996 Charges
Following the adoption of SFAS 121, in particular the change in methodology
requiring the Company to evaluate assets at the lowest level of asset grouping
rather than on an aggregate basis, the Company recorded a charge of $731.7
million in the Fire and Security Services segment relating to the electronic
security services business of ADT. The assets principally comprise subscriber
systems installed at customers' premises, which are included in property, plant
and equipment, and the related goodwill and other intangible assets.
Of this charge, $397.1 million related to an impairment in the carrying
value of subscriber systems, principally in the commercial sector, including the
related goodwill, which principally arose on the acquisition of ADT Security
Services in 1987. Since 1989, the Company's electronic security services
operations in the residential sector have developed at a very rapid rate based
principally on internally generated growth. As a consequence, the Company's
operations in the commercial sector, which were acquired principally in 1987,
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 Healthcare 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.
33
<PAGE> 35
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. OTHER INCOME LESS EXPENSES
Other income less expenses in 1996 consists of a litigation settlement gain
of $65.0 million (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 is
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 are stated net of applicable income
tax benefit of $33.0 million and $0.7 million, respectively.
14. CUMULATIVE EFFECT OF ACCOUNTING CHANGES
The cumulative effect of accounting changes during Fiscal 1997 of $15.5
million ($22.9 million pre-tax) related to AMP changing the accounting practices
used to develop inventory costs, including standardizing globally the definition
of capacity used in determining overhead rates and changing its inventory
costing methodology to include manufacturing engineering costs in inventory
costs.
15. 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.
34
<PAGE> 36
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 PER SHARE PER SHARE
INCOME SHARES AMOUNT LOSS SHARES AMOUNT INCOME 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.... $1,166.2 791.7 $1.47 $(396.0) 738.3 $(.54) $21.2 686.1 $.03
Stock options and
warrants.................. -- 10.5 -- -- -- 17.4
Exchange of LYONs debt...... 7.2 10.2 -- -- -- --
-------- ----- ------- ----- ----- ------
DILUTED INCOME (LOSS) PER
COMMON SHARE:
Net income (loss) available
to common shareholders
plus assumed
conversions............... $1,173.4 812.4 $1.44 $(396.0) 738.3 $(.54) $21.2 703.5 $.03
======== ===== ======= ===== ===== ======
</TABLE>
The computation of diluted income per common share in Fiscal 1998 excludes
the effect of the assumed exercise of approximately 11.9 million stock options
that were outstanding as of September 30, 1998, because the effect would be
anti-dilutive.
16. 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 program.
During the fourth quarter of Fiscal 1998, AMP recorded charges of $185.8
million associated with its Profit Improvement Plan, which includes the
reduction of support staff throughout all its business units and the
consolidation of manufacturing plants and other facilities, in addition to
certain sales growth initiatives. These charges include the cost of staff
reductions of $172.1 million involving the voluntary retirement and involuntary
termination of approximately 2,700 staff support personnel and 700 direct
manufacturing employees, and the consolidation of certain facilities of $13.7
million relating to six plant and facility closures and consolidations.
Approximately $6.0 million in severance costs and $1.0 million in facility
closures were paid during the fourth quarter of Fiscal 1998. At September 30,
1998, approximately 2,100 employees had left the Company. See Note 18 for
discussion of the voluntary early retirement program.
During the first quarter of Fiscal 1998, AMP reduced the restructuring
reserve related to its 1996 restructuring plans by $21.4 million, which was
recorded as a credit to merger, restructuring and other non-recurring charges.
Approximately $77.9 million of accrued merger and restructuring costs are
included in other current liabilities at September 30, 1998.
35
<PAGE> 37
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 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.
During the fourth quarter of 1996, AMP recorded charges of $98.0 million
relating to the exiting of various product lines and manufacturing operations
that were not performing at levels which enhance shareholder value. These
charges include severance of $13.3 million, closure of facilities and
investigation of environmental matters of $42.3 million, the termination of
certain contractual commitments of $26.6 million and other restructuring costs
of $15.8 million. These restructurings were substantially completed during the
first quarter of Fiscal 1998.
36
<PAGE> 38
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. 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 $331.7 million, $242.9 million and $297.9 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: $262.5
million in Fiscal 1999, $241.9 million in Fiscal 2000, $167.7 million in Fiscal
2001, $144.1 million in Fiscal 2002, $93.2 million in Fiscal 2003 and an
aggregate of $312.0 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, the Company assumed the debt which financed the
property for the Owner Participant for approximately $211 million. The
assumption of the debt combined with the settlement of certain other obligations
of $23 million resulted in the Company acquiring ownership of the North Haven
property for a total cost of $234 million.
In the normal course of business, the Company is liable for contract
completion and product performance. In the opinion of management, such
obligations will not significantly affect the Company's financial position or
results of operations.
The Company is involved in various stages of investigation and cleanup
related to environmental remediation matters at a number of sites. The ultimate
cost of site cleanup is difficult to predict given the uncertainties regarding
the extent of the required cleanup, the interpretation of applicable laws and
regulations and alternative cleanup methods. Based upon the Company's experience
with the foregoing environmental matters, the Company has concluded that there
is at least a reasonable possibility that remedial costs will be incurred with
respect to these sites in an aggregate amount in the range of $36.3 million to
$89.6 million. At September 30, 1998, the Company has concluded that the most
probable amount that will be incurred within this range is $43.7 million, and
$25.5 million of such amount is included in the caption "accrued expenses and
other current liabilities" and $18.2 million is included in "other long-term
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 $43.7 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
37
<PAGE> 39
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
proceedings either individually or in the aggregate to have a material adverse
effect on its financial position, results of operations or liquidity.
18. 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.
VOLUNTARY EARLY RETIREMENT PROGRAMS -- In the fourth quarter of Fiscal
1998, AMP offered enhanced retirement benefits to targeted groups of employees.
The cost of these benefits totaled $138.3 million and was recorded as part of
AMP's fourth quarter restructuring charge, as well as the associated net
settlement gain of $13.5 million. These amounts have not been included in the
determination of net periodic pension cost presented below.
The net periodic pension cost for all defined benefit pension plans
includes the following components:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost.......................................... $ 80.3 $ 55.3 $ 67.7
Interest cost......................................... 136.4 97.1 114.7
Actual return......................................... (60.9) (310.9) (178.3)
Net amortization and deferral......................... (108.6) 195.8 45.9
Curtailment gain...................................... (28.4) -- --
------- ------- -------
Net periodic pension expense.......................... $ 18.8 $ 37.3 $ 50.0
======= ======= =======
</TABLE>
38
<PAGE> 40
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Prepaid) accrued 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....................................... $778.6 $ 905.6 $1,684.2
Non-vested................................... 13.3 122.0 135.3
------ -------- --------
Total.......................................... 791.9 1,027.6 1,819.5
Effect of future salary increases.............. 29.3 178.4 207.7
------ -------- --------
Projected benefit obligations.................. 821.2 1,206.0 2,027.2
Plan assets at fair value...................... 870.0 827.8 1,697.8
------ -------- --------
Plan assets (in excess of) less than projected
benefit obligations.......................... (48.8) 378.2 329.4
Unrecognized transition asset (liability)...... 13.0 (4.3) 8.7
Unrecognized prior service cost................ (2.0) (30.0) (32.0)
Additional minimum liability................... -- 64.1 64.1
Unrecognized net loss.......................... (33.8) (34.4) (68.2)
------ -------- --------
(Prepaid) accrued pension cost................. $(71.6) $ 373.6 $ 302.0
====== ======== ========
Accrued pension cost at September 30, 1997 for defined benefit plans is as
follows:
<CAPTION>
ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS TOTAL
------------- ------------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Actuarial present value of accumulated benefit
obligations:
Vested....................................... $1,283.3 $309.0 $1,592.3
Non-vested................................... 72.4 55.8 128.2
-------- ------ --------
Total.......................................... 1,355.7 364.8 1,720.5
Effect of future salary increases and other.... 218.4 42.3 260.7
-------- ------ --------
Projected benefit obligations.................. 1,574.1 407.1 1,981.2
Plan assets at fair value...................... 1,762.2 263.2 2,025.4
-------- ------ --------
Plan assets (in excess of) less than projected
benefit obligations.......................... (188.1) 143.9 (44.2)
Unrecognized transition asset (liability)...... 27.4 (10.5) 16.9
Unrecognized prior service cost................ (10.5) (14.6) (25.1)
Additional minimum liability................... -- 35.8 35.8
Unrecognized net gain (loss)................... 231.9 (37.8) 194.1
-------- ------ --------
Accrued pension cost........................... $ 60.7 $116.8 $ 177.5
======== ====== ========
</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 $64.1 million and $35.8 million as of September
30, 1998 and September 30, 1997, respectively, representing the amount by which
the accumulated
39
<PAGE> 41
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $25.4 million
at September 30, 1998 and $10.7 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, 59% relate to U.S. plans and
41% relate to non-U.S. plans (in Fiscal 1997, 64% and 36%, respectively). The
average discount rate used in determining the actuarial present value of the
projected benefit obligation, weighted in relation to plan obligations, was 6.4%
at September 30, 1998 (7.1% at September 30, 1997). The average rate of increase
in future compensation levels was 3.8% at September 30, 1998 (4.4% at September
30, 1997). The weighted average long-term rate of return on assets was 8.9% at
September 30, 1998 (9.1% 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 $57.1 million, $43.1 million
and $49.7 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.
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.
AMP provides post-retirement health care coverage to qualifying U.S.
retirees. As a result of the merger with Tyco, a $13.7 million adjustment was
recorded to conform AMP's accounting method for post-retirement benefits to
Tyco's method, regarding the initial recognition of such benefits upon adoption
of SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other Than
Pensions."
40
<PAGE> 42
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net periodic post-retirement benefit cost reflects the following
components:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost................................................ $ 3.2 $ 2.0 $ 2.9
Interest cost............................................... 9.5 7.0 8.7
Net amortization and deferral............................... (3.9) (3.1) (3.5)
Curtailment gain............................................ (8.8) -- --
----- ----- -----
Net periodic post-retirement benefit cost................... $ -- $ 5.9 $ 8.1
===== ===== =====
</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................................................ $135.0 $ 82.6
Fully eligible active plan participants................. 24.9 23.3
Other active plan participants.......................... 16.5 21.7
------ ------
176.4 127.6
Unrecognized prior service benefit........................ 5.7 13.8
Unrecognized net (loss) gain.............................. (8.9) 25.6
------ ------
Accrued post-retirement benefit cost...................... $173.2 $167.0
====== ======
</TABLE>
For measurement purposes, in Fiscal 1998, a 9.1% and 8.0% composite annual
rate of increase in the per capita cost of covered health care benefits was
assumed by Tyco and AMP, respectively. Tyco's rate was assumed to decrease
gradually to 4.5% by the year 2008 and remain at that level thereafter, and
AMP's rate was assumed to decrease to 5.5% in the year 2002 and later. The
health care cost trend rate assumption may have a significant effect on the
amounts reported. To illustrate, on a combined basis, increasing Tyco's and
AMP's assumed health care cost trend rate by one percentage point would increase
the accumulated post-retirement benefit obligation as of September 30, 1998 by
$7.2 million and the aggregate of the service and interest cost component of net
periodic post-retirement benefit cost for the year then ended by $.6 million.
The combined weighted average discount rate used in determining the accumulated
post-retirement benefit obligation was 6.75% at September 30, 1998 (7.45% at
September 30, 1997).
41
<PAGE> 43
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. CONSOLIDATED SEGMENT DATA
Selected information by industry segment is presented below.
<TABLE>
<CAPTION>
AS AT AND
AS AT AND FOR THE NINE AS AT AND
FOR THE YEAR MONTHS FOR THE YEAR
ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1998 1997 1996
------------- ------------- ------------
(IN MILLIONS)
<S> <C> <C> <C>
Net sales:
Healthcare 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....... 7,305.3 5,039.4 5,933.6
--------- --------- ---------
$19,061.7 $12,742.5 $14,671.0
========= ========= =========
Operating income:
Healthcare and Specialty Products.......... $ 345.2(1) $ 297.9(3) $ 509.6(7)
Fire and Security Services................. 654.9 (312.4)(4) (621.3)(8)
Flow Control Products...................... 325.9 (92.1)(5) 198.0
Electrical and Electronic Components....... 690.4(2) 277.2(6) 544.5(9)
Corporate and other expenses............... (68.3) (44.8) (43.4)
--------- --------- ---------
$ 1,948.1 $ 125.8 $ 587.4
========= ========= =========
Total Assets:
Healthcare 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....... 6,530.1 6,425.2 4,984.0
Corporate assets........................... 255.5 366.1 124.2
--------- --------- ---------
$23,440.7 $16,960.8 $14,686.2
========= ========= =========
Depreciation and Amortization:
Healthcare 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....... 466.5 355.2 435.8
Corporate.................................. 18.9 19.6 15.5
--------- --------- ---------
$ 1,137.7 $ 774.2 $ 938.1
========= ========= =========
Capital Expenditures:
Healthcare 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....... 520.2 339.2 596.9
Corporate.................................. 10.4 3.5 1.3
--------- --------- ---------
$ 1,317.5 $ 866.6 $ 1,162.4
========= ========= =========
</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.
42
<PAGE> 44
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) Includes restructuring and other non-recurring charges recorded by AMP of
$185.8 million related to its Profit Improvement Plan and an offsetting
credit of $21.4 million to reduce the restructuring reserve established in
1996.
(3) 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.
(4) 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.
(5) 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.
(6) Includes a charge of $361.0 million related to the write off of purchased
research and development costs in connection with an acquisition.
(7) Includes a charge of $13.0 million related to the impairment of long-lived
assets in ADT's vehicle auction services operation.
(8) 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.
(9) Includes restructuring and other non-recurring charges of $98.0 million
primarily related to business exit costs in AMP's operations.
20. CONSOLIDATED GEOGRAPHIC DATA
Selected information by geographic area is presented below.
<TABLE>
<CAPTION>
AS AT AND
AS AT AND FOR THE NINE AS AT AND
FOR THE YEAR MONTHS FOR THE YEAR
ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1998 1997 1996
------------- ------------- ------------
(IN MILLIONS)
<S> <C> <C> <C>
Net sales:
Americas (primarily U.S.).................. $12,518.4 $ 8,127.7 $ 8,980.7
Europe..................................... 4,431.4 2,995.5 3,679.5
Asia -- Pacific............................ 2,111.9 1,619.3 2,010.8
--------- --------- ---------
$19,061.7 $12,742.5 $14,671.0
========= ========= =========
Operating income:
Americas (primarily U.S.).................. $ 1,191.4 $ (132.2) $ 195.4
Europe..................................... 608.1 141.9 195.1
Asia -- Pacific............................ 148.6 116.1 196.9
--------- --------- ---------
$ 1,948.1 $ 125.8 $ 587.4
========= ========= =========
Total Assets:
Americas (primarily U.S.).................. $16,465.0 $11,495.2 $ 9,632.2
Europe..................................... 4,874.0 3,346.7 3,244.6
Asia -- Pacific............................ 1,846.2 1,752.8 1,685.2
Corporate assets........................... 255.5 366.1 124.2
--------- --------- ---------
$23,440.7 $16,960.8 $14,686.2
========= ========= =========
</TABLE>
43
<PAGE> 45
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21. 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.............. $ 681.4 $ 407.5
Work in process......................................... 729.8 745.3
Finished goods.......................................... 1,198.8 1,037.9
--------- ---------
$ 2,610.0 $ 2,190.7
========= =========
Property, Plant and Equipment:
Land.................................................... $ 272.0 $ 263.0
Buildings............................................... 2,013.0 1,781.8
Subscriber systems...................................... 2,171.5 1,737.6
Machinery and equipment................................. 6,125.5 5,675.2
Leasehold improvements.................................. 264.5 232.8
Construction in progress................................ 499.3 431.9
Accumulated depreciation................................ (5,241.5) (4,832.8)
--------- ---------
$ 6,104.3 $ 5,289.5
========= =========
Accrued payroll and payroll related costs................. $ 405.3 $ 381.3
========= =========
</TABLE>
22. 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..................... $518.2 $327.9 $412.9
Advertising.................................. $110.8 $ 82.2 $110.0
</TABLE>
23. 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.
44
<PAGE> 46
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
SEPTEMBER 30, 1997
--------------------
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C>
Net sales................................................... $16,657.3
Gross profit................................................ 5,383.7
Operating income............................................ 131.0
Income taxes................................................ (379.5)
Loss before extraordinary items and cumulative effect of
accounting changes........................................ (300.5)
Extraordinary items, net of taxes........................... (60.9)
Cumulative effect of accounting changes, net of taxes....... 15.5
Net loss.................................................... (345.9)
Basic loss per common share:
Loss before extraordinary items and cumulative effect of
accounting changes..................................... $ (.43)
Extraordinary items, net of taxes......................... (.08)
Cumulative effect of accounting changes, net of taxes..... .02
Net loss per common share................................. (.49)
Diluted loss per common share:
Loss before extraordinary items and cumulative effect of
accounting changes..................................... $ (.43)
Extraordinary items, net of taxes......................... (.08)
Cumulative effect of accounting changes, net of taxes..... .02
Net loss per common share................................. (.49)
</TABLE>
24. 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............................... $4,438.8 $4,561.8 $4,948.7 $5,112.4
Gross profit............................ 1,504.9 1,546.4 1,646.4 1,669.2
Income (loss) before extraordinary
items................................. 389.3 399.9 400.0 (20.6)
Net income (loss)(6).................... 388.4 399.6 399.0 (20.8)
Basic income (loss) per common share:
Income (loss) before extraordinary
items.............................. $ .51 $ .51 $ .50 $ (.03)
Net income (loss) per common share.... .51 .51 .49 (.03)
Diluted income (loss) per common share:
Income (loss) before extraordinary
items.............................. $ .49 $ .50 $ .49 $ (.03)
Net income (loss) per common share.... .49 .50 .49 (.03)
</TABLE>
45
<PAGE> 47
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)
----------- -------------- --------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales.................................... $4,007.4 $4,301.4 $4,433.7
Gross profit................................. 1,310.2 1,459.8 1,448.9
Income (loss) before extraordinary items and
cumulative effect of accounting changes.... 285.3 269.7 (903.5)
Net income (loss)(6)......................... 300.8 269.7 (961.8)
Basic income (loss) per common share:
Income (loss) before extraordinary items
and cumulative effect of accounting
changes................................. $ .39 $ .36 $ (1.20)
Net income (loss) per common share......... .41 .36 (1.28)
Diluted income (loss) per common share:
Income (loss) before extraordinary items
and cumulative effect of accounting
changes................................. $ .38 $ .35 $ (1.20)
Net income (loss) per common share......... .40 .35 (1.28)
</TABLE>
- ---------------
(1) Includes charges of $12.0 million for restructuring charges in USSC's
operations and a $21.4 million credit to restructuring charges related to
AMP's 1996 restructuring plans.
(2) Includes non-recurring charges of $80.5 million primarily related to
business exit costs in USSC's operations and charges of $185.8 million
related to AMP's Profit Improvement Plan.
(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 unamortized deferred refinancing costs relating to the
early extinguishment of debt. The cumulative effect of accounting changes in
the first quarter of Fiscal 1997 relates to the change in accounting
practices used to develop inventory costs in AMP's operations.
46
<PAGE> 48
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
25. TYCO INTERNATIONAL GROUP S.A.
Tyco International Group S.A. ("TIG"), indirectly owns a substantial
portion of the operating subsidiaries of Tyco. As discussed in Note 4, TIG
issued $2.75 billion of debt securities in Fiscal 1998, which are fully and
unconditionally guaranteed by Tyco. 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.
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
(IN MILLIONS)
<S> <C> <C>
Total current assets...................................... $ 6,639.5 $4,673.5
Total non-current assets.................................. 12,090.0 7,275.6
Total current liabilities................................. 5,519.5 4,201.2
Total non-current liabilities............................. 6,401.5 4,166.8
<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................................. 4,800.4 2,950.7 3,222.6
Income (loss) before extraordinary items..... 693.9(1) (642.2)(2) (291.4)(3)
Net income (loss)(4)......................... 691.5 (700.5) (299.8)
</TABLE>
- ---------------
(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.
(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. 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.
(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.
26. UNSOLICITED TENDER OFFER AND DEFENSE
In August 1998, AlliedSignal announced its intention to commence an offer
to purchase all outstanding shares of AMP's common stock. This offer was
rejected by the Board of Directors of AMP. AlliedSignal's offer was then amended
twice in September 1998 to reduce the number of shares sought to be purchased.
As a result, AMP incurred $15.9 million in fees in defending against
AlliedSignal's bid, relating primarily to legal, public relations and financial
consulting costs. In April 1999, AlliedSignal converted its AMP stock into Tyco
47
<PAGE> 49
TYCO INTERNATIONAL LTD.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common shares and reached a settlement with Tyco and AMP, under which
AlliedSignal was to pay $50 million to AMP, and all parties have released all
claims against each other related to AMP.
In addition, in September 1998, AMP's Board of Directors authorized the
establishment of a Flexitrust, a grantor trust, to hold shares of AMP's common
stock. AMP expected to sell to the Flexitrust an aggregate of 25 million
authorized but unissued shares of common stock. AMP also announced its intention
to commence a self-tender offer for 30 million shares of its common stock. AMP
estimated that the total funds required to complete the self-tender would be
approximately $1.7 billion, which AMP intended to source from a proposed $2.6
billion credit facility.
In November 1998, AMP announced its intention to merge with Tyco, and at
that time AMP's Board of Directors rescinded its authorization for a self-tender
offer and the establishment of the Flexitrust. In addition, the debt intended to
fund the self-tender was never used and terminated upon the announced merger.
27. SUBSEQUENT EVENTS (UNAUDITED)
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 Healthcare and Specialty
Products group. The Company is accounting for the acquisition as a purchase.
In January 1999, TIG issued $400 million of its 6.125% notes due 2009 and
$800 million of its 6.875% notes due 2029 in a public offering. Interest is
payable semi-annually in January and July. Repayment of amounts outstanding
under these securities is fully and unconditionally guaranteed by Tyco (Note
25). The net proceeds of approximately $1.17 billion were used to repay
borrowings under TIG's $2.25 billion bank credit facility. At the same time, TIG
also entered into an interest rate swap agreement to hedge the fixed rate terms
of the $400 million notes due 2009. Under the agreement, which expires in
January 2009, TIG will receive payments at a fixed rate of 6.125% and will make
floating rate payments based on an average of three different LIBO rates, as
defined, plus a spread.
In January 1999, TIG initiated a commercial paper program under which it
can issue notes with an aggregate face value of up to $1.75 billion from time to
time outstanding. The notes are unsecured and are fully and unconditionally
guaranteed by Tyco. Proceeds from the sale of the notes will be used for working
capital and other corporate purposes. The Company is required to maintain an
available unused balance under its bank credit agreement sufficient to support
amounts outstanding under this commercial paper program.
In connection with AMP's Profit Improvement Plan (Note 16), AMP recorded
additional restructuring charges of $374.2 million during the first six months
of Fiscal 1999, primarily related to severance and the closure of facilities. In
addition, during the six months ended March 31, 1999, AMP recorded charges of
$67.6 million for the impairment of long-lived assets and $31.9 million of
transaction costs related to the merger with Tyco. The restructuring actions
taken under the plan are expected to be completed in fiscal years 1999 and 2000.
As a result of the merger with Tyco on April 2, 1999, a change in control
of AMP has occurred and, consequently, a maximum total obligation for severance,
performance restricted stock and professional fees of approximately $118.1
million will be incurred by AMP in Fiscal 1999.
In May 1999, the Company announced the acquisition of Raychem Corp.
("Raychem") for approximately $2.87 billion, consisting of approximately $1.4
billion in cash and approximately 16.1 million Tyco common shares (valued at
approximately $1.4 billion). Raychem, with fiscal 1998 revenues of $1.8 billion,
is a leading international designer, manufacturer and distributor of
high-performance electronics products for OEM businesses, and for a broad range
of specialized telecommunications, energy and industrial applications, and will
be integrated within the Electrical and Electronic Components group. The Company
intends to account for the acquisition as a purchase.
48
<PAGE> 1
EXHIBIT 99.2
TYCO INTERNATIONAL LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SEPTEMBER 30, 1998
<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 and April 2, 1999, Tyco consummated mergers with United
States Surgical Corporation ("USSC") and AMP Incorporated ("AMP"), respectively.
These transactions were accounted for under the pooling of interests method and,
accordingly, the Supplemental Consolidated Financial Statements reflect the
combined financial position and results of operations and cash flows of Tyco,
USSC and AMP for all periods presented. Upon publication of the Company's
consolidated financial statements for a period which includes April 2, 1999, the
date of the AMP merger, the Supplemental Consolidated Financial Statements
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 Healthcare 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 and cumulative effect of
accounting changes was $1.17 billion, or $1.45 per share on a diluted basis for
Fiscal 1998, as compared to ($300.5) million, or ($.43) per diluted share, for
the twelve months ended September 30, 1997. During Fiscal 1998, the Company
incurred an after-tax charge of $192.0 million ($.24 per share) primarily
related to costs incurred by AMP to consolidate facilities and reduce support
staff associated with its Profit Improvement Plan and costs incurred by USSC to
exit certain businesses. During the twelve months ended September 30, 1997, the
Company recorded an after-tax charge of $1.49 billion ($1.95 per share) for
merger and transaction costs, writeoffs and integration costs associated with
acquisitions. Excluding these non-recurring charges, income before extraordinary
items and cumulative effect of accounting changes rose 14.8% to $1.36 billion,
or $1.68 per diluted share for Fiscal 1998, as compared to $1.19 billion, or
$1.56 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.
1
<PAGE> 3
Sales
Sales increased 14% during Fiscal 1998 to $19.06 billion from $16.66
billion in the twelve months ended September 30, 1997. Sales of the Healthcare
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 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 $745.7 million to $7.31 billion, or 11%,
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 AMP and 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 $114.1 million, or 2%.
Sales increased 18% during the nine month fiscal period ended September 30,
1997 to $12.74 billion from $10.77 billion in the nine months ended September
30, 1996. Sales of the Healthcare and Specialty Products group increased $620.3
million to $2.87 billion, or 28%, due to increased sales at Kendall, Tyco
Plastics and Adhesives, USSC and ADT Automotive. At Kendall and Tyco Plastics
and Adhesives, the increase in sales resulted principally from the INBRAND and
Carlisle acquisitions, respectively, as well as internal growth at Kendall's
Healthcare business. 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 $616.4 million to $5.04 billion, or 14%,
resulting principally from the acquisition of AT&T's submarine systems business
in July 1997, increased sales at Simplex and sales growth across all of AMP's
major markets.
Income Before Income Taxes, Extraordinary Items and Cumulative Effect of
Accounting Changes
Pre-tax income before extraordinary items and cumulative effect of
accounting changes was $1.70 billion in Fiscal 1998, as compared to $79.0
million in the twelve months ended September 30, 1997. Pre-tax income for Fiscal
1998 included charges of $164.4 million primarily related to AMP's Profit
Improvement Plan and $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 $1.67 billion for merger, restructuring and other
non-recurring charges. See Notes 11 and 16 to the Supplemental Consolidated
Financial Statements. Excluding these non-recurring charges, pre-tax income
increased $210.3 million, or 12%, to $1.96 billion in Fiscal 1998. Amortization
expense for goodwill and other intangible assets was $242.6 million for Fiscal
1998 and $153.8 million for the twelve months ended September 30, 1997. The
following analysis is presented exclusive of these merger, restructuring and
impairment charges.
2
<PAGE> 4
Operating profits of the Healthcare 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 $154.1 million to $854.8
million, or 22%, principally due to the acquisition of AT&T's submarine systems
business in July 1997. Operating profits as a percentage of sales were 11.7% in
Fiscal 1998, as compared to 10.7% 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 TSSL and AMP.
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.
Operating profits of the Healthcare 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 and Adhesives, 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 $55.9 million to $638.2 million, or 10%,
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.
3
<PAGE> 5
Interest Expense
Interest expense increased $76.6 million to $307.9 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 6.4%, 7.2% and
7.7%, respectively. Interest expense decreased $7.1 million to $170.0 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 pay for 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.
Cumulative Effect of Accounting Changes
The cumulative effect of accounting changes during Fiscal 1997 of $15.5
million related to the change in accounting practices used by AMP to develop its
inventory costs, including standardizing globally the definition of capacity
used in determining overhead rates and changing its inventory costing
methodology to include manufacturing engineering costs in inventory costs.
Income Tax Expense
The effective income tax rate was 30.6% during Fiscal 1998 as compared to
32.3% in the twelve months ended September 30, 1997, and 31.9% during Fiscal
1997 as compared to 37.7% in the nine months ended September 30, 1996. The
decreases in the effective income tax rates were primarily due to higher
earnings in domiciles with lower income tax rates. In addition, the higher
effective income tax rate in 1996 was due to an income tax adjustment to conform
tax accounting as a result of the AMP merger. Management believes that the
Company will generate sufficient future income to realize the tax benefits
related to its deferred tax assets. 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.
LIQUIDITY AND CAPITAL RESOURCES
As presented in the Supplemental Consolidated Statement of Cash Flows, net
cash provided by operating activities was $2.28 billion in Fiscal 1998. The
significant changes in working capital were a $226.2 million increase in
inventories, a $96.4 million decrease in accounts payable, accrued expenses and
other current liabilities, a $91.4 million increase in contracts in process and
a $88.9 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, $1.32 billion to purchase property,
plant and equipment, $283.9 million to purchase treasury shares and $303.0
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 17 to the Supplemental
Consolidated Financial Statements.
4
<PAGE> 6
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 $6.24 billion, as compared to
$3.46 billion at September 30, 1997. The increase resulted principally from net
proceeds received of approximately $2.74 billion from the issuance of public
debt by TIG, 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 LYONs for common shares. Goodwill and other intangible
assets were $7.11 billion at September 30, 1998, compared to $3.39 billion at
September 30, 1997. Shareholders' equity was $9.90 billion, or $12.22 per share,
at September 30, 1998, compared to $7.48 billion, or $9.85 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 $1.17 billion and proceeds of $348.7 million from the
exercise of options and warrants. Total debt as a percent of total
capitalization (total debt and shareholders' equity) was 39% at September 30,
1998 and 32% at September 30, 1997. Net debt (total debt less cash and cash
equivalents) as a percent of total capitalization was 32% at September 30, 1998
and 25% 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 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.
5
<PAGE> 7
In August 1998, AMP entered into a $120.0 million letter of credit
agreement related to a trust used to fund non-qualified benefits in connection
with the defense of the unsolicited bid by AlliedSignal. Subsequently, in March
1999 the letter of credit was terminated.
In October 1998, TIG issued $800 million of debt in a private placement
offering consisting of two series of restricted 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 the Supplemental Consolidated Financial Statements.
In December 1998, the Company assumed the debt which financed the property
for the Owner Participant of the USSC North Haven facilities for approximately
$211 million. The assumption of the debt combined with the settlement of certain
other obligations of $23 million resulted in the Company acquiring ownership of
the North Haven property for a total cost of $234 million.
In January 1999, TIG issued $400 million of its 6.125% notes due 2009 and
$800 million of its 6.875% notes due 2029 in a public offering. Interest is
payable semi-annually in January and July. Repayment of amounts outstanding
under these securities is fully and unconditionally guaranteed by Tyco (Note
25). The net proceeds of approximately $1.17 billion were used to repay
borrowings under TIG's $2.25 billion bank credit facility. At the same time, TIG
also entered into an interest rate swap agreement to hedge the fixed rate terms
of the $400 million notes due 2009. Under the agreement which expires in January
2009. TIG will receive payments at a fixed rate of 6.125% and will make floating
rate payments based on an average of three different LIBO rates, as defined,
plus a spread.
In January 1999, TIG initiated a commercial paper program under which it
can issue notes with an aggregate face value of up to $1.75 billion from time to
time outstanding. The notes are unsecured and are fully and unconditionally
guaranteed by Tyco. Proceeds from the sale of the notes will be used for working
capital and other corporate purposes. The Company is required to maintain an
available unused balance under its bank credit agreement sufficient to support
amounts outstanding under this commercial paper program.
The Company believes that its cash flow from operations, together with its
existing credit facilities and other credit arrangements, is adequate to fund
its operations.
Backlog
Backlog at September 30, 1998 amounted to $5.12 billion, compared to $3.41
billion at September 30, 1997. Backlog increased in the Company's Electrical and
Electronic Components, Flow Control Products and Fire and Security Services
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-
6
<PAGE> 8
party readiness. Review of the systems affecting the Company is progressing and
the Company is continuing its implementation strategy. 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. In June 1999, the FASB issued an exposure draft to defer the effective date
to all fiscal years beginning after June 15, 2000. The Company is currently
analyzing this new standard.
CONVERSION TO THE EURO
On January 1, 1999, 11 European countries began using the "euro" as their
single currency, while still continuing to use their own notes and coins for
cash transactions. Banknotes and coins denominated in euros are expected to be
put in circulation and local notes and coins will cease to be legal tender
during 2002. Tyco conducts a significant amount of business in these countries.
Introduction of the euro has not resulted in any material adverse impact upon
the Company, although the Company continues to monitor the effects of the
conversion.
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.
7
<PAGE> 1
EXHIBIT 99.3
TYCO INTERNATIONAL LTD.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<PAGE> 2
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(1) END OF YEAR
- ----------- ---------- --------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996:
Allowances for doubtful accounts....... $96.2 $62.4 $ (1.4) $(21.7) $135.5
Nine Months Ended September 30, 1997:
Allowances for doubtful accounts....... 135.5 37.6 21.8 (36.0) 158.9
Fiscal Year Ended September 30, 1998:
Allowances for doubtful accounts....... 158.9 95.7 107.9 (44.9) 317.6
</TABLE>
- ---------------
(1) Write-off of accounts receivable considered uncollectible.
1
<PAGE> 1
EXHIBIT 99.4
TYCO INTERNATIONAL LTD.
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
<PAGE> 2
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, SEPTEMBER 30,
1999 1998
------------- ---------------
(IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 1,454.4 $ 1,072.9
Accounts receivable, less allowance for doubtful accounts
of $311.2 at March 31, 1999 and $317.6 at September 30,
1998.................................................... 3,880.0 3,478.4
Contracts in process...................................... 588.7 565.3
Inventories............................................... 2,864.9 2,610.0
Deferred income taxes..................................... 775.3 797.6
Prepaid expenses and other current assets................. 544.2 430.7
--------- ---------
10,107.5 8,954.9
--------- ---------
Property, Plant and Equipment:
Land...................................................... 340.1 272.0
Buildings................................................. 2,259.0 2,013.0
Subscriber systems........................................ 2,639.2 2,171.5
Machinery and equipment................................... 6,568.8 6,125.5
Leasehold improvements.................................... 199.8 264.5
Construction in progress.................................. 408.8 499.3
Accumulated depreciation.................................. (5,987.0) (5,241.5)
--------- ---------
6,428.7 6,104.3
--------- ---------
Goodwill and Other Intangible Assets, Net................... 8,605.8 7,105.5
Long-Term Investments....................................... 215.7 228.4
Deferred Income Taxes....................................... 545.8 320.9
Other Assets................................................ 778.0 726.7
--------- ---------
Total Assets....................................... $26,681.5 $23,440.7
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Loans payable and current maturities of long-term debt.... $ 690.7 $ 815.0
Accounts payable.......................................... 1,906.2 1,733.4
Accrued expenses and other current liabilities............ 3,236.9 3,069.3
Contracts in process -- billings in excess of costs....... 567.3 332.9
Deferred revenue.......................................... 277.6 266.5
Income taxes.............................................. 863.6 773.9
Deferred income taxes..................................... 36.7 15.2
--------- ---------
7,579.0 7,006.2
--------- ---------
Long-Term Debt, Less Current Maturities..................... 8,037.2 5,424.7
Other Long-Term Liabilities................................. 1,098.4 976.8
Deferred Income Taxes....................................... 137.9 131.2
Shareholders' Equity:
Common shares, $.20 par value, 2,500,000,000 shares
authorized; 818,085,876 shares outstanding at March 31,
1999 and 810,231,714 shares outstanding at September 30,
1998, net of 205,170 and 3,371,003 shares owned by
subsidiaries at March 31, 1999 and September 30, 1998,
respectively.............................................. 163.6 162.0
Capital in excess:
Share premium............................................. 4,352.0 4,035.0
Contributed surplus, net of deferred compensation of $56.0
at March 31, 1999 and $67.3 at September 30, 1998....... 2,721.0 2,746.1
Retained earnings........................................... 2,978.0 3,151.0
Accumulated other comprehensive loss........................ (385.6) (192.3)
--------- ---------
9,829.0 9,901.8
--------- ---------
Total Liabilities and Shareholders' Equity......... $26,681.5 $23,440.7
========= =========
</TABLE>
See notes to supplemental consolidated financial statements (unaudited).
1
<PAGE> 3
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTERS FOR THE SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
-------------------- ---------------------
1999 1998 1999 1998
-------- -------- --------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
NET SALES........................................ $5,238.7 $4,561.8 $10,452.3 $9,000.6
Cost of sales.................................... 3,387.8 3,015.4 6,789.5 5,949.3
Selling, general and administrative expenses..... 1,122.8 902.1 2,205.9 1,807.7
Merger, restructuring and other non-recurring
charges........................................ 237.3 -- 841.0 (9.4)
Charges for the impairment of long-lived
assets......................................... 67.6 -- 143.6 --
-------- -------- --------- --------
OPERATING INCOME................................. 423.2 644.3 472.3 1,253.0
Interest expense, net............................ (115.0) (51.1) (238.5) (90.9)
-------- -------- --------- --------
Income before income taxes and extraordinary
item........................................... 308.2 593.2 233.8 1,162.1
Income taxes..................................... (146.2) (192.4) (179.5) (384.1)
-------- -------- --------- --------
Income before extraordinary item................. 162.0 400.8 54.3 778.0
Extraordinary item, net of taxes................. (42.5) (0.3) (44.9) (1.2)
-------- -------- --------- --------
NET INCOME....................................... $ 119.5 $ 400.5 $ 9.4 $ 776.8
======== ======== ========= ========
BASIC EARNINGS PER COMMON SHARE:
Income before extraordinary item................. $ .20 $ .51 $ .07 $ 1.00
Extraordinary item, net of taxes................. (.05) -- (.06) --
Net income....................................... .15 .51 .01 1.00
DILUTED EARNINGS PER COMMON SHARE:
Income before extraordinary item................. $ .20 $ .50 $ .07 $ .98
Extraordinary item, net of taxes................. (.05) -- (.05) --
Net income....................................... .14 .50 .01 .98
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic............................................ 815.5 783.1 813.3 775.6
Diluted.......................................... 833.8 804.3 830.8 798.3
</TABLE>
See notes to supplemental consolidated financial statements (unaudited).
2
<PAGE> 4
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED MARCH 31,
----------------------
1999 1998
--------- ---------
(IN MILLIONS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 9.4 $ 776.8
Adjustments to reconcile net income to net cash provided by
operating activities:
Restructuring and other non-recurring charges............. 493.1 (9.9)
Charges for the impairment of long-lived assets........... 143.6 --
Depreciation.............................................. 485.3 445.7
Goodwill and other intangible amortization................ 141.0 93.4
Deferred income taxes..................................... (127.9) 110.1
Other non-cash items...................................... 29.7 (9.2)
Changes in assets and liabilities, net of the effects of
acquisitions:
Accounts receivable and contracts in process........... (101.1) 21.0
Proceeds from sale of accounts receivable.............. 37.0 --
Inventories............................................ (209.5) (130.2)
Prepaid expenses and other current assets.............. (88.5) (58.8)
Accounts payable, accrued expenses and other current
liabilities........................................... 57.8 (308.0)
Income taxes........................................... 16.2 31.7
Deferred revenue....................................... 6.4 14.8
Other.................................................. (108.2) (64.8)
--------- ---------
Net cash provided by operating activities................. 784.3 912.6
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment................... (646.2) (569.9)
Purchase of leased property (Note 2)........................ (234.0) --
Acquisition of businesses, net of cash acquired............. (1,707.3) (2,553.4)
Increase in investments..................................... (6.9) (50.2)
Other....................................................... (3.3) (48.9)
--------- ---------
Net cash used in investing activities..................... (2,597.7) (3,222.4)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds on long-term debt and lines of credit.............. 1,397.7 1,196.5
Net proceeds from issuance of public debt................... 1,173.7 --
Cash paid for tender offer.................................. (417.9) --
Net proceeds from sale of common shares..................... -- 1,245.0
Proceeds from exercise of options........................... 263.5 211.8
Dividends paid.............................................. (150.6) (149.5)
Other....................................................... (71.5) (33.3)
--------- ---------
Net cash provided by financing activities................. 2,194.9 2,470.5
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 381.5 160.7
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 1,072.9 707.7
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 1,454.4 $ 868.4
========= =========
</TABLE>
See notes to supplemental consolidated financial statements (unaudited).
3
<PAGE> 5
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited supplemental consolidated financial statements presented
herein include the consolidated accounts of Tyco International Ltd. (the
"Company" or "Tyco"), a company incorporated in Bermuda, and its subsidiaries.
The financial statements have been prepared in accordance with the instructions
to Form 10-Q and do not include all of the information and note disclosures
required by generally accepted accounting principles. These statements should be
read in conjunction with the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1998 ("Form 10-K"), the financial statements and notes
thereto included in the Company's Current Report on Form 8-K filed on December
10, 1998 and the supplemental consolidated financial statements and notes
thereto filed herewith in the Company's Current Report on Form 8-K. As described
more fully in Note 2, on October 1, 1998 and April 2, 1999, Tyco merged with
United States Surgical Corporation ("USSC") and AMP Incorporated ("AMP"),
respectively. The Form 8-K filed on December 10, 1998 was filed to present
restated financial statements reflecting the combination of Tyco and USSC for
all periods presented in accordance with the pooling of interests method of
accounting. The Form 8-K filed herewith is being filed to present supplemental
consolidated financial statements reflecting the combination of Tyco, USSC and
AMP for all periods presented in accordance with the pooling of interests method
of accounting. Upon publication of the Company's consolidated financial
statements for a period including April 2, 1999 these supplemental consolidated
financial statements become the historical consolidated financial statements of
the Company.
The supplemental consolidated financial statements presented herein have
also been prepared following the pooling of interests method of accounting for
the mergers with USSC and AMP and therefore reflect the combined financial
position, operating results and cash flows of Tyco, USSC and AMP as if they had
been combined for all periods presented.
The accompanying supplemental consolidated financial statements have not
been examined by independent accountants in accordance with generally accepted
auditing standards, but in the opinion of management, such financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to summarize fairly the Company's financial position and results of
operations. Certain prior period amounts have been reclassified to conform with
the current period presentation.
2. MERGERS
On October 1, 1998 and April 2, 1999, Tyco consummated mergers with USSC
and AMP, respectively. A total of approximately 59.2 million shares were issued
to the former shareholders of USSC, and a total of approximately 164 million
shares were issued to the former shareholders of AMP. Aggregate fees and
expenses related to the merger with USSC in October 1998 and to the integration
of the combined companies have been expensed in the accompanying supplemental
consolidated statement of operations for the six months ended March 31, 1999, as
required under the pooling of interests method of accounting. See Notes 7 and 8.
All fees and expenses related to the merger with AMP in April 1999 and to
the integration of the combined companies will be expensed as required under the
pooling of interests accounting method. As such, these expenses have not been
reflected in the supplemental consolidated statement of operations, except for
approximately $31.9 million in transaction costs, but will be reflected in the
consolidated statement of operations of the Company for the quarterly period
ended June 30, 1999. Such fees and expenses 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.
In connection with the USSC merger, the Company assumed an operating lease
for USSC's North Haven facilities. In December 1998, the Company assumed the
debt related to the North Haven property of approximately $211 million. The
assumption of the debt combined with the settlement of certain other obligations
in the amount of $23 million resulted in the Company acquiring ownership of the
North Haven property for a total cost of $234 million.
4
<PAGE> 6
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
The Company also assumed USSC's agreement to potentially pay up to
approximately $70.0 million in common stock as of September 30, 1998 as
additional purchase price consideration relative to an acquisition consummated
by USSC in 1997, if and when certain additional milestones and sales objectives
are achieved. In March 1999, 69,982 Tyco common shares were issued pursuant to
this agreement. This matter is the subject of pending litigation; however, the
Company does not expect to issue a material amount of additional shares pursuant
to this agreement.
Unaudited combined and separate results of Tyco, which include USSC, and
AMP for the periods preceding the merger were as follows:
<TABLE>
<CAPTION>
TYCO AMP ADJUSTMENT COMBINED
-------- -------- ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Six months ended March 31, 1999
Net sales.............................. $7,776.8 $2,675.5 $ -- $10,452.3
Extraordinary item, net of taxes....... (44.9) -- -- (44.9)
Net income (loss)...................... 388.4 (376.0) (3.0)(i) 9.4
Six months ended March 31, 1998
Net sales.............................. $6,159.3 $2,841.3 $ -- $ 9,000.6
Extraordinary item, net of taxes....... (1.2) -- -- (1.2)
Net income............................. 555.8 233.0 (12.0)(i) 776.8
</TABLE>
-----------------------
(i) As a result of the combination of Tyco and AMP, an income tax
adjustment was recorded to conform tax accounting.
3. ACQUISITIONS
In addition to the USSC and AMP mergers discussed in Note 2, during the
first six months of fiscal 1999, the Company purchased businesses in each of its
four business segments at a net amount of $1.96 billion, consisting of $1.71
billion in cash, net of cash acquired, and the assumption of approximately
$248.6 million in debt. The acquisitions were made utilizing cash on hand, the
issuance of public notes and borrowings under the Company's new commercial paper
program. Each of these acquisitions was accounted for as a purchase and the
results of operations of the acquired companies have been included in the
consolidated results of the Company from their respective acquisition dates. As
a result of the acquisitions, approximately $1.79 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.
The fiscal 1999 acquisitions include the acquisition of Graphic Controls
Corporation ("Graphic Controls") in October 1998, Entergy Security Corporation
("Entergy") in January 1999, Alarmguard Holdings, Inc. ("Alarmguard") in
February 1999 and the metals processing division of Glynwed International PLC
("Glynwed") in March 1999. Graphic Controls, a leading designer, manufacturer,
marketer and distributor of disposal medical products, was purchased for
approximately $460 million, including the assumption of certain outstanding
debt, and will be integrated with Ludlow Technical Products within the
Healthcare and Specialty Products group. Entergy and Alarmguard will be
integrated within the electronic security services business of the Fire and
Security Services group. Glynwed, engaged in the production of steel tubing,
steel electrical conduit and other similar products, was purchased for
approximately $236 million and will be integrated with the Flow Control Products
group.
Additional purchase liabilities recorded during fiscal 1999 include
approximately $27.3 million for transaction and other direct costs, $35.8
million for severance and related costs and $117.3 million for costs associated
with the shut down and consolidation of certain acquired facilities. These
additional purchase
5
<PAGE> 7
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
liabilities primarily relate to the acquisitions of Graphic Controls, Entergy,
Alarmguard and Glynwed and to revisions in estimates for purchase acquisitions
consummated prior to fiscal 1999.
In connection with fiscal 1999 purchase acquisitions, the Company began to
formulate plans at the date of each acquisition for workforce reductions and the
closure and consolidation of an aggregate of 130 facilities. The costs of
employee termination benefits relate to the elimination of approximately 1,500
positions in the United States, 300 positions in Europe and 200 positions in
Asia, primarily consisting of manufacturing and distribution, administrative,
technical, and sales and marketing personnel. The 130 facilities designated for
closure include manufacturing plants, sales offices, research and development
facilities and corporate administrative facilities throughout the United States,
Europe and Asia. Approximately 365 employees had been terminated and
approximately 35 facilities has been closed or relocated at March 31, 1999.
In connection with the purchase acquisitions consummated during fiscal
1999, liabilities for approximately $7.5 million in transaction and other costs,
$24.8 million for severance and related costs and $102.0 million for the
shutdown and consolidation of acquired facilities remained on the balance sheet
at March 31, 1999. In connection with purchase acquisitions consummated prior to
fiscal 1999, liabilities for approximately $19.1 million in transaction and
other costs, $88.4 million for severance and related costs and $244.0 million
for the shutdown and consolidation of acquired facilities remained on the
balance sheet at March 31, 1999. The Company expects that the termination of
employees and consolidation of facilities related to all such acquisitions will
be substantially complete within one year of the related dates of acquisition,
except for certain long-term lease obligations.
The following unaudited pro forma data summarize the results of operations
for the periods indicated as if the fiscal 1999 acquisitions had been completed
as of the beginning of the periods presented. The pro forma data give effect to
actual operating results prior to the acquisitions and adjustments to interest
expense, goodwill amortization and income taxes. No effect has been given to
cost reductions or operating synergies in this presentation. These pro forma
amounts do not purport to be indicative of the results that would have actually
been obtained if the acquisitions had occurred as of the beginning of the
periods presented or that may be obtained in the future. The pro forma data do
not give effect to acquisitions completed subsequent to March 31, 1999.
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
---------------- ----------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Net sales........................................... $10,679.2 $9,416.8
Income before extraordinary item.................... 41.7 767.4
Net (loss) income................................... (1.9) 758.1
Net (loss) income per common share:
Basic............................................. -- .98
Diluted........................................... -- .96
</TABLE>
6
<PAGE> 8
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
4. LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1999 1998
--------- -------------
(IN MILLIONS)
<S> <C> <C>
Bank and acceptance facilities.............................. $ -- $ 0.8
Commercial paper program(iii)............................... 2,219.1 --
Bank credit agreement(iv)................................... -- 1,359.0
Bank credit facilities...................................... 62.8 206.9
International overdrafts and demand loans................... 513.2 429.7
8.125% public notes due 1999................................ 10.5 10.5
8.25% senior notes due 2000................................. 9.5 9.5
6.5% public notes due 2001.................................. 299.2 299.0
6.125% public notes due 2001................................ 747.6 747.0
9.25% senior subordinated notes due 2003.................... -- 14.1
5.875% private placement notes due 2004(i).................. 397.5 --
6.375% public notes due 2004................................ 104.6 104.6
6.375% public notes due 2005................................ 743.1 742.6
6.125% private placement notes due 2008(i).................. 394.6 --
7.25% senior notes due 2008(v).............................. 7.8 300.0
6.125% public notes due 2009(ii)............................ 393.8 --
Zero coupon Liquid Yield Option Notes due 2010.............. 112.9 115.3
International bank loans, repayable through 2013............ 225.8 188.6
6.25% public Dealer Remarketable Securities ("Drs.") due
2013...................................................... 761.4 762.8
9.5% public debentures due 2022............................. 49.0 49.0
8.0% public debentures due 2023............................. 50.0 50.0
7.0% public notes due 2028.................................. 492.2 492.1
6.875% public notes due 2029(ii)............................ 780.2 --
Financing lease obligation.................................. 69.1 76.5
Other....................................................... 284.0 281.7
-------- --------
Total debt........................................ 8,727.9 6,239.7
Less current portion........................................ 690.7 815.0
-------- --------
Long-term debt.............................................. $8,037.2 $5,424.7
======== ========
</TABLE>
- ---------------
(i) In October 1998, Tyco International Group S.A. ("TIG"), a wholly-owned
subsidiary of the Company, issued $800 million of debt in a private placement
offering consisting of two series of restricted 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. At the same time, TIG also 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 therein.
Subsequently, in April 1999, TIG exchanged $394.5 million of the 5.875% private
placement notes due 2004 and $345.0 million of the 6.125% private placement
notes due 2008 for public notes (Note 12). The form and terms of the public
notes of each series are identical in all material respects to the form and
7
<PAGE> 9
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
terms of the outstanding private placement notes of the corresponding series,
except that the public notes are not subject to restrictions on transfer under
the United States securities laws.
(ii) In January 1999, TIG issued $400 million of its 6.125% notes due 2009
and $800 million of its 6.875% notes due 2029 in a public offering. The notes
are fully and unconditionally guaranteed by Tyco (Note 12). The net proceeds of
approximately $1.17 billion were used to repay borrowings under TIG's $2.25
billion bank credit facility. At the same time, TIG also entered into an
interest rate swap agreement to hedge the fixed rate terms of the $400 million
notes due 2009. Under the agreement, which expires in January 2009, TIG will
receive payments at a fixed rate of 6.125% and will make floating rate payments
based on an average of three different LIBO rates, as defined, plus a spread.
(iii) In January 1999, TIG initiated a commercial paper program under which
it could initially issue notes with an aggregate face value of up to $1.75
billion. In February 1999, the Company increased its borrowing capacity under
the commercial paper program to $3.25 billion in connection with the increase in
borrowing capacity under TIG's credit agreement discussed below. The notes are
fully and unconditionally guaranteed by Tyco. Proceeds from the sale of the
notes will be used for working capital and other corporate purposes. The Company
is required to maintain an available unused balance under its bank credit
agreement sufficient to support amounts outstanding under the commercial paper
program.
(iv) In February 1999, TIG renegotiated its $2.25 billion credit agreement
with a group of commercial banks, giving it the right to borrow up to $3.40
billion until February 11, 2000, with the option to extend to February 11, 2001,
and to borrow up to an additional $0.5 billion until February 12, 2003. TIG also
has the option to increase the $3.40 billion part of the credit facility up to
$4.0 billion. Interest payable on borrowings is variable based upon TIG's option
to select a Eurodollar rate plus margins ranging from 0.41% to 0.43%, a
certificate of deposit rate plus margins ranging from 0.535% to 0.555%, or a
base rate, as defined. If the outstanding principal amount of loans equals or
exceeds 25% of the commitments, the Eurodollar and certificate of deposit
margins are increased by 0.125%. The obligations of TIG under the credit
agreement are guaranteed by Tyco. TIG is using $3.25 billion of the $3.40
billion credit facility to fully support its commercial paper program discussed
above and therefore expects this part to remain largely undrawn.
(v) In February 1999, the Company completed a tender offer for its 7.25%
senior notes due 2008, issued by USSC, in which $292 million of the $300 million
principal amount of the notes outstanding were purchased. The Company also
completed a tender offer for its 12.0% senior subordinated notes due 2005,
issued by Graphic Controls, in which all $75 million principal amount of the
notes outstanding were purchased.
During the six months ended March 31, 1999 and 1998, respectively, 12,663
and 171,024 of the Liquid Yield Option Notes ("LYONs") with a carrying value of
$6.1 million and $76.3 million were exchanged for 344,128 and 4,647,732 common
shares of the Company. The extraordinary item of $44.9 million in the six months
ended March 31, 1999 primarily relates to the write-off of net unamortized
deferred financing costs related to the tender offer for the Company's 7.25%
senior notes due 2008 and 12.0% senior subordinated notes due 2005 discussed
above. The extraordinary item of $1.2 million in the six months ended March 31,
1998 was the write-off of net unamortized deferred financing costs related to
the LYONs.
Under TIG's bank credit agreement, the Company is required to meet certain
covenants, none of which is considered restrictive to the operations of the
Company.
8
<PAGE> 10
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
5. EARNINGS PER COMMON SHARE
The reconciliations between basic and diluted earnings per common share are
as follows:
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
MARCH 31, 1999 MARCH 31, 1998
------------------------------ ------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ---------- ------ ------ ----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BASIC INCOME PER COMMON SHARE
Net income available to common
shareholders $119.5 815.5 $ .15 $400.5 783.1 $ .51
Stock options and warrants........ -- 11.9 -- 9.0
Exchange of LYONs debt............ 1.2 6.4 2.1 12.2
------ ----- ------ -----
DILUTED INCOME PER COMMON SHARE
Net income available to common
shareholders plus assumed
conversions $120.7 833.8 $ .14 $402.6 804.3 $ .50
====== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
------------------------------ ------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ---------- ------ ------ ----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BASIC INCOME PER COMMON SHARE
Net income available to common
shareholders.................... $ 9.4 813.3 $ 0.1 $776.8 775.6 $1.00
Stock options and warrants........ -- 11.0 -- 10.1
Exchange of LYONs debt............ 2.4 6.5 4.3 12.6
------ ----- ------ -----
DILUTED INCOME PER COMMON SHARE
Net income available to common
shareholders plus assumed
conversions..................... $ 11.8 830.8 $ .01 $781.1 798.3 $ .98
====== ===== ====== =====
</TABLE>
The computation of diluted income per common share in the quarters ended
March 31, 1999 and 1998 and the six months ended March 31, 1999 and 1998
excludes the effect of the assumed exercise of approximately 0.9 million, 2.4
million, 3.8 million and 9.6 million stock options, respectively, that were
outstanding as of March 31, 1999 and 1998 because the effect would be
anti-dilutive.
6. CASH DIVIDENDS PER COMMON SHARE
Tyco paid a quarterly cash dividend of $0.025 per common share in each of
the first two quarters in fiscal 1999 and fiscal 1998. Prior to its merger with
Tyco, USSC paid a dividend of $0.04 per share in the quarters ended December 31,
1997 and March 31, 1998. Prior to its merger with Tyco, AMP paid a dividend of
$0.26 per share in the quarter ended December 31, 1997 and $0.27 per share in
the quarters ended March 31, 1998, December 31, 1998 and March 31, 1999.
7. MERGER, RESTRUCTURING AND OTHER NON-RECURRING CHARGES
During the six months ended March 31, 1999, the Company recorded merger,
restructuring and other non-recurring charges of $841.0 million, consisting of
$434.9 million related to the merger with USSC and $406.1 million related to
AMP's operations (Notes 1 and 2). Included in the $841.0 million are transaction
costs of $85.2 million for legal, printing, accounting, financial advisory
services, and other direct expenses related to the USSC and AMP mergers, in
addition to charges of approximately $742.7 million related to the
9
<PAGE> 11
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
combination of USSC's disposable medical products business with the related
business of Tyco and AMP's Profit Improvement Plan initiated in July 1998. The
$742.7 million consists of the following: the cost of announced workforce
reductions of $300.9 million involving the elimination of approximately 3,552
positions in the United States, 2,551 positions in Europe, 1,031 positions in
the Asia Pacific region and 1,027 positions in Canada and Latin America, which
consist primarily of manufacturing, technical, sales and administrative
personnel; the costs of combining certain facilities of $249.9 million involving
the shut down and consolidation of 47 facilities in the United States, 32
facilities in Europe, 12 facilities in the Asia Pacific region and 3 facilities
in Canada and Latin America, which include manufacturing plants, sales offices,
warehouses, administration buildings and distribution centers; lease termination
costs of $156.8 million and other costs of $35.1 million relating to the
consolidation of certain product lines and other non-recurring charges. At March
31, 1999, approximately 2,703 employees had been terminated and 12 facilities
had been shut down.
Approximately $410.8 million of accrued merger and restructuring costs
related to charges recorded during and prior to the six months ended March 31,
1999 are included in other current liabilities and $41.6 million are included in
other non-current liabilities at March 31, 1999. The Company currently
anticipates that the restructuring activities to which all of these charges
relate will be substantially completed within fiscal 1999, except for certain
long-term contractual obligations.
During the six months ended March 31, 1998, the Company recorded a net
merger, restructuring and other non-recurring credit of $9.4 million comprised
of a $21.4 million credit related to AMP's 1996 restructuring activities, which
was completed in fiscal 1998; and a $12.0 million charge related to employee
severance costs, facility disposals and asset write-downs as part of USSC's cost
cutting objectives, which was substantially completed during fiscal 1999.
8. CHARGE FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
During the six months ended March 31, 1999, the Company recorded charges of
$143.6 million for the impairment of long-lived assets consisting of $67.6
million related to the write-down of goodwill and property, plant and equipment,
primarily manufacturing and administrative facilities, associated with AMP's
operations, and $76.0 million primarily related to the combination of property,
plant and equipment, primarily administrative facilities, in USSC's operations
in the United States and Europe with that of Tyco's, and was determined
following a review of the carrying value of their assets.
9. COMPREHENSIVE (LOSS) INCOME
During the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No.130, "Reporting Comprehensive
Income." SFAS No.130 establishes standards for the reporting and display of
comprehensive income and its components in financial statements. The purpose of
10
<PAGE> 12
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
reporting comprehensive income is to report a measure of all changes in equity,
other than transactions with owners. Total comprehensive (loss) income and its
components are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net income.................................. $ 119.5 $ 400.5 $ 9.4 $ 776.8
Unrealized (losses) gains on securities,
net of taxes........................... (3.0) 5.6 (1.1) 2.0
Minimum pension liability................. -- -- (12.8) (8.8)
Foreign currency translation adjustments,
net of taxes........................... (196.1) (56.4) (168.0) (158.5)
------- ------- ------- -------
Total comprehensive (loss) income........... $ (79.6) $ 349.7 $(172.5) $ 611.5
======= ======= ======= =======
</TABLE>
Certain prior year amounts within shareholders' equity have been
reclassified as Accumulated Other Comprehensive Loss to comply with the
reporting requirements of SFAS No. 130.
10. CONSOLIDATED SEGMENT DATA
Selected information for the Company's four industry segments is as
follows:
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- ---------------------
1999 1998 1999 1998
-------- -------- --------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net Sales:
Healthcare and Specialty Products...... $1,395.1 $1,102.9 $ 2,737.9 $2,081.9
Fire and Security Services............. 1,447.3 1,095.7 2,831.6 2,222.3
Flow Control Products.................. 613.1 548.8 1,265.6 1,098.9
Electrical and Electronic Components... 1,783.2 1,814.4 3,617.2 3,597.5
-------- -------- --------- --------
$5,238.7 $4,561.8 $10,452.3 $9,000.6
======== ======== ========= ========
Operating Income:
Healthcare and Specialty Products...... $ 322.5 $ 190.7 $ 85.4(1) $ 336.0(2)
Fire and Security Services............. 235.8 149.8 441.1 296.2
Flow Control Products.................. 91.3 73.4 184.9 145.3
Electrical and Electronic Components... (207.3)(3) 246.0 (201.0)(4) 506.6(5)
Corporate and other expenses........... (19.1) (15.6) (38.1) (31.1)
-------- -------- --------- --------
$ 423.2 $ 644.3 $ 472.3 $1,253.0
======== ======== ========= ========
</TABLE>
- ---------------
(1) Includes merger, restructuring and other non-recurring charges of $434.9
million and charges for the impairment of long-lived assets of $76.0
million, primarily related to the merger with USSC.
(2) Includes restructuring charges of $12.0 million related to USSC's
operations.
(3) Includes merger, restructuring and other non-recurring charges of $237.3
million and charges for the impairment of long-lived assets of $67.6 million
related to AMP's operations.
(4) Includes merger, restructuring and other non-recurring charges of $406.1
million and charges for the impairment of long-lived assets of $67.6 million
related to AMP's operations.
(5) Includes a credit of $21.4 million to restructuring charges related to AMP's
1996 restructuring activities.
11
<PAGE> 13
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
11. INVENTORIES
Inventories are classified as follows:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1999 1998
--------- -------------
(IN MILLIONS)
<S> <C> <C>
Purchased materials and manufactured parts.................. $ 724.0 $ 681.4
Work in process............................................. 757.7 729.8
Finished goods.............................................. 1,383.2 1,198.8
-------- --------
$2,864.9 $2,610.0
======== ========
</TABLE>
12. TYCO INTERNATIONAL GROUP S.A.
Tyco International Group S.A. ("TIG"), a Luxembourg subsidiary of Tyco,
indirectly owns a substantial portion of the operating subsidiaries of Tyco.
During fiscal 1998 and 1999, TIG issued public debt securities (Note 4), which
are fully and unconditionally guaranteed by 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.
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1999 1998
--------- -------------
(IN MILLIONS)
<S> <C> <C>
Total current assets........................................ $ 7,635.2 $ 6,639.5
Total non-current assets.................................... 19,324.6 12,090.0
Total current liabilities................................... 5,780.8 5,519.5
Total non-current liabilities............................... 9,137.5 6,401.5
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
Net sales................................. $3,956.8 $3,169.3 $7,776.0 $6,159.3
Gross profit.............................. 1,568.8 1,168.1 3,035.0 2,247.8
Income (loss) before extraordinary
item(1)................................. 153.4 290.4 (31.0) 531.9
Net income (loss)(2)...................... 110.9 290.1 (75.9) 530.7
</TABLE>
- ---------------
(1) Loss before extraordinary item in the six months ended March 31, 1999
includes merger, restructuring and other non-recurring charges of $434.9
million and charges for the impairment of long-lived assets of $76.0 million
primarily related to the USSC merger. Income before extraordinary item in
the six months ended March 31, 1998 includes restructuring charges of $12.0
million related to USSC's operations.
(2) Extraordinary item relates primarily to the tender offer for the Company's
7.25% senior notes due 2008 and 12.0% senior subordinated notes due 2005 and
losses on the write-off of net unamortized deferred financing costs relating
to the early extinguishment of debt.
13. SUBSEQUENT EVENTS
On April 2, 1999, the shareholders approved an increase in the number of
authorized common shares from 1,503,750,000 to 2,500,000,000.
In May 1999, the Company announced the acquisition of Raychem Corp.
("Raychem") for approximately $2.87 billion, consisting of approximately $1.4
billion in cash and approximately 16.1 million Tyco common shares (valued at
approximately $1.4 billion). Raychem, a leading international designer,
manufacturer and distributor of high-performance electronics products for OEM
businesses, and for a broad range of specialized telecommunications, energy and
industrial applications, will be integrated within the Electrical and Electronic
Components group. The Company intends to account for the acquisition as a
purchase.
12
<PAGE> 1
EXHIBIT 99.5
TYCO INTERNATIONAL LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MARCH 31, 1999
<PAGE> 2
TYCO INTERNATIONAL LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On October 1, 1998 and April 2, 1999, Tyco consummated mergers with United
States Surgical Corporation ("USSC") and AMP Incorporated ("AMP"), respectively.
These transactions were accounted for under the pooling of interests method and,
accordingly, the consolidated financial statements reflect the combined
financial position, results of operations and cash flows of Tyco, USSC and AMP
for all periods presented. See Notes 1 and 2 to the unaudited Supplemental
Consolidated Financial Statements presented herein.
RESULTS OF OPERATIONS
Information for all periods presented below reflects the grouping of the
Company's businesses into four business segments consisting of Healthcare and
Specialty Products, Fire and Security Services, Flow Control Products, and
Electrical and Electronic Components.
Overview
Income before extraordinary item was $54.3 million, or $.07 per share on a
diluted basis, for the six months ended March 31, 1999 as compared to $778.0
million, or $.98 per diluted share, for the six months ended March 31, 1998.
During the six months ended March 31, 1999, the Company incurred an after-tax
charge of $810.2 million ($.98 per share) related to costs incurred by AMP to
consolidate facilities and reduce support staff associated with its Profit
Improvement Plan and costs incurred by USSC to exit certain businesses. During
the six months ended March 31, 1998, the Company incurred a net after-tax credit
of $5.2 million ($.01 per share) resulting from a reduction in restructuring
reserves related to AMP's 1996 restructuring plans, offset by restructuring
charges incurred in USSC's operations. Excluding these non-recurring charges,
income before extraordinary item rose 11.9% to $864.5 million, or $1.04 per
diluted share, for the six months ended March 31, 1999, as compared to $772.8
million, or $.97 per diluted share, for the six months ended March 31, 1998. The
increase was attributable to increased sales, margin improvements and results of
acquired companies in the Company's Healthcare and Specialty Products group,
Fire and Security Services group and Flow Control Products group.
After each acquisition, acquired companies are immediately integrated, and
Tyco does not separately track post-acquisition financial results. Accordingly,
the impact of certain acquired companies in the following analysis is based on
estimates and assumes that acquisitions were completed as of the beginning of
the periods discussed.
Quarter ended March 31, 1999 Compared to Quarter ended March 31, 1998
Sales increased 14.8% during the quarter ended March 31, 1999 to $5.24
billion from $4.56 billion in the quarter ended March 31, 1998.
Sales of the Healthcare and Specialty Products group increased $292.2
million to $1.40 billion, or 26.5%, principally due to increased sales at the
Tyco Healthcare Group, and to a lesser extent ADT Automotive and Tyco Plastics
and Adhesives. This increase in the Tyco Healthcare Group was primarily due to
the inclusion of Sherwood-Davis & Geck ("Sherwood"), acquired in February 1998
and Graphic Controls Corporation ("Graphic Controls"), acquired in October 1998.
Excluding the impact of Sherwood and Graphic Controls, sales for the segment
increased an estimated $88.8 million, or 6.7%.
Sales of the Fire and Security Services group increased $351.6 million to
$1.45 billion, or 32.1%, principally due to increased sales in the Company's
electronic security services business in the United States and European Fire
Protection operations, and to a lesser extent, in the North American fire
protection operations. These increases were primarily due to the higher volume
of recurring service revenues and the inclusion of the results of acquired
companies. Excluding the impact of CIPE S.A. ("CIPE") and Wells Fargo Alarm
("Wells Fargo"), which were acquired in the third quarter of fiscal 1998, and
Entergy Security
1
<PAGE> 3
Corporation ("Entergy") and Alarmguard Holdings, Inc. ("Alarmguard"), which were
acquired in the second quarter of fiscal 1999, sales increased an estimated
$211.7 million or 16.9%.
Sales of the Flow Control Products group increased $64.3 million to $613.1
million, or 11.7%, primarily reflecting increased demand for valve products in
North America and Europe and the inclusion of the U.S. operations of Crosby
Valve, Inc. ("Crosby Valve"), acquired in July 1998, and Rust Environmental and
Infrastructure, Inc. ("Rust"), acquired in September 1998. Excluding the impact
of Crosby Valve and Rust, sales increased an estimated $21.7 million, or 3.7%.
Sales of the Electrical and Electronic Components group decreased $31.2
million to $1.78 billion, or 1.7%, due to decreased sales at AMP partially
offset by increased sales at Tyco Submarine Systems Ltd. ("TSSL") and the
inclusion of Sigma Circuits, Inc. ("Sigma"), which was acquired in July 1998.
Excluding the impact of Sigma, sales decreased an estimated $54.8 million, or
3.0%.
Pre-tax income before extraordinary item was $308.2 million for the quarter
ended March 31, 1999, as compared to $593.2 million for the quarter ended March
31, 1998. Pre-tax income for the quarter ended March 31, 1999 included charges
of $237.3 million for merger, restructuring and other non-recurring items
related to AMP's Profit Improvement Plan and $67.6 million for the impairment of
long-lived assets related to AMP's operations. Excluding these non-recurring
charges, pre-tax income increased $19.9 million, or 3.4%, to $613.1 million.
Amortization expense for goodwill and other intangible assets was $74.7 million
for the quarter ended March 31, 1999 and $52.2 million for the quarter ended
March 31, 1998. The following analysis is presented exclusive of these merger,
restructuring and impairment charges.
Operating profits for the Healthcare and Specialty Products group increased
$131.8 million to $322.5 million, or 69.1%. Operating profits were 23.1% of
sales in the quarter ended March 31, 1999 as compared to 17.3% in the quarter
ended March 31, 1998. The increase was principally due to increased volume and
margins in the Tyco Healthcare Group, including the effect of the acquisitions
of Sherwood and Graphic Controls, and to a lesser extent, improved margins at
Tyco Plastics and Adhesives and ADT Automotive.
Operating profits for the Fire and Security Services group increased $86.0
million to $235.8 million, or 57.4%. Operating profits were 16.3% of sales in
the quarter ended March 31, 1999 as compared to 13.7% in the quarter ended March
31, 1998. The overall increase was primarily due to higher service volume in the
Company's worldwide security and fire protection businesses. The increase in
operating profits as a percentage of sales was due to improved margins in the
European security and fire protection operations.
Operating profits for the Flow Control Products group increased $17.9
million to $91.3 million, or 24.4%. Operating profits were 14.9% of sales in the
quarter ended March 31, 1999 as compared to 13.4% in the quarter ended March 31,
1998. The increase was due to higher volume and margins in the Company's
European flow control products operations and improved margins at Mueller and
Allied Tube & Conduit.
Operating profits for the Electrical and Electronic Components group
decreased $148.4 million to $97.6 million, or 60.3%. Operating profits were 5.5%
of sales in the quarter ended March 31, 1999 and 13.6% in the quarter ended
March 31, 1998. The decrease was principally due to decreased sales and lower
margins at AMP.
The effect of changes in foreign exchange rates during the quarter ended
March 31, 1999 as compared to the quarter ended March 31, 1998 was not material
to the Company's sales and operating profits.
Net interest expense increased $63.9 million to $115.0 million, due to
higher average debt balances, as a result of monies borrowed to pay for
acquisitions during fiscal 1999 and 1998.
The effective income tax rate was 29.8% during the quarter ended March 31,
1999 and 32.4% during the quarter ended March 31, 1998. The decrease was due to
higher earnings in domiciles with lower income tax rates.
2
<PAGE> 4
Six Months ended March 31, 1999 Compared to Six Months ended March 31, 1998
Sales increased 16.1% during the six months ended March 31, 1999 to $10.45
billion from $9.00 billion in the six months ended March 31, 1998.
Sales of the Healthcare and Specialty Products group increased $656.0
million to $2.74 billion, or 31.5%, principally due to increased sales of the
Tyco Healthcare Group, and to a lesser extent ADT Automotive and Tyco Plastics
and Adhesives. The increase in the Tyco Healthcare Group was primarily due to
the inclusion of Sherwood, acquired in February 1998, and Graphic Controls,
acquired in October 1998. Excluding the impact of Sherwood and Graphic Controls,
sales for the segment increased an estimated $142.0 million, or 5.4%.
Sales of the Fire and Security Services group increased $609.3 million to
$2.83 billion, or 27.4%, principally due to increased sales in the Company's
electronic security services business in the United States, the North American
fire protection operations and the European fire protection and security
operations. These increases were primarily due to the higher volume of recurring
service revenues and the inclusion of the results of acquired companies.
Excluding the impact of CIPE and Wells Fargo, which were acquired in the third
quarter of fiscal 1998, and Entergy and Alarmguard, which were acquired in the
second quarter of fiscal 1999, sales increased an estimated $348.8 million or
13.8%.
Sales of the Flow Control Products group increased $166.7 million to $1.27
billion, or 15.2%, primarily reflecting increased demand for valve products in
North America and Europe and the inclusion of the U.S. Operations of Crosby
Valve, acquired in July 1998, and Rust, acquired in September 1998. Excluding
the impact of Crosby Valve and Rust, sales increased an estimated $74.4 million,
or 6.3%.
Sales of the Electrical and Electronic Components group increased $19.7
million to $3.62 billion, or 0.5%, principally due to increased sales at TSSL
and the inclusion of Sigma, which was acquired in July 1998, partially offset by
decreased sales at AMP. Excluding the impact of Sigma, sales decreased $27.5
million, or 0.8%.
Pre-tax income before extraordinary item was $233.8 million for the six
months ended March 31, 1999, as compared to $1,162.1 million for the six months
ended March 31, 1998. Pre-tax income for the six months ended March 31, 1999
included charges of $841.0 million for merger, restructuring and other
non-recurring items and $143.6 million for the impairment of long-lived assets
related to AMP's Profit Improvement Plan and the merger with USSC. Pre-tax
income for the six months ended March 31, 1998 included a net credit to
restructuring of $9.4 million comprised of a $21.4 million credit for cost
savings on restructuring related to AMP, and a $12.0 million charge related to
USSC's operations. See Notes 7 and 8 to the unaudited Supplemental Consolidated
Financial Statements. Excluding these non-recurring charges, pre-tax income
increased $65.7 million, or 5.7%, to $1.22 billion. Amortization expense for
goodwill and other intangible assets was $141.0 million for the six months ended
March 31, 1999 and $93.4 million for the six months ended March 31, 1998. The
following analysis is presented exclusive of these merger, restructuring and
impairment charges.
Operating profits for the Healthcare and Specialty Products group increased
$248.3 million to $596.3 million, or 71.4%. Operating profits were 21.8% of
sales in the six months ended March 31, 1999 as compared to 16.7% in the six
months ended March 31, 1998. The increase was principally due to increased
volume and margins in the Tyco Healthcare Group, including the effect of the
acquisition of Sherwood and Graphic Controls, and improved margins at Tyco
Plastics and Adhesives.
Operating profits for the Fire and Security Services increased $144.9
million to $441.1 million, or 48.9%. Operating profits were 15.6% of sales in
the six months ended March 31, 1999 as compared to 13.3% in the six months ended
March 31, 1998. The overall increase was primarily due to higher service volume
in the Company's worldwide security and fire protection businesses. The increase
in operating profits as a percentage of sales was due to improved margins in the
European security and fire protection operations.
Operating profits for the Flow Control Products group increased $39.6
million to $184.9 million, or 27.3%. Operating profits were 14.6% of sales in
the six months ended March 31, 1999 as compared to 13.2% in the six
3
<PAGE> 5
months ended March 31, 1998. The increase was due to higher volume and margins
in the Company's European flow control products operations and improved margins
at Mueller and Allied Tube & Conduit.
Operating profits for the Electrical and Electronic Components group
decreased $212.5 million to $272.7 million, or 43.8%. Operating profits were
7.5% of sales in the six months ended March 31, 1999 and 13.5% in the six months
ended March 31, 1998. The decrease was principally due to decreased sales and
lower margins at AMP.
The effect of changes in foreign exchange rates during the six months ended
March 31, 1999 as compared to the six months ended March 31, 1998 was not
material to the Company's sales and operating profits.
Net interest expense increased $147.6 million to $238.5 million, due to
higher average debt balances, as a result of monies borrowed to pay for
acquisitions during fiscal 1999 and 1998.
The effective income tax rate was 29.0% during the six months ended March
31, 1999 and 33.0% during the six months ended March 31, 1998. The decrease was
due to higher earnings in domiciles with lower income tax rates.
LIQUIDITY AND CAPITAL RESOURCES
As presented in the unaudited Supplemental Consolidated Statement of Cash
Flows, cash provided by operating activities net of the effect of acquired
assets and liabilities was $784.3 million during the first six months of fiscal
1999. The working capital acquired as a result of acquisitions during the period
is reflected in the cost of acquisitions in the unaudited Supplemental
Consolidated Statement of Cash Flows. The significant operating changes in
working capital were a $209.5 million increase in inventory, a $101.1 million
increase in accounts receivable and contracts in process and a $88.5 increase in
prepaid expenses and other current assets. The impact of changes in foreign
exchange rates did not materially affect net working capital during the period.
During the first six months of fiscal 1999, the Company used cash of $1.71
billion to acquire companies in each of its four business segments, $646.2
million to purchase property, plant and equipment, $234.0 million to purchase
the USSC North Haven facilities discussed below and $150.6 million to pay
dividends to shareholders. The Company received proceeds of $263.5 million from
the exercise of common share options.
The source of the cash used for acquisitions was primarily an increase in
total debt and cash flows from operations. At March 31, 1999, the Company's
total debt was $8.73 billion, as compared to $6.24 billion at September 30,
1998. The increase resulted principally from the issuance of $800 million
private placement notes in October 1998, the issuance of $1.2 billion public
debt securities in January 1999 and borrowings under the Company's new
commercial paper program, offset by repayment of the bank credit agreement. This
net increase was partially offset by the tender offer for outstanding debt
instruments with higher interest rates, whereby $367 million principal amount of
notes outstanding were purchased. Shareholders' equity was $9.83 billion, or
$12.01 per share, at March 31, 1999, compared to $9.90 billion, or $12.22 per
share, at September 30, 1998. Goodwill and other intangible assets were $8.61
billion at March 31, 1999, compared to $7.11 billion at September 30, 1998.
Total debt as a percent of total capitalization (total debt and shareholders'
equity) was 47% at March 31, 1999 and 39% at September 30, 1998. Net debt (total
debt less cash and cash equivalents) as a percent of total capitalization was
39% at March 31, 1999 and 32% at September 30, 1998.
In October 1998, TIG issued $800 million of debt in a private placement
offering consisting of two series of restricted 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. At the same time, TIG also 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 therein.
Subsequently, in April 1999, TIG exchanged $394.5 million of the 5.875% private
placement notes due 2004 and $345.0 million of the 6.125% restricted notes due
2008 for public notes. The form and terms of the public notes of each series are
identical in all material respects to the
4
<PAGE> 6
form and terms of the outstanding private placement notes of the corresponding
series, except that the public notes are not subject to restrictions on transfer
under the United States securities laws.
In December 1998, the Company assumed the debt related to USSC's North
Haven facilities of approximately $211 million. The assumption of the debt
combined with the settlement of certain other obligations in the amount of $23
million resulted in the Company acquiring ownership of the North Haven property
for a total cost of $234 million.
In January 1999, TIG issued $400 million of its 6.125% notes due 2009 and
$800 million of its 6.875% notes due 2029 in a public offering. The notes are
fully and unconditionally guaranteed by Tyco. The net proceeds of approximately
$1.17 billion were used to repay borrowings under TIG's $2.25 billion bank
credit facility. At the same time, TIG also entered into an interest rate swap
agreement to hedge the fixed rate terms of the $400 million notes due 2009.
Under the agreement, which expires in January 2009, TIG will receive payments at
a fixed rate of 6.125% and will make floating rate payments based on an average
of three different LIBO rates, as defined, plus a spread.
In January 1999, TIG initiated a commercial paper program under which it
could initially issue notes with an aggregate face value of up to $1.75 billion.
In February 1999, the Company increased its borrowing capacity under the
commercial paper program to $3.25 billion in connection with the increase in
borrowing capacity under TIG's credit agreement discussed below. The notes are
fully and unconditionally guaranteed by Tyco. Proceeds from the sale of the
notes will be used for working capital and other corporate purposes. The Company
is required to maintain an available unused balance under its bank credit
agreement sufficient to support amounts outstanding under this commercial paper
program.
In February 1999, TIG renegotiated its $2.25 billion credit agreement with
a group of commercial banks, giving it the right to borrow up to $3.40 billion
until February 11, 2000, with the option to extend to February 11, 2001, and
borrow up to an additional $0.5 billion until February 12, 2003. TIG has the
option to increase the $3.40 billion part of the credit facility up to $4.0
billion. Interest payable on borrowings is variable based upon TIG's option to
select a Eurodollar rate plus margins ranging from 0.41% to 0.43%, a certificate
of deposit rate plus margins ranging from 0.535% to 0.555%, or a base rate, as
defined. If the outstanding principal amount of loans equals or exceeds 25% of
the commitments, the Eurodollar and certificate of deposit margins are increased
by 0.125%. The obligations of TIG under the credit agreement are guaranteed by
Tyco. TIG is using $3.25 billion of the $3.40 billion credit facility to fully
support its commercial paper program discussed above and therefore expects this
part to remain largely undrawn.
In February 1999, the Company completed a tender offer for its 7.25% senior
notes due 2008, issued by USSC, in which $292 million of the $300 million
principal amount of the notes outstanding were purchased. The Company also
completed a tender offer for its 12.0% senior subordinated notes due 2005,
issued by Graphic Controls, in which all $75 million principal amount of the
notes outstanding were purchased.
The Company believes that its cash flow from operations, together with its
existing credit facilities and other credit arrangements, is adequate to fund
its operations.
BACKLOG
The backlog of unfilled orders was approximately $4.9 billion at March 31,
1999 as compared to $5.2 billion at September 30, 1998. The net decrease
resulted principally from a decrease in backlog in the Company's submarine
systems business, due to the timing of contracts, partially offset by an
increase in backlog at Earth Tech and at the Company's worldwide security and
North American fire protection businesses.
YEAR 2000 COMPLIANCE
Year 2000 compliance programs and system 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
5
<PAGE> 7
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 and the Company is continuing its implementation
strategy. 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.
CONVERSION TO THE EURO
On January 1, 1999, 11 European countries began using the "euro" as their
single currency, while still continuing to use their own notes and coins for
cash transactions. Banknotes and coins denominated in euros are expected to be
put in circulation and local notes and coins will cease to be legal tender
during 2002. Tyco conducts a significant amount of business in these countries.
Introduction of the euro has not resulted in any material adverse impact on the
Company, although the Company continues to monitor the effects of the
conversion.
FORWARD LOOKING INFORMATION
Comments in this report contain certain forward-looking statements, which
are based on management's good faith expectations and belief concerning future
developments. Actual results may materially differ from these expectations as a
result of many risk factors, relevant examples of which are set forth in the
"Management's Discussion and Analysis" section of the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1998, the Company's Current
Report on Form 8-K filed on December 10, 1998 and the Company's Current Report
on Form 8-K filed herewith.
6
