Tyco International, Inc.
Filed 12/21/00
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
001-13836
(COMMISSION FILE NUMBER)
TYCO INTERNATIONAL LTD.
(Exact name of registrant as specified in its charter)
BERMUDA NOT APPLICABLE
(Jurisdiction of Incorporation) (IRS Employer Identification No.)
THE ZURICH CENTRE, SECOND FLOOR, 90 PITTS BAY ROAD, PEMBROKE, HM 08, BERMUDA
(Address of registrant's principal executive office)
441-292-8674*
(Registrant's telephone number)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON SHARES, PAR VALUE $0.20 NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III or this Form 10-K or any amendment to this
Form 10-K. /X/.
The aggregate market value of voting common shares held by nonaffiliates of
registrant was $98,909,627,685 as of December 6, 2000.
The number of common shares outstanding as of December 6, 2000 was
1,748,649,762.
DOCUMENTS INCORPORATED BY REFERENCE
See pages 22 to 24 for the exhibit index.
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* The executive offices of Registrant's principal United States subsidiaries
are located at One Tyco Park, Exeter, New Hampshire 03833. The telephone
number there is (603) 778-9700.
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Tyco International Inc. (TYC) NYSE
Indexed 10-K for the fiscal year ended September 30, 2000
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PART I
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PART II
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PART III
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PART IV
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Tyco International Ltd. ("We" or "Tyco") is a diversified manufacturing and
service company that, through its subsidiaries:
- designs, manufactures and distributes electrical and electronic components
and multi-layer printed circuit boards;
- designs, engineers, manufactures, installs, operates and maintains
undersea cable communications systems;
- designs, manufactures and distributes disposable medical supplies and
other specialty products;
- designs, manufactures, installs and services fire detection and
suppression systems and installs, monitors and maintains electronic
security systems; and
- designs, manufactures and distributes flow control products and provides
environmental consulting services.
See Notes 19 and 20 to the Consolidated Financial Statements for certain
segment and geographic financial data relating to our business.
Tyco's strategy is to be the low-cost, high quality producer and provider in
each of our markets. We promote our leadership position by investing in existing
businesses, developing new markets and acquiring complementary businesses and
products. Combining the strengths of our existing operations and our business
acquisitions, we seek to enhance shareholder value through increased earnings
per share and strong cash flows.
I. ELECTRONICS
Tyco is the world's leading supplier of passive electronic components. Our
products and services include:
- designing engineering and manufacturing of electronic connector systems,
fiber optic components, wireless devices, heat shrink products, power
components, wire and cable, relays, sensors, touch screens, identification
and labeling products, switches and battery assemblies; and
- designing and manufacturing of multi-layer printed circuit boards,
backplane assemblies, electronic modules and similar components.
Tyco Electronics has combined the historical leadership of AMP Incorporated
("AMP") in the interconnect industry with other companies such as Raychem
Corporation ("Raychem"), Siemens Electromechanical Components GmbH & Co. KG
("Siemens EC") and the Electronic OEM Business of Thomas & Betts ("T&B"). Tyco
Electronics designs, manufactures and markets a broad range of electronic,
electrical and electro-optic passive and active devices and an expanding number
of interconnection systems and connector-intensive assemblies, as well as
wireless products including semi-conductors, radar sensors, global positioning
satellite systems, silicon and gallium arsenide semiconductors, broadband Local
Multipoint Distribution Systems ("LMDS") and microwave sub-systems. Tyco
Electronics' products have potential uses wherever an electronic, electrical,
computer or telecommunications system is involved, and are becoming increasingly
critical to the performance of these systems as voice, data and video
communications converge. Tyco Electronics manufactures and sells more than
200,000 parts in over 450 global product lines, including terminals, fiber
optic, printed circuit board and cable connectors and assemblies, cable and
cabling systems, and related application tools and application tooling
equipment.
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Tyco Electronics' customers include original equipment manufacturers
("OEMs") and their subcontractors, utilities, government agencies, distributors,
value-added resellers, and customers who install, maintain and repair equipment.
These customers are found in the automotive, power technology, personal
computer, communications, networking, industrial and consumer industries. Tyco
Electronics serves over 200,000 customers located in over 55 countries, covering
many diverse markets.
Tyco Electronics is a global marketing, sales, engineering and manufacturing
company which produces interconnection systems, passive and active electronic
components, and has a strong local presence in the geographical areas in which
it operates, such as the Americas, the Asia-Pacific region, Europe and the
Middle East.
The markets that Tyco Electronics operates in are highly competitive. Tyco
Electronics faces competition across its product lines from other companies
ranging in size from large, diversified manufacturers to small, highly
specialized manufacturers.
The acquisition of Raychem in the last quarter of fiscal 1999 significantly
expanded our product line and complemented existing products and services.
Raychem develops, manufactures and markets a variety of high-performance
products for electronic OEMs, subcontractors and distributors with
telecommunications, computer, consumer, automotive, energy and industrial
markets. Raychem designs, manufactures and distributes products such as circuit
protection devices, heat-shrinkable tubing and molded parts, wire and cable, and
computer touchscreens. In addition, Raychem designs and manufactures fiber optic
and copper cable accessories, energy cable accessories and heat-tracing products
and provides design, engineering and installation services. Siemens EC, acquired
in November 1999, is the world market leader for the manufacture and sale of
relays and is one of the world's leading providers of electro-mechanical
components to the communications, automotive, consumer and general industry
sectors. The Electronic OEM business of T&B, acquired in July 2000, designs and
manufactures electronic connectors for the telecommunications, computer and
automotive industries. T&B's product categories are comprised of: high-density
material interconnect systems used in thermal management, backplane systems and
laptop computers; PCB mounted electromechanical components, including switches,
sockets and I/O connectors; and a variety of connectors for safety systems, I/O
devices, wire harnesses and power distribution centers used in the automotive
industry. T&B's products also include the most advanced high density/high
frequency related metalized particle interconnect technology. These products are
used in telecom equipment and other components such as high density chip carrier
sockets and other high frequency related systems.
In November 2000, we agreed to acquire the Lucent Power Systems ("LPS")
business unit of Lucent Technologies, Inc. LPS provides a full line of energy
solutions and power products for telecommunications service providers and for
the computer industry. LPS products include AC/DC and DC/DC switching power
supplies, batteries, power supplies and back-up power systems.
Also included in Tyco Electronics is Tyco Printed Circuit Group ("TPCG"),
one of the largest independent manufacturers of complex multi-layer printed
circuit boards and backplane assemblies in the United States. TPCG manufactures
multi-layer boards, including highly sophisticated, precision tooled, custom
laminated boards with layer counts up to 68. TPCG also produces sophisticated
flexible-rigid circuit boards for use in commercial, aerospace and military
applications. TPCG's backplane facilities produce soldered, press-fit and
surface mount backplane assemblies. In addition, these facilities provide
turnkey manufacturing services including full "box build" products. Printed
circuit boards and backplane products are manufactured on a job order basis to
the customers' design specifications. The majority of sales are derived from
high-density multi-layer boards.
TPCG markets its products primarily through a direct sales force and, to a
lesser extent, through a network of independent manufacturers' representatives.
Customers are OEMs and contract manufacturers in the communications, computer,
aircraft, military and other industrial and consumer electronics industries. We
compete with several other large independent and captive companies that
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manufacture printed circuit board products primarily in the United States.
Competition is on the basis of quality, reliability, price and timeliness of
delivery.
II. TELECOMMUNICATIONS
Tyco's 86% owned subsidiary, TyCom Ltd. ("TyCom"), is a leading independent
provider of transoceanic fiber optic networks and services. TyCom's products and
services include:
- design, engineering, manufacture and installation of undersea cable
communications systems;
- service and maintenance of major undersea cable networks; and
- design, manufacture and installation of a global undersea fiber optic
network, known as the TyCom Global Network-TM- ("TGN"). TyCom plans to
operate, maintain and sell bandwidth capacity on the TGN.
TyCom, a Bermuda Company, was incorporated on March 8, 2000 as a
wholly-owned subsidiary of Tyco to serve as the holding company for its undersea
fiber optic cable communications business. TyCom is the world's only
fully-integrated source for the design, engineering, manufacturing, installation
and servicing of undersea cable communications systems. TyCom designs and builds
both repeatered and non-repeatered fiber optic cable systems. Repeaters are
specialized undersea equipment designed to house and protect optical amplifiers
that amplify voice, video and data signals as they travel across fiber optic
cable. Used typically in systems spanning between 300 and 12,000 kilometers,
repeaters provide the ability to amplify optical signals without first
converting these signals to their electrical equivalents. Non-repeatered
systems, which allow for even greater circuit capacity and reduced transmission
costs, support short haul systems of several hundred kilometers. TyCom has
designed, manufactured and installed over 300,000 kilometers of undersea optical
cable. TyCom Integrated Cable Systems, Inc. is the primary supplier of cable and
cable assemblies to TyCom. It also manufactures underwater electrical power
cables and electro-mechanical cables for unique field operations. Temasa,
acquired during the prior fiscal year, provides a portion of the cable
installation and maintenance operations of TyCom, and is based in Spain.
TyCom is designing, building and installing its own global undersea fiber
optic network, known as the TyCom Global Network ("TGN") and plans to operate,
maintain and sell bandwidth capacity on the TGN. In July 2000, TyCom sold
approximately 14 percent of its common shares in an initial public offering. Net
proceeds from the offfering were approximately $2.1 billion, which will be used
primarily toward the deployment of the TGN. TyCom's principal operating
subsidiaries include TyCom (US) Inc. (formerly Tyco Submarine Systems Ltd.),
TyCom Integrated Cable Systems Inc. (formerly Simplex Technologies) and
Telecomunicaciones Marinas, S.A. ("Temasa").
TyCom Laboratories, the research and development group of TyCom, includes a
world class research and development facility populated by acclaimed engineers
and state of the art equipment to facilitate forward looking design work. TyCom
Laboratories' intellectual property portfolio includes many key enabling
technologies involving terminal transmission and power equipment, optical signal
amplifiers, cable and fiber, network management systems and software,
installation and repair technologies and network integration. TyCom operates one
of the world's largest fleet of ships deployed worldwide to design, maintain,
install and service undersea fiber optic transmission systems. TyCom also uses a
variety of other undersea tools, including robotic vehicles for undersea cable
burial and retrieval operations.
TyCom's sales and marketing personnel consist of professionals with
extensive telecommunication, technical or service backgrounds, and are located
in offices in Bermuda, France, Singapore, the United Kingdom and the United
States.
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As a supplier of undersea fiber optic cable systems, TyCom competes on a
worldwide basis primarily against two other providers: Alcatel-Alsthom and KDD
Submarine Cable Systems Inc. ("KDD"). Other smaller players compete on a more
limited basis, either as subcontractors to other providers or as suppliers of
regional or non-repeatered systems. Alcatel, like TyCom, is vertically
integrated and produces its own cable, whereas KDD utilizes a Japanese cable
manufacturer. Participants in this market compete on the basis of, among other
things, price, technology, time-to-market, the provision of financing and
regional and long-term relationships. In the future, we will be offering less of
our cable system design, manufacturing and installation capacity to our
customers, and our existing competitors and potential new cable system suppliers
will play a more significant role in the undersea cable system market.
As a provider of undersea cable maintenance, TyCom competes primarily with
Global Marine Systems Ltd., a subsidiary of Global Crossing Ltd. as well as
Alcatel and KDD.
There are a number of companies that are pursuing the deployment of global
fiber optic networks, including Global Crossing, FLAG Telecom, Teleglobe,
360networks and 1Cybernetworks. There are other companies that are or will be
selling bandwidth capacity on various shorter distance undersea cable networks.
As TyCom deploys the TGN, it will face competition in the sale of bandwidth
capacity from existing and planned fiber optic cable networks, as well as
satellite providers and, on certain routes, terrestrial networks. In addition,
the first phase of the TGN will compete with certain of TyCom's customers,
including Global Crossing, 360networks, and various participants in cable system
consortia. The planned expansion of the TGN beyond the first phase will likely
also result in competition with these customers as well as some of TyCom's other
customers. Bandwidth customers, such as large telecommunications service
providers, often have ownership interest in networks that may cause them to
favor purchasing capacity on their own networks rather than on the TGN.
III. HEALTHCARE AND SPECIALTY PRODUCTS
Tyco has a strong leadership position in the medical products and plastics
industries. Our products include:
- a wide variety of disposable medical products, including wound care
products, syringes and needles, sutures and surgical staplers,
incontinence products, electrosurgical instruments and laparoscopic
instruments;
- flexible plastic packaging, plastic bags and sheeting, coated and
laminated packaging materials, tapes and adhesives, and plastic garment
hangers; and
- ADT Automotive's auto redistribution services (which was sold on
October 6, 2000).
The principal divisions in the Healthcare and Specialty Products segment are
Tyco Healthcare Group, Tyco Plastics and Adhesives and ADT Automotive.
TYCO HEALTHCARE GROUP
The Tyco Healthcare Group consists of four primary business units including
Kendall Healthcare, Tyco Healthcare International, U.S. Surgical Corporation and
ValleyLab.
Kendall Healthcare, which is comprised of Kendall, Sherwood-Davis & Geck,
Kendall-LTP, Graphic Controls and Confab, manufactures and markets worldwide a
broad range of needles, syringes, electrodes and wound care, specialized paper
and film, vascular therapy, urological care, incontinence care and other nursing
care products to hospitals and to alternate site healthcare customers. Its
Confab unit sells store brand baby diapers and incontinence and feminine hygiene
products through retail outlets in the United States and Canada.
Kendall Healthcare distributes its products in the United States through its
own sales force and through a network of more than 250 independent distributors.
The sales force is divided into five
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groups: vascular therapy products, medical and surgical products, alternate site
markets, Kendall-LTP and Confab.
Tyco Healthcare's competitors include Johnson & Johnson, Becton Dickinson,
Bard and Smith and Nephew, among others.
Kendall Healthcare, which operates throughout the United States, is the
industry leader in gauze products with its Kerlix-Registered Trademark- and
Curity-Registered Trademark- brand dressings. Kendall Healthcare's other core
product category consists of its vascular therapy products, principally
anti-embolism stockings, marketed under the T.E.D.-Registered Trademark- brand
name, sequential pneumatic compression devices sold under the
SCD-Registered Trademark- brand name and a venous plexus foot pump. Kendall
Healthcare pioneered the pneumatic compression form of treatment and continues
to be the leading participant in the pneumatic compression and elastic stocking
segments of the vascular therapy market.
Kendall Healthcare is also an industry leader in the adult incontinence
market serving the acute care, long-term care and retail markets. It offers a
complete line of disposable adult briefs, underpads, baby diapers and other
related products.
Kendall-LTP, which includes Graphic Controls, manufactures and sells a
variety of disposable medical products, specialized paper and film products.
These include medical electrodes and gels for monitoring and diagnostic tests
and hydrogel wound care products, which are used primarily in critical care,
physical therapy and rehabilitative departments in hospitals. Graphic Controls
also sells operating room kits, sharps containers and other operating room
related products.
Tyco Healthcare International is responsible for the manufacturing,
marketing, distribution and export of the Tyco Healthcare Group products outside
of the United States. Tyco Healthcare International markets directly to
hospitals and medical professionals, as well as through independent
distributors. With a presence in more than 75 countries, its operations are
organized primarily into three geographic regions, Europe, Latin America and the
Asia-Pacific region, although the mix of product lines offered varies from
country to country.
U.S. Surgical, a leader in innovative wound closure products and
laparoscopic instrumentation, develops, manufactures and markets its products to
hospitals throughout the world. Its products include surgical staplers, sutures,
disposable laparoscopic instrumentation, in addition to numerous other products
used in surgical and medical specialties including spine surgery, cardiovascular
surgery, cancer biopsies and orthopedic surgery.
ValleyLab is a leading manufacturer and marketer of electrosurgical and
ultrasonic surgical products used in open and minimally invasive surgical
procedures. Additional product lines relate to radio frequency energy and vessel
sealing technology.
In October 2000, we acquired Mallinckrodt Inc. ("Mallinckrodt"), a global
company whose products are used primarily for respiratory care, diagnostic
imaging and pain relief. Mallinckrodt is the leader in the global respiratory
care markets, alternate care markets, diagnostic imaging, and bulk
pharmaceuticals. Mallinckrodt's products are sold to hospitals and alternate
care sites, clinical laboratories, pharmaceutical manufacturers and other
customers on a worldwide basis.
TYCO PLASTICS AND ADHESIVES
Tyco Plastics & Adhesives consists of Tyco Plastics, A&E Products, Tyco
Adhesives and Ludlow Coated Products.
TYCO PLASTICS
Tyco Plastics manufactures polyethylene based films, packaging products,
bags and sheeting in a wide range of size, gauge, strength, stretch capacity,
clarity and color. Tyco Plastics extrudes low density, high density and linear
low density resin purchased in pellet form, incorporating such additives
5
as color, slip and anti-block. Manufacturing facilities are located in all
regions of the US to insure proper customer service and competitive
transportation costs.
Tyco Plastics Products include: Ruffies-Registered Trademark-, a national
brand consumer trash bag sold to mass merchants, grocery chains and other retail
outlets and Film-Gard-Registered Trademark-, a leading plastic sheeting product
sold to consumers and professional contractors through do-it-yourself outlets,
home improvement centers and hardware stores. A wide range of Film-Gard products
are sold for various uses, including painting, renovation, construction,
landscaping and agriculture.
Tyco Plastics sells it product directly to the retailer for resale, to
distributors for resale or directly to end-users. Tyco Plastics competes with
other nationally recognized brands and also many smaller regional producers on
the basis of price, delivery, breadth of product line and specialized product
capabilities.
LUDLOW COATED PRODUCTS
Ludlow Coated Products produces protective packaging and other materials
made of coated or laminated combinations of paper, polyethylene and foil. Coated
packaging materials provide barriers against grease, oil, light, heat, moisture,
oxygen and other contaminants. The division produces structural coated and
laminated products such as plastic coated kraft, linerboard and bleached boards
for rigid urethane insulation panels, automotive components and wallboard
panels. Other product applications include packaging for photographic film,
frozen foods, health care products, electrical and metallic components,
agricultural chemicals, cement and specialty resins. Ludlow is also the dominant
supplier of thin wall insulative sheathing and a major producer and supplier of
breathable housewrap for the building industry.
Ludlow markets its laminated and coated products through its own sales force
and through independent manufacturers' representatives. Ludlow competes with
many large manufacturers of laminated and coated products on the basis of price,
service, marketing coverage and custom application engineering. It has various
specialized competitors in different markets.
TYCO ADHESIVES
The Tyco Adhesives division manufactures and markets specialty adhesive
products and tapes for industrial applications, including external corrosion
protection products for oil, gas and water pipelines. Other industrial
applications include tapes and adhesive films and laminations used in the
automotive industry for wire harness wraps, sealing and other purposes, in the
aerospace industry, in the heating, ventilation and air conditioning (HVAC)
industry and in the medical industry. Tyco Adhesives also produces duct, foil,
strapping, packaging and electrical tapes and spray adhesives for industrial and
consumer markets worldwide and manufacturers cloth and medical tapes for Tyco
Healthcare and others. Tyco Adhesives' Betham division develops and markets
custom pressure sensitive adhesives and coatings, principally for the
automotive, medical and specialty markets.
Tyco Adhesives generally markets its corrosion protection products directly
to its customer base, working with international engineering and construction
companies and the owners and operators of pipeline transportation facilities.
Tyco Adhesives sells its other industrial products either directly to major end
users or through diverse distribution channels, depending upon the industry
being supplied. Products are sold under the Polyken-Registered Trademark-,
Nashua Tape-Registered Trademark-, Raychem-Registered Trademark-,
Betham-Registered Trademark- and National-TM- brand names.
A&E PRODUCTS
A&E Products Group L.P. manufactures and sells garment hangers throughout
the world and associated apparel products and packing materials to garment
manufacturers and merchants in the Americas. The majority of A&E Products'
clientele are garment manufacturers, national, regional and local retailers, as
well as merchants.
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Garment manufacturers place their apparel on A&E hangers before shipping to
retail outlets. Retailers purchase customized hanger designs created and
manufactured for them exclusively by A&E Products as well as a standard line of
hangers to save time and money. A&E Products also produces a line of plastic
hangers available for sale to the private customer.
In addition to the manufacturing and selling of new hangers, A&E Products
also operates hanger-recycling facilities in the United States and Europe. Used
hangers are bought from various retailers; they are then sorted, processed and
repackaged for sale back to the general marketplace.
ADT AUTOMOTIVE
In October 2000, we sold our ADT Automotive business, which performed auto
redistribution services.
IV. FIRE AND SECURITY SERVICES
Tyco is the world's leading provider of fire protection and electronic
security services. Our products and services include:
- designing, installing and servicing of a broad line of fire detection,
prevention and suppression systems;
- providing electronic security installation and monitoring services; and
- manufacturing and servicing of fire extinguishers and related products.
FIRE PROTECTION CONTRACTING AND SERVICES
Operating under several trade names including Grinnell, Wormald, Mather &
Platt, Total Walther, O'Donnell Griffin, Dong Bang, Ansul and Tyco, we design,
fabricate, install and service automatic fire sprinkler systems, fire alarm and
detection systems, and special hazard suppression systems in buildings and other
installations. Tyco's fire protection contracting and service business utilizes
a worldwide network of sales offices.
We install fire protection systems in both new and existing structures.
Typically, the contracting businesses bid on contracts for fire protection
installation which are let by owners, architects, construction engineers and
mechanical or general contractors. In recent years, the business of retrofitting
existing buildings has grown as a result of legislation mandating the
installation of fire protection systems and also as a result of lower insurance
premiums available to structures with automatic sprinkler systems. We continue
to focus on system maintenance and inspection, which has become a more
significant part of the business.
The majority of the fire suppression systems installed by Tyco are
water-based. However, we are also the world's leading provider of custom
designed hazard fire protection systems which incorporate various specialized
non-water agents such as foams, dry chemicals and gases. Systems using agents
other than water are especially suited to fire protection in certain
manufacturing, power generation, petrochemical, offshore oil exploration,
transportation, telecommunications, mining and marine applications. We hold
exclusive manufacturing and distribution rights in several regions of the world
for INERGEN-Registered Trademark- fire suppression products. INERGEN is an
alternative to the ozone depleting agent known as halon and consists of a
mixture of three inert gases designed to effectively extinguish fires without
polluting the environment, damaging costly equipment or harming people.
In Australia, New Zealand and Asia, Tyco also engages in the installation of
electrical wire and related electrical equipment in new and existing structures
and provides specialized electrical contracting services, including applications
for railroad and bridge construction, primarily through its O'Donnell Griffin
division.
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Substantially all of the mechanical components (and, in North America, a
high proportion of the pipe) used in the fire protection systems installed by us
are manufactured by us. We also have fabrication plants worldwide that cut,
thread and weld pipe, which is then shipped with other prefabricated components
to job sites for installation. We have developed our own computer-aided-design
technology that reduces the time required to design systems for specific
applications and coordinates the fabrication and delivery of system components.
Generally, competition in the fire protection business varies by geographic
location. In North America, Tyco competes with hundreds of smaller contractors
on a regional or local basis for the installation of fire suppression and fire
alarm and detection systems. Many of the regional and local competitors employ
non-union labor. In Europe, Tyco competes with many regional or local
contractors on a country by country basis. In Australia, New Zealand and Asia,
we compete with a few large fire protection contractors as well as with many
smaller regional or local companies. Tyco competes for fire protection contracts
primarily on the basis of price, service and quality.
ELECTRONIC SECURITY SERVICES
We provide electronic security services principally under the ADT trade name
and also under other trade names including Alarmguard, Thorn Security, Total
Walther, Holmes Protection, CIPE, CAPS, Zettler, Sonitrol, TEPG and Armourguard.
We provide electronic security services primarily in North America, Europe, the
Middle East, the Asia-Pacific region and Latin America.
Electronically monitored security systems involve the installation and use
on a customer's premises of devices designed to detect or react to various
occurrences or conditions, such as intrusion, movement, fire, smoke, flooding,
environmental conditions (including temperature or humidity variations),
industrial operations (such as water, gas or steam pressure and process flow
controls) or other hazards. These detection devices are connected to a
microprocessor-based control panel which communicates through telephone lines to
a monitoring center, often located at remote distances from the customer's
premises, where alarm and supervisory signals are received and recorded. In most
systems, control panels can identify the nature of the alarm and the areas
within a building where the sensor was activated. Depending upon the type of
service for which the subscriber has contracted, monitoring center personnel
respond to alarms by relaying appropriate information to the local fire or
police departments, notifying the customer or taking other appropriate action,
such as dispatching employees to the customer's premises. In some instances, the
customer may monitor the system at its own premises or the system may be
connected to local fire or police departments.
We provide electronic security services to both commercial and residential
customers. Our commercial customers include financial institutions, industrial
and commercial businesses, facilities of federal, state and local government
departments, defense installations, and health care and educational facilities.
We provide residential electronic security services primarily in North America
and Europe, with a growing presence in the Asia-Pacific region. Our customers
are often prompted to purchase security systems by their insurance carriers,
which may offer lower insurance premium rates if a security system is installed
or require that a system be installed as a condition to coverage.
We also offer event monitoring and inspection services. We are the global
leader for the supply of event monitoring in the security industry. In addition
to the traditional monitoring of a burglar alarm system, Tyco monitors fire
alarms, heating services, medical alert systems, and activity where around the
clock monitoring and response is required. We also offer regular inspection and
maintenance services so that systems will function appropriately and are
upgraded as technology or risk profiles change.
Our electronic security systems and products are tailored to our customers'
specific needs and include electronic monitoring services that provide intrusion
and fire detection, as well as card or keypad activated access control systems
and closed circuit television ("CCTV") systems. Systems may be monitored by the
customer at its premises or connected to one of our monitoring centers. In
either case, we usually provide support and maintenance through service
contracts. It has been our experience
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that commercial and residential contracts are generally renewed after their
initial terms. Contract discontinuances occur principally as a result of
customer relocation or closure. Systems installed at commercial customers'
premises may be owned by us or by our customer. We usually retain ownership of
standard residential systems, but more sophisticated residential systems are
usually purchased by our customers.
We market our electronic security services to commercial and residential
customers through a direct sales force and an authorized dealer network.
Commercial customers are serviced by a separate national accounts sales force.
We also utilize advertising, telemarketing and direct mail to market our
services.
The electronic security services business in North America is highly
competitive, with a number of major firms and approximately 12,000 smaller
regional and local companies. Tyco also competes with several national companies
and several thousand regional and local companies in Europe, the Middle East,
the Asia-Pacific region and Latin America. Competition is based primarily on
price in relation to quality of service. We believe that the quality of our
electronic security services is higher than that of many of our competitors and,
therefore, our prices may be higher than those charged by our competitors.
In December 2000, we agreed to acquire Simplex Time Recorder Co.
("Simplex"). Simplex manufactures fire and security products and communications
systems including control panels, detection devices and system software. Simplex
also installs, monitors and services fire alarms, security systems and access
control systems.
MANUFACTURING
Our Ansul subsidiary manufactures and sells various lines of dry chemical,
liquid and gaseous portable fire extinguishers and related agents for
industrial, government, commercial and consumer applications. Ansul also
manufactures and sells special hazard fire suppression systems designed for use
in restaurants, marine applications, mining applications, the petrochemical
industry, confined industrial spaces and commercial spaces housing electronic
and other delicate equipment. Ansul also manufactures spill control products
designed to absorb, neutralize and solidify spills of various hazardous
materials.
Our Fire and Security Services segment manufactures certain alarm, detection
and activation devices and central monitoring station equipment which is both
installed by our own units and sold to other installers of alarm and detection
devices. Otherwise, we do not manufacture the electronic security system
components which we install, although we do provide our own specifications to
manufacturers for certain security system components and undertake some final
assembly work in respect of more sophisticated systems. These products are
manufactured primarily outside of the United States.
V. FLOW CONTROL PRODUCTS AND SERVICES
Tyco is the world's leading manufacturer of industrial valves and controls.
Our products and services include:
- a full line of valves and related products for industrial and process
control including butterfly, gate, globe, check, ball, plug, safety
relief, knife-gate, instrumentation, sampling, and other valves as well as
actuators, positioners, couplings and related products, which are used to
transport, control and sample liquids, gases, powders and other
substances;
- pipe and tubular products, made primarily from steel, ductile iron and
plastic and utilized in the mechanical tubing, construction, automotive,
water distribution, fencing products and other markets;
9
- electrical raceway products, including steel conduit, pre-wired armored
cable, flexible conduit, steel support systems and fasteners, cable tray
and cable ladder;
- a broad range of consulting, engineering, construction management and
operating services for the water, wastewater, environmental,
transportation and infrastructure markets; and
- fire sprinkler devices, specialty valves, steel pipe, plastic pipe and
fittings and pipe couplings used in commercial, residential and industrial
fire protection systems.
MANUFACTURING AND SERVICES
VALVES AND CONTROLS
Tyco Flow Control manufactures a wide variety of standard and highly
specialized valves and related products on a worldwide basis in a variety of
configurations, body types, materials, pressure ratings and sizes. The group
also manufactures related equipment and products such as valve actuators,
gauges, positioners, valve control systems, vapor control products, heat tracing
and leak detection systems and other related products. These products are
manufactured in Tyco's facilities located throughout North America, Europe,
South America and the Asia-Pacific region. The group's valves and related
products are used in power generation, chemical, petrochemical, oil and gas,
water distribution, wastewater, pulp and paper, commercial irrigation, mining,
industrial process, food and beverage, plumbing, HVAC and other applications.
Tyco Flow Control also provides engineering, design, inspection, repair and
commissioning services.
Tyco's valves and related products are sold under several trade names,
including Keystone, Grinnell, Hindle, KTM, Flow Control Technologies, Gachot,
Richards, Sapag, Winn, Vanessa, Raimondi, Fasani, Sempell, Descote, Klein,
Biffi, Morin Actuators, Westlock Controls, Crosby, Anderson Greenwood, Yarway,
Valvtron, Neotecha, Belucci, Intecva, Bayard, Belgicast, Whessoe Varec and many
others. Tyco Flow Control sells heat tracing products and services under the
Raychem HTS, Tracer Industries, Accutron and Isopad names.
PIPE AND TUBULAR PRODUCTS
Tyco Flow Control manufactures steel pipe and tubular products at a number
of locations in North America, the United Kingdom, Brazil and Australia.
Allied Tube & Conduit ("Allied") is the leading North American manufacturer
of steel tubular products including (i) mechanical tubing in a wide assortment
of shapes and sizes for a variety of industrial and commercial applications,
(ii) tubing products for the residential, industrial and commercial fence
market, and (iii) light wall steel trusses and studs for the residential and
commercial construction industry. Other specialty products include steel
signposts, welded steel fittings, welded and roll formed carbon steel tubing and
shapes, and stainless steel razor tape.
Tyco Flow Control manufactures and distributes welded and drawn steel tube
products in the United Kindgom under the trade names of Newman Monmore, Newman
Phoenix, Tyco Tube Components and HUB LeBas. We manufacture specialty steel
strip products under the JB&S Lees, Firth Cleveland Steel Strip and Ductile
Stourbridge trade names and also in Brazil under the trade name of Frefer. In
Australia, Tyco Flow Control manufactures ductile and steel pipe, steel
fittings, valves and related products primarily for the water industry at
several locations under the trade name Tyco Water. We also manufacture a line of
plastic pipe and fittings in Australia and Malaysia.
ELECTRICAL PRODUCTS
Tyco Flow Control manufactures electrical raceway and related products in
North America, Europe and the Asia-Pacific region. Our products include steel
electrical conduit, pre-wired armored cable, flexible electrical conduit, metal
framing systems, cable tray and cable ladder and related products
10
utilized in the construction, industrial and original equipment markets. In
North America, Allied is the leading manufacturer of steel electrical conduit
and AFC Cable Systems is the leading manufacturer of steel and aluminum
pre-wired armored cable. Georgia Pipe manufactures plastic conduit. Allied
manufactures metal framing and support systems and electrical cable tray and
cable ladders in North America and sells them under the Powerstrut, Unistrut and
T.J. Cope trade names. We also manufacture metal framing and support products in
Europe, which we sell under the Unistrut trade name. In Australia and Asia, we
manufacture and sell these products under the Unistrut, A.C.S. and other trade
names. We manufacture specialty fastening products in the United Kingdom under
the Lindapter trade name.
ENGINEERING SERVICES
Through its Earth Tech subsidiary, the Flow Control group provides a broad
range of environmental, consulting and engineering services. Earth Tech's
principal services consist of full-spectrum water, wastewater, environmental and
hazardous waste management services. These services include infrastructure
design and construction services for institutional, civic, commercial and
industrial clients; design, construction management, project financing and
facility operating services for water and wastewater treatment facilities for
municipal and industrial clients; and transportation engineering and consulting.
Earth Tech operates through a network of offices in the United States,
Canada, the United Kingdom and Brazil.
FIRE PROTECTION PRODUCTS
The Flow Control group manufactures, sells and distributes a wide variety of
products utilized by fire protection contractors and fabricators of fire
protection systems. These products include a complete line of fire sprinkler
devices, valves, plastic pipe and pipe fittings and ductile iron pipe couplings.
We sell these products to third parties as well as to our fire protection
contracting businesses on an arms-length basis. We manufacture our products in
the United States, the United Kingdom, Germany, China and Malaysia and sell them
under the Central Sprinkler, GEM Sprinkler, Star Sprinkler and Spraysafe trade
names. In North America, Allied also manufactures and sells a complete line of
steel pipe for use in fire protection systems.
SALES AND DISTRIBUTION
We sell valves and related products in some locations directly by an
internal sales force and in other geographical areas by a network of independent
distributors and manufacturer's representatives. The valve industry is highly
fragmented and we compete against a number of international, national and local
manufacturers as well as against specialized manufacturers on the basis of
price, delivery, breadth of product line and specialized product capability.
Allied competes for the sale of steel pipe and tube with other United States
and non-United States producers. The group's pipe and tubular products
manufactured in the United Kingdom, Australia and Brazil compete primarily with
other local and national producers in those countries. Competition is based on
price, service and breadth of product line. Competition for fence products is
principally from national and regional United States producers and to a lesser
extent from non-United States companies on the basis of price, service and
distribution. Allied competes with many small regional manufacturers for the
sale of specialized industrial tubing on the basis of price and breadth of
product line. The group's electrical raceway and related products are sold
through independent distributors and agents. Competition for electrical products
is from local and national companies in each country on the basis of price,
delivery and service. Earth Tech competes with a number of international,
national, regional and local companies on the basis of price and the breadth and
quality of their services.
11
For fire protection products in the United States, Central Sprinkler
maintains a network of distribution facilities which stock and sell a full line
of fire protection products directly to contractors and installers. GEM
Sprinkler and Star Sprinkler sell fire protection products through a network of
independent distributors. In Canada, Central America, South America and the
Asia-Pacific region, we sell fire protection products through independent
distribution and in some cases directly to fire protection contractors. In
Europe and the Middle East, we operate a number of company owned distribution
facilities which stock and sell a full line of fire protection, mechanical and
other flow control products. Competition for the sale of fire products is based
on price, delivery, breadth of product line and specialized product capability.
The principal competitors are specialty products manufacturing companies based
in the United States, with other smaller competitors in Europe and Asia.
BACKLOG
At September 30, 2000, we had a backlog of unfilled orders of approximately
$8,214.8 million, compared to a backlog of approximately $7,581.1 million as of
September 30, 1999. We expect that approximately 86% of our backlog at
September 30, 2000 will be filled during the year ending September 30, 2001.
Backlog by industry segment is as follows ($ in millions):
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
Telecommunications.......................................... $2,941.7 $3,535.4
Electronics................................................. 2,335.7 1,439.1
Flow Control Products and Services.......................... 1,711.4 1,516.5
Fire and Security Services.................................. 1,134.9 986.6
Healthcare and Specialty Products........................... 91.1 103.5
-------- --------
$8,214.8 $7,581.1
======== ========
The decrease in backlog within the Telecommunications segment is due to
TyCom devoting a substantial portion of its resources to designing and
manufacturing the TGN and therefore taking on less work as a supplier of
undersea fiber optic cable systems for others. Within the Electronics segment,
backlog increased principally due to an increase in demand for the products
manufactured by AMP and Raychem, and to a lesser extent, the effect of
acquisitions. Within the Flow Control Products and Services segment, the
increase was principally due to increased backlog at Earth Tech, related to new
contract bookings and water and waste water facility contracts, and an increase
in demand for its valves and control products. Within the Fire and Security
Services segment, backlog increased principally due to long-term service
contracts in the Australian fire protection business and, to a lesser extent,
the effect of acquisitions. Backlog in the Healthcare and Specialty Products
segment is not indicative of the level of sales activity. Backlog in this
segment generally represents unfilled orders which are shipped shortly after
puchase orders are received.
PROPERTIES
Our operations are conducted in facilities throughout the world aggregating
some 74.8 million square feet of floor space, of which approximately
39.9 million square feet are owned and approximately 34.9 million square feet
are leased. These facilities house manufacturing, distribution and warehousing
operations as well as sales and marketing, engineering and administrative
offices.
The Electronics segment has manufacturing facilities in North America,
Central and South America, Europe and Asia. The group occupies some
31.6 million square feet, of which 18.9 million square feet are owned and
12.7 million square feet are leased.
12
The Healthcare and Specialty Products segment has manufacturing facilities
in North America, Europe and Asia. The group occupies some 20.5 million square
feet, of which 11.9 million square feet are owned and 8.6 million square feet
are leased.
The Flow Control Products and Services segment has manufacturing facilities,
warehouses and distribution centers throughout North America, Europe, Australia,
Asia and Central and South America. The group occupies some 7.8 million square
feet, of which 5.8 million square feet are owned and 2.0 million square feet are
leased.
Within the Fire and Security Services segment, the fire protection
contracting and service business operates through a network of offices located
in North America, Central America, South America, Europe, the Middle East and
Asia-Pacific regions. Fire protection components are manufactured at locations
in North America, the United Kingdom, Germany, Australia, New Zealand and South
Korea. The electronic security services business operates through a network of
monitoring centers and sales and service offices and other properties in North
America, Europe, the Asia-Pacific region and Latin America. The environmental
services business operates through a network of offices throughout North
America. The group occupies some 13.4 million square feet, of which 2.5 million
square feet are owned and 10.9 million square feet are leased.
The Telecommunications segment has manufacturing and storage facilities in
North America, Hawaii, St. Croix, Guam and Spain, and sales and administrative
offices in Bermuda, North America, Singapore, Spain and France. The group
occupies some 1.5 million square feet, of which 0.8 million square feet are
owned and 0.7 million are leased.
In the opinion of management, Tyco's properties and equipment generally are
in good operating condition and are adequate for our present needs. We do not
anticipate difficulty in renewing existing leases as they expire or in finding
alternative facilities. See Note 17 to Consolidated Financial Statements for a
description of our rental obligations.
RESEARCH AND DEVELOPMENT
The amounts expended for Tyco-sponsored research and development during
Fiscal 2000, Fiscal 1999, and Fiscal 1998 were $527.5 million, $450.5 million
and $511.4 million, respectively. Customer-funded research and development
expenditures were $18.6 million, $4.6 million and $6.8 million, respectively.
Approximately 7,900 full-time scientists, engineers and other technical
personnel are engaged in our product research and development activities.
Research activity at TyCom involves the continuing design and development of
processes for the next generation of undersea fiber optic cable. Activity at
Tyco Electronics focuses on new product development and a continual expansion of
technical capabilities. Tyco Healthcare focuses on acquiring rights to new
products and technologies to complement existing product lines and applying
expertise to refine and successfully commercialize such products and
technologies. Research activity in the Fire and Security Services and Flow
Control Products and Services segments is related to improvements in hydraulic
design which controls the motion of fluids, resulting in new sprinkler devices
and flow control products. Research and development activity at the specialty
packaging companies involves new product applications.
RAW MATERIALS
We are one of the largest buyers of steel and plastic resin in the United
States. Other principal materials include copper, brass, plastic, gold,
polyethylene resin and film, polypropylene, electronic components, chemicals and
additives, thin and flexible copper clad materials, paper, ink, foil, adhesives,
cloth, wax, pulp and cotton. Certain of the materials used in the Fire and
Security Services segment and the Flow Control Products and Services segment,
principally certain valves and fittings and security
13
systems, are purchased for installation in fire protection systems or for
distribution. Materials are purchased both inside and outside of the United
States from a large number of independent sources. There have been no shortages
in materials which have had a material adverse effect on our businesses.
PATENTS AND TRADEMARKS
We own a number of patents which principally relate to electrical and
electronic products, healthcare and specialty products, fire protection devices,
electronic security systems, flow control products, pipe and tubing manufacture,
and cable manufacture. We also own a number of trademarks and are a licensee
under a number of patents. Although these have been of value and are expected to
continue to be of value in the future, in the opinion of management, the loss of
any single patent or group of patents would not materially affect the conduct of
the business in any of our segments. The patents and licenses have remaining
lives of from one to twenty years. Kendall, part of Tyco Healthcare, sells
certain products under trade names owned by its suppliers and packages certain
products under customer trademarks and labels.
EMPLOYEES
Tyco employed approximately 202,000 persons at September 30, 2000, of which
approximately 90,000 are employed in the United States and 112,000 outside the
United States. These amounts exclude approximately 13,000 persons who work for
Mallinckrodt Inc., which we acquired in October 2000. We have collective
bargaining agreements with labor unions covering approximately 36,000 employees
at certain of our North American, European and Asia-Pacific businesses. We
believe that our relations with the labor unions and with our employees are
generally satisfactory. In April 1994, following lengthy negotiations, contracts
between our Grinnell Corporation ("Grinnell") subsidiary and a number of local
unions affiliated with the United Association of Plumbers and Pipefitters were
not renewed. Employees in those locations, representing 64 percent of Grinnell
Fire Protection's North American union employees at the time of their strike in
1994, continue to be on strike. Grinnell has continued to operate with former
union members who have crossed over and with replacement workers. The labor
action is still pending. The action has not had, and is not expected to have,
any material adverse effect on our business or results of operations.
ENVIRONMENTAL MATTERS
We make a substantial effort to operate our facilities in compliance with
laws relating to the protection of the environment. Compliance has not had and
is not expected to have a material adverse effect upon our capital expenditures,
earnings or competitive position.
We believe that, consistent with applicable laws and regulations, we
exercise due care and take appropriate precautions in the management of wastes.
We have received notification from the United States Environmental Protection
Agency, and from certain state environmental agencies, that conditions at a
number of sites where we and others disposed of hazardous wastes require cleanup
and other possible remedial action.
We also have a number of projects underway at several of our manufacturing
facilities in order to comply with environmental laws. In addition, we remain
responsible for certain environmental issues at manufacturing locations sold by
us. These projects relate to a variety of activities, including solvent and
metal contamination clean up and oil spill equipment upgrades and replacement.
These projects, some of which are voluntary and some of which are required under
applicable law, involve both remediation expenses and capital improvements.
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
our experience with the foregoing environmental matters, we have concluded that
there is at least a reasonable possibility that remedial costs will be incurred
with respect to these issues
14
in an aggregate amount in the range of $32.9 million to $95.2 million. As of
September 30, 2000, we had concluded that the most probable amount which would
be incurred within this range was $68.3 million, $35.4 million of such amount is
included in accrued expenses and other current liabilities and $32.9 million is
included in other long-term liabilities in the Consolidated Balance Sheet. Based
upon information available to us, at those sites where there has been an
allocation of the liability for cleanup costs among a number of parties,
including Tyco, 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 we have 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 our financial position and reserves
for environmental matters of $68.3 million, we have concluded that our payment
of such estimated amounts will not have a material adverse effect on our
consolidated financial position, results of operations or liquidity.
ITEM 2. PROPERTIES
See Item 1. "Business--Properties" for information relating to the Company's
owned and leased properties.
ITEM 3. LEGAL PROCEEDINGS
SECURITIES LITIGATION
Beginning on December 9, 1999, Tyco and two Tyco executive officers were
named as defendants in thirty-eight substantially identical class action
lawsuits that were filed in various federal courts seeking damages on account of
alleged violations of the securities laws in connection with Tyco's financial
disclosures concerning certain mergers and acquisitions and Tyco's accounting
therefor. All of the cases have been consolidated for pretrial purposes before
the United States District Court for the District of New Hampshire.
The Court has selected lead plaintiffs. A Second Amended Class Action
Complaint and Jury Trial Demand was filed on November 2, 2000, purporting to
name two additional Tyco officers and a Tyco Director as defendants. In the
Second Amended Complaint, plaintiffs seek certification of a class of persons
who purchased or acquired Tyco securities during the period from October 1,
1998, through December 8, 1999, as well as certification of certain subclasses.
The plaintiffs seek money damages and/ or rescission. The Court has set a
schedule for briefing a motion to dismiss this action.
TYCO SUBMARINE SYSTEMS LTD./GLOBAL CROSSING LITIGATION
TyCom (US) Inc. (formerly known as Tyco Submarine Systems Ltd.), a
subsidiary of Tyco, is named as the defendant in an action brought in the United
States District Court for the Southern District of New York on May 22, 2000 by
Global Crossing Ltd. and its subsidiary South American Crossing (Subsea) Ltd.
The complaint alleges that, in connection with the development of a South
American subsea cable system to be owned by South American Crossing
(Subsea) Ltd., TyCom (US) Inc. misappropriated trade secrets, committed fraud,
breached several alleged agreements, and defamed South American Crossing
(Subsea) Ltd. Plaintiffs seek damages, including punitive damages, in excess of
$1 billion, attorneys' fees and costs, and declarative and injunctive relief.
TyCom (US) Inc. has answered the complaint, denying its material allegations
and raising various defenses to plaintiffs' claims. Additionally, TyCom
(US) Inc. has asserted counterclaims that South American Crossing
(Subsea) Ltd., at the instance of Global Crossing Ltd., breached the parties'
construction contract. TyCom (US) Inc. seeks damages of not less than
$150 million and attorneys' fees and costs, as well as declarative relief.
Plaintiffs have replied to the counterclaims and denied the material allegations
therein.
15
The Court has set February 28, 2001, as the date for completion of all party
and third-party fact discovery.
TYCO SUBMARINE SYSTEMS LTD./GLOBAL CROSSING ARBITRATION
TyCom (US) Inc. (formerly known as Tyco Submarine Systems Ltd.), a
subsidiary of Tyco, is named as the defendant in an arbitration proceeding that
was commenced on May 22, 2000 by Atlantic Crossing Ltd., GT Landing Corp., GT
U.K. Ltd., Global Telesystems GmbH, and GT Netherlands BV (all subsidiaries of
Global Crossing Ltd.) under the international rules of the American Arbitration
Association. In the notice of arbitration, claimants assert that TyCom
(US) Inc. breached an alleged duty of loyalty and three agreements between the
parties relating to the Atlantic Crossing-1 subsea cable system. Claimants seek
unspecified monetary damages and declarative and injunctive relief. The parties
have since agreed to terminate one of the agreements at issue (the operations,
administration and maintenance agreement) in exchange for mutual releases,
payments to TyCom (US) Inc. of approximately $19 million, and a dismissal from
the arbitration of claims arising out of that agreement.
TyCom (US) Inc. has responded to claimants' notice of arbitration, denying
the claims therein and asserting counterclaims for claimants' breaches of the
parties' agreements by refusing to pay certain costs, expenses, and commissions
due and owing to TyCom (US) Inc. TyCom (US) Inc. seeks the denial of all relief
sought by claimants, full disclosure and an accounting of certain contracts,
damages of more than $188 million, and an award of interest and other costs. On
July 24, 2000, claimants replied to TyCom (US) Inc.'s statement of defenses and
counterclaims, denying the material allegations therein.
A panel of three arbitrators has been appointed. Hearings in the arbitration
are scheduled to commence on December 18, 2000. Pursuant to the parties'
commission sharing agreement, the parties have, at the arbitrators' direction,
agreed on an independent auditor who is examining the amount of sales
commissions owing to TyCom (US) Inc. under the parties' agreements.
TYCO SUBMARINE SYSTEMS LTD./IDT
On January 31, 2000, IDT Europe B.V.B.A. filed a complaint in the United
States District Court for the District of New Jersey asserting claims against
TyCom (US) Inc. (formerly known as Tyco Submarine Systems Ltd.) and Tyco Group
S.a.r.l., a Luxembourg subsidiary of Tyco International Ltd. The claims arose
out of negotiations conducted by Tyco Group S.a.r.l. with IDT Europe B.V.B.A., a
Belgian corporation, concerning the possible formation of a joint venture for
the development of an undersea fiber optic telecommunications system to be
supplied by TyCom (US) Inc., which the complaint alleged was to be substantially
similar to the proposed TyCom Global Network. The plaintiff, IDT Europe
B.V.B.A., alleged that Tyco Group S.a.r.l. breached a Memorandum of
Understanding dated November 9, 1999 (which expired in December 1999), and
alleged implied covenants of good faith and fair dealing and made various other
claims. The plaintiff sought, among other relief such as attorneys' fees and
costs, specific performance of Tyco Group S.a.r.l.'s alleged obligation to
negotiate and execute such agreements, as well as compensatory and punitive
damages. With respect to TyCom (US) Inc., the plaintiff alleged breach of an
agreement by which the plaintiff reserved manufacturing capacity for the cable
system and authorized the undertaking of certain long-lead time activities.
Plaintiff also alleged that TyCom (US) Inc. failed to negotiate in good faith a
system supply agreement for the cable system. The plaintiff sought, among other
relief such as attorneys' fees and costs, compensatory damages of $1 billion,
punitive damages of $3 billion and injunctive relief precluding TyCom (US) Inc.
from undertaking any business activity contrary to the terms of the Instruction
to Proceed. On June 5, 2000, the court granted Tyco Group S.a.r.l. and TyCom
(US) Inc.'s motion to dismiss.
On March 24, 2000, Tyco Group S.a.r.l., TyCom (US) Inc., Tyco International
Ltd., Tyco International (US) Inc., and TyCom Ltd. filed a complaint in the
Supreme Court of the State of New York, County of New York, asserting claims
against IDT Europe B.V.B.A. and IDT Corporation
16
(collectively "IDT"). The complaint alleged that IDT filed a baseless lawsuit in
federal court in New Jersey, improperly disclosed confidential information to
the press and otherwise engaged in a pattern of conduct with the purpose and
effect of obstructing efforts to build the TyCom Global Network and to finance
it principally through the initial public offering of TyCom shares. The
complaint demanded compensatory damages of at least $1 billion, punitive damages
and declaratory and injunctive relief. On June 19, 2000, the court denied IDT
Corporation's motion to dismiss and referred IDT Europe B.V.B.A.'s motion to
dismiss to a referee to hear and report with recommendations.
On June 13, 2000, IDT Europe B.V.B.A. filed a complaint in the Superior
Court of New Jersey, Law Division, Morris County, against Tyco Group (S.a.r.l.),
TyCom (US) Inc., Tyco International Ltd., and Tyco International (US) Inc. The
complaint made factual allegations similar to those previously asserted in the
federal complaint in the United States District Court for the District of New
Jersey, along with additional allegations regarding, among other things, a
purported agreement between TyCom (US) Inc. and Global Crossing. The complaint
asserted claims, similar to those previously asserted in the complaint in
federal court. The plaintiff sought, among other relief such as attorneys' fees
and costs, specific performance, compensatory damages of $1 billion, punitive
damages of $3 billion and injunctive relief. On August 18, 2000, the Court
granted the defendants' motion to dismiss without prejudice, and on the
condition that defendants may not defend any subsequent action by plaintiff upon
the grounds of statute of limitations.
On October 10, 2000, Tyco Group (S.a.r.l.), TyCom (US) Inc., Tyco
International Ltd., Tyco International (US) Inc., and TyCom Ltd. entered into a
Settlement Agreement with IDT Europe B.V.B.A. and IDT Corporation which
encompasses all actual and potential claims asserted in the actions before the
United States District Court for the District of New Jersey, the Supreme Court
of the State of New York, County of New York, and the Supreme Court of New
Jersey, Law Division, Morris County. Under the terms of the Settlement
Agreement, TyCom Ltd. granted IDT Europe B.V.B.A. rights to use a certain
limited amount of capacity on the transatlantic and transpacific segments of the
first phase of the TGN free of charge.
Tyco has agreed to indemnify TyCom (US) Inc. for certain losses and expenses
with respect to the claims brought in these federal litigation and arbitration
proceedings, excluding losses and expenses arising out of any award of
injunctive relief.
See also the discussions under Item 1. "Business--Environmental Matters".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Tyco's executive officers and executive officers of certain subsidiaries are
as follows (1):
L. Dennis Kozlowski, age 54, Chairman of the Board, President and Chief
Executive Officer since July 1997. Chairman of the Board of Former Tyco from
January 1993 to July 1997; Chief Executive Officer of Former Tyco since
July 1992, President of Former Tyco since 1989; associated with Former Tyco
since 1975.
Mark A. Belnick, age 54, Executive Vice President and Chief Corporate
Counsel since September 1998. Prior to joining Tyco, Mr. Belnick was a Senior
Partner at the international law firm of Paul, Weiss, Rifkind, Wharton &
Garrison since 1987.
Jerry R. Boggess, age 56, President of Tyco Fire and Security Services since
August 1993. Vice President of Former Tyco since February 1996; associated with
Former Tyco since 1968.
Neil R. Garvey, age 45, President and Chief Executive Officer of TyCom Ltd.
since July 2000. President and Chief Executive Officer of Tyco Submarine
Systems Ltd. from July 1997 to July 2000;
17
President of Simplex Technologies from July 1995 to June 1997; associated with
Former Tyco since 1979.
Juergen W. Gromer, age 55, President of Tyco Electronics since April 1999.
Senior Vice President, Worldwide Sales and Service of AMP from 1998 to
April 1999; President, Global Automotive Division, and Corporate Vice President
of AMP from 1997 to 1998; Vice President and General Manager of various
divisions of AMP from 1990 to 1997.
Stephen B. McDonough, age 47, President of Tyco Flow Control Products since
November 2000. President of Tyco Plastics and Adhesives since May 1997;
President of A&E Molded Products from January 1997 to May 1997; Vice President
and General Manager of Ludlow Laminating and Coating from July 1991 to
January 1997; associated with Former Tyco since 1979.
Richard J. Meelia, age 51, President of Tyco Healthcare Group since 1995.
Group President of Kendall Healthcare Products Company from January 1991 to
1995.
Mark H. Swartz, age 40, Executive Vice President and Chief Financial Officer
since July 1997. Vice President and Chief Financial Officer of Former Tyco since
February 1995; associated with Former Tyco since 1991.
------------------------
(1) In July 1997, a wholly-owned subsidiary of what was formerly called ADT
Limited ("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.
Former Tyco became a wholly-owned subsidiary of the Company and changed its
name to Tyco International (US) Inc. ("Tyco US").
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED SECURITY HOLDER
MATTERS
The number of registered holders of Tyco's common shares at November 13,
2000 was 34,675.
Tyco common shares are listed and traded on the New York Stock Exchange
("NYSE"), the London Stock Exchange and the Bermuda Stock Exchange. The
following table sets forth the high and low sales prices per Tyco common share
as reported by the NYSE and the dividends paid on Tyco common shares, for the
quarterly periods presented below. The price and dividends for Tyco common
shares have been restated to reflect a two-for-one stock split distributed on
October 21, 1999, which was effected in the form of a stock dividend.
FISCAL 2000 FISCAL 1999
---------------------------------- ----------------------------------
MARKET PRICE RANGE MARKET PRICE RANGE
------------------- DIVIDEND PER ------------------- DIVIDEND PER
QUARTER HIGH LOW COMMON SHARE HIGH LOW COMMON SHARE
------- -------- -------- ------------ -------- -------- ------------
First..................... $53.8750 $23.0625 $0.0125 $39.5938 $20.1563 $0.0125
Second.................... 53.2500 32.0000 0.0125 39.9688 33.7500 0.0125
Third..................... 51.3750 41.0000 0.0125 47.4063 35.1875 0.0125
Fourth.................... 59.1875 45.5625 0.0125 52.9375 47.1250 0.0125
------- -------
$ 0.05 $ 0.05
======= =======
18
PART II
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial information
of Tyco as at and for the fiscal years ended September 30, 2000, 1999 and 1998,
the nine-month fiscal period ended September 30, 1997 and the year ended
December 31, 1996. This selected financial information should be read in
conjunction with Tyco's Consolidated Financial Statements and related notes. The
selected financial data reflect the combined results of operations and financial
position of Tyco, Former Tyco, Keystone, Inbrand (from January 1, 1997), USSC
and AMP restated for all periods presented pursuant to the pooling of interests
method of accounting. The selected financial data prior to January 1, 1997 do
not reflect the results of operations and financial position of Inbrand, which
was acquired in 1997 and accounted for under the pooling of interests method of
accounting, due to immateriality. See Notes 1 and 2 to the Consolidated
Financial Statements.
NINE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED YEAR ENDED
--------------------------------- SEPTEMBER 30, DECEMBER 31,
2000(1) 1999(2) 1998(3) 1997(4)(5) 1996(6)(7)
(IN MILLIONS, EXCEPT PER SHARE DATA) --------- --------- --------- ------------- ------------
Consolidated Statements of Operations
Data:
Net sales............................... $28,931.9 $22,496.5 $19,061.7 $12,742.5 $14,671.0
Operating income........................ 5,474.4 2,190.8 1,948.1 125.8 587.4
Income (loss) from continuing
operations............................ 4,520.1 1,067.7 1,168.6 (348.5) 49.4
Income (loss) from continuing operations
per common share:
Basic................................. 2.68 0.65 0.74 (0.24) 0.02
Diluted............................... 2.64 0.64 0.72 (0.24) 0.02
Cash dividends per common share(8)........ See (9) below.
Consolidated Balance Sheet Data (End of
Period):
Total assets............................ $40,404.3 $32,344.3 $23,440.7 $16,960.8 $14,686.2
Long-term debt.......................... 9,461.8 9,109.4 5,424.7 2,785.9 2,202.4
Shareholders' equity.................... 17,033.2 12,369.3 9,901.8 7,478.7 7,022.6
------------------------
(1) Operating income in the fiscal year ended September 30, 2000 includes a net
charge of $176.3 million, of which $1.0 million is included in cost of
sales, for restructuring and other non-recurring charges, and charges of
$99.0 million for the impairment of long-lived assets. See Notes 12 and 16
to the Consolidated Financial Statements. Income from continuing operations
for the fiscal year ended September 30, 2000 includes a one-time pre-tax
gain of $1,760.0 million related to the issuance of common shares by a
subsidiary. See Note 15 to the Consolidated Financial Statements.
(2) Operating income in the fiscal year ended September 30, 1999 is net of
charges of $1,035.2 million for merger, restructuring and other
non-recurring charges, of which $106.4 million is included in cost of sales,
and charges of $507.5 million for the impairment of long-lived assets
related to the mergers with USSC and AMP and AMP's profit improvement plan.
See Notes 12 and 16 to the Consolidated Financial Statements.
(3) Operating income in the fiscal year ended September 30, 1998 is net of
charges of $80.5 million primarily related to costs to exit certain
businesses in USSC's operations and restructuring charges of $12.0 million
related to the continuing operations of USSC. In addition, AMP recorded
restructuring charges of $185.8 million in connection with its profit
improvement plan and a credit of $21.4 million to restructuring charges
representing a revision of estimates related to its 1996 restructuring
activities. See Note 16 to the Consolidated Financial Statements.
(4) In September 1997, Tyco changed its fiscal year end from December 31 to
September 30. Accordingly, the nine-month transition period ended
September 30, 1997 is presented.
19
(5) Operating income in the nine months ended September 30, 1997 is net of
charges related to merger, restructuring and other non-recurring costs of
$917.8 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, and charges of $24.3 million for litigation and other
related costs and $5.8 million for restructuring charges in USSC's
operations. The results for the nine months ended September 30, 1997 also
include a charge of $361.0 million for the write-off of purchased in-process
research and development related to the acquisition of the submarine systems
business of AT&T Corp.
(6) Prior to their respective mergers, ADT, Keystone, USSC and AMP had
December 31 fiscal year ends and Former Tyco had a June 30 fiscal year end.
The selected consolidated financial data have been combined using a
December 31 fiscal year end for ADT, Keystone, Former Tyco, USSC and AMP for
the year ended December 31, 1996.
(7) Operating income in 1996 includes non-recurring charges of $744.7 million
related to the adoption of Statement of Financial Accounting Standards
No. 121 "Accounting for the Impairment of Long-Lived Assets to Be Disposed
Of," $237.3 million related principally to the restructuring of ADT's
electronic security services business in the United States and United
Kingdom, $98.0 million to exit various product lines and manufacturing
operations associated with AMP's operations and $8.8 million of fees and
expenses related to ADT's acquisition of Automated Security (Holdings) plc,
a United Kingdom company.
(8) Per share amounts have been retroactively restated to give effect to the
mergers with Former Tyco, Keystone, Inbrand, USSC and AMP; a 0.48133 reverse
stock split (1.92532 after giving effect to the subsequent stock splits)
effected on July 2, 1997; and two-for-one stock splits distributed on
October 22, 1997 and October 21, 1999, both of which were effected in the
form of a stock dividend.
(9) Tyco has paid a quarterly cash dividend of $0.0125 per common share since
July 2, 1997, the date of the Former Tyco/ADT merger. Prior to the merger
with ADT, Former Tyco had paid a quarterly cash dividend of $0.0125 per
share of common stock since January 1992. ADT had not paid any dividends on
its common shares since 1992. USSC paid quarterly dividends of $0.04 per
share in the year ended September 30, 1998 and the nine months ended
September 30, 1997 and aggregate dividends of $0.08 per share in 1996. AMP
paid dividends of $0.27 per share in the first two quarters of the year
ended September 30, 1999, $0.26 per share in the first quarter and $0.27 per
share in the last three quarters of the year ended September 30, 1998, $0.26
per share in each of the three quarters of the nine months ended
September 30, 1997 and aggregate dividends of $1.00 per share in 1996. The
payment of dividends by Tyco in the future will depend on business
conditions, Tyco's financial condition and earnings and other factors.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
See Management's Discussion and Analysis of Financial Condition and Results
of Operations which appears on pages 81 to 98 of this Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Management's Discussion and Analysis of Financial Condition and Results
of Operations which appears on pages 81 to 98 of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements and schedule are filed as
part of this Annual Report:
Financial Statements:
Reports of Independent Accountants
20
Consolidated Balance Sheets--September 30, 2000 and September 30, 1999
Consolidated Statements of Operations for the fiscal years ended
September 30, 2000, 1999 and 1998.
Consolidated Statements of Shareholders' Equity for the fiscal years
ended September 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the fiscal years ended
September 30, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts
All other financial statements and schedules have been omitted since the
information required to be submitted has been included in the consolidated
financial statements and related notes or because they are either not applicable
or not required under the rules of Regulation S-X.
See Notes to Consolidated Financial Statements for Summarized Quarterly
Financial Data (unaudited).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Directors of the Registrant is hereby
incorporated by reference to the Registrant's definitive proxy statement which
will be filed with the Commission within 120 days after the close of the fiscal
year.
ITEM 11. MANAGEMENT REMUNERATION
Information concerning management remuneration is hereby incorporated by
reference to the Registrant's definitive proxy statement which will be filed
with the Commission within 120 days after the close of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is hereby incorporated by reference to the Registrant's definitive
proxy statement which will be filed with the Commission within 120 days after
the close of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
hereby incorporated by reference to the Registrant's definitive proxy statement
which will be filed with the Commission within 120 days after the close of the
fiscal year.
21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2) Financial Statements and Schedules--see Item 8.
(b) Exhibits
2.1 Agreement and Plan of Merger, dated as of November 22, 1998,
by and among Tyco International (PA) Inc., AMP Merger Corp.
and AMP Incorporated, including guarantee of Tyco
International Ltd. (Incorporated by reference to the
Registrant's Form S-4 filed December 11, 1998.)
2.2 Agreement and Plan of Merger, dated as of May 25, 1998, by
and among Tyco International Ltd., T11 Acquisition Corp. and
United States Surgical Corporation. (5)
2.3 Agreement and Plan of Merger, dated as of May 19, 1999, by
and among Tyco International Ltd., Tyco International (PA)
Inc. and Raychem Corporation (Incorporated by reference to
the Registrant's Form S-4 filed June 11, 1999).
2.4 Agreement and Plan of Merger, dated June 28, 2000, by and
among Tyco Acquisition Corp. VI (NV), EVM Merger Corp. and
Mallinckrodt Inc. (Incorporated by reference to the
Registrant's Form S-4 filed July 12, 2000)
2.5 Agreement for the Purchase and Sale of Assets, dated
November 13, 2000, by and between Lucent Technologies and
Tyco Group S.a.r.L. (Filed herewith)
2.6 Stock Purchase Agreement, dated January 13, 2000, by and
between Manheim Auctions, Inc. and ADT General Holdings,
Inc. (Filed herewith).
3.1 Memorandum of Association (as altered) (Incorporating all
amendments to May 26, 1992). (1)
3.2 Certificate of Incorporation on change of name dated July 2,
1997. (3)
3.3 Bye-Laws (Incorporating all amendments to April 1, 1999).
(6)
4.1 Indenture dated as of July 1, 1995 among ADT Operations,
Inc., ADT Limited and Bank of Montreal Trust Company, as
trustee and the form of note included therein. (2)
4.2 Indenture dated April 30, 1992 between Former Tyco and
Security Pacific National Trust Company (New York)
(Incorporated by reference to Former Tyco's Form 10-Q for
the period ended March 31, 1992).
4.3 First Supplemental Indenture dated April 30, 1992 between
Former Tyco and Security Pacific National Trust Company (New
York) (Incorporated by reference to Former Tyco's Form 10-Q
for the period ended March 31, 1992).
4.4 Second Supplemental Indenture, dated as of March 8, 1993,
between Former Tyco and BankAmerica National Trust Company,
as Trustee (Incorporated by reference to Tyco International
Ltd.'s Form 8-K filed on March 8, 1993).
4.5 Form of Indenture, dated as of June 9, 1998, among Tyco
International Group S.A. (TIG), Tyco and The Bank of New
York, as trustee. (7)
4.6 Form of Supplemental Indenture No.1, dated as of June 9,
1998, among TIG, Tyco and The Bank of New York, as trustee
relating to the 6 1/8% Notes due 2001 of the Company
(including the form of Notes). (7)
4.7 Form of Supplemental Indenture No.2, dated as of June 9,
1998, among TIG, Tyco and The Bank of New York, as trustee
relating to the 6 3/8% Notes due 2005 of the Company
(including the form of Notes). (7)
4.8 Form of Supplemental Indenture No.3, dated as of June 9,
1998, among TIG, Tyco and The Bank of New York, as trustee
relating to the 7% Notes due 2028 of the Company (including
the form of Notes). (7)
4.9 Form of Supplemental Indenture No.4, dated as of June 9,
1998, among TIG, Tyco and The Bank of New York, as trustee
relating to the 6 1/4% Dealer remarketable
securities(SM)(Drs.(SM)) due 2013 of the Company (including
the form of Drs). (7)
22
4.10 Form of Supplemental Indenture No.5, dated as of November 2,
1998, among TIG, Tyco and The Bank of New York, as trustee
relating to the 5.875% Notes due 2004 of TIG. (8)
4.11 Form of Supplemental Indenture No.6, dated as of November 2,
1998, among TIG, Tyco and The Bank of New York, as trustee
relating to the 6.125% Notes due 2008 of TIG. (8)
4.12 Form of Supplemental Indenture No. 7, dated as of
January 12, 1999, among TIG, Tyco and The Bank of New York,
as trustee relating to the 6.125% due 2009 of TIG. (7)
4.13 Form of Supplemental Indenture No. 8, dated as of
January 12, 1999, among TIG, Tyco and The Bank of New York,
as trustee relating to the 6.875% due 2029 of TIG. (7)
4.14 Form of Supplemental Indenture No. 10, dated as of August
31, 1999, among TIG, Tyco and The Bank of New York, as
trustee relating to the Floating Rate Notes due 2001 of TIG.
(9)
4.15 Form of Supplemental Indenture No. 11, dated as of August
31, 1999, among TIG, Tyco and The Bank of New York, as
trustee relating to the 6.875% Notes due 2002. (9)
4.16 Form of Supplemental Indenture No. 13, dated as of April 4,
2000, among TIG, TIL and The Bank of New York, as trustee
relating to the Euro 6 1/8% Notes due 2007. (9)
4.17 Form of Indenture among United States Surgical Corporation
("USSC") and The Bank of New York, as trustee relating to
the 7.25% Senior Debt Securities due 2008 of USSC
(incorporated by reference to Exhibit 4(a) to USSC's Form
S-3 (File No. 333-46239) filed March 6, 1998).
4.18 Officer's Certificate, dated March 17, 1998, defining the
terms of the debenture among USSC and The Bank of New York,
as Trustee relating to the 7.25% Senior Debt Securities due
2008 of USSC. (8)
4.19 364-Day Credit Agreement dated as of February 11, 2000 among
TIG, the Banks named therein and Morgan Guaranty Trust
Company of New York, as Agent (Filed herewith).
4.20 $500 million Extendible Credit Agreement, as amended, dated
February 13, 1998 held by TIG. (4)
4.21 Parent Guarantee Agreement, as amended, dated as of February
13, 1998. (4)
4.22 Indenture dated November 17, 2000 between Tyco International
Ltd. and State Street Bank and Trust Company, as Trustee
(Incorporated by reference to the Registrant's Form S-3
filed December 8, 2000).
10.1 The Tyco International Ltd. Long Term Incentive Plan
(formerly known as the ADT 1993 Long-Term Incentive Plan)
(as amended May 12, 1999) (Incorporated by reference to the
Registrant's Form S-8 filed on June 10, 1999).*
10.2 1981 Key Employee Loan Program (Incorporated by reference to
Former Tyco's Form 10-K for the year ended May 31, 1982).*
10.3 1983 Restricted Stock Ownership Plan for Key Employees
(Incorporated by reference to Former Tyco Shareholders'
Proxy Statement for Annual Meeting of Shareholders on
October 18, 1983).*
10.4 1983 Key Employee Loan Program, as amended December 9, 1993
(Incorporated by reference to Former Tyco's Form 10-K for
the year ended June 30, 1994).*
10.5 1994 Restricted Stock Ownership Plan for Key Employees
(Incorporated by reference to the Registrant's Form S-8
filed on December 21, 1999).
10.6 Tyco International Ltd. Supplemental Executive Retirement
Plan (Incorporated by reference to Former Tyco's Form 10-K
for the year ended June 30, 1995).*
10.7 The Tyco International Ltd. Long Term Incentive Plan II
(Incorporated by reference to the Registrant's Form S-8
filed March 25, 1999).*
21.1 Subsidiaries of the registrant (Filed herewith).
23.1 Consent of PricewaterhouseCoopers (Filed herewith).
23.2 Consent of Arthur Andersen LLP (Filed herewith).
27 Financial Data Schedule (Filed herewith).
------------------------
* Management contract or compensatory plan.
23
(1) Incorporated by reference to an Exhibit to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1992.
(2) Incorporated by reference to an Exhibit to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995.
(3) Incorporated by reference to an Exhibit to the Registrant's
Current Report dated July 2, 1997 on Form 8-K filed
July 10, 1997.
(4) Incorporated by reference to an Exhibit to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1997.
(5) Incorporated by reference to an Exhibit to the Registrant's
Current Report dated May 25, 1998 on Form 8-K filed
June 24, 1998.
(6) Incorporated by reference to an Exhibit to the Registrant's
Registration Statement on Form S-3 filed April 23, 1998 and
Current Report dated September 10, 1999 on Form 8-K filed
September 14, 1999.
(7) Incorporated by reference to an Exhibit to the Registrant's
and TIG's Co-Registration Statement on Form S-3 (File Nos.
333-50855 and 333-50855-01) filed June 9, 1998.
(8) Incorporated by reference to the Registrant's Annual Report
on Form 10-K for the fiscal year ended September 30, 1998.
(9) Incorporated by reference to an Exhibit to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
September 30, 1999 filed December 13, 1999.
(c) Reports on Form 8-K.
Current Report on Form 8-K filed on July 14, 2000 containing the press release
of Tyco dated July 13, 2000 announcing that it had been advised that the
informal inquiry, which was being conducted by the staff of the Division of
Enforcement of the Securities and Exchange Commission since December 1999, had
been terminated.
Current Report on Form 8-K filed on November 1, 2000 containing the press
release of Tyco dated November 1, 2000 announcing the consummation of the
acquisition of Mallinckrodt Inc.
Current Report on Form 8-K filed on November 15, 2000 containing the press
releases of Tyco dated November 13 and 14, 2000 announcing the private offering
of zero-coupon convertible debt securities.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TYCO INTERNATIONAL LTD.
By: /s/ MARK H. SWARTZ
-----------------------------------------
Mark H. Swartz
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
Date: December 21, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
Chairman of the Board, Chief
/s/ L. DENNIS KOZLOWSKI Executive Officer, President
-------------------------------------- and Director (Principal
L. Dennis Kozlowski Executive Officer)
/s/ LORD ASHCROFT KCMG
-------------------------------------- Director
Lord Ashcroft KCMG
/s/ JOSHUA M. BERMAN
-------------------------------------- Director
Joshua M. Berman
/s/ RICHARD S. BODMAN
-------------------------------------- Director December 21, 2000
Richard S. Bodman
/s/ JOHN F. FORT
-------------------------------------- Director
John F. Fort
/s/ STEPHEN W. FOSS
-------------------------------------- Director
Stephen W. Foss
/s/ PHILIP M. HAMPTON
-------------------------------------- Director
Philip M. Hampton
/s/ WENDY E. LANE
-------------------------------------- Director
Wendy E. Lane
/s/ JAMES S. PASMAN, JR.
-------------------------------------- Director
James S. Pasman, Jr.
/s/ W. PETER SLUSSER
-------------------------------------- Director
W. Peter Slusser
/s/ MARK H. SWARTZ Executive Vice President and
-------------------------------------- Chief
Mark H. Swartz Financial Officer
/s/ FRANK E. WALSH, JR.
-------------------------------------- Director
Frank E. Walsh, Jr.
25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of Tyco International Ltd.
In our opinion, based upon our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related 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, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended
September 30, 2000, in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion, the accompanying
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We did not audit the financial
statements of AMP Incorporated, a wholly owned subsidiary, as of September 30,
1998, and for the year ended September 30, 1998, which statements reflect total
assets of 20.1% of the related consolidated total assets as of September 30,
1998, and net sales of 29.0% of the related consolidated total sales for the
year ended September 30, 1998. Those statements were audited by other auditors
whose report thereon has been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for AMP Incorporated, as of and
for the period described above, is based solely on the report of the other
auditors. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, 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 report of
other auditors provide a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS
Hamilton, Bermuda
October 24, 2000, except as to Note 25
which is as of December 4, 2000
26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of AMP Incorporated:
We have audited the consolidated balance sheet of AMP Incorporated (a
Pennsylvania corporation) and subsidiaries as of September 30, 1998, the related
consolidated statements of income, shareholders' equity and cash flows for the
year ended September 30, 1998, 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 consolidated financial position of
AMP Incorporated and subsidiaries as of September 30, 1998, and the consolidated
results of their operations and their cash flows for the year ended
September 30, 1998, in conformity with accounting principles generally accepted
in the United States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. 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, Pennsylvania
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)
27
TYCO INTERNATIONAL LTD.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
SEPTEMBER 30,
---------------------
2000 1999
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents................................... $ 1,264.8 $ 1,762.0
Receivables, less allowance for doubtful accounts of $442.1
in 2000 and $329.8 in 1999................................ 5,630.4 4,582.3
Contracts in process........................................ 357.3 536.6
Inventories................................................. 3,845.1 2,849.1
Deferred income taxes....................................... 683.3 694.3
Prepaid expenses and other current assets................... 1,034.8 721.2
--------- ---------
Total current assets........................................ 12,815.7 11,145.5
CONSTRUCTION IN PROGRESS--TYCOM GLOBAL NETWORK.............. 111.1 --
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 8,218.4 7,322.4
GOODWILL AND OTHER INTANGIBLE ASSETS, NET................... 16,332.6 12,158.9
LONG-TERM INVESTMENTS....................................... 1,653.7 269.7
DEFERRED INCOME TAXES....................................... 532.5 668.8
OTHER ASSETS................................................ 740.3 779.0
--------- ---------
TOTAL ASSETS............................................ $40,404.3 $32,344.3
========= =========
CURRENT LIABILITIES:
Loans payable and current maturities of long-term debt...... $ 1,537.2 $ 1,012.8
Accounts payable............................................ 3,291.9 2,530.8
Accrued expenses and other current liabilities.............. 4,038.2 3,545.7
Contracts in process--billings in excess of costs........... 835.0 977.9
Deferred revenue............................................ 265.7 258.8
Income taxes................................................ 1,650.3 798.0
Deferred income taxes....................................... 60.6 1.0
--------- ---------
Total current liabilities................................... 11,678.9 9,125.0
LONG-TERM DEBT.............................................. 9,461.8 9,109.4
OTHER LONG-TERM LIABILITIES................................. 1,095.3 1,236.4
DEFERRED INCOME TAXES....................................... 791.6 504.2
--------- ---------
TOTAL LIABILITIES....................................... 23,027.6 19,975.0
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 17)
MINORITY INTEREST........................................... 343.5 --
SHAREHOLDERS' EQUITY:
Preference shares, $1 par value, 125,000,000 shares
authorized, none issued................................... -- --
Common shares, $0.20 par value, 2,500,000,000 shares
authorized; 1,684,511,070 shares outstanding in 2000 and
1,690,175,338 shares outstanding in 1999, net of
31,551,310 shares owned by subsidiaries in 2000 and
11,432,678 shares owned by subsidiaries in 1999........... 336.9 338.0
Capital in excess:
Share premium........................................... 5,233.3 4,881.5
Contributed surplus, net of deferred compensation of
$59.4 in 2000 and $30.7 in 1999....................... 2,786.3 3,607.6
Accumulated earnings........................................ 8,427.6 3,992.3
Accumulated other comprehensive income (loss)............... 249.1 (450.1)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY.............................. 17,033.2 12,369.3
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $40,404.3 $32,344.3
========= =========
See Notes to Consolidated Financial Statements.
28
TYCO INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED SEPTEMBER 30,
---------------------------------
2000 1999 1998
--------- --------- ---------
NET SALES................................................... $28,931.9 $22,496.5 $19,061.7
Cost of sales............................................... 17,931.2 14,433.1 12,694.8
Selling, general and administrative expenses................ 5,252.0 4,436.3 4,161.9
Merger, restructuring and other non-recurring charges....... 175.3 928.8 256.9
Charge for the impairment of long-lived assets.............. 99.0 507.5 --
--------- --------- ---------
OPERATING INCOME............................................ 5,474.4 2,190.8 1,948.1
Interest income............................................. 75.2 61.5 62.6
Interest expense............................................ (844.8) (547.1) (307.9)
Gain on issuance of common shares by subsidiary............. 1,760.0 -- --
--------- --------- ---------
Income before income taxes, minority interest and
extraordinary items....................................... 6,464.8 1,705.2 1,702.8
Income taxes................................................ (1,926.0) (637.5) (534.2)
Minority interest........................................... (18.7) -- --
--------- --------- ---------
Income before extraordinary items........................... 4,520.1 1,067.7 1,168.6
Extraordinary items, net of taxes........................... (0.2) (45.7) (2.4)
--------- --------- ---------
NET INCOME.................................................. $ 4,519.9 $ 1,022.0 $ 1,166.2
========= ========= =========
BASIC EARNINGS PER COMMON SHARE:
Income before extraordinary items......................... $ 2.68 $ 0.65 $ 0.74
Extraordinary items, net of taxes......................... -- (0.03) --
Net income per common share............................... 2.68 0.62 0.74
DILUTED EARNINGS PER COMMON SHARE:
Income before extraordinary items......................... $ 2.64 $ 0.64 $ 0.72
Extraordinary items, net of taxes......................... -- (0.03) --
Net income per common share............................... 2.64 0.61 0.72
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic..................................................... 1,688.0 1,641.3 1,583.4
Diluted................................................... 1,713.2 1,674.8 1,624.7
See Notes to Consolidated Financial Statements.
29
TYCO INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN MILLIONS, EXCEPT PER SHARE DATA)
COMMON ACCUMULATED
SHARES CONTRIBUTED OTHER
FOR THE YEARS ENDED $0.20 SHARE SURPLUS-- ACCUMULATED COMPREHENSIVE COMPREHENSIVE
SEPTEMBER 30, 1998, 1999 AND 2000 PAR VALUE PREMIUM COMMON EARNINGS INCOME (LOSS) INCOME
--------------------------------- --------- -------- ----------- ----------- ------------- -------------
BALANCE AT SEPTEMBER 30, 1997.................. $303.7 $2,450.2 $ 2,559.4 $2,302.3 $ (136.9)
Comprehensive income:
Net income................................... 1,166.2 $1,166.2
Currency translation adjustment.............. (36.7) (36.7)
Unrealized loss on marketable securities..... (15.6) (15.6)
Minimum pension liability adjustment......... (14.7) (14.7)
--------
Total comprehensive income................. $1,099.2
========
Sale of common shares.......................... 10.2 1,239.9 (5.1)
Exchange of Liquid Yield Option Notes.......... 3.6 151.7
Dividends...................................... (305.9)
Restricted stock grants, net of surrenders..... .2 .1
Warrants and options exercised................. 8.0 344.9 35.5
Purchase of treasury shares.................... (1.8) (282.1)
Equity-related compensation expense, including
amortization of deferred compensation........ 43.4
Issuance of common shares for acquisition...... .2 19.0
Issuance of common shares for litigation
settlement................................... 7.8
Tax benefit on stock transactions.............. 55.1
Other adjustments.............................. (.8)
------ -------- --------- -------- --------
BALANCE AT SEPTEMBER 30, 1998.................. 324.1 4,035.0 2,584.0 3,162.6 (203.9)
Comprehensive income:
Net income................................... 1,022.0 $1,022.0
Currency translation adjustment.............. (258.3) (258.3)
Unrealized gain on marketable securities..... 12.6 12.6
Minimum pension liability adjustment......... (.5) (.5)
--------
Total comprehensive income................. $ 775.8
========
Exchange of Liquid Yield Option Notes.......... 1.6 70.7
Dividends...................................... (192.3)
Restricted stock grants, net of surrenders..... .2 13.2
Warrants and options exercised................. 8.2 846.5 17.7
Purchase of treasury shares.................... (2.5) (635.3)
Amortization of deferred compensation.......... 92.1
Issuance of common shares for acquisitions..... 6.4 1,448.4
Tax benefit on stock transactions.............. 15.2
Other adjustments.............................. 1.6
------ -------- --------- -------- --------
BALANCE AT SEPTEMBER 30, 1999.................. 338.0 4,881.5 3,607.6 3,992.3 (450.1)
Comprehensive income:
Net income................................... 4,519.9 $4,519.9
Currency translation adjustment.............. (384.0) (384.0)
Unrealized gain on marketable securities..... 1,075.7 1,075.7
Minimum pension liability adjustment......... 7.5 7.5
--------
Total comprehensive income................. $5,219.1
========
Exchange of Liquid Yield Option Notes.......... .4 16.0
Dividends...................................... (84.6)
Restricted stock grants, net of surrenders..... .6 .4
Options exercised.............................. 3.5 351.8
Purchase of treasury shares.................... (8.7) (1,876.4)
Equity-related compensation expense, including
amortization of deferred compensation........ 128.2
Issuance of common shares for acquisitions..... 3.1 668.3
Tax benefit on stock transactions.............. 125.7
Assumption of options in acquisitions.......... 116.5
------ -------- --------- -------- --------
BALANCE AT SEPTEMBER 30, 2000.................. $336.9 $5,233.3 $ 2,786.3 $8,427.6 $ 249.1
====== ======== ========= ======== ========
See Notes to Consolidated Financial Statements
30
TYCO INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
YEAR ENDED SEPTEMBER 30,
---------------------------------
2000 1999 1998
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 4,519.9 $ 1,022.0 $ 1,166.2
Adjustments to reconcile net income to net cash provided by
operating activities:
Merger, restructuring and other non-recurring (credits)
charges................................................. (84.2) 327.7 253.7
Charge for the impairment of long-lived assets............ 99.0 507.5 --
Minority interest in net income of consolidated
subsidiary.............................................. 18.7 -- --
Gain on issuance of common shares by subsidiary........... (1,760.0) -- --
Extraordinary items....................................... 0.2 45.4 2.4
Depreciation.............................................. 1,095.0 979.6 895.1
Goodwill and other intangibles amortization............... 549.4 331.6 242.6
Debt and refinancing cost amortization.................... 6.8 10.4 11.3
Interest on ITS vendor note............................... (14.0) (12.1) (11.5)
Deferred income taxes..................................... 507.8 351.6 (8.2)
Provisions for losses on accounts receivable and
inventory............................................... 354.3 211.5 192.9
Other non-cash items...................................... 73.8 (6.7) 2.5
Changes in assets and liabilities, net of the effects of
acquisitions and divestitures:
Receivables............................................. (992.4) (796.0) (88.9)
Proceeds from accounts receivable sale.................. 100.0 50.0 --
Contracts in process.................................... 28.9 642.2 (91.4)
Inventories............................................. (850.0) (124.4) (226.2)
Prepaid expenses and other current assets............... 100.2 (154.1) (57.7)
Accounts payable, accrued expenses and other current
liabilities........................................... 497.0 324.0 (96.4)
Income taxes payable.................................... 896.4 (10.2) 66.3
Deferred revenue........................................ (0.2) (54.1) (6.5)
Other, net.............................................. 128.4 (96.1) 35.6
--------- --------- ---------
Net cash provided by operating activities................. 5,275.0 3,549.8 2,281.8
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net.............. (1,703.8) (1,632.5) (1,317.5)
Construction in progress--TyCom Global Network.............. (111.1) -- --
Purchase of leased property (Note 2)........................ -- (234.0) --
Acquisition of businesses, net of cash acquired............. (4,790.7) (4,901.2) (4,251.8)
Disposal of businesses...................................... 74.4 926.8 --
Net (increase) decrease in investments...................... (353.4) 10.5 6.4
Other....................................................... (52.9) (13.7) (83.1)
--------- --------- ---------
Net cash utilized by investing activities................. (6,937.5) (5,844.1) (5,646.0)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) receipts of short-term debt.................. (736.0) 162.3 287.1
Net proceeds from issuance of public debt................... -- 1,173.7 2,744.5
Repayment of long-term debt, including debt tenders......... (376.8) (2,057.8) (1,074.6)
Proceeds from long-term debt................................ 1,793.2 3,665.6 802.0
Proceeds from sale of common shares......................... -- -- 1,245.0
Proceeds from exercise of options and warrants.............. 355.3 872.4 348.7
Net proceeds from issuance of common shares by subsidiary... 2,130.7 -- --
Dividends paid.............................................. (86.2) (187.9) (303.0)
Purchase of treasury shares................................. (1,885.1) (637.8) (283.9)
Other....................................................... (29.8) (7.1) (36.5)
--------- --------- ---------
Net cash provided by financing activities................. 1,165.3 2,983.4 3,729.3
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents........ (497.2) 689.1 365.1
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 1,762.0 1,072.9 707.8
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 1,264.8 $ 1,762.0 $ 1,072.9
========= ========= =========
SUPPLEMENTARY CASH FLOW DISCLOSURE:
Interest paid............................................... $ 814.2 $ 509.1 $ 250.7
========= ========= =========
Income taxes paid (net of refunds).......................... $ 454.7 $ 209.7 $ 345.9
========= ========= =========
See Notes to Consolidated Financial Statements.
31
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS--Tyco International Ltd. (the "Company" or "Tyco") manages its
business in the following five operating segments:
ELECTRONICS
The Electronics segment's products and services include:
- designing, engineering and manufacturing of electronic connector systems,
fiber optic components, wireless devices, heat shrink products, power
components, wire and cable, relays, sensors, touch screens, identification
and labeling products, switches and battery assemblies; and
- designing and manufacturing of multi-layer printed circuit boards,
backplane assemblies, electronic modules and similar components.
TELECOMMUNICATIONS
The Company's 86% owned subsidiary, TyCom Ltd. ("TyCom"), is a leading
independent provider of transoceanic fiber optic networks and services. TyCom's
products and services include:
- design, engineering, manufacture and installation of undersea cable
communications systems;
- service and maintenance of major undersea cable networks; and
- design, manufacture and installation of a global undersea fiber optic
network, known as the TyCom Global Network-TM- ("TGN"). TyCom plans to
operate, maintain and sell bandwidth capacity on the TGN.
HEALTHCARE AND SPECIALTY PRODUCTS
The Healthcare and Specialty Products segment's products and services
include:
- a wide variety of disposable medical products, including wound care
products, syringes and needles, sutures and surgical staplers,
incontinence products, electrosurgical instruments and laparoscopic
instruments;
- flexible plastic packaging, plastic bags and sheeting, coated and
laminated packaging materials, tapes and adhesives, and plastic garment
hangers; and
- ADT Automotive's auto redistribution services (See Note 25).
FIRE AND SECURITY SERVICES
The Fire and Security Services segment's products and services include:
- designing, installing and servicing a broad line of fire detection,
prevention and suppression systems;
- providing electronic security installation and monitoring services; and
- manufacturing and servicing fire extinguishers and related products.
FLOW CONTROL PRODUCTS AND SERVICES
The Flow Control Products and Services segment's products and services
include:
- a full line of valves and related products for industrial and process
control, pipe and tubular products, electrical raceway products and fire
sprinkler devices; and
32
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- a broad range of consulting, engineering, construction management and
operating services for the water, wastewater, environmental,
transportation and infrastructure markets.
BASIS OF PRESENTATION--The consolidated financial statements have been
prepared in United States dollars in accordance with generally accepted
accounting principles in the United States. As described more fully in Note 2,
Tyco merged with United States Surgical Corporation ("USSC") and AMP
Incorporated ("AMP") on October 1, 1998 and April 2, 1999, respectively. These
transactions are referred to herein as the "mergers." The 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 USSC and AMP as
if they had been combined for all periods presented.
PRINCIPLES OF CONSOLIDATION--Tyco is a holding company whose assets consist
of its investments in its subsidiaries, intercompany balances and holdings of
cash and cash equivalents. The businesses of the consolidated group are
conducted through the Company's subsidiaries. The Company consolidates companies
in which it owns or controls more than fifty percent of the voting shares unless
control is likely to be temporary. The results of companies acquired or disposed
of during the fiscal year are included in the consolidated financial statements
from the effective date of acquisition or up to the date of disposal except in
the case of mergers accounted for as pooling of interests (See Note 2). All
significant intercompany balances and transactions have been eliminated in
consolidation.
CASH EQUIVALENTS--All highly liquid investments purchased with a maturity of
three months or less are considered to be cash equivalents.
INVENTORIES--Inventories are recorded at the lower of cost (primarily
first-in, first-out) or market value.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment is principally
recorded at cost less accumulated depreciation. Maintenance and repair
expenditures are charged to expense when incurred. For the years ended
September 30, 2000, 1999 and 1998, the Company capitalized interest of $10.8
million, $8.7 million and $9.0 million, respectively. The straight-line method
of depreciation is used over the estimated useful lives of the related assets as
follows:
Buildings and related improvements.............. 5 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 25 years
Gains and losses arising on the disposal of property, plant and equipment
are included in the Consolidated Statements of Operations and were not material.
GOODWILL AND OTHER INTANGIBLE ASSETS--Goodwill, which is being amortized on
a straight-line basis over periods ranging from 10 to 40 years, was
$13,723.0 million and $10,639.3 million, net, at September 30, 2000 and 1999,
respectively. Accumulated amortization amounted to $959.3 million at
September 30, 2000 and $615.6 million at September 30, 1999.
Other intangible assets were $2,609.6 million and $1,519.6 million, net, at
September 30, 2000 and 1999, respectively. These amounts 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
33
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
September 30, 2000 and 1999, accumulated amortization amounted to
$525.2 million and $319.5 million, respectively.
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
classification 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 Consolidated Statements of Operations and were not material.
As of September 30, 2000, the Company had Available-for-Sale equity
investments with a fair market value of $1,320.3 million and a cost basis of
$218.7 million. The gross unrealized gains of $1,118.0 million and gross
unrealized losses of $16.4 million have been recorded net of deferred taxes of
$18.1 million, and have been included as a separate component of shareholders'
equity.
Other investments for which the Company does not have the ability to
exercise significant influence and for which there is not a readily determinable
market value are accounted for under the cost method of accounting. The Company
periodically evaluates the carrying value of its investments accounted for under
the cost method of accounting and, as of September 30, 2000 and 1999, such
investments were recorded at the lower of cost or estimated net realizable
value.
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
Company's share of net income or losses of equity investments is included in the
Consolidated Statements of Operations and was not material in any period
presented.
Investments are included in Other Assets in the Consolidated Balance Sheets.
LONG-LIVED ASSETS--The Company periodically evaluates the net realizable
value of long-lived assets, including goodwill and other intangible assets and
property, plant and equipment, relying on a number of factors including
operating results, business plans, economic projections and anticipated future
cash flows. An impairment in the carrying value of an asset is assessed when the
undiscounted, expected future operating cash flows derived from the asset are
less than its carrying value.
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 the installation of fire protection systems, underwater
cable systems and other construction related projects are recorded on the
percentage-of-completion method. Profits recognized on contracts in process are
based upon estimated contract revenue and related cost to completion. Revisions
in cost estimates as contracts progress have the effect of increasing or
decreasing profits in the current period. Provisions for anticipated losses are
made in the period in which they first become determinable.
Accounts receivable include amounts billed under retainage provisions
primarily for fire protection and electronic contracts. The retention balances
were $56.6 million and $33.3 million at September 30,
34
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
2000 and 1999, respectively, and become due upon contract completion and
acceptance. The balance as of September 30, 2000 is expected to be substantially
collected during the fiscal year ending September 30, 2001.
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
consolidated financial statements or tax returns. Deferred tax liabilities and
assets are determined based on the differences between the 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 Consolidated Statements
of Operations.
ADVERTISING--Advertising costs are expensed when incurred.
ISSUANCE OF STOCK BY A SUBSIDIARY--Gains on the issuance of common shares by
a subsidiary are included in net income.
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 component of accumulated other comprehensive income (loss)
within 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.
Gains and losses resulting from foreign currency transactions, the amounts
of which are not material, are included in net income.
FINANCIAL INSTRUMENTS--From time to time the Company enters into a variety
of forward foreign currency exchange contracts, cross-currency swaps, currency
options, forward commodity contracts and interest rate swaps in its management
of foreign currency and commodity exposures and interest costs.
Forward foreign currency exchange contracts and cross-currency swaps, used
to mitigate the impact of changes in currency exchange rates on intercompany
cross-border obligations, are accounted for consistent with the related
intercompany transactions. Under cross-currency swaps, which principally hedge
certain net foreign currency denominated investments, changes in valuation are
included in the currency translation adjustment component of accumulated other
comprehensive income (loss) within shareholders' equity. The interest
differentials on cross-currency swaps are included in interest expense. Forward
foreign currency exchange contracts and currency options, acquired for the
purpose of
35
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reducing exposure to currency fluctuations associated with expected cash flows
denominated in currencies other than the functional currencies, are marked to
market with realized and unrealized gains or losses reflected in selling,
general and administrative expenses.
Under forward commodity contracts which hedge anticipated purchases of
certain metals and other materials used in manufacturing operations payments are
received or paid based on the differential between the contract price and the
actual price of the underlying commodity. Gains or losses on forward commodity
contracts are recorded as adjustments to the value of the purchased commodity.
Interest rate swaps 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 are
recognized over the life of the underlying agreement or indebtedness,
respectively, as an adjustment to interest expense.
Receivables and payables related to unrealized increases and decreases in
the values of derivative financial instruments are included in other current
assets and other current liabilities, respectively, and are not material.
USE OF ESTIMATES--The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make extensive use of certain estimates and assumptions that affect the reported
amount of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reported periods.
Significant estimates in these consolidated financial statements include merger,
restructuring and other non-recurring (credits) charges, purchase accounting
reserves, 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 these estimates.
ACCOUNTING PRONOUNCEMENTS--In June 1998 and June 2000, the FASB issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities." These statements establish accounting and reporting standards
requiring that every derivative instrument be recorded on the balance sheet as
either an asset or liability measured at its fair value. SFAS Nos. 133 and 138
also require that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. SFAS Nos. 133 and
138 are effective for fiscal years beginning after June 15, 2000. The Company
does not expect that the adoption of these new standards will have a material
impact on the Company's earnings or financial position.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"), which clarifies certain existing accounting principles for the
timing of revenue recognition and its classification in the financial
statements. In June 2000, the SEC delayed the required implementation date of
SAB 101. As a result, SAB 101 will not be effective for the Company until the
quarter ended September 30, 2001. In October 2000, the SEC issued further
guidance on the interpretations included in SAB 101. The Company is currently
analyzing the impact of this Staff Accounting Bulletin.
36
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities--a
replacement of FASB Statement No. 125" ("SFAS 140"). SFAS 140 revises the
standards for accounting for securitizations and other transfers of financial
assets and collateral and requires certain disclosures, but it carries over most
of SFAS 125's provisions without reconsideration. This Statement is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. This Statement is effective for
recognition and reclassification of collateral and for disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 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 SPLITS--Per share amounts and share data have been retroactively
restated to give effect to the two-for-one stock splits distributed on
October 22, 1997 and October 21, 1999, both effected in the form of a stock
dividend (See Note 10).
2. POOLING OF INTERESTS TRANSACTIONS
On April 2, 1999 and October 1, 1998, Tyco merged with AMP and USSC,
respectively. A total of approximately 329.2 million and 118.4 million Tyco
common shares, respectively, were issued to the former shareholders of these
companies.
Both of the merger transactions discussed above were 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.
Aggregate fees and expenses related to the mergers and to the integration of
the combined companies have been expensed in the Consolidated Statements of
Operations in the period in which each transaction was consummated, as required
under the pooling of interests method of accounting (See Notes 12 and 16).
37
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. POOLING OF INTERESTS TRANSACTIONS (CONTINUED)
Combined and separate results of Tyco, USSC and AMP for the periods
preceding the mergers were as follows ($ in millions):
TYCO USSC AMP ADJUSTMENTS COMBINED
--------- -------- -------- ----------- ---------
Six months ended March 31, 1999
(unaudited) (i)
Net sales.............................. $ 7,776.8 $ -- $2,675.5 $ -- $10,452.3
Operating income (loss)................ 906.1 -- (405.2) -- 500.9
Extraordinary items, net of taxes...... (44.9) -- -- -- (44.9)
Net income (loss)...................... 408.8 -- (376.0) (3.0)(iii) 29.8
Year ended September 30, 1998 (ii)
Net sales.............................. 12,311.3 1,225.9 5,524.5 -- 19,061.7
Operating income (loss)................ 1,923.7 (298.5) 322.9 -- 1,948.1
Extraordinary items, net of taxes...... (2.4) -- -- -- (2.4)
Net income (loss)...................... 1,174.7 (212.0) 208.5 (5.0)(iii) 1,166.2
------------------------
(i) Includes merger, restructuring and other non-recurring charges of
$414.6 million and impairment charges of $76.0 million primarily related to
the merger with USSC, and restructuring and other non-recurring charges of
$275.3 million, of which $55.2 million is included in cost of sales, and
impairment charges of $236.7 million related to AMP's profit improvement
plan. Also includes a credit of $8.3 million representing a revision of
estimates related to Tyco's 1997 merger, restructuring and other
non-recurring accruals.
(ii) Includes restructuring and other non-recurring charges of $164.4 million
primarily related to AMP's profit improvement plan and $92.5 million
principally related to costs incurred by USSC to exit certain businesses.
(iii) As a result of the combination of Tyco and AMP, an income tax adjustment
was recorded to conform tax accounting.
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.
38
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DIVESTITURES
FISCAL 2000
During Fiscal 2000, the Company purchased businesses for an aggregate cost
of $5,162.0 million, consisting of $4,246.5 million in cash, net of cash
acquired, the issuance of approximately 15.6 million common shares valued at
$671.4 million and the assumption of $244.1 million in debt. In addition,
$544.2 million of cash was paid during the year for purchase accounting
liabilities related to current and prior years' acquisitions. The cash portions
of the acquisition costs were funded utilizing cash on hand, the issuance of
long-term debt and borrowings under the Company's 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.
In connection with these acquisitions, the Company recorded purchase
accounting liabilities of $426.2 million for transaction costs and the costs of
integrating the acquired companies within the various Tyco business segments.
Details regarding these purchase accounting liabilities are set forth below.
At the time each purchase acquisition is made, the Company records each
asset acquired and each liability assumed at its estimated fair value, which
amount is subject to future adjustment when appraisals or other further
information are obtained. The excess of (a) the total consideration paid for the
acquired company over (b) the fair value of assets acquired less liabilities
assumed and purchase accounting liabilities recorded is recorded as goodwill. As
a result of acquisitions completed in Fiscal 2000, and adjustments to the fair
values of assets and liabilities and purchase accounting liabilities recorded
for acquisitions completed prior to Fiscal 2000, the Company recorded
approximately $5,206.8 million in goodwill and other intangibles.
The following table shows the fair values of assets and liabilities and
purchase accounting liabilities recorded for purchase acquisitions completed in
Fiscal 2000, adjusted to reflect changes in fair values of assets and
liabilities and purchase accounting liabilities recorded for acquisitions
completed prior to Fiscal 2000 ($ in millions):
Receivables................................................. $ 714.4
Inventories................................................. 453.9
Prepaid expenses and other current assets................... 257.0
Property, plant and equipment............................... 674.6
Goodwill and other intangible assets........................ 5,206.8
Other assets................................................ 95.2
--------
7,401.9
--------
Accounts payable............................................ 485.8
Accrued expenses and other current liabilities.............. 1,286.6
Other long-term liabilities................................. 351.0
Options assumed............................................. 116.5
--------
2,239.9
--------
$5,162.0
========
Cash consideration paid (net of cash acquired).............. $4,246.5
Share consideration paid.................................... 671.4
Debt assumed................................................ 244.1
--------
$5,162.0
========
39
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DIVESTITURES (CONTINUED)
Thus, in Fiscal 2000, the Company spent a total of $4,790.7 million in cash
related to the acquisition of businesses, consisting of $4,246.5 million of cash
in purchase price for these businesses (net of cash acquired) plus
$544.2 million of cash paid out during the year for purchase accounting
liabilities related to current and prior years' acquisitions.
Fiscal 2000 purchase acquisitions include, among others, the acquisition of
General Surgical Innovations, Inc. ("GSI"), AFC Cable Systems, Inc. ("AFC
Cable") and Siemens Electromechanical Components GmbH & Co. KG ("Siemens EC") in
November 1999, Praegitzer Industries, Inc. ("Praegitzer") in December 1999,
Critchley Group PLC ("Critchley") in March 2000 and the Electronic OEM Business
of Thomas & Betts in July 2000. GSI, a manufacturer and distributor of balloon
dissectors and related devices for minimally invasive surgery, was purchased
through the issuance of approximately 2.8 million Tyco common shares valued at
$108.6 million and has been integrated within the Healthcare and Specialty
Products segment. AFC Cable, a manufacturer of prewired armor cable, was
purchased through the issuance of approximately 12.8 million Tyco common shares
valued at $562.8 million and has been integrated within the Flow Control
Products and Services segment. Siemens EC, a world market leader for relays and
one of the world's leading providers of components to the communications,
automotive, consumer and general industry sectors, was purchased for
$1,165.8 million in cash and has been integrated within the Electronics segment.
Praegitzer, a provider of printed circuit board and interconnect solutions to
OEMs and contract manufacturers in the communications, computer, industrial and
consumer electronics industries, was purchased for $72.2 million in cash and has
been integrated within the Electronics segment. Critchley, a world leader in
cable identification products, was purchased for $185.0 million in cash and has
been integrated within the Electronics segment. The Electronic OEM Business of
Thomas & Betts, a manufacturer of electronic connectors for the
telecommunications, computer and automotive industries, was purchased for
$750.0 million in cash and is being integrated within the Electronics segment.
The following table summarizes the purchase accounting liabilities recorded
in connection with the Fiscal 2000 purchase acquisitions ($ in millions):
SEVERANCE FACILITIES OTHER
-------------------- --------------------- --------
NUMBER OF NUMBER OF
EMPLOYEES RESERVE FACILITIES RESERVE RESERVE
--------- -------- ---------- -------- --------
Original reserve established.................... 7,215 $243.0 102 $87.6 $95.6
Fiscal 2000 activity............................ (4,023) (146.2) (53) (34.3) (47.3)
------ ------ --- ----- -----
Ending balance at September 30, 2000............ 3,192 $ 96.8 49 $53.3 $48.3
====== ====== === ===== =====
Purchase accounting liabilities recorded during Fiscal 2000 consist of
$243.0 million for severance and related costs; $87.6 million for costs
associated with the shut down and consolidation of certain acquired facilities,
including unfavorable leases, lease terminations and other related fees and
other costs and $95.6 million for transaction and other direct costs, including
pension and other employee related costs and other costs. These purchase
accounting liabilities relate primarily to the acquisitions of GSI, AFC Cable,
Siemens EC, Praegitzer, Critchley and the Electronics OEM Business of Thomas &
Betts.
In connection with the Fiscal 2000 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 102 facilities. The Company has
communicated with the employees of the acquired companies to
40
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DIVESTITURES (CONTINUED)
announce the benefit arrangements. The costs of employee termination benefits
relate to the elimination of 2,895 positions in the United States, 2,434
positions in Europe, 1,135 positions in Canada and Latin America and 751
positions in the Asia-Pacific region, primarily consisting of manufacturing and
distribution, administrative, technical, and sales and marketing personnel.
Facilities designated for closure include 43 facilities in the United States, 32
facilities in Europe, 24 facilities in the Asia-Pacific region and 3 facilities
in Canada, primarily consisting of manufacturing plants, sales offices,
corporate administrative facilities and research and development facilities. At
September 30, 2000, 4,023 employees had been terminated and 53 facilities had
been closed or consolidated.
In connection with the purchase acquisitions consummated during Fiscal 2000,
liabilities for approximately $96.8 million for severance and related costs,
$53.3 million for the shutdown and consolidation of acquired facilities and
$48.3 million in transaction and other direct costs remained on the balance
sheet at September 30, 2000. 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 plan finalization, except for
certain long-term contractual obligations.
During Fiscal 2000, the Company reduced its estimate of purchase accounting
liabilities related to acquisitions in prior years by $117.8 million and,
accordingly, goodwill and related deferred tax assets were reduced by an
equivalent amount. These changes primarily resulted from costs being less than
originally anticipated on certain acquisitions. In addition, the Company
finalized its business plan for the exiting of activities and the involuntary
termination of employees in connection with the 1999 acquisition and integration
of Raychem, and as a result recorded $90.0 million of purchase accounting
liabilities.
During Fiscal 2000, the Company sold certain of its businesses for net
proceeds of approximately $74.4 million in cash that consist primarily of
certain businesses within the Healthcare and Specialty Products segment.
The following unaudited pro forma data summarize the results of operations
for the periods indicated as if the Fiscal 2000 acquisitions and divestitures
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
divestitures. Adjustments to interest expense, goodwill amortization and income
taxes related to the Fiscal 2000 acquisitions are reflected in the pro forma
data. 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 and
divestitures had occurred as of the beginning of the periods presented or that
may be obtained in the future.
YEAR ENDED SEPTEMBER 30,
--------------------------
2000 1999
---------- ----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Net sales............................................. $30,383.6 $25,633.3
Income before extraordinary items..................... 4,478.2 976.8
Net income............................................ 4,478.0 931.1
Net income per common share:
Basic............................................... 2.65 0.57
Diluted............................................. 2.61 0.56
41
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DIVESTITURES (CONTINUED)
FISCAL 1999
In addition to the pooling of interests transactions discussed in Note 2,
during Fiscal 1999, the Company purchased businesses for an aggregate cost of
$6,923.3 million, consisting of $4,546.8 million in cash, net of cash acquired,
the issuance of 32.4 million common shares valued at $1,449.6 million and the
assumption of $926.9 million in debt. In addition, $354.4 million of cash was
paid during the year for purchase accounting liabilities related to 1999 and
prior years' acquisitions. The cash portions of the acquisition costs were
funded utilizing cash on hand, the issuance of long-term debt and borrowings
under the Company's 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.
In connection with these acquisitions, the Company recorded purchase
accounting liabilities of $525.4 million for transaction costs and the costs of
integrating the acquired companies within the various Tyco business segments.
Details regarding these purchase accounting liabilities are set forth below.
During Fiscal 1999, the Company spent a total of $4,901.2 million in cash
related to the acquisition of businesses, consisting of $4,546.8 million of
purchase price (net of cash acquired) plus $354.4 million of cash paid out
during the year for purchase accounting liabilities related to 1999 and prior
years' acquisitions.
The following table summarizes the purchase accounting liabilities recorded
in connection with the Fiscal 1999 purchase acquisitions ($ in millions):
SEVERANCE FACILITIES OTHER
-------------------- --------------------- --------
NUMBER OF NUMBER OF
EMPLOYEES RESERVE FACILITIES RESERVE RESERVE
--------- -------- ---------- -------- --------
Original reserve established................... 5,620 $ 234.3 183 $174.8 $116.3
Fiscal 1999 activity........................... (3,230) (55.9) (95) (48.2) (46.0)
Fiscal 2000 activity........................... (1,969) (158.6) (81) (86.3) (63.5)
Changes in estimates........................... 964 28.7 65 47.5 13.8
Reversal to goodwill in Fiscal 2000............ (250) (5.7) (45) (17.7) (2.4)
------ ------- --- ------ ------
Ending balance at September 30, 2000........... 1,135 $ 42.8 27 $ 70.1 $ 18.2
====== ======= === ====== ======
Purchase accounting liabilities recorded during Fiscal 1999 consist of
$234.3 million for severance and related costs, $174.8 million for costs
associated with the shut down and consolidation of certain acquired facilities
and $116.3 million for transaction and other direct costs. The $234.3 million of
severance and related costs covers employee termination benefits for
approximately 5,620 employees located throughout the world, consisting primarily
of manufacturing and distribution employees to be terminated as a result of the
shut down and consolidation of production facilities and, to a lesser extent,
administrative, technical and sales and marketing personnel. At September 30,
2000, 5,199 employees had been terminated and $42.8 million in severance and
related costs remained in the Consolidated Balance Sheet. The Company expects
that the remaining employee terminations will be completed in Fiscal 2001.
The $174.8 million of exit costs are associated with the closure and
consolidation of facilities involving 183 facilities located primarily in the
Asia-Pacific region and the United States. These facilities include
manufacturing plants, sales offices, corporate administrative facilities and
research and development facilities. Included within these costs are accruals
for non-cancelable leases associated with
42
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DIVESTITURES (CONTINUED)
certain of these facilities. Approximately 176 facilities had been closed or
consolidated at September 30, 2000. The remaining facilities include primarily
large manufacturing plants, which are expected to be shut down in Fiscal 2001.
Expenses in connection with the closure of these remaining facilities, as well
as the expiration of non-cancelable leases (less any expected sublease income
for facilities already closed), comprise the approximately $70.1 million for
facility related costs remaining in the Consolidated Balance Sheet as of
September 30, 2000.
During Fiscal 1999, the Company reduced its estimate of purchase accounting
liabilities relating primarily to Fiscal 1998 acquisitions by $90.0 million and,
accordingly, goodwill and related deferred tax assets were reduced by an
equivalent amount. These changes primarily resulted from costs being less than
originally anticipated for acquisitions consummated prior to Fiscal 1999.
During Fiscal 1999, the Company sold certain of its businesses for net
proceeds of approximately $926.8 million in cash. These consist primarily of
certain businesses within the Flow Control Products and Services segment,
including The Mueller Company and portions of Grinnell Supply Sales and
Manufacturing, and certain businesses within the Healthcare and Specialty
Products segment. The aggregate net gain recognized on the sale of these
businesses was not material. In connection with the Flow Control divestiture,
the Company granted a non-exclusive license to the buyer for use of certain
intellectual property and is entitled to receive future royalties equal to a
percentage of net sales of the businesses sold. The Company also granted an
option to the buyer to purchase certain intellectual property in the future at
the then fair market value.
FISCAL 1998
During Fiscal 1998, the Company acquired companies for an aggregate cost of
$4,559.4 million, consisting of $4,154.8 million in cash, the assumption of
approximately $260 million in debt and the issuance of 765,544 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 bank credit agreements, proceeds of approximately
$1,245.0 million from the sale of common shares, and 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, the Company recorded
approximately $3,947.0 million in goodwill and other intangibles. As of
September 30, 2000, $14.3 million in employee severance, principally payments to
employees previously severed, and $28.7 million of facility related costs,
principally for the expiration of non-cancelable leases on vacant premises,
remained in the Consolidated Balance Sheet.
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 Consolidated
Balance Sheets. 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. In October 2000, the Company redeemed these
preference shares for $128.7 million.
43
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INDEBTEDNESS
Long-term debt is as follows ($ in millions):
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
Commercial paper program(i)................................. $2,420.6 $1,392.0
Bank credit agreement(i).................................... -- --
Euro commercial paper program(ii)........................... 172.9 --
International overdrafts and demand loans(iii).............. 83.0 184.9
8.125% public notes due 1999................................ -- 10.5
Floating rate private placement notes due 2000(iv).......... -- 499.4
0.57% Yen denominated private placement notes due
2000(iv).................................................. -- 89.7
8.25% senior notes due 2000................................. -- 9.5
Floating rate private placement notes due 2001(iv).......... 499.7 499.1
6.5% public notes due 2001.................................. 299.7 299.3
6.125% public notes due 2001(v)............................. 749.2 748.1
Floating rate Euro denominated private placement note due
2002(vi).................................................. 66.3 --
6.875% public notes due 2002(iv)............................ 994.9 992.2
5.875% public notes due 2004(vii)........................... 398.2 397.7
6.375% public notes due 2004................................ 104.7 104.6
6.375% public notes due 2005(v)............................. 744.8 743.7
6.125% Euro denominated public notes due 2007(viii)......... 525.4 --
6.125% public notes due 2008(vii)........................... 395.5 394.9
7.2% notes due 2008(ix)..................................... 398.9 398.8
7.25% senior notes due 2008(x).............................. 8.2 8.2
6.125% public notes due 2009(xi)............................ 394.7 394.1
Zero coupon Liquid Yield Option Notes due 2010(xii)......... 35.0 49.1
International bank loans, repayable through 2013(xiii)...... 218.0 208.2
6.25% public Dealer Remarketable Securities ("Drs.") due
2013(v)................................................... 757.3 760.1
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(v)............................... 492.6 492.4
6.875% public notes due 2029(xi)............................ 781.2 780.5
Financing lease obligation(xiv)............................. 55.3 69.5
Other....................................................... 303.9 496.7
-------- --------
Total debt.................................................. 10,999.0 10,122.2
Less current portion........................................ 1,537.2 1,012.8
-------- --------
Long-term debt.............................................. $9,461.8 $9,109.4
======== ========
------------------------
(i) In January 1999, Tyco International Group S.A. ("TIG"), a wholly-owned
subsidiary of the Company, initiated a commercial paper program with an
aggregate face value of up to $1.75 billion. In February 2000, TIG increased
its borrowing capacity under the commercial paper program to $4.5 billion.
The notes are fully and unconditionally guaranteed by the Company. Proceeds
from the sale of the notes are used for working capital and other corporate
purposes. TIG is required to maintain an available unused balance under its
bank credit agreement sufficient to support amounts outstanding under the
commercial paper program. In February 2000, TIG renegotiated its revolving
credit agreement with a group of commercial banks, giving it the right to
44
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INDEBTEDNESS (CONTINUED)
borrow up to $4.5 billion until February 9, 2001, with the option to extend
to February 9, 2002. TIG has the option to increase the $4.5 billion credit
facility up to $5.0 billion. TIG also has a $0.5 billion multiyear revolving
credit facility which expires on February 12, 2003. Interest payable on
borrowings under the two facilities is variable based upon TIG's option to
select a Euro rate plus margins ranging from 0.41% to 0.43%, or a base rate,
as defined. If the outstanding principal amount of loans equals or exceeds
25% of the commitments, the Euro margins are increased by 0.125%. The
obligations of TIG under the credit agreements are fully and unconditionally
guaranteed by the Company. TIG is using the credit agreements to fully
support its commercial paper program and therefore expects these facilities
to remain largely undrawn. The Company is required to meet certain covenants
under the credit agreements, none of which is considered restrictive to the
operations of the Company.
(ii) In June 2000, TIG initiated a European commercial paper program under which
it could initially issue notes with an aggregate face value of up to
E 300 million. In September 2000, TIG increased its borrowing capacity under
the European commercial paper program to E 500 million. The notes are fully
and unconditionally guaranteed by the Company. Proceeds from the sale of
these notes are used for working capital and other corporate purposes.
(iii) 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 2000 and Fiscal 1999
was 5.1% and 5.3%, respectively.
(iv) In August 1999, TIG issued $500 million floating rate notes due 2000,
$500 million floating rate notes due 2001, $1 billion 6.875% notes due 2002
and Y 10 billion (approximately $89.7 million) 0.57% notes due 2000. The
$500 million floating rate notes bear interest at LIBOR plus 0.6% for the
2000 notes and LIBOR plus 0.7% for the 2001 notes. These notes are fully and
unconditionally guaranteed by Tyco (See Note 24). The net proceeds of
approximately $2,080.3 million were used to repay borrowings under TIG's
$4.5 billion commercial paper program discussed above. In connection with
the $1 billion 6.875% notes, TIG entered into an interest rate swap
agreement expiring in September 2002, under which TIG will receive a fixed
rate of 6.875% and will pay a floating rate based on the average of two
different LIBO rates, as defined, plus 3.755%. In June 2000, TIG offered to
exchange all of its $1 billion 6.875% private placement notes due 2002 for
public notes. The form and terms of the public notes are identical in all
material respects to the 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 United States securities laws. In
connection with the Yen denominated 0.57% notes, TIG entered into a
cross-currency swap expiring in September 2000, under which TIG received a
payment of Y 10 billion plus accrued interest at a rate of 0.57% and made
quarterly U.S. dollar payments based on LIBOR plus 0.60%, as well as a final
payment at maturity of approximately $89.7 million.
(v) In June 1998, TIG issued $750 million 6.125% notes due 2001, $750 million
6.375% notes due 2005, $750 million 6.25% Dealer Remarketable Securities
("Drs.") due 2013 and $500 million 7.0% notes due 2028 in a public offering.
Interest is payable semi-annually in June and December. Under the terms of
the Drs., the Remarketing Dealer has an option to remarket the Drs. in
June 2003, which if exercised would subject the Drs. to mandatory tender to
the Remarketing Dealer and reset the interest rate to an adjusted fixed rate
until June 2013. If the Remarketing Dealer does not exercise its option,
then all Drs. are required to be tendered to the Company in June 2003.
Repayment of amounts outstanding under these debt securities is fully and
45
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INDEBTEDNESS (CONTINUED)
unconditionally guaranteed by Tyco (See Note 24). The net proceeds of
approximately $2,744.5 million were ultimately used to repay borrowings
under TIG's bank credit agreement and uncommitted lines of credit. In
December 1998, TIG terminated two interest rate swap agreements with
notional amounts of $650 million each, which were entered into in June 1998
with a financial institution to hedge a portion of the fixed rate terms of
the public notes.
(vi) In July 2000, TIG issued a E 75 million floating rate note due 2002, which
bears interest at EURIBOR plus 0.42%.
(vii) 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 bank credit agreement. 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. Subsequently, during the third and fourth quarters of Fiscal
1999, TIG exchanged all of the $400 million 5.875% private placement notes
due 2004 and $400 million 6.125% private placement notes due 2008 for public
notes (See Note 24). The form and terms of the public notes of each series
are identical in all material respects to the 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.
(viii) In April 2000, TIG issued E600 million (approximately $565.7 million)
6.125% notes due 2007 in a private placement offering. The notes are fully
and unconditionally guaranteed by Tyco. The net proceeds were used to repay
borrowings under TIG's commercial paper program. In September 2000, TIG
offered to exchange all of its E600 million (approximately $565.7 million)
6.125% notes due 2007 for public notes. The form and terms of the public
notes are identical in all material respects to the 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 United
States securities laws.
(ix) In October 1998, Raychem issued notes in the amount of $400 million. The
notes mature on October 15, 2008, and bear interest at a rate of 7.2% per
annum.
(x) 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. In February 1999, the Company completed a tender offer in which
$292 million of the $300 million principal amount of the notes outstanding
were purchased.
(xi) 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 (See Note 24). The net
proceeds of approximately $1,173.7 million were used to repay borrowings
under TIG's bank credit agreement. 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.
46
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INDEBTEDNESS (CONTINUED)
(xii) 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 issue price per LYON was
$383.09, being 38.309% of the principal amount of $1,000 per LYON at
maturity, reflecting a yield to maturity of 6.5% per annum (computed on a
semi-annual bond equivalent basis). The discount amortization on the LYONs
is being charged as interest expense through the Consolidated Statements of
Operations on a basis linked to the yield to maturity. The LYONs discount
amortization amounted to $2.4 million in Fiscal 2000, $6.0 million in Fiscal
1999 and $11.0 million in Fiscal 1998. 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 54.352 common shares per LYON.
During Fiscal 2000 and Fiscal 1999, respectively, 32,169 and 147,418 LYONs
with carrying values of $16.4 million and $72.3 million were exchanged for
1,748,442 and 8,012,468 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 that 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.
(xiii) International bank loans represent term borrowings by Tyco Electronics
from various commercial banks. Borrowings are repayable in varying amounts
through 2013. The weighted-average interest rate on all international bank
loans as of September 30, 2000 and 1999 was 3.3% and 3.9%, respectively.
(xiv) 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 eleven year term of the lease with a balloon
payment of approximately 42 million French Francs ($6 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 5.0% and 4.0% per annum at September 30, 2000
and 1999, respectively.
The weighted-average rate of interest on all long-term debt was 6.5% and
6.2% during Fiscal 2000 and Fiscal 1999, respectively. The weighted-average rate
of interest on all variable long-term debt was 6.5% and 5.6% as of
September 30, 2000 and 1999, 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
$6.6 million, $0.9 million and $1.9 million for Fiscal 2000, Fiscal 1999 and
Fiscal 1998, respectively.
The aggregate amounts of total debt maturing during the next five years are
as follows (in millions): $1,537.2 in Fiscal 2001, $4,075.5 in Fiscal 2002,
$53.9 in Fiscal 2003, $129.4 in Fiscal 2004 and $1,161.6 in Fiscal 2005.
47
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SALE OF ACCOUNTS RECEIVABLE
The Company has an agreement under which several of its operating
subsidiaries sell a defined pool of trade accounts receivable to a limited
purpose subsidiary of the Company. The subsidiary, a separate corporate entity,
holds these receivables and sells participating interests in such accounts
receivable to financiers who, in turn, purchase and receive ownership and
security interests in those receivables. As collections reduce accounts
receivable included in the pool, the operating subsidiaries sell new receivables
to the limited purpose subsidiary. 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 in the Consolidated Balance
Sheets. The availability under the program is $500 million. At September 30,
2000 and 1999, $450 million and $350 million, respectively, was utilized under
the program. The proceeds from the sales were used to reduce borrowings under
TIG's commercial paper program and are reported as operating cash flows in the
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 cost
that the limited purpose subsidiary would incur if it were to issue commercial
paper backed by these accounts receivable. The discount from the face amount is
accounted for as a loss on the sale of receivables and has been included in
selling, general and administrative expenses in the Consolidated Statements of
Operations. Such discount aggregated $25.7 million, $15.7 million, and
$17.3 million, or 6.6%, 5.6% and 5.8% of the weighted-average balance of the
receivables outstanding, during Fiscal 2000, Fiscal 1999 and Fiscal 1998,
respectively. The operating subsidiaries retain collection and administrative
responsibilities for the participating interests in the defined pool.
6. FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, long-term investments, accounts payable, debt
and derivative financial instruments. The notional amounts of the derivative
financial instruments were as follows ($ in millions):
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
Forward foreign currency exchange contracts................. $2,867.5 $2,717.3
Currency options............................................ -- 160.0
Cross-currency swaps........................................ 150.0 447.9
Forward commodity contracts................................. 112.0 104.0
Interest rate swaps......................................... 1,800.0 1,800.0
While it is not the Company's intention to terminate the above derivative
financial instruments, fair values were estimated, based on market rates or
quotes from brokers, which represented the amounts that the Company would
receive or pay if the instruments were terminated at the balance sheet dates.
These fair values indicated that the termination of forward foreign currency
exchange contracts, cross-currency swap agreements, currency options, forward
commodity contracts and interest rate swaps at September 30, 2000 would have
resulted in a $279.0 million gain, a $15.3 million loss, a zero gain, an
$11.1 million gain and a $95.7 million loss, respectively, and at September 30,
1999 would have resulted in a $52.7 million loss, a $27.0 million loss, a
$0.7 million loss, a $13.0 million gain and a $66.9 million loss, respectively.
At September 30, 2000 and 1999, the book values of derivative financial
instruments recorded in the Consolidated Balance Sheets approximated fair
values.
48
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. FINANCIAL INSTRUMENTS (CONTINUED)
The fair value of cash and cash equivalents, accounts receivable, long-term
investments and accounts payable approximated book value at September 30, 2000
and 1999. The fair value of debt was approximately $10,851.6 million (book value
of $10,999.0 million) and $10,120.4 million (book value of $10,122.2 million) at
September 30, 2000 and 1999, respectively, based on discounted cash flow
analyses using current interest rates. The Company's financial instruments
present certain market and credit risks; however, concentrations of credit risk
are mitigated as the Company deals with a variety of major banks worldwide and
its accounts receivable are spread among a number of major industries, customers
and geographic areas. None of the Company's financial instruments with
off-balance sheet risk would result in a significant loss to the Company if a
counterparty failed to perform according to the terms of its agreement. The
Company does not require collateral or other security to be furnished by the
counterparties to its financial instruments. The Company does, however, maintain
reserves for potential credit losses on financial instruments.
7. INCOME TAXES
The provision for income taxes and the reconciliation between the notional
United States federal income taxes at the statutory rate on consolidated income
before taxes and the Company's income tax provision are as follows ($ in
millions):
YEAR ENDED SEPTEMBER 30,
------------------------------
2000 1999 1998
-------- -------- --------
Notional U.S. federal income taxes at the statutory
rate.................................................... $2,262.7 $596.8 $596.0
Adjustments to reconcile to the Company's income tax
provision:
U.S. state income tax provision, net.................... 46.7 33.6 15.8
SFAS 121 impairment..................................... 6.4 43.5 --
Non-U.S. net earnings................................... (495.6) (216.5) (67.9)
Nondeductible charges................................... 140.8 139.2 20.1
Other................................................... (35.0) 40.9 (29.8)
-------- ------ ------
Provision for income taxes.............................. 1,926.0 637.5 534.2
Deferred provision (benefit)............................ 721.3 191.2 (10.0)
-------- ------ ------
Current provision....................................... $1,204.7 $446.3 $544.2
======== ====== ======
The provisions for Fiscal 2000, Fiscal 1999, and Fiscal 1998 included
$648.6 million, $263.9 million and $210.5 million, respectively, for non-U.S.
income taxes. The non-U.S. component of income before income taxes was
$3,343.6 million, $1,376.3 million and $640.6 million for Fiscal 2000, Fiscal
1999 and Fiscal 1998, respectively.
49
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The deferred income tax balance sheet accounts result from temporary
differences between the amount of assets and liabilities recognized for
financial reporting and tax purposes. The components of the net deferred income
tax asset are as follows ($ in millions):
SEPTEMBER 30,
-----------------------
2000 1999
-------- --------
Deferred tax assets:
Inventories, accrued liabilities and reserves............. $ 295.5 $ 886.3
Accrued postretirement benefit obligation................. 99.6 102.9
Tax loss and credit carryforwards......................... 474.6 506.1
Interest.................................................. 85.9 81.2
Capitalized research and development...................... 63.0 72.3
Other..................................................... 56.1 49.8
-------- --------
1,074.7 1,698.6
-------- --------
Deferred tax liabilities:
Property, plant and equipment............................. (281.9) (440.6)
Undistributed earnings of subsidiaries.................... (155.1) (155.1)
Other..................................................... (151.7) (37.5)
-------- --------
(588.7) (633.2)
-------- --------
Net deferred income tax asset before valuation allowance.... 486.0 1,065.4
Valuation allowance......................................... (122.4) (207.5)
-------- --------
Net deferred income tax asset............................... $ 363.6 $ 857.9
======== ========
As of September 30, 2000, the Company had approximately $370 million of net
operating loss carryforwards in certain non-U.S. jurisdictions. Of these,
$230 million have no expiration, and the remaining $140 million will expire in
future years through 2010. U.S. operating loss carryforwards at September 30,
2000 were approximately $692 million and will expire in future years through
2020. A valuation allowance has been provided for operating loss carryforwards
that are not expected to be utilized.
In the normal course, the Company and its subsidiaries' income tax returns
are examined by various regulatory tax authorities. In connection with such
examinations, substantial tax deficiencies have been proposed. However, the
Company is contesting such proposed deficiencies, and ultimate resolution of
such matters is not expected to have a material adverse effect on the Company's
financial position, results of operations or liquidity.
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 2000, the maximum amount outstanding under this
program was $26.0 million. Loans receivable under this program were
$11.4 million and $18.6 million at September 30, 2000 and 1999, respectively.
50
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PREFERENCE SHARES
The Company has authorized 125,000,000 preference shares of $1 each, none of
which were issued or outstanding during fiscal 2000, 1999 or 1998. Rights as to
dividends, return of capital, redemption, conversion, voting and otherwise may
be determined by the Board of Directors of the Company on or before the time of
issuance. In the event of the liquidation of the Company, the holders of any
preference shares then outstanding would be entitled to payment to them of the
amount for which the preference shares were subscribed and any unpaid dividends
prior to any payment to the common shareholders.
10. SHAREHOLDERS' EQUITY
During the last quarter of Fiscal 1999, the Company announced that its Board
of Directors had declared a two-for-one stock split in the form of a 100% stock
dividend on its common shares. The split was payable on October 21, 1999 to
shareholders of record on October 1, 1999. In addition, 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,
which was distributed on October 22, 1997. Per share amounts and share data have
been retroactively adjusted to reflect both stock splits. There was no change in
the par value or the number of authorized shares as a result of these stock
splits.
During the third quarter of Fiscal 1999, in conjunction with the approval of
the merger with AMP, shareholders approved an increase in the number of
authorized common shares from 1,503,750,000 to 2,500,000,000. During the second
quarter of Fiscal 1998, shareholders approved an increase in the number of
authorized common shares from 750,000,000 to 1,503,750,000.
In December 1997 the Company filed a shelf registration to enable it to
offer from time to time unsecured debt securities or common shares, or any
combination of the foregoing, at an aggregate initial offering price not to
exceed $2.0 billion. In March 1998, the Company sold 50.6 million common shares
at $25.38 per share. The net proceeds from the sale of approximately
$1,245.0 million were used to repay indebtedness incurred for previous
acquisitions.
In August 2000, the Company filed an additional shelf registration to enable
it to offer from time to time unsecured debt securities, preference shares,
depositary shares or common shares, or any combination of the foregoing, at an
aggregate initial offering price not to exceed $2.5 billion. Availability under
this shelf registration statement incorporates any remaining availability under
the shelf registration filed in December 1997.
Information with respect to 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 0.7606 and 0.7507,
respectively (1.5212 and 1.5014, respectively, after giving effect to the
subsequent stock splits).
The total compensation cost expensed for all stock-based compensation awards
discussed below was $137.4 million, $96.9 million and $37.1 million for Fiscal
2000, Fiscal 1999 and Fiscal 1998, respectively.
RESTRICTED STOCK--The Company maintains a restricted stock ownership plan,
which 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, 2000, there were 31,397,856
shares authorized under the plan, of which 10,954,383 shares had been granted.
Common shares are awarded subject to certain restrictions with vesting varying
over periods of up to ten years.
51
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SHAREHOLDERS' EQUITY (CONTINUED)
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 of performance, once achievement of criteria is deemed probable. For
grants that vest through passage of time, the fair market value of the shares at
the time of the grant is amortized (net of tax benefit) to expense over the
period of vesting. The unamortized portion of deferred compensation expense is
recorded as a reduction of shareholders' equity. Recipients of all restricted
shares have the right to vote such shares and receive dividends. Income tax
benefits resulting from the vesting of restricted shares, including a deduction
for the excess, if any, of the fair market value of restricted shares at the
time of vesting over their fair market value at the time of the grants and from
the payment of dividends on unvested shares, are credited to contributed
surplus.
EMPLOYEE STOCK PURCHASE PLAN--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 portion 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.
SHARE OPTIONS--The Company has granted employee share options which were
issued under five fixed share option plans 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 (the "Incentive Plan"). The Incentive Plan is administered by the
Compensation Committee of the Board of Directors of the Company, which consists
exclusively of independent directors of the Company. Options are granted to
purchase common shares at prices which are equal to or greater than the market
price of the common shares on the date the option is granted. Conditions of
vesting are determined at the time of grant. Options which have been granted
under the Incentive Plan to date have generally vested and become exercisable
over periods of up to five years from the date of grant and have a maximum term
of ten years. The Company has reserved 140.0 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 are assumed and administered under the Incentive
Plan but do not count against this limit. At September 30, 2000, there were
approximately 37.0 million shares available for future grant under the Incentive
Plan. During October 1998, 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. The Company has reserved 50.0 million common shares for issuance
under the LTIP II. The terms and conditions of this plan are similar to the
Incentive Plan. At September 30, 2000, there were approximately 17.2 million
shares available for future grant under the LTIP II.
In connection with the acquisitions of Raychem in Fiscal 1999 and CIPE S.A.
and Holmes Protection in Fiscal 1998, options outstanding under the respective
stock option plans of these companies were assumed under the Incentive Plan. In
connection with the mergers occurring in Fiscal 1999 (See Note 2), all of the
options outstanding under the USSC and AMP stock option plans were assumed under
the 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.
52
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SHAREHOLDERS' EQUITY (CONTINUED)
Share option activity for all Tyco plans since September 30, 1997 has been
as follows:
WEIGHTED-AVERAGE
OUTSTANDING EXERCISE PRICE
----------- ----------------
At September 30, 1997................................. 107,261,072 $17.03
Assumed from acquisition............................ 87,232 10.23
Granted............................................. 32,011,414 23.51
Exercised........................................... (37,626,616) 9.20
Canceled............................................ (7,281,946) 27.48
-----------
At September 30, 1998................................. 94,451,156 24.83
Assumed from acquisition............................ 8,883,160 37.44
Granted............................................. 30,313,362 38.44
Exercised........................................... (43,180,390) 22.79
Canceled............................................ (4,476,021) 47.83
-----------
At September 30, 1999................................. 85,991,267 27.91
Granted............................................. 30,355,027 44.30
Exercised........................................... (17,240,959) 20.72
Canceled............................................ (4,090,184) 37.25
-----------
At September 30, 2000................................. 95,015,151 $32.01
===========
The following table summarizes information about outstanding and exercisable
Tyco options at September 30, 2000:
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
---------------- ----------- --------- ----------- ----------- ---------
$ 0.00 to $ 4.98 541,696 $4.11 2.8 541,696 $ 4.11
4.99 to 7.44 4,792,734 6.58 4.5 4,792,734 6.58
7.45 to 9.98 1,503,739 8.85 5.2 1,157,128 8.86
9.99 to 11.76 780,224 10.84 5.8 421,916 10.84
11.77 to 14.88 2,807,377 14.03 5.9 2,053,457 13.98
14.89 to 19.97 8,025,566 18.88 6.7 6,619,681 18.80
19.98 to 24.93 9,164,125 21.63 6.4 8,182,205 21.72
24.94 to 29.87 9,339,844 28.19 7.5 4,315,879 28.27
29.88 to 31.80 5,057,521 31.41 6.3 5,031,454 31.41
31.81 to 34.42 2,226,357 32.79 7.7 1,416,219 32.83
34.43 to 44.62 30,989,158 38.61 8.8 2,484,907 38.96
44.63 to 50.00 8,580,994 49.43 8.4 6,888,088 49.65
50.01 to 52.01 2,916,906 51.01 8.7 2,906,302 51.01
52.02 to 75.00 8,288,910 59.14 8.7 6,208,686 58.52
---------- ----------
Total 95,015,151 53,020,352
========== ==========
53
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SHAREHOLDERS' EQUITY (CONTINUED)
As a result of the merger with USSC, approximately 14.2 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,
approximately 7.8 million options became immediately exercisable due to the
change in ownership of AMP resulting from the merger.
TyCom has two option plans and an employee stock purchase plan. The exercise
price of options granted under the plans is equal to the fair market value at
the date of grant of TyCom common shares. TyCom options outstanding and
exercisable at September 30, 2000 were 21,607,050 and 26,250, respectively, at
prices ranging from $32.00 to $44.62 per share.
STOCK-BASED COMPENSATION--SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), allows companies to measure compensation cost in
connection with executive share option plans 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 and TyCom have decided to continue to
use the intrinsic value based method and do not recognize compensation expense
for the issuance of options with an exercise price equal to or greater than the
market price at the time of grant. Had the fair value based method been adopted
by Tyco and TyCom, Tyco's pro forma net income and pro forma net income per
common share for Fiscal 2000, Fiscal 1999 and Fiscal 1998 would have been as
follows:
2000 1999 1998
-------- -------- --------
Net income--pro forma (in millions)...................... $4,136.7 $858.3 $1,063.3
Net income per common share--pro forma
Basic.................................................. 2.45 0.52 0.67
Diluted................................................ 2.42 0.51 0.66
The estimated weighted-average fair value of Tyco and TyCom options granted
during Fiscal 2000 was $16.26 and $17.47, respectively. The estimated
weighted-average fair value of Tyco and AMP options granted during Fiscal 1999
was $12.13 and $7.11, respectively, on the date of grant using the
option-pricing model and assumptions referred to below. The estimated
weighted-average fair value of Tyco, USSC and AMP options granted during Fiscal
1998 was $8.24, $6.79 and $5.98, respectively, on the date of grant using the
option-pricing model and assumptions referred to below.
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 2000:
TYCO TYCOM
--------- ---------
Expected stock price volatility............................. 36% 60%
Risk free interest rate..................................... 6.35% 6.19%
Expected annual dividend yield per share.................... $0.05 --
Expected life of options.................................... 4.5 years 4.5 years
54
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SHAREHOLDERS' EQUITY (CONTINUED)
The following weighted-average assumptions were used for Fiscal 1999:
TYCO AMP
--------- ---------
Expected stock price volatility............................. 30% 27%
Risk free interest rate..................................... 5.15% 5.07%
Expected annual dividend yield per share.................... $0.05 1.25%
Expected life of options.................................... 4.2 years 6.5 years
The following weighted-average assumptions were used for Fiscal 1998:
TYCO USSC AMP
------- --------- ---------
Expected stock price volatility........................ 22% 39% 27%
Risk free interest rate................................ 5.62% 5.40% 5.50%
Expected annual dividend yield per share............... $0.05 $0.11 1.25%
Expected life of options............................... 5 years 4.2 years 6.5 years
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of what the effects may be in future years. SFAS 123 does not apply
to awards prior to 1995. Additional awards in future years are anticipated.
TREASURY SHARES--In November 1999, the Board of Directors authorized the
Company to reacquire up to 20 million of its common shares in the open market,
which was completed during the quarter ended March 31, 2000. In January 2000,
the Board of Directors authorized the Company to reacquire up to an additional
$2.0 billion of its common shares in the open market, of which the Company has
in excess of $0.9 billion remaining as of September 30, 2000. From time to time
the Company, through its subsidiaries, also purchases shares in the open market
to satisfy certain stock-based compensation arrangements. Treasury shares are
recorded at cost in the Consolidated Balance Sheets.
DIVIDENDS--Tyco has paid a quarterly cash dividend of $0.0125 per common
share since July 1997. USSC paid quarterly dividends of $0.04 per share in
Fiscal 1998. AMP paid dividends of $0.27 per share in the first two quarters of
Fiscal 1999, $0.26 per share in the first quarter of Fiscal 1998 and $0.27 per
share in the last three quarters of Fiscal 1998.
11. COMPREHENSIVE INCOME
The purpose of reporting comprehensive income (loss) is to report a measure
of all changes in equity, other than transactions with shareholders. Total
comprehensive income (loss) is included in the
55
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMPREHENSIVE INCOME (CONTINUED)
Consolidated Statements of Shareholders' Equity. The components of accumulated
other comprehensive income (loss) are as follows ($ in millions):
ACCUMULATED
CURRENCY UNREALIZED MINIMUM OTHER
TRANSLATION GAIN (LOSS) PENSION COMPREHENSIVE
ITEMS ON SECURITIES LIABILITY INCOME (LOSS)
----------- ------------- --------- -------------
Balance at September 30, 1997........... $(137.1) $ 10.8 $(10.6) $(136.9)
Current period change, gross.......... (45.0) (21.5) (24.6) (91.1)
Income tax benefit.................... 8.3 5.9 9.9 24.1
------- -------- ------ -------
Balance at September 30, 1998........... (173.8) (4.8) (25.3) (203.9)
Current period change, gross.......... (277.8) 18.6 5.2 (254.0)
Income tax benefit (expense).......... 19.5 (6.0) (5.7) 7.8
------- -------- ------ -------
Balance at September 30, 1999........... (432.1) 7.8 (25.8) (450.1)
Current period change, gross.......... (384.0) 1,094.8 11.5 722.3
Income tax expense.................... -- (19.1) (4.0) (23.1)
------- -------- ------ -------
Balance at September 30, 2000........... $(816.1) $1,083.5 $(18.3) $ 249.1
======= ======== ====== =======
12. CHARGE FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews the recoverability of the carrying value of long-lived
assets, primarily property, plant and equipment and related goodwill and other
intangible assets, for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable.
Impairment losses are recognized when expected future undiscounted 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 to fair value
if the sum of expected future undiscounted cash flows is less than book value.
Fair values are based on quoted market prices and assumptions concerning the
amount and timing of estimated future cash flows and assumed discount rates,
reflecting varying degrees of perceived risk.
2000 CHARGES
The Healthcare and Specialty Products segment recorded a charge of
$99.0 million primarily related to an impairment in goodwill and other
intangible assets associated with the Company exiting the interventional
cardiology business of USSC.
1999 CHARGES
The Electronics segment recorded a charge of $431.5 million in Fiscal 1999,
which includes $350.1 million related to the write-down of property, plant and
equipment, primarily manufacturing and administrative facilities, associated
with facility closures throughout AMP's worldwide operations in connection with
its profit improvement plan and the combination of facilities as a result of its
merger with the Company, approximately $143.6 million of which was taken as part
of the AMP profit improvement plan prior to its acquisition by Tyco. It also
includes an impairment in the value of goodwill and other intangibles of
$81.4 million. The Company evaluated the profitability and
56
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CHARGE FOR THE IMPAIRMENT OF LONG-LIVED ASSETS (CONTINUED)
anticipated customer demand for its various products and found that certain
product lines were underperforming compared to expectations. As a result of this
analysis, which was performed in connection with AMP's profit improvement plan,
the book value of goodwill and other intangibles was deemed impaired and written
down to fair value.
The Healthcare and Specialty Products segment recorded a charge of
$76.0 million in Fiscal 1999 primarily relating to the write-down of property,
plant and equipment, principally administrative facilities, associated with the
consolidation of facilities in USSC's operations in the United States and Europe
as a result of its merger with the Company.
13. EXTRAORDINARY ITEMS
The extraordinary item in Fiscal 2000 of $0.2 million, net of tax benefit of
$0.1 million, relates to the write-off of unamortized deferred financing costs
related to the LYONs (See Note 4). The extraordinary item in Fiscal 1999 of
$45.7 million, net of tax benefit of $18.0 million, relates primarily to the
write-off of net unamortized deferred financing costs related to the Company's
debt tender offers (See Note 4). The extraordinary item in Fiscal 1998 of
$2.4 million, net of tax benefit of $1.2 million, was the write-off of
unamortized deferred financing costs related to the LYONs (See Note 4).
14. EARNINGS PER COMMON SHARE
The reconciliations between basic and diluted earnings per common share are
as follows (in millions, except per share data):
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------------------- ------------------------------- -------------------------------
PER SHARE PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT LOSS SHARES AMOUNT
-------- -------- --------- -------- -------- --------- -------- -------- ---------
BASIC EARNINGS PER COMMON
SHARE:
Income before extraordinary
items..................... $4,520.1 1,688.0 $2.68 $1,067.7 1,641.3 $0.65 $1,168.6 1,583.4 $0.74
Stock options and
warrants.................. -- 21.2 -- 23.3 -- 20.9
Exchange of LYONs debt...... 1.5 4.0 3.9 10.2 7.2 20.4
-------- ------- -------- ------- -------- -------
DILUTED EARNINGS PER COMMON
SHARE:
Income before extraordinary
items plus assumed
conversions............... $4,521.6 1,713.2 $2.64 $1,071.6 1,674.8 $0.64 $1,175.8 1,624.7 $0.72
======== ======= ======== ======= ======== =======
The computation of diluted earnings per common share in Fiscal 2000, Fiscal
1999 and Fiscal 1998 excludes the effect of the assumed exercise of
approximately 7.3 million, 3.1 million and 23.8 million stock options,
respectively, that were outstanding as of September 30, 2000, 1999 and 1998,
respectively, because the effect would be anti-dilutive.
57
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. TYCOM LTD.
In August 2000, TyCom Ltd., a subsidiary of the Company, completed an
initial public offering (the "TyCom IPO") of 70,300,000 of its common shares at
a price of $32.00 per share. Net proceeds to TyCom from the TyCom IPO, after
deducting the underwriting discount, commissions and other direct costs, were
approximately $2.1 billion. Of that amount, TyCom paid $200 million as a
dividend to the Company. Prior to the TyCom IPO, the Company's ownership in
TyCom's outstanding common shares was 100%, and at September 30, 2000 the
Company's ownership in TyCom's outstanding common shares is approximately 86%.
As a result of the TyCom IPO, the Company recognized a pre-tax gain on its
investment in TyCom of approximately $1.76 billion ($1.01 billion, after-tax),
which has been included in gain on issuance of common shares by subsidiary in
the Consolidated Statement of Operations.
16. MERGER, RESTRUCTURING AND OTHER NON-RECURRING CHARGES (CREDITS)
Merger, restructuring and other non-recurring charges (credits), net, are as
follows ($ in millions):
2000 1999 1998
------------ ------------ ------------
Electronics.................................. $ (90.9)(i) $ 643.3(iii) $ 164.4
Healthcare and Specialty Products............ (10.9)(ii) 419.1 92.5
Fire and Security Services................... (11.2) (27.2) --
Telecommunications........................... 13.1 -- --
Corporate.................................... 276.2 -- --
-------- -------- --------
$ 176.3 $1,035.2 $ 256.9
======== ======== ========
------------------------
(i) Includes $0.9 million charge related to the write-down of inventory, which
is included in cost of sales, and a credit of $6.3 million also included in
cost of sales.
(ii) Includes $6.4 million charge related to the write-down of inventory, which
is included in cost of sales.
(iii) Includes $106.4 million charge related to the write-down of inventory,
which is included in cost of sales.
2000 CHARGES AND CREDITS
The Electronics segment recorded a net merger, restructuring and other
non-recurring credit of $90.9 million, which consists of credits of
$107.8 million and charges of $16.9 million. The merger, restructuring and other
non-recurring credit of $107.8 million, of which $6.3 million is included in
cost of sales, is related to the merger with AMP and costs associated with AMP's
profit improvement plan. The $107.8 million credit consists of a revision in
estimates of severance reserves of $55.2 million, facility reserves of
$7.8 million and other reserves of $44.8 million. See the table on page 60 for
Fiscal 2000 revision in estimates related to Fiscal 1999 charges. The
restructuring and other non-recurring charges of $16.9 million, of which
$0.9 million is included in cost of sales, is related to restructuring
activities in AMP's Brazilian operations and wireless communications business.
The following table
58
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. MERGER, RESTRUCTURING AND OTHER NON-RECURRING CHARGES (CREDITS) (CONTINUED)
provides information about the restructuring and other non-recurring charges
related to the Electronics segment recorded in Fiscal 2000 ($ in millions):
SEVERANCE FACILITIES OTHER
-------------------- --------------------- --------
NUMBER OF NUMBER OF
EMPLOYEES RESERVE FACILITIES RESERVE RESERVE TOTAL
--------- -------- ---------- -------- -------- --------
Fiscal 2000 charges.................... 941 $ 4.9 3 $ 4.8 $ 7.2 $ 16.9
Fiscal 2000 utilization................ (97) -- (3) (1.7) (5.1) (6.8)
------ ------ ------ ------ ------ ------
Ending balance at September 30, 2000... 844 $ 4.9 -- $ 3.1 $ 2.1 $ 10.1
====== ====== ====== ====== ====== ======
The cost of announced workforce reductions of $4.9 million includes the
elimination of 941 positions primarily in Brazil. The cost of facility closures
of $4.8 million consists of the shut-down and consolidation of 3 facilities. At
September 30, 2000, 97 employees had been terminated and 3 facilities had been
shut down. The remaining facility reserves are primarily for payments on
non-cancellable lease obligations.
The other charges of $7.2 million consist of the write-off of non-facility
assets and other direct costs.
The Healthcare and Specialty Products segment recorded a net merger,
restructuring and other non-recurring credit of $10.9 million. The
$10.9 million net credit consists of charges of $11.1 million related to USSC's
suture business and charges of $7.9 million, of which $6.4 million is included
in cost of sales, related to exiting USSC's interventional cardiology business.
Substantially all of these restructuring activities were completed during the
year. Also recorded was a credit of $29.9 million representing a revision in
estimates of prior years' merger, restructuring and other non-recurring
accruals, of which $19.7 million related primarily to the merger with USSC and
$10.2 million related to the Company's 1997 restructuring accruals. The
$19.7 million credit relates to a revision in estimates of severance reserves of
$4.2 million, facility reserves of $4.5 million and other reserves of
$11.0 million. See the table on page 61 for Fiscal 2000 revision in estimates
related to Fiscal 1999 charges.
The Fire and Security Services segment recorded restructuring and other
non-recurring credits of $11.2 million related to revision in estimates of the
Company's 1997 restructuring activities for amounts lower than originally
recorded. Actions under the Company's 1997 restructuring plans have been
substantially completed.
The Telecommunications segment recorded a non-recurring charge of
$13.1 million incurred in connection with the TyCom IPO.
In addition to segment (credits) charges, the Company recorded non-recurring
charges of $275.0 million as a reserve for certain claims relating to a merged
company in the Healthcare business and $1.2 million for other non-recurring
charges, all of which remains in other current liabilities in the Consolidated
Balance Sheet at September 30, 2000.
1999 CHARGES AND CREDITS
The Electronics segment recorded net merger, restructuring and other
non-recurring charges of $643.3 million primarily related to the merger with AMP
and costs associated with AMP's profit
59
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. MERGER, RESTRUCTURING AND OTHER NON-RECURRING CHARGES (CREDITS) (CONTINUED)
improvement plan. The following table provides information about these charges,
in addition to revision in estimates of Fiscal 1999 charges ($ in millions):
SEVERANCE FACILITIES OTHER
-------------------- --------------------- --------
NUMBER OF NUMBER OF
EMPLOYEES RESERVE FACILITIES RESERVE RESERVE TOTAL
--------- -------- ---------- -------- -------- --------
Fiscal 1999 charges................ 16,139 $ 433.7 87 $ 68.6 $ 141.0 $ 643.3
Fiscal 1999 utilization............ (8,410) (359.2) (45) (15.4) (16.8) (391.4)
Fiscal 2000 revision in
estimates........................ (5,375) (55.2) (14) (7.8) (44.8) (107.8)
Fiscal 2000 utilization............ (1,662) (7.9) (17) (14.0) (76.7) (98.6)
------- ------- ------- ------- ------- -------
Ending balance at September 30,
2000............................. 692 $ 11.4 11 $ 31.4 $ 2.7 $ 45.5
======= ======= ======= ======= ======= =======
The cost of announced workforce reductions of $433.7 million includes the
elimination of 16,139 positions primarily in the United States and Europe,
consisting primarily of manufacturing and distribution, administrative, research
and development and sales and marketing personnel. The cost of facility closures
of $68.6 million consists primarily of the shut-down and consolidation of 87
facilities primarily in the United States and Europe, consisting primarily of
manufacturing plants, distribution centers, administrative buildings, research
and development facilities and sales offices. It also includes $18.3 million
related to the write-down of inventory, which is included in cost of sales. At
September 30, 2000, 10,072 employees had been terminated and 62 facilities had
been shut down.
The other charges of $141.0 million consist of transaction costs of
$67.9 million for legal, printing, accounting, financial advisory services and
other direct expenses related to the AMP merger; $88.1 million related to the
write-down of inventory, discussed below; lease termination costs following the
merger of $9.6 million; a credit of $50.0 million related to a litigation
settlement with AlliedSignal Inc.; and other costs of $25.4 million relating to
the consolidation of certain product lines and other non-recurring charges
related to the AMP merger.
As part of the integration of AMP's electronics business and AMP's profit
improvement plan, the Company evaluated the profitability and anticipated
customer demand for its various products. As a result of this evaluation,
management decided to exit certain product lines and/or businesses which were
under-performing relative to expectations. The inventory held by the Company
related to these exited activities was deemed impaired and written down to
estimated fair value. The total write-down of $88.1 million was recorded as a
charge to cost of sales. These discontinued product lines represented
approximately $150 million of historical net sales for AMP on an annualized
basis.
The Healthcare and Specialty Products segment recorded net merger,
restructuring and other non-recurring charges of $419.1 million, consisting of a
$423.8 million charge primarily related to the merger with USSC and a
$4.7 million credit representing a revision of estimates related to Tyco's 1997
restructuring and other non-recurring accruals discussed below. The following
table provides
60
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. MERGER, RESTRUCTURING AND OTHER NON-RECURRING CHARGES (CREDITS) (CONTINUED)
information about these charges, in addition to revision in estimates of Fiscal
1999 charges ($ in millions):
SEVERANCE FACILITIES OTHER
-------------------- --------------------- --------
NUMBER OF NUMBER OF
EMPLOYEES RESERVE FACILITIES RESERVE RESERVE TOTAL
--------- -------- ---------- -------- -------- --------
Fiscal 1999 charges................. 1,467 $ 124.8 45 $ 51.8 $ 247.2 $ 423.8
Fiscal 1999 activity................ (1,282) (99.3) (20) (18.3) (217.6) (335.2)
Fiscal 2000 revision in estimates... -- (4.2) (1) (4.5) (11.0) (19.7)
Fiscal 2000 utilization............. (91) (14.8) (17) (10.7) (18.6) (44.1)
------- ------- ------ ------- ------- -------
Ending balance at September 30,
2000.............................. 94 $ 6.5 7 $ 18.3 $ -- $ 24.8
======= ======= ====== ======= ======= =======
The cost of announced workforce reductions of $124.8 million includes the
elimination of 1,467 positions primarily in the United States and Europe,
consisting primarily of manufacturing and distribution, sales and marketing,
administrative and research and development personnel. The cost of facility
closures of $51.8 million includes the shut-down and consolidation of 45
facilities primarily in Europe and the United States, consisting primarily of
manufacturing plants, distribution centers, sales offices, administrative
buildings and research and development facilities. At September 30, 2000, 1,373
employees had been terminated and 37 facilities had been shut down.
The other charges of $247.2 million consist of transaction costs of
$53.3 million for legal, printing, accounting, financial advisory services and
other direct expenses related to the USSC merger, lease termination costs
following the merger of $156.8 million and other costs of $37.1 million relating
to the consolidation of certain product lines and other non-recurring charges
primarily related to the USSC merger. The lease termination costs of
$156.8 million relate to the USSC North Haven facility that was purchased by
Tyco subsequent to the merger (See Note 2).
The remaining balance at September 30, 2000 of $24.8 million is included in
other current liabilities in the Consolidated Balance Sheet. The Company
currently anticipates that the restructuring and other non-recurring activities
to which all of these charges relate will be completed within Fiscal 2001.
In Fiscal 1999, the Company recorded a credit of $31.9 million, including
$27.2 million in the Fire and Security Services segment and $4.7 million in the
Healthcare and Specialty Products segment referred to above, representing a
revision of estimates related to Tyco's 1997 restructuring and other
non-recurring accruals. Most of the actions under Tyco's 1997 restructuring and
other non-recurring plans are completed or near completion and have resulted in
total estimated costs being less than originally anticipated.
1998 CHARGES AND CREDIT
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 cost of consolidation of certain facilities of
$13.7 million
61
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. MERGER, RESTRUCTURING AND OTHER NON-RECURRING CHARGES (CREDITS) (CONTINUED)
relating to six plant and facility closures and consolidations. At
September 30, 1999, these restructuring activities were substantially completed.
See Note 18 for discussion of the voluntary early retirement program.
During the first quarter of Fiscal 1998, AMP recorded a credit of
$21.4 million to merger, restructuring and other non-recurring charges
representing a revision of estimates related to its 1996 restructuring
activities, which were completed in Fiscal 1998.
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 representing the write down of assets from earlier purchases of
technology that had 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. USSC substantially completed its 1998 restructuring
activities during Fiscal 1999.
17. COMMITMENTS AND CONTINGENCIES
The Company occupies certain facilities under leases that expire at various
dates through the year 2030. Rental expense under these leases and leases for
equipment was $442.7 million, $381.0 million and $331.7 million for Fiscal 2000,
Fiscal 1999 and Fiscal 1998, respectively. At September 30, 2000, the minimum
lease payment obligations under noncancelable operating leases were as follows:
$435.7 million in Fiscal 2001, $335.4 million in Fiscal 2002, $239.5 million in
Fiscal 2003, $170.4 million in Fiscal 2004, $142.7 million in Fiscal 2005 and an
aggregate of $431.4 million in Fiscal years 2006 through 2030.
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 environmental remediation 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 $32.9 million to
$95.2 million. At September 30, 2000, the Company concluded that the most
probable amount that will be incurred within this range is $68.3 million.
$35.4 million of such amount is included in accrued expenses and other current
liabilities and $32.9 million is included in other long-term liabilities in the
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 allocated 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
62
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. COMMITMENTS AND CONTINGENCIES (CONTINUED)
environmental matters of $68.3 million, the Company has concluded that its
payment of such estimated amounts will not have a material effect on its
financial position, results of operations or liquidity.
The Company is a defendant in a number of other pending legal proceedings
incidental to present and former operations, acquisitions and dispositions. The
Company does not expect the outcome of these proceedings, either individually or
in the aggregate, to have a material adverse effect on its financial position,
results of operations or liquidity.
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 $138.3 million and was recorded as part of AMP's
fourth quarter restructuring charge. This amount has not been included in the
determination of net periodic pension cost presented below. The net periodic
pension (income) cost for all U.S. and non-U.S. defined benefit pension plans
includes the following components ($ in millions):
U.S. PLANS
------------------------------
2000 1999 1998
-------- -------- --------
Service cost................................................ $ 12.1 $ 37.8 $ 44.7
Interest cost............................................... 84.6 86.2 93.3
Expected return on plan assets.............................. (112.8) (96.1) (109.9)
Recognition of initial net asset............................ (1.0) (0.9) (1.9)
Amortization of prior service cost.......................... 0.7 3.0 3.2
Recognized net actuarial gain............................... (6.4) (0.6) (7.1)
Curtailment/settlement gain................................. (4.6) (102.6) (48.6)
------ ------ ------
Net periodic benefit income................................. $(27.4) $(73.2) $(26.3)
====== ====== ======
63
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. RETIREMENT PLANS (CONTINUED)
NON-U.S. PLANS
-------------------------------
2000 1999 1998
-------- --------- --------
Service cost............................................... $60.9 $47.4 $35.6
Interest cost.............................................. 75.1 48.0 43.1
Expected return on plan assets............................. (85.3) (56.8) (53.6)
Recognition of initial net obligation...................... 0.2 0.1 --
Amortization of prior service cost......................... 0.8 0.6 0.6
Recognized net actuarial loss (gain)....................... 2.3 1.1 (0.8)
Curtailment/settlement (gain) loss......................... (2.7) 1.2 6.7
----- ----- -----
Net periodic benefit cost.................................. $51.3 $41.6 $31.6
===== ===== =====
The curtailment/settlement gains in Fiscal 1999 relate primarily to the
termination of employees at AMP and the freezing of AMP's pension plan. The
curtailment/settlement gains in Fiscal 1998 relate primarily to the freezing of
the ADT pension plan. These curtailment/settlement gains have been recorded in
selling, general and administrative expenses.
The net pension cost recognized at September 30, 2000 and 1999 for all U.S.
and non-U.S. defined benefit plans is as follows ($ in millions):
U.S. PLANS NON-U.S. PLANS
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year....... $1,142.5 $1,191.8 $1,339.9 $ 835.4
Service cost.................................. 9.6 35.8 59.6 45.7
Interest cost................................. 84.6 86.2 75.1 48.0
Employee contributions........................ -- -- 8.7 8.7
Plan amendments............................... 0.1 8.3 0.6 0.8
Actuarial (gain) loss......................... (15.1) (74.4) (55.1) 28.1
Benefits paid................................. (77.0) (68.8) (44.1) (49.2)
Acquisitions.................................. 19.2 190.9 132.3 404.9
Divestitures.................................. -- (69.8) -- (5.9)
Plan curtailments............................. (9.0) (136.3) (2.9) (10.7)
Plan settlements.............................. (71.0) (25.7) (10.1) (2.4)
Special termination benefits.................. 1.9 4.5 3.0 9.2
Currency translation adjustment............... -- -- (139.4) 27.3
-------- -------- -------- --------
Benefit obligation at end of year............. $1,085.8 $1,142.5 $1,367.6 $1,339.9
======== ======== ======== ========
64
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. RETIREMENT PLANS (CONTINUED)
U.S. PLANS NON-U.S. PLANS
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of
year........................................ $1,165.8 $ 997.4 $1,175.2 $ 700.5
Actual return on plan assets.................. 258.7 169.3 121.7 86.0
Employer contributions........................ 23.9 24.7 55.6 38.8
Employee contributions........................ -- -- 8.7 8.8
Acquisitions.................................. 7.7 155.8 74.7 376.9
Divestitures.................................. -- (84.2) -- (7.5)
Plan settlements.............................. (71.0) (25.7) (9.9) (2.4)
Benefits paid................................. (77.0) (68.9) (44.1) (49.2)
Administrative expenses paid.................. (3.9) (2.6) (1.7) (1.8)
Currency translation adjustment............... -- -- (127.1) 25.1
-------- -------- -------- --------
Fair value of plan assets at end of year...... $1,304.2 $1,165.8 $1,253.1 $1,175.2
======== ======== ======== ========
Funded status................................. $ 218.4 $ 23.3 $ (114.5) $ (164.7)
Unrecognized net actuarial (gain) loss........ (284.7) (128.8) (2.3) 89.4
Unrecognized prior service cost............... 4.4 6.7 5.3 6.0
Unrecognized transition asset................. (4.0) (5.1) (3.8) (4.5)
-------- -------- -------- --------
Net amount recognized......................... $ (65.9) $ (103.9) $ (115.3) $ (73.8)
======== ======== ======== ========
U.S. PLANS NON-U.S. PLANS
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE
SHEETS
Prepaid benefit cost............................... $ 47.6 $ 29.2 $ 107.6 $106.8
Accrued benefit liability.......................... (117.6) (141.7) (255.8) (222.1)
Intangible asset................................... 0.8 1.0 4.9 6.3
Accumulated other comprehensive income............. 3.3 7.6 28.0 35.2
------ ------- ------- ------
Net amount recognized.............................. $(65.9) $(103.9) $(115.3) $(73.8)
====== ======= ======= ======
U.S. PLANS NON-U.S. PLANS
------------------------- -------------------------
WEIGHTED-AVERAGE ASSUMPTIONS AS OF SEPTEMBER 30, 2000 1999 2000 1999
------------------------------------------------ -------- -------- -------- --------
Discount rate............................... 8.00% 7.75% 5.75% 5.65%
Expected return on plan assets.............. 9.75 8.60 7.40 7.39
Rate of compensation increase............... 4.40 4.30 4.07 4.03
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for U.S. pension plans with accumulated benefit obligations
in excess of plan assets were $30.3 million, $29.3 million and $9.3 million,
respectively, as of September 30, 2000 and $186.7 million, $173.4 million and
$130.7 million, respectively, as of September 30, 1999.
65
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. RETIREMENT PLANS (CONTINUED)
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for non-U.S. pension plans with accumulated benefit
obligations in excess of plan assets were $543.8 million, $464.0 million and
$256.1 million, respectively, as of September 30, 2000 and $563.5 million,
$517.1 million and $314.6 million, respectively, as of September 30, 1999.
The Company also participates in a number of multi-employer defined benefit
plans on behalf of certain employees. Pension expense related to multi- employer
plans was $8.2 million, $7.5 million and $1.7 million for Fiscal 2000, Fiscal
1999 and Fiscal 1998, 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 share bonus retirement plans.
Pension expense for the defined contribution plans is computed as a percentage
of participants' compensation and was $132.7 million, $73.2 million and
$57.1 million for Fiscal 2000, Fiscal 1999 and Fiscal 1998, 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 $10.8 million, $6.9 million
and $3.7 million in Fiscal 2000, Fiscal 1999 and Fiscal 1998, respectively.
POSTRETIREMENT BENEFIT PLANS--The Company generally does not provide
postretirement 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
postretirement plan which covers both salaried and non-salaried employees and
which provides medical and other benefits. This postretirement 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 which was included in selling, general and administrative expenses.
AMP provides postretirement 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 postretirement 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."
In the second quarter of Fiscal 1999, AMP offered enhanced postretirement
benefits to terminated employees totaling $16.0 million, which was recorded as
part of AMP's second quarter restructuring charge. This amount has not been
included in the determination of net periodic benefit cost presented below.
Net periodic postretirement benefit cost reflects the following components
($ in millions):
2000 1999 1998
-------- -------- --------
Service cost (with interest)................................ $ 1.1 $ 3.5 $ 3.2
Interest cost............................................... 12.7 12.0 9.5
Amortization of prior service cost.......................... (1.9) (2.2) (2.5)
Amortization of net gain.................................... (1.6) (0.7) (1.4)
Curtailment gain............................................ (3.2) (5.8) (8.8)
------ ------ ------
Net periodic postretirement benefit cost.................... $ 7.1 $ 6.8 $ --
====== ====== ======
66
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. RETIREMENT PLANS (CONTINUED)
The components of the accrued postretirement benefit obligation, all of
which are unfunded, are as follows ($ in millions):
SEPTEMBER 30,
-----------------------
2000 1999
-------- --------
Benefit obligation at beginning of year..................... $ 168.2 $ 174.1
Service cost................................................ 1.1 3.5
Interest cost............................................... 12.7 12.0
Amendments.................................................. (3.1) 4.5
Actuarial gain.............................................. (1.7) (4.1)
Acquisition................................................. 8.4 11.2
Curtailment gain (loss)..................................... 1.7 (15.3)
Expected net benefits paid.................................. (19.6) (17.8)
Currency fluctuation (gain) loss............................ (0.1) 0.1
------- -------
Benefit obligation at end of year........................... $ 167.6 $ 168.2
======= =======
Funded status............................................... $(167.6) $(168.2)
Unrecognized net gain....................................... (29.6) (24.5)
Unrecognized prior service cost............................. (11.1) (13.8)
------- -------
Accrued postretirement benefit cost......................... $(208.3) $(206.5)
======= =======
For measurement purposes, in Fiscal 2000, an 8.15% composite annual rate of
increase in the per capita cost of covered health care benefits was assumed. The
rate was assumed to decrease gradually to 5.00% by the year 2008 and remain at
that level thereafter. The health care cost trend rate assumption may have a
significant effect on the amounts reported. A one-percentage-point change in
assumed healthcare cost trend rates would have the following effects ($ in
millions):
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
-------------- --------------
Effect on total of service and interest cost components... $0.5 $(0.5)
Effect on postretirement benefit obligation............... 6.2 (5.4)
The combined weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 8.00% at September 30, 2000
(7.75% at September 30, 1999).
19. CONSOLIDATED SEGMENT DATA
The Company's reportable segments are strategic business units that operate
in different industries and are managed separately. Segment data have been
presented on a basis consistent with how business activities are reported
internally to management. Certain corporate expenses were allocated to each
operating segment's operating income, based generally on net sales and other
factors. For additional information, including a description of the products and
services included in each segment, see Note 1.
67
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. CONSOLIDATED SEGMENT DATA (CONTINUED)
Selected information by industry segment is presented below ($ in millions).
AS AT AND FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------------
2000 1999 1998
---------- ---------- ----------
Net sales:
Electronics................................... $ 9,909.8 $ 6,087.4 $ 5,787.3
Telecommunications............................ 2,539.7 1,623.8 1,280.0
Healthcare and Specialty Products............. 6,467.9 5,742.7 4,672.4
Fire and Security Services.................... 6,076.6 5,534.0 4,393.5
Flow Control Products and Services............ 3,937.9 3,508.6 2,928.5
--------- --------- ---------
$28,931.9 $22,496.5 $19,061.7
========= ========= =========
AS AT AND FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------------------------
2000 1999 1998
----------- ----------- -----------
Operating income (loss):
Electronics......................... $ 2,538.6 (1) $ (225.9)(6) $ 403.1 (9)
Telecommunications.................. 516.6 (2) 325.1 268.3
Healthcare and Specialty Products... 1,439.8 (3) 890.9 (7) 389.3 (10)
Fire and Security Services.......... 1,040.5 (4) 934.2 (8) 630.6
Flow Control Products and
Services.......................... 746.9 605.5 456.9
--------- --------- ---------
6,282.4 2,529.8 2,148.2
--------- --------- ---------
Less: Corporate expenses............ (463.6)(5) (122.9) (68.3)
Goodwill amortization
expense..................... (344.4) (216.1) (131.8)
--------- --------- ---------
$ 5,474.4 $ 2,190.8 $ 1,948.1
========= ========= =========
Total Assets:
Electronics......................... $12,248.1 $ 8,326.9 $ 4,995.1
Telecommunications.................. 2,029.9 2,392.2 1,366.8
Healthcare and Specialty Products... 8,925.6 8,696.2 7,256.8
Fire and Security Services.......... 9,298.5 8,219.4 6,606.2
Flow Control Products and
Services.......................... 5,748.4 3,858.6 2,960.3
Corporate........................... 2,153.8 851.0 255.5
--------- --------- ---------
$40,404.3 $32,344.3 $23,440.7
========= ========= =========
Depreciation and Amortization:
Electronics......................... $ 563.0 $ 421.3 $ 430.0
Telecommunications.................. 67.4 47.1 36.5
Healthcare and Specialty Products... 330.1 287.6 262.5
Fire and Security Services.......... 531.6 417.2 269.8
Flow Control Products and
Services.......................... 144.7 130.0 120.0
Corporate........................... 7.6 8.0 18.9
--------- --------- ---------
$ 1,644.4 $ 1,311.2 $ 1,137.7
========= ========= =========
68
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. CONSOLIDATED SEGMENT DATA (CONTINUED)
AS AT AND FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------------------------
2000 1999 1998
----------- ----------- -----------
Capital Expenditures:
Electronics......................... $ 293.8 $ 391.1 $ 492.0
Telecommunications.................. 316.0 (11) 97.4 28.2
Healthcare and Specialty Products... 251.1 235.9 (12) 202.9
Fire and Security Services.......... 764.3 746.3 491.4
Flow Control Products and
Services.......................... 142.1 135.1 92.6
Corporate........................... 47.6 26.7 10.4
--------- --------- ---------
$ 1,814.9 $ 1,632.5 $ 1,317.5
========= ========= =========
------------------------
(1) Includes a restructuring charge of $16.9 million, of which $0.9 million is
included in cost of sales, related to AMP's Brazilian operations and
wireless communications business and a credit of $107.8 million, of which
$6.3 million is included in cost of sales, primarily representing a
revision of estimates of merger, restructuring, and other non-recurring
accruals related to the merger with AMP and AMP's profit improvement plan.
(2) Includes a non-recurring charge of $13.1 million incurred in connection
with the TyCom IPO.
(3) Includes charges for the impairment of long-lived assets of $99.0 million
and restructuring and other non-recurring charges of $7.9 million, of which
$6.4 million is included in cost of sales, related to exiting USSC's
interventional cardiology business. Includes restructuring and other
non-recurring charges of $11.1 million related to USSC's suture business.
Also includes a credit of $29.9 million representing a revision in
estimates of merger, restructuring, and other non-recurring accruals
consisting of $19.7 million related primarily to the merger with USSC and
$10.2 million related to the Company's 1997 restructuring accruals.
(4) Includes a merger, restructuring and other non-recurring credit of
$11.2 million representing a revision in estimates related to the Company's
1997 restructuring accruals.
(5) Includes a non-recurring charges of $275.0 million as a reserve for certain
claims relating to a merged company in the Healthcare business and other
non-recurring charges of $1.2 million.
(6) Includes merger, restructuring and other non-recurring charges of
$643.3 million, of which $106.4 million is included in cost of sales, and
charges for the impairment of long-lived assets of $431.5 million primarily
related to the merger with AMP and AMP's profit improvement plan.
(7) Includes merger, restructuring and other non-recurring charges of
$423.8 million and charges for the impairment of long-lived assets of
$76.0 million, primarily related to the merger with USSC, and a credit of
$4.7 million representing a revision of estimates related to Tyco's 1997
restructuring and other non-recurring accruals.
(8) Includes a credit of $27.2 million representing a revision of estimates
related to Tyco's 1997 restructuring and other non-recurring accruals.
(9) Includes restructuring and other non-recurring charges recorded by AMP of
$185.8 million related to its profit improvement plan and a credit of
$21.4 million to restructuring charges representing a revision of estimates
related to AMP's 1996 restructuring activities.
(10) 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.
(11) Includes $111.1 million in spending for construction of the TyCom Global
Network.
(12) Excludes $234.0 million related to the purchase of property previously
leased by USSC.
69
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. CONSOLIDATED GEOGRAPHIC DATA
Selected information by geographic area is presented below ($ in millions).
AS AT AND FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------------
2000 1999 1998
---------- ---------- ----------
Net sales:
Americas (primarily U.S.)..................... $18,457.5 $14,409.0 $12,518.4
Europe........................................ 6,610.1 5,362.4 4,431.4
Asia--Pacific................................. 3,864.3 2,725.1 2,111.9
--------- --------- ---------
$28,931.9 $22,496.5 $19,061.7
========= ========= =========
Long-Lived Assets:
Americas (primarily U.S.)..................... $17,655.4 $13,849.4
Europe........................................ 5,453.3 4,084.6
Asia--Pacific................................. 1,751.5 1,838.3
Corporate..................................... 435.0 311.3
========= =========
$25,295.2 $20,083.6
========= =========
21. SUPPLEMENTARY BALANCE SHEET INFORMATION
Selected supplementary balance sheet information is presented below ($ in
millions).
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
Inventories:
Purchased materials and manufactured parts................ $1,076.5 $ 719.1
Work in process........................................... 1,105.1 774.2
Finished goods............................................ 1,663.5 1,355.8
-------- --------
$3,845.1 $2,849.1
======== ========
Property, Plant and Equipment:
Land...................................................... $ 538.8 $ 386.8
Buildings................................................. 2,416.1 2,414.0
Subscriber systems........................................ 3,200.7 2,703.3
Machinery and equipment................................... 7,089.5 7,005.3
Leasehold improvements.................................... 295.8 224.4
Construction in progress.................................. 727.6 573.0
Accumulated depreciation.................................. (6,050.1) (5,984.4)
-------- --------
$8,218.4 $7,322.4
======== ========
Accured expenses and other current liabilities include the
following:
Accrued payroll and payroll related costs (including
bonuses)................................................ $ 808.9 $ 723.5
======== ========
70
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22. SUPPLEMENTARY INCOME STATEMENT INFORMATION
Selected supplementary income statement information is presented below ($ in
millions).
YEAR ENDED SEPTEMBER 30,
------------------------------------------
2000 1999 1998
-------- -------- --------
Research and development.......................... $527.5 $450.5 $511.4
Advertising....................................... $149.3 $133.1 $110.8
23. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is presented below ($ in millions,
except per share data).
YEAR ENDED SEPTEMBER 30, 2000
-----------------------------------------------------
1ST QTR.(1) 2ND QTR.(2) 3RD QTR.(3) 4TH QTR.(4)
----------- ----------- ----------- -----------
Net sales................................... $6,638.8 $7,070.0 $7,417.8 $7,805.3
Gross profit................................ 2,446.9 2,614.7 2,868.0 3,071.1
Income before extraordinary items........... 757.2 855.5 997.3 1,910.1
Net income (9).............................. 757.0 855.5 997.3 1,910.1
Basic income per common share:
Income before extraordinary items......... $ 0.45 $ 0.51 $ 0.59 $ 1.13
Net income per common share............... 0.45 0.51 0.59 1.13
Diluted income per common share:
Income before extraordinary items......... $ 0.44 $ 0.50 $ 0.58 $ 1.12
Net income per common share............... 0.44 0.50 0.58 1.12
YEAR ENDED SEPTEMBER 30, 1999
-----------------------------------------------------
1ST QTR.(5) 2ND QTR.(6) 3RD QTR.(7) 4TH QTR.(8)
----------- ----------- ----------- -----------
Net sales................................... $5,213.5 $5,238.7 $5,819.8 $6,224.5
Gross profit................................ 1,796.9 1,849.0 2,036.5 2,381.0
(Loss) income before extraordinary items.... (89.6) 164.3 212.2 780.8
Net (loss) income (9)....................... (92.0) 121.8 211.7 780.5
Basic (loss) income per common share:
(Loss) income before extraordinary
items................................... $ (0.06) $ 0.10 $ 0.13 $ 0.47
Net (loss) income per common share........ (0.06) 0.07 0.13 0.47
Diluted (loss) income per common share:
(Loss) income before extraordinary
items................................... $ (0.06) $ 0.10 $ 0.13 $ 0.46
Net (loss) income per common share........ (0.06) 0.07 0.13 0.46
------------------------
(1) Includes charges for the impairment of long-lived assets of $99.0 million
and restructuring and other non-recurring charges of $7.9 million, of which
$6.4 million is included in cost of sales, related to exiting USSC's
interventional cardiology business; restructuring and other non-recurring
charges of $7.7 million related to USSC's suture business; and a
restructuring charge of $6.5 million related to AMP's Brazilian operations.
Also includes a credit of $94.7 million representing a revision in estimates
of merger, restructuring and other non-recurring accruals, consisting of
$57.8 million related to the merger with AMP and AMP's profit improvement
plan, $15.5 million related primarily to the merger with USSC and
$21.4 million related to the Company's 1997 restructuring accruals.
(2) Includes merger, restructuring and other non-recurring charges of
$10.4 million, of which $0.9 million is included in cost of sales, primarily
related to activities in AMP's wireless
71
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
23. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
communications business and restructuring and other non-recurring charges of
$0.5 million related to USSC's suture business. Also includes a credit of
$12.7 million, of which $6.3 million is included in cost of sales, primarily
representing a revision of estimates of merger, restructuring and other
non-recurring accruals related to the merger with AMP and AMP's profit
improvement plan.
(3) Includes restructuring and other non-recurring charges of $2.9 million
related to USSC's suture business. Also includes a merger, restructuring and
other non-recurring credit of $9.8 million representing a revision of
estimates of merger, restructuring and other non-recurring accruals related
to the merger with AMP and AMP's profit improvement plan.
(4) Includes non-recurring charges of $275.0 million as a reserve for certain
claims relating to a merged company in the Healthcare business,
$13.1 million related to a non-recurring charge incurred in connection with
the TyCom IPO and $1.2 million of other non-recurring charges. Also includes
credits of $27.5 million and $4.2 million representing a revision of
estimates of merger, restructuring and other non-recurring accruals related
to the merger with AMP and AMP's profit improvement plan and the merger with
USSC, respectively.
(5) Includes merger, restructuring and other non-recurring charges of
$412.6 million and charges for the impairment of long-lived assets of
$76.0 million, primarily related to the merger with USSC, and restructuring
and other non-recurring charges of $116.5 million, of which $28.3 million is
included in cost of sales, and charges for the impairment of long-lived
assets of $65.6 million related to AMP's profit improvement plan. Also
includes a credit of $3.0 million representing a revision of estimates
related to Tyco's 1997 merger, restructuring and other non-recurring
accruals.
(6) Includes restructuring and other non-recurring charges of $158.8 million, of
which $26.9 million is included in cost of sales, and charges for the
impairment of long-lived assets of $171.1 million related to AMP's profit
improvement plan. Also includes restructuring and other non-recurring
charges of $2.0 million related to the merger with USSC and a credit of
$5.3 million representing a revision of estimates related to Tyco's 1997
merger, restructuring and other non-recurring accruals.
(7) Includes merger, restructuring and other non-recurring charges of
$368.0 million, of which $51.2 million is included in cost of sales, and
charges for the impairment of long-lived assets of $194.8 million, related
to the merger with AMP and AMP's profit improvement plan. Also includes
restructuring and other non-recurring charges of $2.8 million related to the
merger with USSC and a credit of $19.7 million representing a revision of
estimates related to Tyco's 1997 merger, restructuring and other
non-recurring accruals.
(8) Includes restructuring and other non-recurring charges of $6.4 million
related to the merger with USSC. Also includes a credit of $3.9 million
representing a revision of estimates related to Tyco's 1997 merger,
restructuring and other non-recurring accruals.
(9) Extraordinary items relate principally to the Company's debt tender offers
and the write-off of net unamortized deferred refinancing costs relating to
the early extinguishment of debt.
72
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24. TYCO INTERNATIONAL GROUP S.A.
During Fiscal 2000 and Fiscal 1999, Tyco International Group S.A. ("TIG"), a
wholly-owned subsidiary of the Company, issued public debt securities (See
Note 4) which are fully and unconditionally guaranteed by Tyco. In accordance
with SEC rules promulgated in August 2000, the following presents condensed
consolidating financial information for TIG and its subsidiaries, as if TIG and
its current organizational structure were in place for all periods presented.
Condensed financial information for Tyco and TIG on a stand-alone basis are
presented using the equity method of accounting for subsidiaries in which it
owns or controls twenty percent or more of the voting shares.
CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2000
TYCO TYCO
INTERNATIONAL INTERNATIONAL OTHER CONSOLIDATING
LTD. GROUP, S.A. SUBSIDIARIES ADJUSTMENTS TOTAL
($ IN MILLIONS) ------------- ------------- ------------ ------------- ---------
CURRENT ASSETS:
Cash and cash equivalents..................... $ 34.2 $ 3.6 $ 1,227.0 $ -- $ 1,264.8
Accounts receivable, net...................... 1.2 -- 5,629.2 -- 5,630.4
Inventory, net................................ -- -- 3,845.1 -- 3,845.1
Intercompany receivables...................... 802.4 51.3 3,661.3 (4,515.0) --
Other current assets.......................... -- 14.4 2,061.0 -- 2,075.4
---------- ---------- ---------- ---------- ---------
Total current assets.......................... 837.8 69.3 16,423.6 (4,515.0) 12,815.7
PROPERTY, PLANT AND EQUIPMENT, NET............ 6.7 -- 8,322.8 -- 8,329.5
GOODWILL AND OTHER INTANGIBLE ASSETS, NET..... -- 0.7 16,331.9 -- 16,332.6
INVESTMENT IN SUBSIDIARIES.................... 31,307.9 16,133.2 -- (47,441.1) --
INTERCOMPANY LOANS RECEIVABLE................. 269.2 10,678.8 -- (10,948.0) --
OTHER ASSETS.................................. 1.4 9.2 4,524.8 (1,608.9) 2,926.5
---------- ---------- ---------- ---------- ---------
TOTAL ASSETS.............................. $ 32,423.0 $ 26,891.2 $ 45,603.1 $(64,513.0) $40,404.3
========== ========== ========== ========== =========
CURRENT LIABILITIES:
Loans payable and current maturities of long-
term debt................................... $ -- $ 1,248.9 $ 288.3 $ -- $ 1,537.2
Accounts payable.............................. 0.3 0.2 3,291.4 -- 3,291.9
Accrued expenses and other current
liabilities................................. 25.3 118.3 3,894.6 -- 4,038.2
Intercompany payables......................... 2,447.8 1,213.5 853.7 (4,515.0) --
Other......................................... -- 0.5 2,377.3 433.8 2,811.6
---------- ---------- ---------- ---------- ---------
Total current liabilities..................... 2,473.4 2,581.4 10,705.3 (4,081.2) 11,678.9
LONG-TERM DEBT................................ -- 8,144.3 1,317.5 -- 9,461.8
INTERCOMPANY LOANS PAYABLE.................... -- -- 10,948.0 (10,948.0) --
OTHER LONG-TERM LIABILITIES................... -- 3.9 1,883.0 -- 1,886.9
MINORITY INTEREST............................. -- -- 343.5 -- 343.5
SHAREHOLDERS' EQUITY:
Common shares................................. 345.0 -- 5.1 (13.2) 336.9
Capital in excess:
Share premium............................... 16,031.2 -- -- (10,797.9) 5,233.3
Contributed surplus......................... 5,973.3 12,665.0 14,365.6 (30,217.6) 2,786.3
Accumulated earnings.......................... 7,600.1 3,496.6 5,786.0 (8,455.1) 8,427.6
Accumulated other comprehensive income........ -- -- 249.1 -- 249.1
---------- ---------- ---------- ---------- ---------
TOTAL SHAREHOLDERS' EQUITY................ 29,949.6 16,161.6 20,405.8 (49,483.8) 17,033.2
---------- ---------- ---------- ---------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY.................................. $ 32,423.0 $ 26,891.2 $ 45,603.1 $(64,513.0) $40,404.3
========== ========== ========== ========== =========
73
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24. TYCO INTERNATIONAL GROUP S.A. (CONTINUED)
CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1999
TYCO TYCO
INTERNATIONAL INTERNATIONAL OTHER CONSOLIDATING
LTD. GROUP, S.A. SUBSIDIARIES ADJUSTMENTS TOTAL
($ IN MILLIONS) ------------- ------------- ------------ ------------- ---------
CURRENT ASSETS:
Cash and cash equivalents..................... $ 22.8 $ 15.4 $ 1,723.8 $ -- $ 1,762.0
Accounts receivable, net...................... 2.2 -- 4,580.1 -- 4,582.3
Inventory, net................................ -- -- 2,849.1 -- 2,849.1
Intercompany receivables...................... 704.5 42.1 51.1 (797.7) --
Other current assets.......................... 0.4 3.6 1,948.1 -- 1,952.1
--------- --------- --------- ---------- ---------
Total current assets.......................... 729.9 61.1 11,152.2 (797.7) 11,145.5
PROPERTY, PLANT AND EQUIPMENT, NET............ 0.5 -- 7,321.9 -- 7,322.4
GOODWILL AND OTHER INTANGIBLE ASSETS, NET..... -- -- 12,158.9 -- 12,158.9
INVESTMENT IN SUBSIDIARIES.................... 25,220.7 13,577.1 -- (38,797.8) --
INTERCOMPANY LOANS RECEIVABLE................. 265.4 8,255.1 -- (8,520.5) --
OTHER ASSETS.................................. 1.4 8.2 2,434.2 (726.3) 1,717.5
--------- --------- --------- ---------- ---------
TOTAL ASSETS.............................. $26,217.9 $21,901.5 $33,067.2 $(48,842.3) $32,344.3
========= ========= ========= ========== =========
CURRENT LIABILITIES:
Loans payable and current maturities of long-
term debt................................... $ -- $ 589.0 $ 423.8 $ -- $ 1,012.8
Accounts payable.............................. -- -- 2,530.8 -- 2,530.8
Accrued expenses and other current
liabilities................................. 24.8 100.3 3,420.6 -- 3,545.7
Intercompany payables......................... 44.1 7.0 746.6 (797.7) --
Other......................................... -- -- 1,730.7 305.0 2,035.7
--------- --------- --------- ---------- ---------
Total current liabilities..................... 68.9 696.3 8,852.5 (492.7) 9,125.0
LONG-TERM DEBT................................ -- 7,594.8 1,514.6 -- 9,109.4
INTERCOMPANY LOANS PAYABLE.................... -- -- 8,520.5 (8,520.5) --
OTHER LONG-TERM LIABILITIES................... -- 4.9 1,735.7 -- 1,740.6
SHAREHOLDERS' EQUITY:
Common shares................................. 342.2 -- 1.0 (5.2) 338.0
Capital in excess:
Share premium............................... 15,967.2 -- -- (11,085.7) 4,881.5
Contributed surplus......................... 5,542.3 12,665.0 12,979.6 (27,579.3) 3,607.6
Accumulated earnings (loss)................... 4,297.3 940.5 (86.6) (1,158.9) 3,992.3
Accumulated other comprehensive loss.......... -- -- (450.1) -- (450.1)
--------- --------- --------- ---------- ---------
TOTAL SHAREHOLDERS' EQUITY................ 26,149.0 13,605.5 12,443.9 (39,829.1) 12,369.3
--------- --------- --------- ---------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY.................................. $26,217.9 $21,901.5 $33,067.2 $(48,842.3) $32,344.3
========= ========= ========= ========== =========
74
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24. TYCO INTERNATIONAL GROUP S.A. (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2000
TYCO TYCO
INTERNATIONAL INTERNATIONAL OTHER CONSOLIDATING
LTD. GROUP, S.A. SUBSIDIARIES(1) ADJUSTMENTS TOTAL
($ IN MILLIONS) ------------- ------------- --------------- ------------- ---------
NET SALES.......................................... $ -- $ -- $28,931.9 $ -- $28,931.9
Cost of sales...................................... -- -- 17,931.2 -- 17,931.2
Selling, general and administrative expenses....... 12.5 9.9 5,229.6 -- 5,252.0
Merger, restructuring and other non-recurring
charges.......................................... -- -- 175.3 -- 175.3
Charge for the impairment of long-lived assets..... -- -- 99.0 -- 99.0
-------- -------- --------- --------- ---------
OPERATING INCOME (LOSS)............................ (12.5) (9.9) 5,496.8 -- 5,474.4
Interest income (expense), net..................... 3.5 (698.9) (74.2) -- (769.6)
Gain on issuance of common shares by subsidiary.... -- -- 1,760.0 -- 1,760.0
Equity in net income of unconsolidated
subsidiaries..................................... 4,672.1 2,556.1 -- (7,228.2) --
Intercompany dividends, interest and fees.......... 29.8 709.0 (694.6) (44.2) --
-------- -------- --------- --------- ---------
Income before income taxes, minority interest and
extraordinary items.............................. 4,692.9 2,556.3 6,488.0 (7,272.4) 6,464.8
Income taxes....................................... -- (0.2) (1,797.0) (128.8) (1,926.0)
Minority interest.................................. -- -- (18.7) -- (18.7)
-------- -------- --------- --------- ---------
Income before extraordinary items.................. 4,692.9 2,556.1 4,672.3 (7,401.2) 4,520.1
Extraordinary items, net of taxes(2)............... -- -- (0.2) -- (0.2)
-------- -------- --------- --------- ---------
NET INCOME......................................... $4,692.9 $2,556.1 $ 4,672.1 $(7,401.2) $ 4,519.9
======== ======== ========= ========= =========
------------------------------
(1) Operating income includes a net charge of $176.3 million, of which
$1.0 million is included in cost of sales, for restructuring and other
non-recurring charges, and charges of $99.0 million for the impairment of
long-lived assets related to the Company exiting the interventional
cardiology business of USSC. The net charge is comprised of charges of
$325.2 million, of which $7.3 million is included in cost of sales,
primarily for non-recurring claims related to a merged company in the
Healthcare business, the restructuring activities in AMP's Brazilian
operations and wireless communications business, a non-recurring charge
incurred in connection with TyCom's initial public offering and credits of
$148.9 million, of which $6.3 million is included in cost of sales,
primarily related to a revision in estimates associated with the AMP merger
and AMP's profit improvement plan, the Company's 1997 restructuring plan and
the merger with USSC. Income from continuing operations includes a one-time
pre-tax gain of $1,760.0 million related to the issuance of common shares by
a subsidiary.
(2) Extraordinary items relate principally to the write-off of net unamortized
deferred refinancing costs relating to the early extinguishment of debt.
75
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24. TYCO INTERNATIONAL GROUP S.A. (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1999
TYCO TYCO
INTERNATIONAL INTERNATIONAL OTHER CONSOLIDATING
LTD. GROUP, S.A. SUBSIDIARIES(1) ADJUSTMENTS TOTAL
($ IN MILLIONS) ------------- ------------- --------------- ------------- ---------
NET SALES.......................................... $ -- $ -- $22,496.5 $ -- $22,496.5
Cost of sales...................................... -- -- 14,433.1 -- 14,433.1
Selling, general and administrative expenses....... 2.9 1.1 4,432.3 -- 4,436.3
Merger, restructuring and other non-recurring
charges.......................................... -- -- 928.8 -- 928.8
Charge for the impairment of long-lived assets..... -- -- 507.5 -- 507.5
-------- -------- --------- --------- ---------
OPERATING INCOME (LOSS)............................ (2.9) (1.1) 2,194.8 -- 2,190.8
Interest income (expense), net..................... 3.0 (401.9) (86.7) -- (485.6)
Equity in net income of unconsolidated
subsidiaries..................................... 663.0 244.7 -- (907.7) --
Intercompany dividends, interest and fees.......... 1,656.0 403.2 (999.7) (1,059.5) --
-------- -------- --------- --------- ---------
Income before income taxes and extraordinary
items............................................ 2,319.1 244.9 1,108.4 (1,967.2) 1,705.2
Income taxes....................................... -- (0.2) (399.7) (237.6) (637.5)
-------- -------- --------- --------- ---------
Income before extraordinary items.................. 2,319.1 244.7 708.7 (2,204.8) 1,067.7
Extraordinary items, net of taxes(2)............... -- -- (45.7) -- (45.7)
-------- -------- --------- --------- ---------
NET INCOME......................................... $2,319.1 $ 244.7 $ 663.0 $(2,204.8) $ 1,022.0
======== ======== ========= ========= =========
------------------------------
(1) Operating income includes merger, restructuring and other non-recurring
charges of $643.3 million, of which $106.4 million is included in cost of
sales, and charges for the impairment of long-lived assets of
$431.5 million primarily related to the merger with AMP and AMP's profit
improvement plan. Also included are merger, restructuring and other
non-recurring charges of $423.8 million and charges for the impairment of
long-lived assets of $76.0 million, primarily related to the USSC merger and
a credit of $31.9 million representing a revision of estimates related to
Tyco's 1997 restructuring and other non-recurring accruals.
(2) Extraordinary items relate principally to the Company's debt tender offers
and the write-off of net unamortized deferred refinancing costs relating to
the early extinguishment of debt.
CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
TYCO TYCO
INTERNATIONAL INTERNATIONAL OTHER CONSOLIDATING
LTD. GROUP, S.A. SUBSIDIARIES(1) ADJUSTMENTS TOTAL
($ IN MILLIONS) ------------- ------------- --------------- ------------- ---------
NET SALES.......................................... $ -- $ -- $19,061.7 $ -- $19,061.7
Cost of sales...................................... -- -- 12,694.8 -- 12,694.8
Selling, general and administrative expenses....... 18.2 58.9 4,084.8 -- 4,161.9
Merger, restructuring and other non-recurring
charges.......................................... -- -- 256.9 -- 256.9
-------- -------- --------- --------- ---------
OPERATING INCOME (LOSS)............................ (18.2) (58.9) 2,025.2 -- 1,948.1
Interest income (expense), net..................... 4.0 (65.3) (184.0) -- (245.3)
Equity in net income of unconsolidated
subsidiaries..................................... 902.4 721.5 -- (1,623.9) --
Intercompany dividends, interest and fees.......... 613.8 98.5 (443.9) (268.4) --
-------- -------- --------- --------- ---------
Income before income taxes and extraordinary
items............................................ 1,502.0 695.8 1,397.3 (1,892.3) 1,702.8
Income taxes....................................... -- -- (466.8) (67.4) (534.2)
-------- -------- --------- --------- ---------
Income before extraordinary items.................. 1,502.0 695.8 930.5 (1,959.7) 1,168.6
Extraordinary items, net of taxes(2)............... -- -- (2.4) -- (2.4)
-------- -------- --------- --------- ---------
NET INCOME......................................... $1,502.0 $ 695.8 $ 928.1 $(1,959.7) $ 1,166.2
======== ======== ========= ========= =========
------------------------------
(1) Operating income includes restructuring and other non-recurring charges
recorded by AMP of $185.8 million related to its profit improvement plan and
a credit of $21.4 million to restructuring charges representing a revision
of estimates related to AMP's 1996 restructuring activities. Also included
are non-recurring charges of $80.5 million and restructuring charges of
$12.0 million related to USSC's operations.
(2) Extraordinary items relate principally to the write-off of net unamortized
deferred refinancing costs relating to the early extinguishment of debt.
76
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24. TYCO INTERNATIONAL GROUP S.A. (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 2000
TYCO TYCO
INTERNATIONAL INTERNATIONAL OTHER CONSOLIDATING
LTD. GROUP, S.A. SUBSIDIARIES ADJUSTMENTS TOTAL
($ IN MILLIONS) ------------- ------------- ------------ ------------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities.... $893.7 $1,201.3 $3,180.0 $ -- $5,275.0
------ -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment,
net.......................................... (6.4) -- (1,808.5) -- (1,814.9)
Acquisition of businesses, net of cash
acquired..................................... -- -- (4,790.7) -- (4,790.7)
Disposal of businesses......................... -- -- 74.4 -- 74.4
Net decrease (increase) in investments......... 16.4 -- (369.8) -- (353.4)
(Increase) in intercompany loans............... -- (2,421.8) -- 2,421.8 --
(Increase) in investment in subsidiaries....... (900.7) -- -- 900.7 --
Other.......................................... -- (0.7) (52.2) -- (52.9)
------ -------- -------- -------- --------
Net cash utilized by investing activities.... (890.7) (2,422.5) (6,946.8) 3,322.5 (6,937.5)
------ -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) of short-term debt.............. -- (587.3) (148.7) -- (736.0)
Repayment of long-term debt, including debt
tenders...................................... -- (376.8) (380.3) 380.3 (376.8)
Proceeds from long-term debt................... -- 2,173.5 -- (380.3) 1,793.2
Proceeds from exercise of options and
warrants..................................... 64.6 -- 290.7 -- 355.3
Net proceeds from issuance of common shares by
subsidiary................................... -- -- 2,130.7 -- 2,130.7
Dividends paid................................. (86.2) -- -- -- (86.2)
Intercompany dividends received (paid)......... 30.0 -- (30.0) -- --
Purchase of treasury shares.................... -- -- (1,885.1) -- (1,885.1)
Financing from parent.......................... -- -- 2,421.8 (2,421.8) --
Capital contributions.......................... -- -- 900.7 (900.7) --
Other.......................................... -- -- (29.8) -- (29.8)
------ -------- -------- -------- --------
Net cash provided by financing activities.... 8.4 1,209.4 3,270.0 (3,322.5) 1,165.3
------ -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................. 11.4 (11.8) (496.8) -- (497.2)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR......................................... 22.8 15.4 1,723.8 -- 1,762.0
------ -------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR....... $ 34.2 $ 3.6 $1,227.0 $ -- $1,264.8
====== ======== ======== ======== ========
77
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24. TYCO INTERNATIONAL GROUP S.A. (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 1999
TYCO TYCO
INTERNATIONAL INTERNATIONAL OTHER CONSOLIDATING
LTD. GROUP, S.A. SUBSIDIARIES ADJUSTMENTS TOTAL
($ IN MILLIONS) ------------- ------------- ------------ ------------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities.... $ 254.3 $ 60.7 $3,234.8 $ -- $3,549.8
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment,
net.......................................... (0.5) -- (1,632.0) -- (1,632.5)
Acquisition of businesses, net of cash
acquired..................................... -- -- (4,901.2) -- (4,901.2)
Disposal of businesses......................... -- -- 926.8 -- 926.8
Net decrease (increase) in investments......... 81.7 -- (71.2) -- 10.5
(Increase) in intercompany loans............... -- (4,132.4) -- 4,132.4 --
(Increase) in investment in subsidiaries....... (1,013.6) -- -- 1,013.6 --
Other.......................................... -- -- (247.7) -- (247.7)
-------- -------- -------- -------- --------
Net cash utilized by investing activities.... (932.4) (4,132.4) (5,925.3) 5,146.0 (5,844.1)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net receipts (payments) of short-term debt..... -- 589.0 (426.7) -- 162.3
Net proceeds from issuance of public debt...... -- 1,173.7 -- -- 1,173.7
Repayment of long-term debt, including debt
tenders...................................... -- (2,057.8) (791.3) 791.3 (2,057.8)
Proceeds from long-term debt................... -- 4,375.5 81.4 (791.3) 3,665.6
Proceeds from exercise of options and
warrants..................................... 714.5 -- 157.9 -- 872.4
Dividends (paid)............................... (75.0) -- (112.9) -- (187.9)
Intercompany dividends received (paid)......... 59.5 -- (59.5) -- --
Purchase of treasury shares.................... -- -- (637.8) -- (637.8)
Financing from parent.......................... -- -- 4,132.4 (4,132.4) --
Capital contributions.......................... -- -- 1,013.6 (1,013.6) --
Other.......................................... (0.6) -- (6.5) -- (7.1)
-------- -------- -------- -------- --------
Net cash provided by financing activities.... 698.4 4,080.4 3,350.6 (5,146.0) 2,983.4
-------- -------- -------- -------- --------
Net increase in cash and cash equivalents...... 20.3 8.7 660.1 -- 689.1
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR......................................... 2.5 6.7 1,063.7 -- 1,072.9
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR....... $ 22.8 $ 15.4 $1,723.8 $ -- $1,762.0
======== ======== ======== ======== ========
78
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24. TYCO INTERNATIONAL GROUP S.A. (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 1998
TYCO TYCO
INTERNATIONAL INTERNATIONAL OTHER CONSOLIDATING
LTD. GROUP, S.A. SUBSIDIARIES ADJUSTMENTS TOTAL
($ IN MILLIONS) ------------- ------------- ------------ ------------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by (used in) operating
activities................................ $ 177.8 $ (5.8) $2,109.8 $ -- $ 2,281.8
-------- -------- -------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment,
net......................................... -- -- (1,317.5) -- (1,317.5)
Acquisition of businesses, net of cash
acquired.................................... -- -- (4,251.8) -- (4,251.8)
Net decrease (increase) in investments........ 65.3 -- (58.9) -- 6.4
(Increase) in intercompany loans.............. -- (4,090.9) -- 4,090.9 --
(Increase) in investment in subsidiaries...... (1,805.2) (1,110.7) -- 2,915.9 --
Other......................................... -- -- (83.1) -- (83.1)
-------- -------- -------- -------- ---------
Net cash utilized by investing activities... (1,739.9) (5,201.6) (5,711.3) 7,006.8 (5,646.0)
-------- -------- -------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net receipts of short-term debt............... -- -- 287.1 -- 287.1
Net proceeds from issuance of public debt..... -- 2,744.5 -- -- 2,744.5
Repayment of long-term debt, including debt
tenders..................................... -- -- (2,214.5) 1,139.9 (1,074.6)
Proceeds from long-term debt.................. -- 1,358.9 583.0 (1,139.9) 802.0
Proceeds from the sale of common shares....... 1,245.0 -- -- -- 1,245.0
Proceeds from exercise of options and
warrants.................................... 304.9 -- 43.8 -- 348.7
Dividends paid................................ (56.5) -- (246.5) -- (303.0)
Purchase of treasury shares................... -- -- (283.9) -- (283.9)
Financing from parent......................... -- -- 4,090.9 (4,090.9) --
Capital contributions......................... -- 1,110.7 1,805.2 (2,915.9) -
Other......................................... -- -- (36.5) -- (36.5)
-------- -------- -------- -------- ---------
Net cash provided by financing activities... 1,493.4 5,214.1 4,028.6 (7,006.8) 3,729.3
-------- -------- -------- -------- ---------
Net (decrease) increase in cash and cash
equivalents................................. (68.7) 6.7 427.1 -- 365.1
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR........................................ 71.2 -- 636.6 -- 707.8
-------- -------- -------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR...... $ 2.5 $ 6.7 $1,063.7 $ -- $ 1,072.9
======== ======== ======== ======== =========
79
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
25. SUBSEQUENT EVENTS
On October 4, 2000, the Company entered into an agreement to acquire
InnerDyne, Inc. ("InnerDyne"), a manufacturer and distributor of patented radial
dilating access devices used in minimally invasive medical surgical procedures.
The purchase price is approximately $180 million payable in Tyco common shares.
InnerDyne will be integrated within Tyco's Healthcare business. Tyco intends to
account for the acquisition as a purchase.
On October 6, 2000, the Company sold its ADT Automotive business to Manheim
Auctions, Inc., a wholly-owned subsidiary of Cox Enterprises, Inc., for
approximately $1 billion in cash. The sale is expected to generate a one-time
pre-tax gain to the Company in excess of $300 million in the first quarter of
Fiscal 2001.
On October 17, 2000, the Company acquired Mallinckrodt Inc.
("Mallinckrodt"), a global healthcare company with products used primarily for
respiratory care, diagnostic imaging and pain relief. The Company issued
approximately 64.8 million common shares, valued at approximately $3.2 billion,
and assumed approximately $1.0 billion in debt. Mallinckrodt is being integrated
within the Company's Healthcare business. The Company is accounting for the
acquisition as a purchase.
On November 13, 2000, the Company agreed to acquire the Lucent Power Systems
("LPS") business unit of Lucent Technologies, Inc. for $2.5 billion in cash. LPS
provides a full line of energy solutions and power products for
telecommunications service providers and for the computer industry and will be
integrated within the Electronics segment. LPS products include AC/DC and DC/DC
switching power supplies, batteries, power supplies and back-up power systems.
The acquisition is subject to customary regulatory approvals.
On November 17, 2000, the Company completed a private placement offering of
$4,657,500,000 principal at maturity of zero-coupon debt securities due 2020 for
aggregate net proceeds of approximately $3,374,000,000. Each $1,000 principal
amount at maturity security was issued at 74.165% of principal amount at
maturity, acretes at a rate of 1.5% per annum and is convertible into 10.3014
Tyco common shares if certain conditions are met. The Company may be required to
repurchase the securities at the accreted value at the option of the holders on
November 17, 2001, 2003, 2005, 2007 or 2014. The proceeds of this offering will
be used to finance the LPS acquisition and to repay commercial paper.
On December 4, 2000, the Company agreed to acquire Simplex Time Recorder Co.
("Simplex") for approximately $1.15 billion in cash. Simplex manufactures fire
and security products and communications systems including control panels,
detection devices and system software. Simplex also installs, monitors and
services fire alarms, security systems and access control systems and will be
integrated within the Fire and Security Services segment. The acquisition is
subject to customary regulatory approvals.
80
TYCO INTERNATIONAL LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Information for all periods presented below reflects the grouping of Tyco's
businesses into five business segments consisting of Electronics,
Telecommunications, Healthcare and Specialty Products, Fire and Security
Services, and Flow Control Products and Services.
In Fiscal 1999, we consummated two mergers that were accounted for under the
pooling of interests method of accounting. The merger with United States
Surgical Corporation closed on October 1, 1998, and the merger with AMP
Incorporated closed on April 2, 1999. As required by generally accepted
accounting principles in the United States ("GAAP"), we restated our financial
statements as if USSC and AMP had always been a part of Tyco. We recorded as
expenses during Fiscal 1999 costs directly associated with the USSC and AMP
mergers and the costs of terminating employees and closing or consolidating
facilities as a result of the mergers. We also expensed in Fiscal 1999 the costs
of staff reductions and facility closings that AMP undertook as part of a plan
to improve its profitability unrelated to our merger with AMP. In Fiscal 1998,
we expensed charges for staff reductions and facility closings under the AMP
profit improvement plan and charges that USSC incurred to exit certain of its
businesses. These are discussed in more detail under "Liquidity and Capital
Resources" below.
OVERVIEW
Sales increased 28.6% during Fiscal 2000 to $28,931.9 million from
$22,496.5 million in Fiscal 1999. Sales in Fiscal 1999 increased 18.0% compared
to Fiscal 1998. Income before extraordinary items was $4,520.1 million in Fiscal
2000, as compared to $1,067.7 million in Fiscal 1999 and $1,168.6 million in
Fiscal 1998. Income before extraordinary items for Fiscal 2000 included an
after-tax net credit of $793.7 million ($1,484.7 million pre-tax) consisting of
restructuring, non-recurring and impairment charges of $327.3 million
($424.2 million pre-tax) primarily for non-recurring claims related to a merged
company and the exiting of USSC's interventional cardiology business, offset by
a credit of $113.6 million ($148.9 million pre-tax) representing a revision of
estimates of merger, restructuring and other non-recurring accruals and a gain
of $1,007.4 million ($1,760.0 million pre-tax) on the issuance of common shares
in connection with TyCom's initial public offering. Income before extraordinary
items for Fiscal 1999 included an after-tax net charge of $1,304.8 million
($1,542.7 million pre-tax) primarily related to the mergers with USSC and AMP
and costs associated with AMP's profit improvement plan. Income before
extraordinary items for Fiscal 1998 included an after-tax charge of
$192.0 million ($256.9 million pre-tax) primarily related to AMP's profit
improvement plan and costs incurred by USSC to exit certain businesses.
81
The following table details Tyco's sales and earnings in Fiscal 2000, Fiscal
1999 and Fiscal 1998: ($ in millions)
FISCAL 2000 FISCAL 1999 FISCAL 1998
----------- ----------- -----------
Net sales.................................. $28,931.9 $22,496.5 $19,061.7
========= ========= =========
Operating income, before certain
charges(i)............................... $ 6,094.1(ii) $ 3,949.6(ii) $ 2,336.8
Merger, restructuring and other
non-recurring charges, net............... (176.3) (1,035.2) (256.9)
Impairment of long-lived assets............ (99.0) (507.5) --
Amortization of goodwill................... (344.4) (216.1) (131.8)
--------- --------- ---------
Operating income........................... 5,474.4 2,190.8 1,948.1
Interest expense, net...................... (769.6) (485.6) (245.3)
Gain on issuance of common shares by
subsidiary............................... 1,760.0 -- --
--------- --------- ---------
Income before income taxes, minority
interest and extraordinary items......... 6,464.8 1,705.2 1,702.8
Income taxes............................... (1,926.0) (637.5) (534.2)
Minority interest.......................... (18.7) -- --
--------- --------- ---------
Income before extraordinary items.......... 4,520.1 1,067.7 1,168.6
Extraordinary items, net of taxes.......... (0.2) (45.7) (2.4)
--------- --------- ---------
Net income................................. $ 4,519.9 $ 1,022.0 $ 1,166.2
========= ========= =========
------------------------
(i) This amount is the sum of the operating income of Tyco's five business
segments set forth in the segment discussion below, less certain corporate
expenses, and is before merger, restructuring and other non-recurring
charges, impairment of long-lived assets and amortization of goodwill.
(ii) Net restructuring charges in the amount of $1.0 million and
$106.4 million related to the write-down of inventory have been deducted
as part of cost of sales in the Consolidated Statements of Operations for
Fiscal 2000 and 1999, respectively. However, they have not been deducted
as part of cost of sales for the purpose of calculating operating income
before certain charges in this table. These charges are instead included
in merger, restructuring and other non-recurring charges.
During Fiscal 2000 and 1999, we took merger, restructuring and other
non-recurring charges and charges for the impairment of long-lived assets with
respect to AMP and USSC. Under our restructuring and integration programs, we
terminate employees and close facilities made redundant. The reduction in
manpower and facilities comes from the manufacturing, distribution, sales and
administrative functions. In addition, we discontinue or dispose of product
lines which do not fit the long-term strategy of the respective businesses. We
do not separately track the impact on financial results of the restructuring and
integration programs. However, we estimate that our overall cost structure has
been reduced by approximately $1,000.0 million on an annualized basis due to the
impact associated with these charges. The significant decreases have been to
selling, general and administrative expenses and to cost of sales.
Operating income and margins for our five business segments, which are
presented in accordance with GAAP in the following discussion, are supplemented
by a discussion of operating income and margins stated before deductions for
merger, restructuring and other non-recurring charges related to business
combinations accounted for under the pooling of interests method of accounting
and charges for impairment of long-lived assets. This supplemental discussion of
operating results before certain charges should not be considered an alternative
to operating or net income as an indicator of the
82
performance of our business, or as an alternative to cash flows from operating
activities as a measure of liquidity, in each case determined in accordance with
GAAP.
Operating income improved in all segments in each of Fiscal 2000 and Fiscal
1999. The operating improvements are the result of both increased revenues in
all segments and enhanced margins in all but one segment in Fiscal 2000.
Increased revenues result from organic growth and from acquisitions that are
accounted for under the purchase method of accounting. We enhance our margins
through improved productivity and cost reductions in the ordinary course of
business, unrelated to acquisition or divestiture activities. We regard charges
that we incur to reduce costs in the ordinary course of business as recurring
charges, which are reflected in cost of sales and in selling, general and
administrative expenses in the Consolidated Statements of Operations.
When we make an acquisition, the acquired company is immediately integrated
with our existing operations. Consequently, we do not separately track the
financial results of acquired companies. The year-to-year sales comparisons that
are presented below include estimates of year-to-year sales growth that exclude
the effects of acquisitions that are accounted for under the purchase method of
accounting. These estimates assume that the acquisitions were made at the
beginning of the relevant fiscal periods.
SALES AND OPERATING INCOME
ELECTRONICS
Tyco's Electronics segment's products and services include:
- designing, engineering and manufacturing of electronic connector systems,
fiber optic components, wireless devices, heat shrink products, power
components, wire and cable, relays, sensors, touch screens, identification
and labeling products, switches and battery assemblies; and
- designing and manufacturing of multi-layer printed circuit boards,
backplane assemblies, electronic modules and similar components.
The AMP merger occurred in April 1999, but as required under the pooling of
interests method of accounting, AMP's results have been included for all periods
presented. The following table sets forth sales and operating income (loss) and
margins for the Electronics segment ($ in millions):
FISCAL 2000 FISCAL 1999 FISCAL 1998
----------- ----------- -----------
Sales................................................ $9,909.8 $6,087.4 $5,787.3
Operating income, before certain credits (charges)... $2,447.7 $ 848.9 $ 567.6
Operating margins, before certain credits
(charges).......................................... 24.7% 13.9% 9.8%
Operating income (loss), after certain credits
(charges).......................................... $2,538.6 $ (225.9) $ 403.1
Operating margins, after certain credits (charges)... 25.6% (3.7)% 7.0%
The 62.8% increase in sales in Fiscal 2000 over Fiscal 1999 in the
Electronics segment resulted primarily from acquisitions and, to a lesser
extent, increased organic growth. These acquisitions included: the acquisition
in August 1999 of Raychem Corporation; the acquisition in November 1999 of
Siemens Electromechanical Components GmbH & Co. KG; the acquisition in
December 1999 of Praegitzer Industries, Inc.; the acquisition in March 2000 of
Critchley Group PLC; and the acquisition in July 2000 of the Electronic OEM
Business of Thomas & Betts. Excluding the impact of these acquisitions, sales
increased an estimated 15.1%.
The 5.2% increase in sales in Fiscal 1999 over Fiscal 1998 was predominantly
due to the acquisition of Raychem in August 1999 and Sigma Circuits, Inc. in
July 1998. Excluding the impact of these acquisitions, sales remained relatively
stable.
The substantial increase in operating income and margins, before certain
credits (charges), in Fiscal 2000 compared with Fiscal 1999 was primarily due to
the acquisitions of Raychem and Siemens
83
and improved margins at both AMP and Tyco Printed Circuit Group. The improved
operating margins, before certain charges, in Fiscal 2000 compared with Fiscal
1999 resulted from increased volume, improved pricing and continuing cost
reduction programs following the AMP merger.
In addition to the items discussed above, the substantial increase in
operating income and margins, after certain credits (charges), was due to a
merger, restructuring and other non-recurring net credit of $90.9 million in
Fiscal 2000 compared with a restructuring and other non-recurring charge of
$1,074.8 million in Fiscal 1999.
The 49.6% increase in operating income, before certain credits (charges), in
Fiscal 1999 compared with Fiscal 1998 was due to improved margins at AMP, the
acquisition of Raychem, and higher sales volume at the Tyco Printed Circuit
Group. The improved operating margins, before certain credits (charges), in
Fiscal 1999 compared with Fiscal 1998 were primarily due to the implementation
of AMP's profit improvement plan, which was initiated in the fourth quarter of
Fiscal 1998, cost reduction programs associated with the AMP merger, a pension
curtailment/settlement gain and the acquisition of Raychem. These improvements
were partially offset by $253.4 million of certain costs in Fiscal 1999 at AMP
prior to the merger with Tyco, including costs to defend the AlliedSignal Inc.
tender offer, the write-off of inventory and other balance sheet write-offs and
adjustments.
In addition, the decrease in operating income and margins, after certain
credits (charges), was due to merger, restructuring and impairment charges of
$1,074.8 million in Fiscal 1999 compared with net restructuring and impairment
charges of $164.4 million in Fiscal 1998.
TELECOMMUNICATIONS
Tyco's 86% owned subsidiary, TyCom Ltd. ("TyCom"), is a leading independent
provider of transoceanic fiber optic networks and services. TyCom's products and
services include:
- design, engineering, manufacture and installation of undersea cable
communications systems;
- service and maintenance of major undersea cable networks; and
- design, manufacture and installation of a global undersea fiber optic
network, known as the TyCom Global Network-TM- ("TGN"). TyCom plans to
operate, maintain and sell bandwidth capacity on the TGN.
The following table sets forth sales and operating income and margins for
the Telecommunications segment ($ in millions):
FISCAL 2000 FISCAL 1999 FISCAL 1998
----------- ----------- -----------
Sales........................................... $2,539.7 $1,623.8 $1,280.0
Operating income, before certain charges........ $ 529.7 $ 325.1 $ 268.3
Operating margins, before certain charges....... 20.9% 20.0% 21.0%
Operating income, after certain charges......... $ 516.6 $ 325.1 $ 268.3
Operating margins, after certain charges........ 20.3% 20.0% 21.0%
The 56.4% increase in sales in Fiscal 2000 over Fiscal 1999 for the
Telecommunications segment resulted primarily from increased demand for
third-party sales of TyCom systems and, to a much lesser extent, the acquisition
in May of 1999 of Telecomunicaciones Marinas, S.A. ("Temasa"). Excluding the
effect of Temasa, the sales increase for the segment in Fiscal 2000 was an
estimated 54.0%.
84
The 26.9% increase in sales in Fiscal 1999 over Fiscal 1998 for the
Telecommunications segment was due primarily to higher industry demand driving
backlog and project activity and to a lesser extent, the acquisition of Temasa
in May 1999. Excluding the impact of Temasa, sales increased an estimated 25.5%.
The substantial increase in operating income, before and after certain
charges, in Fiscal 2000 compared with Fiscal 1999 was primarily due to higher
sales volume, and to a lesser extent, the Temasa acquisition. The increase in
operating income, after certain charges, was offset by a non-recurring charge of
$13.1 million incurred in connection with the TyCom initial public offering.
The 21.2% increase in operating income in Fiscal 1999 compared with Fiscal
1998 was due to higher project and service revenues and increased bandwidth
capacity sales commissions, offset in part by one lower margin project.
During construction of the transatlantic portion of the TGN, which began in
the fourth quarter of Fiscal 2000, revenues and operating income may decrease.
During the same period, operating expenses are expected to increase due to
building TyCom's infrastructure, including network operations, sales and
marketing, research and development and administration.
HEALTHCARE AND SPECIALTY PRODUCTS
Tyco's Healthcare and Specialty Products segment's products and services
include:
- a wide variety of disposable medical products, including wound care
products, syringes and needles, sutures and surgical staples, incontinence
products, electrosurgical instruments and laparoscopic instruments;
- flexible plastic packaging, plastic bags and sheeting, coated and
laminated packaging materials, tapes and adhesives and plastic garment
hangers; and
- ADT Automotive's auto redistribution services (See Note 25).
Tyco's merger with USSC, which is included in Tyco Healthcare, occurred in
October 1998. As required under the pooling of interests method of accounting,
USSC's results have been included for all periods presented. The following table
sets forth sales and operating income and margins for the Healthcare and
Specialty Products segment ($ in millions):
FISCAL 2000 FISCAL 1999 FISCAL 1998
----------- ----------- -----------
Sales.............................................. $6,467.9 $5,742.7 $4,672.4
Operating income, before certain credits
(charges)........................................ $1,527.9 $1,386.0 $ 481.8
Operating margins, before certain credits
(charges)........................................ 23.6% 24.1% 10.3%
Operating income, after certain credits
(charges)........................................ $1,439.8 $ 890.9 $ 389.3
Operating margins, after certain credits
(charges)........................................ 22.3% 15.5% 8.3%
The 12.6% increase in sales in Fiscal 2000 over Fiscal 1999 was primarily
the result of increased sales at Tyco Plastics and Adhesives and Tyco Healthcare
and, to a lesser extent, ADT Automotive. The increases for Tyco Healthcare were
due to organic growth and, to a lesser extent, acquisitions. The acquisitions
primarily responsible for the sales increase in Fiscal 2000 included: Graphic
Controls Corporation and Sunbelt Plastics, both acquired in November 1998 and
included in results for all of Fiscal 2000 but only part of Fiscal 1999;
Batts, Inc., acquired in April 1999; General Surgical Innovations, Inc.,
acquired in November 1999; Radionics, acquired in January 2000; and Fiber-Lam,
acquired in March 2000. Excluding the impact of these acquistions, sales for the
segment increased an estimated 8.2% in Fiscal 2000 over Fiscal 1999.
The 22.9% increase in sales in Fiscal 1999 over Fiscal 1998 was primarily
the result of increased sales at Tyco Healthcare and, to a lesser extent, Tyco
Plastics and Adhesives and ADT Automotive. For Fiscal 1999, the acquisitions
primarily responsible for the sales increase included Valleylab, Sherwood-
85
Davis & Geck, Confab and Graphic Controls Corporation. Excluding the impact of
these acquisitions, the sales increase for Fiscal 1999 over Fiscal 1998 was
5.1%.
The 10.2% increase in operating income, before certain credits (charges), in
Fiscal 2000 over Fiscal 1999 was due to increased sales volume at Tyco
Healthcare, Tyco Plastics and Adhesives and, to a lesser extent, ADT Automotive,
slightly offset by a lower operating margin percentage at Tyco Healthcare
principally due to higher raw materials costs.
In addition to the items discussed above, the substantial increase in
operating income and margins, after certain credits (charges), was due to net
merger, restructuring and other non-recurring and impairment charges of
$88.1 million in Fiscal 2000 compared with net merger, restructuring and other
non-recurring charges of $495.1 million in Fiscal 1999.
The substantial increase in operating income and operating margins, before
certain credits (charges), in Fiscal 1999 over Fiscal 1998 was due to improved
margins and increased sales volume at Tyco Healthcare, whose margins were
depressed in Fiscal 1998. The increase in Fiscal 1999 also reflected higher
sales volume and better margins at Tyco Plastics and Adhesives and ADT
Automotive. The Fiscal 1998 margins at Tyco Healthcare were brought down by
fourth quarter results at USSC, which lowered sales of higher margin products to
reduce excess inventory levels at distributors, and recorded increased costs,
principally a $105.8 million accrual for special hospital education programs.
Excluding these effects, management estimates that the increase in operating
income in Fiscal 1999 over Fiscal 1998 would have been 48.6% and the operating
margin for the segment in Fiscal 1998 would have been 19.6%. The increase in
margins for Fiscal 1999 above the 19.6% level was primarily attributable to the
effects of the cost reduction programs associated with the USSC merger,
including the termination of 1,282 employees and the consolidation or closure of
20 facilities. The effect of exiting businesses of Tyco Healthcare did not
significantly impact operating margins or income.
In addition to the items discussed above, the increase in operating income
and margins was offset by net merger, restructuring and impairment charges of
$495.1 million in Fiscal 1999 compared with restructuring and other
non-recurring charges of $92.5 million in Fiscal 1998.
On October 6, 2000, we sold our ADT Automotive business, which performed
auto redistribution services.
FIRE AND SECURITY SERVICES
Tyco's Fire and Security Services segment's products and services include:
- designing, installing and servicing of a broad line of fire detection,
prevention and suppression systems;
- providing electronic security installation and monitoring services; and
- manufacturing and servicing of fire extinguishers and related products.
The following table sets forth sales and operating income and margins for
the Fire and Security Services segment ($ in millions):
FISCAL 2000 FISCAL 1999 FISCAL 1998
----------- ----------- -----------
Sales.............................................. $6,076.6 $5,534.0 $4,393.5
Operating income, before certain credits........... $1,029.3 $ 907.0 $ 630.6
Operating margins, before certain credits.......... 16.9% 16.4% 14.4%
Operating income, after certain credits............ $1,040.5 $ 934.2 $ 630.6
Operating margins, after certain credits........... 17.1% 16.9% 14.4%
The 9.8% increase in sales in Fiscal 2000 over Fiscal 1999 resulted
primarily from increased sales in the worldwide electronic security services
business and higher sales volume in fire protection operations in North America,
Asia and Australia. The increases were due primarily to a higher volume
86
of recurring service revenues and, to a lesser extent, the effects of
acquisitions in the security services business. These acquisitions included:
Entergy Security Corporation ("Entergy"), acquired in January 1999, and
Alarmguard Holdings ("Alarmguard"), acquired in February 1999, both of which
were included in results for all of Fiscal 2000 but only part of Fiscal 1999.
Excluding the impact of these acquisitions, the sales increase for the segment
in Fiscal 2000 was an estimated 8.9%.
The 26.0% sales increase in Fiscal 1999 over Fiscal 1998 reflected increased
sales worldwide in both our electronic security services and our fire protection
businesses. The increases were due both to a higher volume of recurring service
revenues and the effects of Fiscal 1999 acquisitions in the security services
business. These acquisitions included CIPE S.A., Wells Fargo Alarm, Entergy and
Alarmguard. Excluding the effects of these acquisitions, the increase in sales
for the segment in Fiscal 1999 was an estimated 15.4%.
The 13.5% increase in operating income, before certain credits, in Fiscal
2000 over Fiscal 1999 reflects increased service volume in security operations
in the United States and fire protection businesses in North America and Asia.
The increase in operating margins, before certain credits, was due to increased
sales volume in both security services and fire protection offset slightly, in
the case of security services, by the costs of the reorganization of the
security services' dealer program and internal sales force during the first two
quarters of Fiscal 2000.
The 43.8% increase in operating income, before certain credits, in Fiscal
1999 over Fiscal 1998 reflects the worldwide increase in service volume, both in
security services and fire protection, including the higher margins associated
with recurring monitoring revenue. The increase in operating margins, before
certain credits, in Fiscal 1999 was principally due to increased volume of
higher margin service and inspection work in the North American fire protection
operations; increased volume due to economic improvements in the Asia-Pacific
region; higher incremental margins in the European security operations from
additions to the customer base; and cost reductions related to acquisitions.
In addition to the items discussed above, operating income and margins,
after certain credits reflect a restructuring and other non-recurring credit of
$11.2 million in Fiscal 2000 and $27.2 million in Fiscal 1999.
FLOW CONTROL PRODUCTS AND SERVICES
Tyco's Flow Control Products and Services segment's products and services
include:
- a full line of valves and related products for industrial and process
control including butterfly, gate, globe, check, ball, plug, safety
relief, knife-gate, instrumentation, sampling, and other valves as well as
actuators, positioners, couplings and related products, which are used to
transport, control and sample liquids, gases, powders and other
substances;
- pipe and tubular products, made primarily from steel, ductile iron and
plastic, utilized in the mechanical tubing, construction, automotive,
water distribution, fencing products and other markets;
- electrical raceway products, including steel conduit, pre-wired armored
cable, flexible conduit, steel support systems and fasteners, cable tray
and cable ladder;
- a broad range of consulting, engineering, construction management and
operating services for the water, wastewater, environmental,
transportation and infrastructure markets; and
- fire sprinkler devices, specialty valves, steel pipe, plastic pipe and
fittings and pipe couplings used in commercial, residential and industrial
fire protection systems.
87
The following table sets forth sales and operating income and margins for
the Flow Control Products and Services segment ($ in millions):
FISCAL 2000 FISCAL 1999 FISCAL 1998
----------- ----------- -----------
Sales.............................................. $3,937.9 $3,508.6 $2,928.5
Operating income................................... $ 746.9 $ 605.5 $ 456.9
Operating margins.................................. 19.0% 17.3% 15.6%
The 12.2% sales increase in Fiscal 2000 over Fiscal 1999 was primarily due
to increased volume at Allied Tube and Conduit, increased demand for valve
products in the Asia-Pacific region and Europe, increased sales at Earth Tech
and, to a lesser extent, the impact of acquisitions. These acquisitions
included: Glynwed International, plc ("Glynwed"), acquired in March 1999;
Central Sprinkler Corporation, acquired in August 1999; AFC Cable
Systems, Inc., acquired in November 1999; and Flow Control Technologies,
acquired in February 2000. In August 1999, we sold certain businesses within
this segment, including The Mueller Company ("Mueller") and portions of Grinnell
Supply Sales and Manufacturing ("Grinnell"). Excluding the impacts of these
acquisitions and divestitures, sales increased an estimated 11.9%.
The 19.8% sales increase in Fiscal 1999 over Fiscal 1998 reflects increased
demand for valve products in Europe, increased sales at Earth Tech and the
impact of acquisitions. These acquisitions included Crosby Valve, Rust
Environmental and Infrastructure, Inc. and Glynwed. Excluding the effect of
these acquisitions and the divestitures of Mueller and Grinnell, the sales
increase for the segment in Fiscal 1999 was an estimated 11.3%.
The 23.4% increase in operating income in Fiscal 2000 over Fiscal 1999 was
primarily due to increased volume at Allied Tube & Conduit and increased volume
and improved margins in the North American and European valve operations and at
Earth Tech. Also, royalty and licensing fee income from certain intellectual
property associated with the divested businesses offset a portion of the
operating income lost from the divestitures. Increased operating margins in
Fiscal 2000 resulted primarily from royalty and licensing fee income and margin
improvement in the North American and European valve operations and at Earth
Tech.
The 32.5% increase in operating income in Fiscal 1999 over Fiscal 1998 was
primarily due to increased sales in the European flow control operations and
North American valve products and at Earth Tech. The increase in operating
margins was principally due to cost containment programs that improved margins
in our North American pipe products business and the worldwide valve operations.
The gain on the sale of Mueller and portions of Grinnell in this segment did not
significantly impact operating profits and margins in Fiscal 1999.
FOREIGN CURRENCY
The effect of changes in foreign exchange rates during Fiscal 2000, Fiscal
1999 and Fiscal 1998 was not material to our sales and operating income.
CORPORATE EXPENSES
Corporate expenses, excluding non-recurring charges of $275.0 million as a
reserve for certain claims relating to a merged company in the Healthcare
business and other non-recurring charges of $1.2 million, were $187.4 million in
Fiscal 2000 compared to $122.9 million in Fiscal 1999 and $68.3 million in
Fiscal 1998. These increases were due principally to higher compensation expense
under our equity-based incentive compensation plans and an increase in corporate
staffing and related costs to support and monitor our expanding businesses and
operations.
88
AMORTIZATION OF GOODWILL
Amortization of goodwill, a non-cash charge, increased $128.3 million to
$344.4 million in Fiscal 2000 compared with Fiscal 1999. Fiscal 1999
amortization of goodwill increased to $216.1 million from $131.8 million in
Fiscal 1998. The increase in amortization of goodwill is due to the
$5,162.0 million in consideration paid for acquisitions and acquisition related
costs in Fiscal 2000, which resulted in goodwill and other intangibles of
$5,206.8 million, and the $6,923.3 million in consideration paid for
acquisitions and acquisition related costs in Fiscal 1999, which resulted in
goodwill and other intangibles of $5,807.9 million.
INTEREST EXPENSE, NET
Interest expense, net, increased $284.0 million to $769.6 million in Fiscal
2000, as compared to Fiscal 1999, and increased $240.3 million to
$485.6 million in Fiscal 1999, as compared to Fiscal 1998. These increases were
primarily due to higher average debt balances, resulting from borrowings to
finance acquisitions and our stock repurchase program and, to a lesser extent,
higher average interest rates in Fiscal 2000. The increase in borrowings was
mitigated in part by the use of free cash flow to pay for certain acquisitions.
The weighted-average rate of interest on all long-term debt during Fiscal 2000,
Fiscal 1999 and Fiscal 1998 was 6.5%, 6.2% and 6.4%, respectively.
EXTRAORDINARY ITEMS
Extraordinary items in Fiscal 2000, Fiscal 1999 and Fiscal 1998 included
after-tax losses amounting to $0.2 million, $45.7 million and $2.4 million,
respectively, relating primarily to our tender offers for debt and the write-off
of net unamortized deferred financing costs related to the LYONs. Further
details are provided in Notes 4 and 13 to the Consolidated Financial Statements.
INCOME TAX EXPENSE
The effective income tax rate, excluding the impact of merger, restructuring
and other non-recurring credits (charges), charges for the impairment of
long-lived assets and gain on the sale of TyCom shares, was 24.8% during Fiscal
2000 as compared to 27.0% in Fiscal 1999 and 30.6% in Fiscal 1998. The decreases
in the effective income tax rates were primarily due to higher earnings in tax
jurisdictions with lower income tax rates. We believe that we will generate
sufficient future income to realize the tax benefits related to our deferred tax
assets. A valuation allowance has been maintained due to continued uncertainties
of realization of certain tax benefits, primarily tax loss carryforwards (See
Note 7).
89
LIQUIDITY AND CAPITAL RESOURCES
The following table shows the sources of our cash flow from operating
activities and the use of a portion of that cash in our operations in Fiscal
2000 and Fiscal 1999. We refer to the net amount of cash generated from
operating activities less capital expenditures and dividends as "free cash
flow."
FISCAL 2000 FISCAL 1999
----------- -----------
($ IN MILLIONS)
Operating income, before certain charges (1).............. $ 6,094.1 $ 3,949.6
Depreciation and amortization (2)......................... 1,300.0 1,095.1
Net increase in deferred income taxes..................... 507.8 351.6
Less:
Net increase in working capital (3)....................... (64.9) (122.6)
Interest expense, net..................................... (769.6) (485.6)
Income tax expense........................................ (1,926.0) (637.5)
Restructuring expenditures (4)............................ (155.2) (633.6)
Other, net................................................ 288.8 32.8
--------- ---------
Cash flow from operating activities....................... 5,275.0 3,549.8
Less:
Capital expenditures...................................... (1,814.9) (1,632.5)
Dividends paid............................................ (86.2) (187.9)
--------- ---------
Free cash flow............................................ $ 3,373.9 $ 1,729.4
========= =========
------------------------
(1) This amount is the sum of the operating income of the five business segments
as set forth above, less certain corporate expenses, and is before merger,
restructuring and other non-recurring credits and charges, charges for the
impairment of long-lived assets and goodwill amortization.
(2) This amount is the sum of depreciation of tangible property
($1,095.0 million and $979.6 million in Fiscal 2000 and Fiscal 1999,
respectively) and amortization of intangible property other than goodwill
($205.0 million and $115.5 million in Fiscal 2000 and Fiscal 1999,
respectively).
(3) This amount is net of $100.0 million and $50.0 million received on the sale
of accounts receivable in Fiscal 2000 and Fiscal 1999, respectively.
(4) This amount is the sum of all cash paid out for (a) merger, restructuring
and other non-recurring charges in connection with business combinations
accounted for on a pooling of interests basis and (b) other restructuring
and non-recurring charges taken by the pooled companies prior to their
combination with Tyco.
In addition, in Fiscal 2000 and Fiscal 1999 we paid out $544.2 million and
$354.4 million, respectively, in cash that was charged against reserves
established in connection with acquisitions accounted for under the purchase
accounting method. This amount is included in "Acquisition of businesses, net of
cash acquired" in the Consolidated Statement of Cash Flows.
Business combinations are accounted for either on a pooling of interests
basis or under the purchase accounting method. In Fiscal 1999, the Company made
two business combinations, USSC and AMP, that were required to be accounted for
on a pooling of interests basis. Under pooling of interests accounting, the
merged companies are treated as if they had always been part of Tyco, and their
financial statements are included in our Consolidated Financial Statements for
all periods presented.
At the time of each pooling of interests transaction, Tyco establishes a
reserve for transaction costs and the costs that we expect to incur in
integrating the merged company within the relevant Tyco business segment. By
integrating merged companies with our existing businesses, we expect to realize
operating synergies and long-term cost savings. Integration costs, which relate
primarily to termination of employees and the closure of facilities made
redundant, are detailed in Note 16 to the Consolidated Financial Statements.
Reserves for merger, restructuring and other non-recurring items are taken as a
charge against current earnings at the time the reserves are established.
Amounts expended for merger, restructuring and other non-recurring costs are
charged against the reserves as they are paid out. If the amount of the reserves
proves to be greater than the costs actually incurred, any excess is credited
against merger, restructuring and other non-recurring charges in the
Consolidated Statement of Operations in the period in which that determination
is made.
90
In Fiscal 2000, we established merger, restructuring and other non-recurring
reserves of $325.2 million, of which $7.3 million is included in cost of sales,
primarily related to a reserve for certain claims relating to a merged company
in the Healthcare business, the restructuring activities in AMP's Brazilian
operations and wireless communications business, a non-recurring charge incurred
in connection with the TyCom IPO, charges associated with USSC's suture business
and the exiting of USSC's interventional cardiology business. At the beginning
of the fiscal year, there existed merger, restructuring and other non-recurring
reserves of $399.3 million related to pooling of interests transactions
consummated in prior years and other restructuring charges taken by the merged
companies prior to their combination with Tyco. During Fiscal 2000, we paid out
$155.2 million in cash and incurred $54.5 million in non-cash charges that were
charged against these reserves. Also in Fiscal 2000, we determined that
$148.9 million of merger, restructuring and other non-recurring reserves
established in prior years were not needed. These amounts were taken as merger,
restructuring and other non-recurring credits during Fiscal 2000 and offset
against the reserves. At September 30, 2000, there remained $365.9 million of
merger, restructuring and other non-recurring reserves on our Consolidated
Balance Sheet, of which $334.8 million is included in current liabilities and
$31.1 million is included in long-term liabilities.
All business combinations completed in Fiscal 2000 were required to be
accounted for under the purchase accounting method. At the time each purchase
acquisition is made, we establish a reserve for transaction costs and the costs
of integrating the purchased company within the relevant Tyco business segment.
The amounts of such reserves established in Fiscal 2000 are detailed in Note 3
to the Consolidated Financial Statements. These amounts are not charged against
current earnings but are treated as additional purchase price consideration and
have the effect of increasing the amount of goodwill recorded in connection with
the respective acquisition. We view these costs as the equivalent of additional
purchase price consideration when we consider making an acquisition. If the
amount of the reserves proves to be in excess of costs actually incurred, any
excess is used to reduce the goodwill account that was established at the time
the acquisition was made.
In Fiscal 2000, we made acquisitions that were accounted for under the
purchase accounting method at an aggregate cost of $5,162.0 million. Of this
amount, $4,246.5 million was paid in cash (net of cash acquired),
$671.4 million was paid in the form of Tyco common shares, and we assumed
$244.1 million in debt. In connection with these acquisitions, we established
purchase accounting reserves of $426.2 million for transaction and integration
costs. At the beginning of Fiscal 2000, purchase accounting reserves were
$570.3 million as a result of purchase accounting transactions made in prior
years. During Fiscal 2000, we paid out $544.2 million in cash and incurred
$52.1 million in non-cash charges against the reserves established during and
prior to Fiscal 2000. Also in Fiscal 2000, we determined that $117.8 million of
purchase accounting reserves related to acquisitions made prior to Fiscal 2000
were not needed and reversed that amount against goodwill. At September 30,
2000, there remained $372.6 million in purchase accounting reserves on our
Consolidated Balance Sheet, of which $349.2 million is included in current
liabilities and $23.4 million is included in long-term liabilities.
91
The following details the Fiscal 2000 capital expenditures and depreciation
by segment:
CAPITAL
EXPENDITURES DEPRECIATION
($ IN MILLIONS) ------------ ------------
Electronics.......................................... $ 293.8 $ 444.9
Telecommunications................................... 316.0(1) 57.4
Healthcare and Specialty Products.................... 251.1 192.8
Fire and Security Services........................... 764.3 309.4
Flow Control Products and Services................... 142.1 82.9
Corporate............................................ 47.6 7.6
-------- --------
Total............................................ $1,814.9 $1,095.0
======== ========
------------------------
(1) Includes $111.1 million in spending for construction of the TyCom Global
Network.
We continue to fund capital expenditures to improve the cost structure of
our businesses, to invest in new processes and technology, and to maintain high
quality production standards. The level of capital expenditures for the Fire and
Security Services segment significantly exceeded, and is expected to continue to
significantly exceed, depreciation due to the large volume growth of new
residential subscriber systems capitalized. The level of capital expenditures in
the Telecommunications segment is expected to significantly increase due to
construction of the TyCom Global Network. The level of capital expenditures in
the other segments is expected to increase moderately in Fiscal 2001. The source
of funds for capital expenditures is expected to be cash from operating
activities.
The provision for income taxes in the Consolidated Statement of Operations
for Fiscal 2000 was $1,926.0 million, but the amount of income taxes paid (net
of refunds) during the year was $454.7 million. The difference is due primarily
to the timing of tax payments related to the gain on issuance of shares by
TyCom. The current income tax liability at September 30, 2000 was $1,650.3
million, as compared to $798.0 million at September 30, 1999. After adjustment
for deferred income taxes of acquired companies and other items, the net
increase in deferred income taxes was $507.8 million. The increase in deferred
income taxes is attributable primarily to current utilization of deductions on
restructuring, other non-recurring charges and purchase accounting spending,
other timing differences between book and tax recognition of income and expense,
utilization of net operating loss and credit carryforwards, and the tax benefits
of stock option exercises.
The net change in working capital, net of the effects of acquisitions and
divestitures, was an increase of $91.7 million. The components of this change
are set forth in detail in the Consolidated Statement of Cash Flows. The
increase in working capital accounts is attributable to the higher level of
business activity in Fiscal 2000 as reflected in the increased sales over the
prior year. We focus on maximizing the cash flow from our operating businesses
and attempt to keep the working capital employed in the businesses to the
minimum level required for efficient operations.
In addition, we used $1,885.1 million to purchase our own common shares. In
November 1999, we announced the authorization by our Board of Directors to
reacquire up to 20 million Tyco common shares in the open market, which was
completed during the quarter ended March 31, 2000. In January 2000, the Board of
Directors authorized the expenditure of up to an additional $2,000.0 million to
reacquire our shares, of which we have spent nearly $1,100.0 million through
September 30, 2000. In addition, we repurchase our own shares from time to time
in the open market to satisfy certain stock-based compensation arrangements,
such as the exercise of stock options.
We received proceeds of $2,130.7 million from the issuance of common shares
by a subsidiary in the TyCom IPO and $355.3 million from the exercise of common
share options.
92
The source of the cash used for acquisitions was primarily an increase in
total debt and cash flows from operations. Goodwill and other intangible assets
were $16,332.6 million at September 30, 2000, compared to $12,158.9 million at
September 30, 1999. At September 30, 2000, our total debt was
$10,999.0 million, as compared to $10,122.2 million at September 30, 1999. This
increase resulted principally from borrowings under our commercial paper program
and net proceeds of approximately $565.9 million from the issuance of Euro
denominated private placement notes in April 2000. For a full discussion of debt
activity, see Note 4 to the Consolidated Financial Statements.
Shareholders' equity was $17,033.2 million, or $10.11 per share, at
September 30, 2000, compared to $12,369.3 million, or $7.32 per share, at
September 30, 1999. The increase in shareholders' equity was due primarily to
net income of $4,519.9 million, an unrealized gain on available for sale
securities of $1,075.7 million and the issuance of a total of approximately
15.6 million common shares valued at approximately $671.4 million for the
acquisitions of GSI and AFC Cable in November 1999. Total debt as a percent of
total capitalization (total debt and shareholders' equity) was 39% at
September 30, 2000 and 45% at September 30, 1999. Net debt (total debt less cash
and cash equivalents) as a percent of total capitalization was 35% at
September 30, 2000 and 37% at September 30, 1999.
On October 4, 2000, we entered into an agreement to acquire InnerDyne, Inc.
("InnerDyne"), a manufacturer and distributor of patented radial dilating access
devices used in minimally invasive medical surgical procedures. The purchase
price is approximately $180 million payable in Tyco common shares. InnerDyne
will be integrated within Tyco's Healthcare business. We intend to account for
the acquisition as a purchase.
On October 6, 2000, we sold our ADT Automotive business to Manheim
Auctions, Inc., a wholly-owned subsidiary of Cox Enterprises, Inc., for
approximately $1 billion in cash. The sale is expected to generate a one-time
pre-tax gain to Tyco in excess of $300 million in the first quarter of Fiscal
2001.
On October 17, 2000, we acquired Mallinckrodt Inc. ("Mallinckrodt"), a
global healthcare company with products used primarily for respiratory care,
diagnostic imaging and pain relief. We issued approximately 64.8 million common
shares, valued at approximately $3.2 billion, and assumed approximately $1.0
billion in debt. Mallinckrodt is being integrated within Tyco's Healthcare
business. We are accounting for the acquisition as a purchase.
On November 13, 2000, we agreed to acquire the Lucent Power Systems ("LPS")
business unit of Lucent Technologies, Inc. for $2.5 billion in cash. LPS
provides a full line of energy solutions and power products for
telecommunications service providers and for the computer industry and will be
integrated within the Electronics segment. LPS products include AC/DC and DC/DC
switching power supplies, batteries, power supplies and back-up power systems.
The acquisition is subject to customary regulatory approvals.
On November 17, 2000, we completed a private placement offering of
$4,657,500,000 principal at maturity of zero-coupon debt securities due 2020 for
aggregate net proceeds of approximately $3,374,000,000. Each $1,000 principal
amount at maturity security was issued at 74.165% of principal amount at
maturity, accretes at a rate of 1.5% per annum and is convertible into 10.3014
Tyco common shares if certain conditions are met. We may be required to
repurchase the securities at the accreted value at the option of the holders on
November 17, 2001, 2003, 2005, 2007 or 2014. The proceeds of this offering will
be used to finance the LPS acquisition and to repay commercial paper.
On December 4, 2000, we agreed to acquire Simplex Time Recorder Co.
("Simplex") for approximately $1.15 billion in cash. Simplex manufactures fire
and security products and communications systems including control panels,
detection devices and system software. Simplex also installs, monitors and
services fire alarms, security systems and access control systems and will be
integrated within the Fire and Security Services segment. The acquisition is
subject to customary regulatory approvals.
93
We believe that our cash flow from operations, together with our existing
credit facilities and other credit arrangements, is adequate to fund our
operations.
BACKLOG
At September 30, 2000, we had a backlog of unfilled orders of approximately
$8,214.8 million, compared to a backlog of approximately $7,581.1 million as of
September 30, 1999. We expect that approximately 86% of our backlog at
September 30, 2000 will be filled during the year ending September 30, 2001.
Backlog by industry segment is as follows ($ in millions):
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
Telecommunications....................................... $2,941.7 $3,535.4
Electronics.............................................. 2,335.7 1,439.1
Flow Control Products and Services....................... 1,711.4 1,516.5
Fire and Security Services............................... 1,134.9 986.6
Healthcare and Specialty Products........................ 91.1 103.5
-------- --------
$8,214.8 $7,581.1
======== ========
The decrease in backlog within the Telecommunications segment is due to
TyCom devoting a substantial portion of its resources to designing and
manufacturing the TGN and therefore taking on less work as a supplier of
undersea fiber optic cable systems for others. Within the Electronics segment,
backlog increased principally due to an increase in demand for the products
manufactured by AMP and Raychem, and to a lesser extent, the effect of
acquisitions. Within the Flow Control Products and Services segment, backlog
increased principally due to increased backlog at Earth Tech, related to new
contract bookings and water and waste water facility contracts, and an increase
in demand for its valves and control products. Within the Fire and Security
Services segment, backlog increased principally due to long-term service
contracts in the Australian fire protection business and, to a lesser extent,
the effect of acquisitions. Backlog in the Healthcare and Specialty Products
segment is not indicative of the level of sales activity. Backlog in this
segment generally represents unfilled orders which are shipped shortly after
purchase orders are received.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risk associated with changes in interest rates,
foreign currency exchange rates and certain commodity prices. In order to manage
the volatility relating to our more significant market risks, we enter into
forward foreign currency exchange contracts, cross-currency swaps, foreign
currency options, commodity swaps and interest rate swaps. The Company does not
anticipate any material changes in our primary market risk exposures in Fiscal
2001.
We utilize risk management procedures and controls in executing derivative
financial instrument transactions. We do not execute transactions or hold
derivative financial instruments for trading purposes. Derivative financial
instruments related to interest rate sensitivity of debt obligations,
intercompany cross-border transactions and anticipated non-functional currency
cash flows, as well as commodity price exposures, are used with the goal of
mitigating a significant portion of these exposures when it is cost effective to
do so. Counter-parties to derivative financial instruments are limited to
financial institutions with at least an AA long-term credit rating.
94
INTEREST RATE SENSITIVITY
The table below provides information about our financial instruments that
are sensitive to changes in interest rates, including long-term investments,
debt obligations, interest rate swaps and currency swaps. For long-term
investments, the table presents cash flows of principal payments (in millions)
related to a subordinated, non-collateralized zero coupon loan note, based on
the amortized cost of the investment as of September 30, 2000, and the
associated fair value interest rate discount. For debt obligations, the table
presents cash flows of principal repayment (in millions) and weighted-average
interest rates. For interest rate swaps and cross-currency swaps, the table
presents notional amounts (in millions) and weighted-average interest rates.
Notional amounts are used to calculate the contractual payments to be exchanged
under the contract. The amounts included in the table below are in U.S. dollars
($ in millions).
FISCAL FISCAL FISCAL FISCAL FISCAL FAIR
2001 2002 2003 2004 2005 THEREAFTER TOTAL VALUE
------ ------- ------ ------ ------- ---------- ------- -------
Long-term investment:
Fixed Rate (British Pound)...................... -- -- -- 119.6 -- -- 119.6 119.6
Interest rate................................. 11.5%
Total debt:
Fixed rate (US$)................................ 858.6 1,354.8 11.2 113.0 1,147.5 3,391.8 6,876.9 6,721.8
Average interest rate......................... 6.3% 6.9% 7.4% 6.2% 6.2% 6.6%
Fixed rate (Euro)............................... -- -- -- -- -- 525.4 525.4 515.0
Average interest rate......................... 6.1%
Fixed rate (Yen)................................ 9.0 22.8 33.5 5.6 5.6 58.7 135.2 153.3
Average interest rate......................... 3.2% 3.4% 2.2% 1.4% 1.4% 4.8%
Variable rate (US$)............................. 666.1 2,454.5 4.4 5.8 2.9 33.3 3,167.0 3,167.0
Average interest rate (i)..................... 5.9% 6.9% 5.9% 6.7% 7.6% 4.9%
Variable rate (Euro)............................ -- 239.2 -- -- -- -- 239.2 239.2
Average interest rate......................... 5.0%
Variable rate (French Franc).................... 3.5 4.1 4.8 5.0 5.6 32.3 55.3 55.3
Average interest rate (i)..................... 4.9% 4.9% 4.9% 4.9% 4.9% 4.9%
Interest rate swap:
Fixed to variable (US$)......................... -- 1,000.0 -- -- -- 800.0 1,800.0 (95.7)
Average pay rate (i).......................... 7.9% 7.3%
Average receive rate............................ 6.9% 6.1%
Cross-currency swap:
Receive US$/Pay Japanese Yen (ii)............... -- -- -- 150.0 -- -- 150.0 (18.3)(iii)
Pay Japanese Yen interest....................... 6.8 6.8 6.8 3.4 -- -- 23.8
Receive US$ interest............................ 10.1 10.1 10.1 5.0 -- -- 35.3
Pay rate...................................... 4.6% 4.6% 4.6% 4.6%
Receive rate.................................. 6.7% 6.7% 6.7% 6.7%
------------------------------
(i) Weighted-average variable interest rates are based on applicable rates as
of September 30, 2000 per the terms of the contracts of the related
financial instruments.
(ii) In March 1994, AMP entered into a cross-currency swap with a financial
institution to hedge a portion of its net investment in its Japanese
subsidiary.
(iii) The fair value of the cross-currency swap included in the table reflects
the portion of the fair value of the contract that is attributable to the
interest component of the contract.
95
EXCHANGE RATE SENSITIVITY
The table below provides information about Tyco's financial instruments that
are sensitive to foreign currency exchange rates. These instruments include
long-term investments, debt obligations, cross-currency swaps, forward foreign
currency exchange contracts and currency options. For long-term investments, the
table presents cash flows of principal payments (in millions) related to a
subordinated, non-collateralized zero coupon loan note, based on the amortized
cost of the investment as of September 30, 2000, and the associated fair value
interest rate discount. For debt obligations, the table presents cash flows of
principal repayment (in millions) and weighted-average interest rates. For
cross-currency swaps and forward foreign currency exchange contracts, the table
presents notional amounts (in millions) and weighted-average contractual
exchange rates. For currency options, the table presents notional amounts (in
millions) and weighted-average contractual strike prices. Notional amounts are
used to calculate the contractual payments to be exchanged under the contract.
The amounts included in the table below are in U.S. dollars ($ in millions).
FISCAL FISCAL FISCAL FISCAL FISCAL FAIR
2001 2002 2003 2004 2005 THEREAFTER TOTAL VALUE
------- ------ ------ ------ ------ ---------- ------- -----
Long-term investment:
Fixed Rate (British Pound)...................... -- -- -- 119.6 -- -- 119.6 119.6
Interest rate................................. 11.5%
Long-term debt:
Fixed rate (Euro)............................... -- -- -- -- -- 525.4 525.4 515.0
Average interest rate......................... 6.1%
Fixed rate (Yen)................................ 9.0 22.8 33.5 5.6 5.6 58.7 135.2 153.3
Average interest rate......................... 3.2% 3.4% 2.2% 1.4% 1.4% 4.8%
Variable rate (Euro)............................ -- 239.2 -- -- -- -- 239.2 2392
Average interest rate......................... 5.0%
Variable rate (French Franc).................... 3.5 4.1 4.8 5.0 5.6 32.3 55.3 55.3
Average interest rate (i)..................... 4.9% 4.9% 4.9% 4.9% 4.9% 4.9%
Cross-currency swap:
Receive US$/Pay Japanese Yen (ii)............... -- -- -- 150.0 -- -- 150.0 3.0 (iii)
Contractual exchange rate (Yen/US$)........... -- -- -- 105.95 -- --
Forward contracts:
Receive US$/Pay Australian Dollar............... 325.1 -- -- -- -- -- 325.1 40.5
Average contractual exchange rate............. 0.63 -- -- -- -- --
Receive US$/Pay British Pound................... 1,389.6 -- -- -- -- -- 1,389.6 107.8
Average contractual exchange rate............. 1.59 -- -- -- -- --
Receive US$/Pay Canadian Dollar................. 109.5 -- -- -- -- -- 109.5 2.3
Average contractual exchange rate............. 0.69 -- -- -- -- --
Receive US$/Pay Euro............................ 790.8 -- -- -- -- -- 790.8 125.1
Average contractual exchange rate............... 1.00 -- -- -- -- --
Receive US$/Pay Japanese Yen.................... 194.1 -- -- -- -- -- 194.1 3.9
Average contractual exchange rate
(Yen/US$)..................................... 101.51 -- -- -- -- --
Pay US$/Receive Singapore Dollar................ 58.4 -- -- -- -- -- 58.4 (0.6)
Average strike price............................ 0.58 -- -- -- -- --
------------------------------
(i) Weighted-average variable interest rates are based on applicable rates as
of September 30, 2000 per the terms of the contracts of the related
financial instruments.
(ii) In March 1994, AMP entered into a cross-currency swap with a financial
institution to hedge a portion of its net investment in its Japanese
subsidiary.
(iii) The fair value of cross-currency swap included in the table reflects the
portion of the fair value of the contract that is attributable to the
foreign currency component of the contracts.
96
COMMODITY PRICE SENSITIVITY
The table below provides information about Tyco's financial instruments that
are sensitive to changes in commodity prices. Total contract dollar amounts (in
millions) and notional quantity amounts are presented for forward commodity
contracts. Contract amounts are used to calculate the contractual payments
quantity of the commodity to be exchanged under the contracts ($ in millions).
FISCAL FISCAL FISCAL FISCAL FISCAL FAIR
2001 2002 2003 2004 2005 THEREAFTER TOTAL VALUE
-------- -------- -------- -------- -------- ---------- -------- --------
Forward contracts:
Copper
Contract amount (US$)... 62.4 10.9 -- -- -- -- 73.3 10.6
Contract quantity (in
000 metric tons)...... 35.6 6.1 -- -- -- -- 41.7
Gold
Contract amount (US$)... 25.8 1.7 -- -- -- -- 27.5 0.4
Contract quantity (in
000 ounces)............. 93.0 6.0 -- -- -- -- 99.0
Silver
Contract amount (US$)... 8.6 2.0 -- -- -- -- 10.6 0.0
Contract quantity (in
000 ounces)............. 1,700.0 400.0 -- -- -- -- 2,100.0
Zinc
Contract amount (US$)... 0.7 -- -- -- -- -- 0.7 0.1
Contract quantity (in
000 metric tons)...... 0.7 -- -- -- -- -- 0.7
YEAR 2000 COMPLIANCE
Tyco's Year 2000 compliance programs and systems modifications were
completed on time, and the conversion process was successful. Our business has
not been adversely affected due to the failure of key third parties to
successfully complete the Year 2000 conversion. Although there can be no
assurance that all of our material third-party relationships had successful
conversion programs we do not expect that any such failure would have a material
adverse effect on our financial position, results of operations or liquidity.
The costs of our Year 2000 program to date have not been material, and we know
of no further required modifications to its information technology or embedded
technology systems that would have a material impact on our financial position,
results of operations or liquidity.
ACCOUNTING AND TECHNICAL PRONOUNCEMENTS
In June 1998 and June 2000, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities." These statements
establish accounting and reporting standards requiring that every derivative
instrument be recorded on the balance sheet as either an asset or liability
measured at its fair value. SFAS Nos. 133 and 138 also require that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS Nos. 133 and 138 are effective for
fiscal years beginning after June 15, 2000. We do not expect that the adoption
of these new standards will have a material impact on our earnings or financial
position.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"), which clarifies certain existing accounting principles for the
timing of revenue recognition and its classification in the financial
statements. In June 2000, the SEC delayed the required implementation date of
SAB 101. As a result, SAB 101 will not be effective for Tyco until the quarter
ended September 30, 2001. In October 2000, the SEC issued further guidance on
the interpretations included in SAB 101. We are currently analyzing the impact
of this Staff Accounting Bulletin.
97
In September 2000, the FASB issued SFAS No. 140 ("SFAS 140"), "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities--a replacement of FASB Statement No. 125." SFAS 140 revises the
standards for accounting for securitizations and other transfers of financial
assets and collateral and requires certain disclosures, but it carries over most
of SFAS 125's provisions without reconsideration. This Statement is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. This Statement is effective for
recognition and reclassification of collateral and for disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. We are currently analyzing this new standard.
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 Tyco'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, earnings, cash flows, operating efficiencies, product expansion, backlog,
financings and share repurchases, are subject to known and unknown risks,
uncertainties and contingencies, many of which are beyond the control of Tyco,
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 Tyco's goods and services;
competitive factors in the industries in which Tyco competes; changes in
government regulation; changes in tax requirements (including tax rate changes,
new tax laws and revised tax law interpretations); results of litigation;
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 timing of construction and the
successful operation of the TyCom Global Network; the ability to achieve
anticipated synergies and other cost savings in connection with acquisitions;
and the timing, impact and other uncertainties of future acquisitions.
98
TYCO INTERNATIONAL LTD.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
ADDITIONS
BALANCE AT CHARGED ACQUISITIONS,
BEGINNING TO DISPOSALS, BALANCE AT
DESCRIPTION OF YEAR INCOME AND OTHER DEDUCTIONS END OF YEAR
----------- ---------- --------- ------------- ---------- -----------
Allowances for Doubtful Accounts:
Fiscal Year Ended September 30, 1998... $158.9 $ 95.7 $107.9 $(44.9) $317.6
Fiscal Year Ended September 30, 1999... 317.6 141.8 (9.2) (120.4) 329.8
Fiscal Year Ended September 30, 2000... 329.8 226.1 29.5 (143.3) 442.1
99
EXHIBIT 2.5
EXECUTION COPY
AGREEMENT FOR THE PURCHASE AND SALE OF ASSETS
BY AND BETWEEN
LUCENT TECHNOLOGIES INC.
AS SELLER
AND
TYCO GROUP S.A.R.L.
AS BUYER
DATED AS OF NOVEMBER 13, 2000
LUCENT TECHNOLOGIES PROPRIETARY
USE PURSUANT TO COMPANY INSTRUCTIONS
TABLE OF CONTENTS
PAGE
1. Definitions.......................................................2
1.1 Defined Terms...............................................2
1.2 Other Definitional and Interpretive Matters.................10
2. Purchase and Sale of the Business.................................11
2.1 Purchase and Sale of Assets.................................11
2.2 Excluded Assets.............................................12
2.3 Purchase Price..............................................14
2.4 Assumed Liabilities.........................................15
2.5 Excluded Liabilities........................................16
2.6 Further Assurances; Further Conveyances and
Assumptions; Consent of Third Parties.......................16
2.7 No Licenses.................................................18
2.8 Bulk Sales Law..............................................18
2.9 Taxes.......................................................18
2.10 Buyer Designee..............................................19
3. Representations and Warranties of Seller..........................19
3.1 Organization and Qualification..............................19
3.2 Subsidiaries................................................19
3.3 Authorization; Binding Effect...............................20
3.4 Non-Contravention; Consents.................................20
3.5 Title to Property; Principal Equipment; Sufficiency
of Assets...................................................21
3.6 Permits, Licenses...........................................21
3.7 Real Estate.................................................22
3.8 Compliance With Laws; Litigation............................22
3.9 Business Employees..........................................23
3.10 Contracts...................................................24
3.11 Environmental Matters.......................................24
3.12 Financial Statement; Absence of Changes.....................25
3.13 Intellectual Property.......................................26
3.14 Brokers.....................................................27
3.15 Taxes.......................................................27
3.16 Product Liability and Recalls...............................27
3.17 Product Warranty............................................27
3.18 Inventory...................................................28
3.19 Customer and Suppliers......................................28
3.20 Restrictions on the Business................................28
3.21 No Other Representations or Warranties......................28
-i-
LUCENT TECHNOLOGIES PROPRIETARY
USE PURSUANT TO COMPANY INSTRUCTIONS
4. Representations and Warranties of Buyer...........................28
4.1 Organization and Qualification..............................29
4.2 Authorization; Binding Effect...............................29
4.3 No Violations...............................................29
4.4 Brokers.....................................................30
4.5 No Other Seller Representations and Warranties..............30
4.6 Sufficiency of Funds........................................31
4.7 No Other Representations or Warranties......................31
5. Certain Covenants.................................................31
5.1 Access and Information......................................31
5.2 Conduct of Business.........................................32
5.3 Tax Reporting and Allocation of Consideration...............34
5.4 Business Employees..........................................34
5.5 Collateral Agreements; Leased Equipment.....................40
5.6 Regulatory Compliance.......................................41
5.7 Contacts with Suppliers, Employees and Customers............41
5.8 Use of Lucent's Name; Brazilian JV Comany Name..............41
5.9 No Hire and Non-Solicitation of Employees...................43
5.10 No Negotiation or Solicitation..............................43
5.11 Non-Competition.............................................43
6. Confidential Nature of Information................................44
6.1 Confidentiality Agreement...................................44
6.2 Seller's Proprietary Information............................44
6.3 Buyer's Proprietary Information.............................46
6.4 Confidential Nature of Agreement............................47
7. Closing...........................................................47
7.1 Deliveries by Seller or the Subsidiaries....................47
7.2 Deliveries by Buyer.........................................48
7.3 Closing Date................................................48
8. Conditions Precedent to Closing...................................49
8.1 General Conditions..........................................49
8.2 Conditions Precedent to Buyer's Obligations.................49
8.3 Conditions Precedent to Seller's Obligations................50
9. Status of Agreements..............................................50
9.1 Effect of Breach............................................50
9.2 Survival of Representations and Warranties..................50
9.3 General Agreement to Indemnify..............................51
9.4 General Procedures for Indemnification......................53
-ii-
LUCENT TECHNOLOGIES PROPRIETARY
USE PURSUANT TO COMPANY INSTRUCTIONS
10. Miscellaneous Provisions..........................................54
10.1 Notices.....................................................54
10.2 Expenses....................................................55
10.3 Entire Agreement; Modification..............................55
10.4 Assignment; Binding Effect; Severability....................55
10.5 Governing Law...............................................55
10.6 Execution in Counterparts...................................56
10.7 Public Announcement.........................................56
10.8 No Third-Party Beneficiaries................................56
11. Termination and Waiver............................................57
11.1 Termination.................................................57
11.2 Effect of Termination.......................................57
11.3 Waiver of Agreement.........................................57
11.4 Amendment of Agreement......................................57
11.5 Disputes; Waiver of Jury Trial..............................58
-iii-
LUCENT TECHNOLOGIES PROPRIETARY
USE PURSUANT TO COMPANY INSTRUCTIONS
SCHEDULES
SCHEDULE 2.1(h) Licenses
SCHEDULE 2.1(j) Governmental Permits
SCHEDULE 2.2(f) Excluded Contracts
SCHEDULE 2.3(b) 9/30/2000 Inventory Statement
SCHEDULE 2.3(d) Allocation of Purchase Price Among Seller, Subsidiaries of
Seller, and Buyer Designees
SCHEDULE 3.2 Subsidiaries
SCHEDULE 3.4(b) Required Consents
SCHEDULE 3.7(a) Assumed Leases; Leased Premises
SCHEDULE 3.7(b) Transferred Premises
SCHEDULE 3.8(a) Compliance with Laws
SCHEDULE 3.8(b) Litigation
SCHEDULE 3.9(a) Business Employees
SCHEDULE 3.9(b) Benefit Plans
SCHEDULE 3.10 Material Contracts
SCHEDULE 3.11 Environmental Matters
SCHEDULE 3.12 Financial Statements
SCHEDULE 3.13(b) Intellectual Property
SCHEDULE 3.16 Product Liability and Recalls
SCHEDULE 3.17 Product Warranty Terms
SCHEDULE 3.19 Customers and Suppliers
SCHEDULE 5.4(m) Labor Agreements
EXHIBITS
EXHIBIT A Form of Assignment and Bill of Sale
EXHIBIT B Form of Assumption Agreement
EXHIBIT C Form of Lease Assignment
EXHIBIT D Form of Sublease
EXHIBIT E Form of Supply Agreement
EXHIBIT F Form of Intellectual Property Agreement
EXHIBIT G Form of Transition Services Agreement
EXHIBIT H Form of Opinion - Buyer's Savings Plan
-iv-
LUCENT TECHNOLOGIES PROPRIETARY
USE PURSUANT TO COMPANY INSTRUCTIONS
AGREEMENT FOR THE PURCHASE AND SALE OF ASSETS
THIS AGREEMENT FOR THE PURCHASE AND SALE OF ASSETS ("AGREEMENT") is made
as of November 13, 2000 by and between LUCENT TECHNOLOGIES INC., a Delaware
corporation ("SELLER" or "LUCENT"), and TYCO GROUP S.A.R.L., a company organized
under the laws of Luxembourg ("BUYER").
R E C I T A L S
A. WHEREAS, Seller and the Subsidiaries are, among other things, engaged
through a unit (referred to herein as "POWER SYSTEMS") of its Microelectronics
and Communications Technology Group in the worldwide manufacturing, marketing,
sales and distribution of power supply, power conversion and backup power
equipment for wireless, optical, switching and other equipment that run
communications networks and a full line of power products, including Titania(TM)
power products, for computer manufacturers; and provide custom design,
engineering, installation and technical support related to such power products
(collectively, the "BUSINESS");
B. WHEREAS, the Business is composed of certain assets and liabilities
that are currently part of Seller and the Subsidiaries;
C. WHEREAS, Seller and the Subsidiaries desire to sell, transfer and
assign to Buyer, and Buyer desires to purchase and assume from Seller and the
Subsidiaries, the Purchased Assets (as hereinafter defined), and Buyer is
willing to assume, the Assumed Liabilities (as hereinafter defined), in each
case as more fully described and upon the terms and subject to the conditions
set forth herein; and
D. WHEREAS, Seller and/or one or more of the Subsidiaries and Buyer desire
to enter into each Assignment and Bill of Sale, each Assumption Agreement, the
Supply Agreement, the Intellectual Property Agreement, the Transition Services
Agreement, each Lease Assignment, each Sublease and each Real Estate Deed
(collectively, the "COLLATERAL AGREEMENTS").
NOW, THEREFORE, in consideration of the mutual agreements and covenants
herein contained and intending to be legally bound hereby, the parties hereto
hereby agree as follows:
LUCENT TECHNOLOGIES PROPRIETARY
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1. DEFINITIONS
1.1 DEFINED TERMS
For the purposes of this Agreement, in addition to the words and phrases
that are described throughout the body of this Agreement, the following words
and phrases shall have the following meanings:
"AFFILIATE" of any Person means any Person that controls, is controlled
by, or is under common control with such Person. As used herein, "CONTROL" means
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such entity, whether through
ownership of voting securities or other interests, by contract or otherwise.
"AGREEMENT" has the meaning assigned in the preamble hereof.
"ASSET ACQUISITION STATEMENT" has the meaning assigned in Section 5.3(b).
"ASSIGNMENT AND BILL OF SALE" means each agreement in substantially the
form set forth as EXHIBIT A.
"ASSUMED LEASES" means the Leases to be assumed by the Buyer pursuant to a
Lease Assignment or Sublease and identified on SCHEDULE 3.7(a).
"ASSUMED LIABILITIES" means the liabilities and obligations of Seller and
the Subsidiaries assumed by Buyer pursuant to the Assumption Agreement and
Section 2.4.
"ASSUMPTION AGREEMENT" means each agreement in substantially the form set
forth as EXHIBIT B.
"BENEFIT PLAN" means, in respect of any Business Employee, each "employee
benefit plan," as defined in Section 3(3) of ERISA (including any "multiemployer
plan" as defined in Section 3(37) of ERISA) and each employment, severance,
retention, consulting, or similar agreement or arrangement related to
profit-sharing, bonus, stock option, stock purchase, stock ownership, pension,
retirement, severance, deferred compensation, excess benefit, supplemental
unemployment, post-retirement medical or life insurance, welfare or incentive
plan, or sick leave, long-term disability, medical, hospitalization, life
insurance, other insurance plan, or other employee benefit plan, program or
arrangement, qualified or non-qualified, funded or unfunded, maintained or
contributed to by Seller or the Subsidiaries, provided such plans, programs, or
arrangements are in writing.
"BRAZILIAN JV COMPANY" has the meaning assigned in Section 2.1(k).
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"BUSINESS" has the meaning assigned in Recital A hereof.
"BUSINESS DAY" means a day that is not a Saturday, a Sunday or a statutory
or civic holiday in the State of New York or any other day on which the
principal offices of Seller or Buyer are closed or become closed prior to 2:00
p.m. local time.
"BUSINESS EMPLOYEES" means the employees of Seller or the Subsidiaries
employed in the Business and identified on SCHEDULE 3.9(a).
"BUSINESS RECORDS" means all books, records, ledgers and files or other
similar information used primarily in the conduct of the Business, including
price lists, customer lists, vendor lists, mailing lists, warranty information,
catalogs, sales promotion literature, advertising materials, brochures, records
of operation, standard forms of documents, manuals of operations or business
procedures, research materials and product testing reports required by any
national, federal, state, provincial or local court, administrative body or
other Governmental Body of any country, but excluding any such items to the
extent (i) they are included in, or primarily related to, any Excluded Assets or
Excluded Liabilities, or (ii) any applicable Law prohibits their transfer.
"BUYER" has the meaning assigned in the preamble hereof.
"BUYER DESIGNEE" means one or more Affiliates of Buyer identified to
Seller prior to the Closing Date.
"BUYER NONREPRESENTED SAVINGS PLAN" has the meaning assigned in Section
5.4(e).
"BUYER PENSION PLAN" has the meaning assigned in Section 5.4(g).
"BUYER REPRESENTED SAVINGS PLAN" has the meaning assigned in Section
5.4(e).
"BUYER SAVINGS PLAN" has the meaning assigned in Section 5.4(e).
"CERCLA" means the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, 42 U.S.C.ss.ss.9601 ET SEQ. as amended.
"CLOSING" means the closing of the transactions described in Article 7.
"CLOSING DATE" means the date of the Closing as determined pursuant to
Section 7.3.
"CLOSING DATE INVENTORY STATEMENT" has the meaning assigned in Section
2.3(b).
"CODE" means the U.S. Internal Revenue Code of 1986, as amended.
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"COLLATERAL AGREEMENTS" has the meaning assigned in Recital D hereof.
"CONFIDENTIALITY AGREEMENT" shall mean the agreement between Seller and
Buyer dated June 1, 2000.
"CONTRACTS" means all Third-Party contracts, agreements, leases and
subleases, supply contracts, purchase orders, sales orders and instruments used
or held for use in each case primarily in the conduct of the Business, that will
be in effect on the Closing Date to which Seller or a Subsidiary is a party, (i)
for the lease of machinery and equipment, motor vehicles, or furniture and
office equipment, (ii) for the provision of goods or services, (iii) for the
sale of goods or performance of services by the Business, including teaming
agreements relating thereto, (iv) for the sale and distribution of the products,
and (v) any such contracts, agreements, instruments and leases referred to in
clauses (i) - (iv), inclusive, entered into between the date hereof and
outstanding as of the Closing Date by Seller or a Subsidiary, but "CONTRACTS"
excludes the Excluded Contracts.
"COUNSEL FOR BUYER" means a corporate counsel of Buyer.
"COUNSEL FOR SELLER" means a corporate counsel of Seller.
"DALLAS RECEIVABLES" has the meaning assigned in Section 2.1(l).
"ENCUMBRANCE" means any lien, claim, charge, security interest, mortgage,
pledge, easement, conditional sale or other title retention agreement, covenant
or other similar restrictions or third party rights affecting the Purchased
Assets other than Permitted Encumbrances.
"ENVIRONMENTAL LAW" means any foreign, local, county, state or federal
Law that governs the existence of or provides a remedy for release of
Hazardous Substances, the protection of persons, natural resources or the
environment, the management of Hazardous Substances, or other activities
involving Hazardous Substances including, without limitation, under CERCLA,
the Hazardous Materials Transportation Act, 49 U.S.C.ss.1801 ET SEQ., the
Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C.ss.6901 ET SEQ.,
the Clean Water Act, 33 U.S.C. Sectionss.1251 ET SEQ., the Clean Air Act, 42
U.S.C.ss.7401 ET SEQ., the Toxic Substance Control Act, 15 U.S.C.ss.2601 ET
SEQ., the Oil Pollution Act of 1990, 33 U.S.C.ss.2701 ET SEQ., and the
Occupational Safety and Health Act, 29 U.S.C.ss.651 ET SEQ., or any other
similar foreign, federal, state, local or county Laws, as such laws have been
amended or supplemented, and the regulations promulgated pursuant thereto, in
each case as in effect on or prior to the Closing Date or, with respect to
representations and warranties made on the date hereof, on or prior to the
date hereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
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"EXCLUDED ASSETS" means the properties and assets of the Business excluded
from the Purchased Assets by Section 2.2.
"EXCLUDED CONTRACTS" means those Contracts (i) identified in SCHEDULE
2.2(f), (ii) under which performance by Seller or an Affiliate has been
completed and for which there is no remaining warranty, maintenance, or support
obligation, (iii) relating to any General Purchase Agreement, and (iv) relating
to Excluded Assets or Excluded Liabilities.
"EXCLUDED LEASED EQUIPMENT" has the meaning assigned in Section 5.5(b).
"EXCLUDED LIABILITIES" means the liabilities and obligations that are not
assumed by Buyer as provided in Section 2.5.
"EXISTING INVENTORY" has the meaning assigned in Section 5.8(a).
"FINANCIAL STATEMENTS" has the meaning assigned in Section 3.12(a).
"FIRST TRANSFER DATE" has the meaning assigned in Section 5.4(g).
"FIXTURES AND SUPPLIES" means all furniture, furnishings and other
tangible personal property owned by Seller or a Subsidiary and used or held for
use primarily in the conduct of the Business and located on the Premises,
including, without limitation desks, tables, chairs, file cabinets and other
storage devices and office supplies but excluding any such items related to
Excluded Assets or Excluded Liabilities.
"GENERAL PURCHASE AGREEMENTS" shall mean Third-Party supply contracts or
other agreements between Seller or an Affiliate and a Third Party pursuant to
which Seller or an Affiliate purchases products or services from such
Third-Party for any of Seller's or an Affiliate's businesses other than
primarily for the Business.
"GOVERNMENTAL BODY" means any legislative, executive or judicial unit of
any governmental entity (foreign, federal, state or local) or any department,
commission, board, agency, bureau, official or other regulatory, administrative
or judicial authority thereof.
"GOVERNMENTAL PERMITS" means all governmental permits and licenses,
certificates of inspection, approvals or other authorizations issued to Seller
or a Subsidiary with respect to the Business or the Premises and necessary for
the operation of the Business or the Premises as currently conducted under
applicable Laws.
"HAZARDOUS SUBSTANCE" means (i) any hazardous, toxic or dangerous waste,
substance or material defined as such in (or for the purposes of) any
Environmental Law, including Environmental Laws relating to or imposing
liability or standards or conduct concerning any hazardous, toxic or dangerous
waste, substance or material in effect on the date of this
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Agreement, (ii) asbestos, flammable explosives, radioactive materials, urea
formaldehyde foam insulation, polychlorinated biphenyls, petroleum and petroleum
products (including but not limited to waste petroleum and petroleum products),
or methane, and (iii) any other chemical, material or substance, exposure to
which is prohibited, limited or regulated by any Governmental Body pursuant to
any Environmental Law or any health and safety or similar law, code, ordinance,
rule or regulation, order or decree, and which may or could pose a hazard to the
health and safety of workers at or users of any properties of Seller or any
Subsidiary or cause damage to the environment.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"INDEMNIFIED PARTY" has the meaning assigned in Section 9.3(a).
"INDEMNIFYING PARTY" has the meaning assigned in Section 9.4(a).
"INTELLECTUAL PROPERTY" has the meaning assigned in Section 3.13.
"INTELLECTUAL PROPERTY AGREEMENT" means the agreement in substantially the
form set forth as EXHIBIT F.
"INVENTORY" means all inventory, wherever located, including raw
materials, work in process, recycled materials, finished products, inventoriable
supplies, and non-capital spare parts owned by Seller or a Subsidiary and used
or held for use primarily in the conduct of the Business, and any rights of
Seller or a Subsidiary to the warranties received from suppliers and any related
claims, credits, rights of recovery and setoff with respect to such Inventory,
but only to the extent such rights are assignable, but excluding any inventory
related to Excluded Assets or Excluded Liabilities.
"IRS" means the U.S. Internal Revenue Service.
"LAWS" shall mean any national, federal, state, provincial or local law,
statute, ordinance, rule, regulation, code, order, judgment, injunction or
decree of any country.
"LEASE" means the lease for any of the Leased Premises.
"LEASE ASSIGNMENT" means each assignment agreement with respect to a Lease
in substantially the form set forth as EXHIBIT C.
"LEASED EQUIPMENT" means the computers, servers, machinery and equipment
and other similar items leased and used by Seller or a Subsidiary primarily in
the conduct of the Business but excluding any such items related to Excluded
Assets or Excluded Liabilities.
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"LEASED PREMISES" means the real property that is leased by Seller or a
Subsidiary from Third Parties and used by Seller or a Subsidiary primarily in
the conduct of the Business as identified on SCHEDULE 3.7(a).
"LICENSES" means all licenses, agreements and other arrangements
identified on SCHEDULE 2.1(h) under which Seller or a Subsidiary has the right
to use any Proprietary Information of a Third Party to the extent used or held
for use primarily in the conduct of the Business but not the Nonassignable
Licenses or any such items related to Excluded Assets or Excluded Liabilities.
"LOSSES" has the meaning assigned in Section 9.3(a).
"LSP" has the meaning assigned in Section 5.4(e).
"LTSSP" has the meaning assigned in Section 5.4(e).
"LUCENT" has the meaning assigned in the preamble hereof.
"LUCENT OCCUPATIONAL PLAN" has the meaning assigned in Section 5.4(g).
"MARKED ASSETS" has the meaning assigned in Section 5.8(a).
"MARKED INSTRUMENTALITIES" has the meaning assigned in Section 5.8(a).
"MATERIAL ADVERSE EFFECT" means any condition or event that has material
and adverse effect upon the financial condition or results of operations of the
Business taken as a whole, other than any condition or event (i) relating to the
economy in general, (ii) relating to the industries in which the Business
operates in general, (iii) arising out of or resulting from actions of Buyer or
a Buyer Designee in connection with this Agreement.
"MATERIAL CONTRACTS" has the meaning assigned in Section 3.10.
"9/30/2000 INVENTORY STATEMENT" has the meaning assigned in
Section 2.3(b).
"NONASSIGNABLE ASSETS" has the meaning assigned in Section 2.6(c).
"NONASSIGNABLE LICENSES" means those Licenses of Proprietary Information
to which Seller or an Affiliate is the licensee that are (i) not by their terms
assignable to Buyer, or (ii) related to other businesses of Seller or an
Affiliate and not solely to the Business.
"NONREPRESENTED TRANSFERRED EMPLOYEES" means Transferred Employees in the
United States who are not Represented Transferred Employees.
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"OTHER MARKED ASSETS" has the meaning assigned in Section 5.8(a).
"PENSION PLAN" has the meaning assigned in Section 3.9(b).
"PENSION TRANSFER AMOUNT" has the meaning assigned in Section 5.4(h).
"PERMITTED ENCUMBRANCES" means any (i) liens for taxes, assessments and
other governmental charges or of landlords, liens of carriers, warehouseman,
mechanics and material men incurred in the ordinary course of business, in each
case for sums not yet due and payable or due but not delinquent or being
contested in good faith by appropriate proceedings, (ii) liens incurred or
deposits made in the ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social security or to
secure the performance of tenders, statutory obligations, surety and appeal
bonds, bids, leases government contracts, performance and return of money bonds
and similar obligations, (iii) licenses granted by Seller or an Affiliate in
connection with sales of products in the ordinary course of business, and (iv)
any Encumbrance or minor imperfection in title and minor encroachments, if any,
not material in amount that, individually or in the aggregate, do not materially
interfere with the conduct of the Business or with the use of the Purchased
Assets and do not materially affect the value of the Purchased Assets.
"PERSON" means any individual, corporation, partnership, firm,
association, joint venture, joint stock company, trust, unincorporated
organization or other entity, or any government or regulatory, administrative or
political subdivision or agency, department or instrumentality thereof.
"POWER SYSTEMS" has the meaning assigned in Recital A hereof.
"PREMISES" means the Leased Premises and the Transferred Premises.
"PRINCIPAL EQUIPMENT" means the computers, servers, machinery and
equipment (including any related spare parts, dies, molds, tools, and tooling)
and other similar items used by Seller or a Subsidiary primarily in the conduct
of the Business but not the Leased Equipment or any such items related to
Excluded Assets or Excluded Liabilities. Principal Equipment includes rights to
the warranties received from the manufacturers and distributors of said items
and to any related claims, credits, rights of recovery and setoff with respect
to said items, but only to the extent such rights are assignable.
"PROPRIETARY INFORMATION" means all information (whether or not
protectable by patent, copyright, mask works or trade secret rights) not
generally known to the public (except for patents), including, but not limited
to, works of authorship, inventions, discoveries, patentable subject matter,
patents, patent applications, industrial models, industrial designs, trade
secrets, trade secret rights, software, works, copyrightable subject matters,
copyright rights and registrations, mask works, know-how and show-how,
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trademarks, trade names, service marks, emblems, logos, insignia and related
marks and registrations, specifications, technical manuals and data, libraries,
blueprints, drawings, proprietary processes, product information and development
work-in-process.
"PURCHASE PRICE" has the meaning assigned in Section 2.3(a).
"PURCHASE PRICE ADJUSTMENT" has the meaning assigned in Section 2.3(b).
"PURCHASED ASSETS" has the meaning assigned in Section 2.1.
"PURCHASED LEASED EQUIPMENT" has the meaning assigned in Section 5.5(b).
"REAL ESTATE DEED" means each deed with respect to Transferred Premises.
"REASONABLE COMMERCIAL EFFORTS" means that the obligated party is required
to make a diligent, reasonable and good faith effort to accomplish the
applicable objective. Such obligation, however, does not require an expenditure
of funds or the incurrence of a liability on the part of the obligated party,
nor does it require that the obligated party act in a manner that would be
contrary to normal commercial practices in order to accomplish the objective.
The fact that the objective is or is not actually accomplished is no indication
that the obligated party did or did not in fact utilize its reasonable
commercial efforts in attempting to accomplish the objective.
"RELEASE" means any past or present spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, dumping or
disposing of a Hazardous Substance into the environment.
"REPRESENTED TRANSFERRED EMPLOYEES" means Transferred Employees in the
United States who are represented by the Communications Workers of America.
"REPRESENTED TRUST" has the meaning assigned in Section 5.4(g).
"REQUIRED CONSENT" has the meaning assigned in Section 3.4(b).
"RETURN" means any return, declaration, report, statement, and any other
document required to be filed in respect of any Tax.
"SECOND TRANSFER DATE" has the meaning assigned in Section 5.4(g).
"SELLER" has the meaning assigned in the preamble hereof.
"SELLER NAME" has the meaning assigned in Section 5.8(a).
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"SELLER'S ADJUSTMENT RESPONSE" has the meaning assigned in Section 2.3(b).
"SENIOR EXECUTIVES" means, in the case of Seller, Robert C. Holder,
Executive Vice President, Corporate Operations of Lucent, and in the case of
Buyer, Edward Federman, Chief Financial Officer of Tyco Electronics Corporation,
or their respective successors.
"SUBLEASE" means each sublease with respect to a Lease in substantially
the form set forth as EXHIBIT D.
"SUBSIDIARY" means each entity listed on SCHEDULE 3.2.
"SUPPLY AGREEMENT" means the agreement in substantially the form set forth
as EXHIBIT E.
"TAXES" means, (A) all taxes of any kind, charges, fees, customs, levies,
duties, imposts, required deposits or other assessments, including, without
limitation, all net income, capital gains, gross income, gross receipt,
property, franchise, sales, use, excise, withholding, payroll, employment,
social security, worker's compensation, unemployment, occupation, capital stock,
ad valorem, value added, transfer, gains, profits, net worth, asset,
transaction, and other taxes, imposed upon any Person by federal, foreign,
state, or local Law or taxing authority, together with any interest and any
penalties, or additions to tax, with respect to such taxes and (B) any liability
of a Person for the payment of any amount of any type described in clause (A) as
a result of the Person being a transferee or a member of an affiliated or
combined group prior to the Closing.
"THIRD PARTY" means any Person not an Affiliate of the other referenced
Person or Persons.
"THIRD-PARTY CLAIM" has the meaning assigned in Section 9.4(a).
"TRANSFERRED EMPLOYEES" has the meaning assigned in Section 5.4(a).
"TRANSFERRED PREMISES" means the real property that is owned and used by
Seller or a Subsidiary primarily in the conduct of the Business identified on
SCHEDULE 3.7(b).
"TRANSFERRED SAVINGS PLAN PARTICIPANTS" has the meaning assigned in
Section 5.4(e).
"TRANSITION SERVICES AGREEMENT" means the agreement in substantially the
form set forth as EXHIBIT G.
1.2 OTHER DEFINITIONAL AND INTERPRETIVE MATTERS
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Unless otherwise expressly provided, for purposes of this Agreement, the
following rules of interpretation shall apply:
CALCULATION OF TIME PERIOD. When calculating the period of time before
which, within which or following which any act is to be done or step taken
pursuant to this Agreement, the date that is the reference date in calculating
such period shall be excluded. If the last day of such period is a non-Business
Day, the period in question shall end on the next succeeding Business Day.
GENDER AND NUMBER. Any reference in this Agreement to gender shall include
all genders, and words imparting the singular number only shall include the
plural and vice versa.
HEADINGS. The provision of a Table of Contents, the division of this
Agreement into Articles, Sections and other subdivisions and the insertion of
headings are for convenience of reference only and shall not affect or be
utilized in construing or interpreting this Agreement. All references in this
Agreement to any "SECTION" are to the corresponding Section of this Agreement
unless otherwise specified.
HEREIN. The words such as "HEREIN," "HEREINAFTER," "HEREOF," and
"HEREUNDER" refer to this Agreement as a whole and not merely to a subdivision
in which such words appear unless the context otherwise requires.
INCLUDING. The word "INCLUDING" or any variation thereof means "INCLUDING,
WITHOUT LIMITATION" and shall not be construed to limit any general statement
that it follows to the specific or similar items or matters immediately
following it.
SCHEDULES AND EXHIBITS. The Schedules and Exhibits attached to this
Agreement shall be construed with and as an integral part of this Agreement to
the same extent as if the same had been set forth verbatim herein.
2. PURCHASE AND SALE OF THE BUSINESS
2.1 PURCHASE AND SALE OF ASSETS
Upon the terms and subject to the conditions of this Agreement and in
reliance on the representations and warranties contained herein, on the Closing
Date, Seller shall, or shall cause one or more of the Subsidiaries to, grant,
bargain, sell, transfer, assign, convey and deliver to Buyer or one or more
Buyer Designees, and Buyer or one or more Buyer Designees shall purchase,
acquire and accept from Seller or the applicable Subsidiary, all of the right,
title and interest in, to and under the Purchased Assets that Seller or the
applicable Subsidiary possesses and has the right to transfer as the same shall
exist on the Closing Date. For purposes of this Agreement, "PURCHASED ASSETS"
shall mean all the assets, properties and
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rights used by Seller or the applicable Subsidiary, whether tangible or
intangible, real, personal or mixed, set forth or described in Sections 2.1(a)
through 2.1(l), inclusive (except in each case for the Excluded Assets), whether
or not any of such assets, properties or rights have any value for accounting
purposes or are carried or reflected on or specifically referred to in Seller's
or the applicable Subsidiary's books or financial statements:
(a) the Assumed Leases;
(b) the Transferred Premises;
(c) the Principal Equipment and the Purchased Leased Equipment;
(d) the Fixtures and Supplies;
(e) the Inventory;
(f) the Intellectual Property;
(g) the Contracts;
(h) the Licenses;
(i) the Business Records;
(j) the Governmental Permits that are identified on SCHEDULE 2.1(j) but
only to the extent that such Governmental Permits are assignable or transferable
to Buyer;
(k) the quotas of Lucent Inepar Sistemas de Energia Ltda. (the
"BRAZILIAN JV COMPANY"); and
(l) the accounts receivable imbedded on Power Systems' SAP that are billed
directly by the Business and not by other Lucent operations (the "DALLAS
RECEIVABLES").
2.2 EXCLUDED ASSETS
Notwithstanding the provisions of Section 2.1, it is hereby expressly
acknowledged and agreed that the Purchased Assets shall not include, and neither
Seller nor any of the Subsidiaries is selling, transferring, assigning,
conveying or delivering to Buyer or a Buyer Designee, and neither Buyer nor a
Buyer Designee is purchasing, acquiring or accepting from Seller or any of the
Subsidiaries, the following (the rights, properties and assets expressly
excluded by this Section 2.2 or otherwise excluded by the terms of Section 2.1
from the Purchased Assets being referred to herein as the "EXCLUDED ASSETS"):
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(a) any of Seller's or its Affiliate's receivables (except the Dallas
Receivables), cash, bank deposits or similar cash items or employee receivables;
(b) any Proprietary Information of Seller or any Affiliate other than
the Intellectual Property;
(c) any (i) books and records that Seller or any Affiliate is required
by Law to retain or that Seller determines are necessary or advisable to retain;
PROVIDED, HOWEVER, that Buyer shall have the right to make copies of any
portions of such retained books and records that relate to the Business or any
of the Purchased Assets; and (ii) any information management system of Seller or
any Affiliate other than those used primarily in the conduct of the Business and
contained within computer hardware included as a Purchased Asset pursuant to
Section 2.1(c);
(d) any claim, right or interest of Seller or any Affiliate in or to any
refund, rebate, abatement or other recovery for Taxes, together with any
interest due thereon or penalty rebate arising therefrom, the basis of which
arises or accrues in any period prior to the Closing Date;
(e) subject to Section 5.8, all "Lucent Technologies" marked sales and
marketing or packaging materials, samples, prototypes, other similar Lucent
Technologies-identified sales and marketing or packaging materials and any
marketing studies;
(f) the Excluded Contracts and the Nonassignable Licenses;
(g) any insurance policies or rights of proceeds thereof;
(h) the Excluded Leased Equipment;
(i) any of Seller's or any Affiliate's rights, claims or causes of
action against Third Parties relating to the assets, properties, business or
operations of Seller or any Affiliate arising out of transactions occurring
prior to, and including, the Closing Date; and
(j) all other assets, properties, interests and rights of Seller or any
Affiliate not related primarily to the Business.
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2.3 PURCHASE PRICE
(a) In consideration of the sale, transfer, assignment, conveyance and
delivery by Seller and the Subsidiaries of the Purchased Assets to Buyer or a
Buyer Designee, and in addition to assuming the Assumed Liabilities, Buyer or a
Buyer Designee shall pay to Seller at the Closing, an aggregate amount equal to
$2,500,000,000.00 (the "PURCHASE PRICE") in cash by wire transfer of immediately
available funds to an account designated by Seller's written instructions to
Buyer at least two (2) Business Days prior to Closing.
(b) (i) Attached hereto as SCHEDULE 2.3(b) is a valuation of the
Inventory as of September 30, 2000 (the "9/30/2000 INVENTORY STATEMENT").
(ii) Within one hundred and twenty (120) days after the Closing
Date, Buyer shall submit to Seller a valuation of the Inventory as of the
Closing Date (the "CLOSING DATE INVENTORY STATEMENT") wherein Buyer shall set
forth in reasonable detail Buyer's valuation of the Inventory and its proposed
Purchase Price Adjustment (upward or downward). The Closing Date Inventory
Statement shall be prepared in accordance with GAAP (unless otherwise indicated
or agreed to in writing by Buyer and Seller) and shall use the same methodology
used to prepare the 9/30/2000 Inventory Statement.
(iii) Seller shall review the Closing Date Inventory Statement
promptly upon receipt thereof. If Seller believes that the Closing Date
Inventory Statement is incorrect in any respect, Seller shall deliver to Buyer a
statement without thirty (30) days after Seller's receipt of the Closing Date
Inventory Statement, identifying the specific aspects of the Closing Date
Inventory Statement with which Seller disagrees and the reasons therefor with
supporting detail, and setting forth Seller's valuation of the Inventory and a
proposed Purchase Price Adjustment (the "SELLER'S ADJUSTMENT RESPONSE"). The
Seller's Adjustment Response shall be prepared in accordance with GAAP (unless
otherwise indicated or agreed to in writing by Buyer and Seller) and shall use
the same methodology used to prepare the 9/30/2000 Inventory Statement.
(iv) Within the thirty (30) day period after Buyer's receipt of
Seller's Adjustment Response, the parties shall use reasonable commercial
efforts to resolve mutually their differences with regard to, and agree upon,
the valuation of the Inventory and the Purchase Price Adjustment.
(v) If the parties are able to reach an Agreement with regard to the
valuation of the Inventory and the Purchase Price Adjustment, payment will be
made by either Seller or Buyer, as applicable, to the other within ten (10)
Business Days after such agreement as follows: the Purchase Price shall be
adjusted (x) upward if the value of the Inventory on the Closing Date Inventory
Statement is greater than the value of the Inventory on the 9/30/2000
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Inventory Statement, or (y) downward if the value of the Inventory on the
Closing Date Inventory Statement is less than the value of the Inventory on the
9/30/2000 Inventory Statement, in each case by the absolute difference between
the value of the Inventory on the respective inventory statements (the "PURCHASE
PRICE ADJUSTMENT"). If the Purchase Price is adjusted upward, then Buyer or a
Buyer Designee shall pay the Purchase Price Adjustment to Seller, and if
Purchase Price is adjusted downward, then Seller shall pay the Purchase Price
Adjustment to Buyer or a Buyer Designee.
(vi) If the Parties are unable to resolve mutually their dispute
with regard to the valuation of the Inventory and the Purchase Price Adjustment
within the thirty (30) day calendar period provided for doing so, then the issue
shall be submitted to a mutually agreed auditing firm other than
PricewaterhouseCoopers LLC (the "AUDITOR") to resolve any dispute. The Auditor,
acting as an expert and not as an arbitrator, shall determine the Purchase Price
Adjustment. The determination of the Auditor shall be final, binding and
conclusive on the parties. Buyer and Seller shall provide all documents and
information requested by Auditor promptly and shall use their reasonable efforts
to cause the Auditor to make its determination within thirty (30) days after the
dispute is submitted to it. The fees and expenses of the Auditor shall be borne
by Seller and Buyer equally.
(c) Within thirty (30) days after the Closing Date, Buyer shall pay to
Seller as an addition to the Purchase Price an amount equal to the Dallas
Receivables minus (a) the Warranty Liability of $14,700,000 as of September 30,
2000 and (b) net of allowance for doubtful accounts allocable to the Dallas
Receivables. Any disagreements related to this provision shall be handled as set
forth in Section 2.3(b).
(d) Prior to the Closing Date, Buyer and Seller shall agree to allocate
the Purchase Price as between Seller (or any selling Subsidiary listed on
Schedule 3.2, as appropriate) and Buyer (or any appropriate Buyer Designee).
Such allocation shall be attached to this Agreement prior to Closing as SCHEDULE
2.3(d) and shall be modified after the Closing to reflect any adjustments to the
Purchase Price pursuant to Sections 2.3(b) and (c). Buyer and Seller shall act
in accordance with such allocation (as adjusted) in the preparation, filing and
audit of any Return.
2.4 ASSUMED LIABILITIES
On the Closing Date, Buyer or one or more Buyer Designees shall execute
and deliver to Seller the one or more Assumption Agreements and one or more
Lease Assignments or Subleases pursuant to which Buyer or any such Buyer
Designee shall accept, assume and agree to pay, perform or otherwise discharge,
in accordance with the respective terms and subject to the respective conditions
thereof, the liabilities and obligations of Seller or a Subsidiary pursuant to
and under the Assumed Liabilities. "ASSUMED LIABILITIES" shall mean only those
liabilities and obligations set forth in this Section 2.4, whether or not any
such obligation has a value for accounting purposes or is carried or reflected
on or specifically referred to in either Seller's or the applicable Subsidiary's
books or financial statements:
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(a) the vacation, personal days and floating holidays of Transferred
Employees;
(b) the liabilities and obligations arising on or after the Closing Date
under the Assumed Leases and the transferred Contracts, Licenses and Government
Permits;
(c) with respect to the Business, any product warranty liabilities
arising from sales of products in the ordinary course of business;
(d) the Permitted Encumbrances and all other Encumbrances and other
obligations related to the Purchased Assets that are specifically identified in
this Agreement or the Schedules hereto; and
(e) the obligations and liabilities with respect to the Transferred
Employees, the Business or the Purchased Assets, known or unknown, absolute or
contingent, the basis of which arises or accrues on or after the Closing Date.
2.5 EXCLUDED LIABILITIES
Neither Buyer nor any Buyer Designee shall assume or be obligated to pay,
perform or otherwise assume or discharge any liabilities or obligations of
Seller or any of its Affiliates, whether direct or indirect, known or unknown,
absolute or contingent, except for the Assumed Liabilities (all of such
liabilities and obligations not so assumed being referred to herein as the
"EXCLUDED LIABILITIES"). For the avoidance of doubt, the parties agree that the
Excluded Liabilities include, but are not limited to, (i) any violation,
liability, penalty or obligation of Seller or any of its Affiliates (or any
predecessor company that historically operated the Business or conducted other
operations at the Premises) relating to, or arising in connection with, any
Environmental Law, known or unknown, absolute or contingent, the basis of which
arises or accrues on or before the Closing Date (other than any violation,
liability, penalty or obligation caused by a Third Party), (ii) any wages,
salary, bonuses, commissions or retention bonuses relating to Transferred
Employees which accrue on or prior to the Closing Date irrespective of when any
such wages, salary, bonuses, commissions or retention bonuses are paid, and
(iii) any liabilities in connection with, or relating to, any actions, suits,
claims or proceedings against Seller or any Affiliate which arise or accrue on
or before the Closing Date.
2.6 FURTHER ASSURANCES; FURTHER CONVEYANCES AND ASSUMPTIONS;
CONSENT OF THIRD PARTIES
(a) From time to time following the Closing, Seller hereby agrees to
make available, or to cause its Affiliates to make available, to Buyer or Buyer
Designees non-confidential data in personnel records of Transferred Employees as
is reasonably necessary for Buyer or Buyer Designees to transition such
employees into Buyer's or Buyer Designees' records.
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(b) From time to time following the Closing, Seller and Buyer shall, and
shall cause their respective Affiliates to, execute, acknowledge and deliver all
such further conveyances, notices, assumptions, releases and acquittances and
such other instruments, and shall take such further actions, as may be necessary
or appropriate to assure fully to Buyer and its Affiliates and their respective
successors or assigns, all of the properties, rights, titles, interests,
estates, remedies, powers and privileges intended to be conveyed to Buyer and/or
its Affiliates under this Agreement and the Collateral Agreements and to assure
fully to Seller and its Affiliates and their successors and assigns, the
assumption of the liabilities and obligations intended to be assumed by Buyer
and/or its Affiliates under this Agreement and the Collateral Agreements, and to
otherwise make effective the transactions contemplated hereby and thereby.
(c) Nothing in this Agreement nor the consummation of the transactions
contemplated hereby shall be construed as an attempt or agreement to assign any
Purchased Asset, including any Contract, Lease, License, Governmental Permit,
certificate, approval, authorization or other right, which by its terms or by
Law is nonassignable without the consent of a Third Party or a Governmental Body
or is cancelable by a Third Party in the event of an assignment ("NONASSIGNABLE
ASSETS") unless and until such consents shall be given. Seller agrees, or to
cause its Affiliates to use reasonable commercial efforts, with the cooperation
of Buyer and Buyer Designees, where appropriate, to obtain such consents
promptly; PROVIDED, HOWEVER, that such cooperation shall not require Seller or
any of its Affiliates to remain secondarily liable or to make any payment to
obtain any such consent with respect to any Nonassignable Asset. Seller agrees
to use reasonable best efforts in conjunction with Buyer to obtain approval from
the applicable license vendor to the assignment of the seats allocated to the
Business related to the Nonassignable Licenses. Seller agrees not to re-deploy
any such seats allocated to the Business outside of the Business after the date
hereof, and upon the assignment of such seats, if any, Seller shall amend its
licenses (if necessary) reducing the amount of Seller's seats by the number of
seats allocated to the Business. As soon as practicable after the date hereof,
Seller and Buyer agree to jointly negotiate with the appropriate license vendors
of shared mainframe-based software to obtain the approval for the temporary use
of such software in order for Seller and Buyer to perform their respective
obligations under the Transition Services Agreement.
(d) Buyer and Seller agree to use their respective reasonable
commercial efforts to obtain, or to cause to be obtained, any consent,
substitution, approval, or amendment required to novate all obligations under
any and all Contracts or other obligations or liabilities that constitute
Assumed Liabilities or to obtain in writing the unconditional release of Seller
and its Affiliates so that, in any such case, Buyer and its Affiliates shall be
solely responsible for such liabilities and obligations. To the extent permitted
by applicable Law, in the event consents to the assignment thereof cannot be
obtained, such Nonassignable Assets shall be held, as and from the Closing Date,
by Seller or its Affiliates in trust for Buyer and the covenants and obligations
thereunder shall be performed by Buyer in Seller's or one of its
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Affiliate's name and all benefits and obligations existing thereunder shall be
for Buyer's account. Seller shall take or cause to be taken at Buyer's expense
such action in its name or otherwise as Buyer may reasonably request so as to
provide Buyer with the benefits of the Nonassignable Assets and to effect
collection of money or other consideration to become due and payable under the
Nonassignable Assets, and Seller or its Affiliates shall promptly pay over to
Buyer all money or other consideration received by it in respect to all
Nonassignable Assets.
(e) As of and from the Closing Date, Seller on behalf of itself and its
Affiliates authorizes Buyer, to the extent permitted by applicable Law and the
terms of the Nonassignable Assets, at Buyer's expense, to perform all the
obligations and receive all the benefits of Seller or its Affiliates under the
Nonassignable Assets and appoints Buyer its attorney-in-fact to act in its name
on its behalf or in the name of the applicable Affiliate of Seller and on such
Affiliate's behalf with respect thereto.
2.7 NO LICENSES
Unless expressly set forth in the Intellectual Property Agreement, no
title, right or license of any kind is granted to Buyer pursuant to this
Agreement with respect to Seller's or any of its Affiliate's Proprietary
Information, either directly or indirectly, by implication, by estoppel or
otherwise.
2.8 BULK SALES LAW
Buyer hereby waives compliance by Seller and any of the Subsidiaries with
the requirements and provisions of any "bulk-transfer" Laws of any jurisdiction,
including Article 6 of the New York Commercial Code, that may otherwise be
applicable with respect to the sale of any or all of the Purchased Assets to
Buyer.
2.9 TAXES
(a) Buyer shall pay all applicable Taxes (other than real estate
transfer taxes which shall be paid as set forth in the last sentence of this
Section 2.9(a)) and all recording and filing fees that may be imposed, assessed
or payable by reason of the operation or as a result of this Agreement including
the sales, transfers, leases, rentals, licenses, and assignments contemplated
hereby, except for Seller's or any Subsidiary's net income and capital gains
taxes or franchise or other taxes based on Seller's or any Subsidiary's net
income. Buyer and Seller agree to each pay one-half (1/2) of any applicable
real estate transfer taxes that arise as a result of this Agreement.
(b) Buyer shall be responsible for all Taxes attributable to, levied
upon or incurred in connection with the Purchased Assets pertaining to the
period (or that portion of the period) immediately beginning after the Closing
Date. Seller shall be responsible for all
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Taxes attributable to, levied upon or incurred in connection with the Purchased
Assets pertaining to the period (or that portion of the period) prior to or on
the Closing Date.
2.10 BUYER DESIGNEE
The parties agree that Buyer may assign the right to purchase certain of
the Purchased Assets to one or more Buyer Designees or that one or more Buyer
Designees may enter into a Collateral Agreement. Notwithstanding any such
assignment or execution of a Collateral Agreement by a Buyer Designee, Buyer
shall remain liable for, and any such assignment or execution shall not relieve
Buyer of, its obligations hereunder or thereunder. Any reference to Buyer in
this Agreement shall to the extent applicable also be deemed a reference to the
applicable Buyer Designee, except where in context of this Agreement such use
would not be appropriate.
3. REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer that:
3.1 ORGANIZATION AND QUALIFICATION
Seller is a corporation duly organized, validly existing and in good
standing under the Laws of the State of Delaware and has all requisite corporate
power and authority to carry on the Business as currently conducted and to own
or lease and operate the Purchased Assets. Seller is duly qualified to do
business and is in good standing as a foreign corporation (in any jurisdiction
that recognizes such concept) in each jurisdiction where the ownership or
operation of the Purchased Assets or the conduct of the Business requires such
qualification, except for failures to be so qualified or in good standing, as
the case may be, that could not reasonably be expected to have a Material
Adverse Effect.
3.2 SUBSIDIARIES
SCHEDULE 3.2 sets forth a list of each Subsidiary of Seller that has title
to any asset reasonably expected to be a Purchased Asset or an obligation
reasonably expected to be an Assumed Liability, together with its jurisdiction
of organization and its authorized and outstanding capital stock or other equity
interests as of the date hereof. Except as set forth on SCHEDULE 3.2, each
entity is duly organized and validly existing under the Laws of its jurisdiction
of organization and has all requisite corporate or similar power and authority
to own, lease and operate the Purchased Assets owned by it and to carry on its
portion of the Business as presently conducted and is duly qualified to do
business and is in good standing as a foreign corporation or other entity (in
any jurisdiction that recognizes such concept) in each jurisdiction where the
ownership or operation of its properties and assets or the conduct of its
business requires such qualification, except for failures to be so duly
organized, validly existing, qualified or in good standing that could not
reasonably be expected to have a
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Material Adverse Effect. The Subsidiaries listed on SCHEDULE 3.2 are the only
Affiliates of Seller that have title to any Purchased Asset or any obligation
that is an Assumed Liability, in each case related to the Business as currently
conducted.
3.3 AUTHORIZATION; BINDING EFFECT
(a) (i) Seller has all requisite corporate power and authority to
execute and deliver this Agreement and the Collateral Agreements to which it
will be a party and to effect the transactions contemplated hereby and thereby
and has duly authorized the execution, delivery and performance of this
Agreement and the Collateral Agreements to which it will be a party by all
requisite corporate action.
(ii) Each Subsidiary that has title to any asset reasonably expected to
be a Purchased Asset or an obligation reasonably expected to be an Assumed
Liability has all requisite corporate power and authority to execute and deliver
the Collateral Agreements to which it will be a party and to effect the
transactions contemplated thereby and has duly authorized the execution,
delivery and performance of the Collateral Agreements to which it will be a
party by all requisite corporate action.
(b) This Agreement has been duly executed and delivered by Seller and
this Agreement is, and the Collateral Agreements to which Seller and each
Subsidiary that has title to any asset reasonably expected to be a Purchased
Asset or an obligation reasonably expected to be an Assumed Liability will be a
party when duly executed and delivered by Seller or such Subsidiary will be,
valid and legally binding obligations of Seller or such Subsidiary, enforceable
against Seller or such Subsidiary, as applicable, in accordance with their
respective terms, except to the extent that enforcement of the rights and
remedies created hereby and thereby may be affected by bankruptcy,
reorganization, moratorium, insolvency and similar Laws of general application
affecting the rights and remedies of creditors and by general equity principles.
3.4 NON-CONTRAVENTION; CONSENTS
(a) Assuming that all Required Consents have been made, the execution,
delivery and performance of this Agreement by Seller and the Collateral
Agreements by Seller or any Subsidiary that is a party thereto and the
consummation of the transactions contemplated hereby and thereby do not and will
not: (i) result in a breach or violation of any provision of Seller's or the
applicable Subsidiary's charter, by-laws or similar organizational document,
(ii) violate or result in a breach of or constitute an occurrence of default
under any provision of, result in the acceleration or cancellation of any
obligation under, or give rise to a right by any party to terminate or amend its
obligations under, any mortgage, deed of trust, conveyance to secure debt, note,
loan, indenture, lien, lease, agreement, instrument, order, judgment, decree or
other arrangement or commitment to which Seller or the applicable Subsidiary is
a party or by which it is bound and which relates to the Business or the
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Purchased Assets, which violation, breach or default could be reasonably
expected to have a Material Adverse Effect, or (iii) violate any order,
judgment, decree, rule or regulation of any court or any Governmental Body
having jurisdiction over Seller, a Subsidiary or the Purchased Assets, and which
violation could be reasonably expected to have a Material Adverse Effect.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Person is required to be obtained by Seller or a
Subsidiary in connection with the execution and delivery of this Agreement and
the Collateral Agreements to which Seller or such Subsidiary will be a party or
for the consummation of the transactions contemplated hereby or thereby by
Seller or such Subsidiary, except for (i) any filings required to be made under
the HSR Act and any applicable filings required under foreign antitrust Laws,
(ii) consents or approvals of Third Parties that are required to transfer or
assign to Buyer any Purchased Assets or assign the benefits of or delegate
performance with regard thereto, (iii) those set forth in SCHEDULE 3.4(b) (items
(i), (ii) and (iii) being referred to herein as the "REQUIRED CONSENTS"), and
(iv) such consents, approvals, orders, authorizations, registrations,
declarations or filings where failure of compliance could not reasonably be
expected to have a Material Adverse Effect.
3.5 TITLE TO PROPERTY; PRINCIPAL EQUIPMENT; SUFFICIENCY OF
ASSETS
(a) Seller or a Subsidiary has and at the Closing will have good and
valid title to, or a valid and binding leasehold interest or license in, all
real and personal tangible Purchased Assets free and clear of any Encumbrance
except for Permitted Encumbrances.
(b) Each material item of Principal Equipment is in good operating
condition, in light of its respective age, for the purposes for which it is
currently being used, but is otherwise being transferred on a "where is" and, as
to condition, "as is" basis.
(c) Except for (i) the assets that will be used in connection with
providing services under the Transition Services Agreement, and (ii) the
Excluded Assets, the Purchased Assets and the Business Employees and the rights
to be acquired under this Agreement and the Collateral Agreements (including the
services to be provided pursuant to the Transition Services Agreement) include
all assets, personnel and rights that are used in or necessary to conduct the
Business as currently conducted. In the event this Section 3.5(c) is breached
because Seller or a Subsidiary has in good faith failed to identify and transfer
any assets or properties or provide any services used in the Business, such
breach shall be deemed cured if Seller or the applicable Subsidiary promptly
transfers such properties or assets or provide such services to Buyer or a Buyer
Designee at no additional cost to Buyer or a Buyer Designee.
3.6 PERMITS, LICENSES
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Except as set forth on SCHEDULE 2.1(j), there are no material Governmental
Permits necessary for or used by Seller or a Subsidiary to operate the Business
as now being operated or to use or occupy the Premises, which Governmental
Permits are required by currently effective Laws. Seller or one of its
Subsidiaries owns, holds or possesses in their own name, all Governmental
Permits necessary to own or lease, operate and use the Purchased Assets or use
or occupy the Premises and to carry on and conduct the Business and its
operations as presently conducted, except for such Governmental Permits, the
absence of which could not reasonably be expected to have a Material Adverse
Effect. Neither Seller nor any Subsidiary is in violation of or default under
any such Governmental Permits, which could, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect or which could
reasonably be expected to interfere materially with the consummation of the
transactions contemplated herein.
3.7 REAL ESTATE
(a) SCHEDULE 3.7(a) contains a complete and accurate list of the Leased
Premises and the Assumed Leases. Buyer has been provided with a complete and
correct copy of each Assumed Lease. Except as set forth in SCHEDULE 3.7(a), each
Assumed Lease is in full force and effect and, to Seller's knowledge, neither
Seller nor any Subsidiary has violated, and the landlord has not waived, any of
the material terms or conditions of any Assumed Lease and, to Seller's
knowledge, all the material covenants to be performed by the Seller or a
Subsidiary and the landlord under each Assumed Lease prior to the date hereof or
the Closing Date, as applicable, have been performed in all material respects.
(b) SCHEDULE 3.7(b) contains a complete and accurate list of the
Transferred Premises. Seller or a Subsidiary has good and valid title to the
Transferred Premises. Except as set forth on SCHEDULE 3.7(b), none of such
Transferred Premises are subject to any Encumbrance except for Permitted
Encumbrances.
(c) The use of any Leased Premises or Transferred Premises, as presently
used by the Business, does not violate any local zoning or similar land use laws
or governmental regulations which violation could reasonably be expected to have
a Material Adverse Effect. Neither Seller nor any Subsidiary is in violation of
or in noncompliance with any covenant, condition, restriction, order or easement
affecting any Leased Premises or Transferred Premises where such violation or
noncompliance could reasonably be expected to have a Material Adverse Effect.
There is no condemnation or, to the best knowledge of Seller, threatened
condemnation affecting any Leased Premises or Transferred Premises.
3.8 COMPLIANCE WITH LAWS; LITIGATION
(a) Except as set forth on SCHEDULE 3.8(a), with respect to the Business
conducted by it and the Subsidiaries, Seller and each Subsidiary engaged in the
conduct of the Business (including the use and occupation of the Premises) is in
compliance in all material respects
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with all applicable Laws and all decrees, orders, judgments, permits and
licenses of or from Governmental Bodies except for failures to comply that could
not reasonably be expected to have a Material Adverse Effect.
(b) Except as set forth on SCHEDULE 3.8(b), there are no actions, suits,
proceedings, arbitrations or governmental investigations pending or, to Seller's
knowledge, threatened against it or the Subsidiaries with respect to the
Business that could be reasonably expected to have a Material Adverse Effect.
3.9 BUSINESS EMPLOYEES
(a) SCHEDULE 3.9(a) contains a complete and accurate list of all the
Business Employees as of October 31, 2000, showing for each Business Employee,
the name, position held, service date, salary or wages and aggregate annual
compensation for Seller's or the applicable Subsidiary's last fiscal year, and
which employees are represented by the Communications Workers of America and the
Confederacion de Trabajadores de Mexico. Except as set forth on SCHEDULE 5.4(m),
none of the Business Employees is covered by any union, collective bargaining or
other similar labor agreements. Seller will update Schedule 3.9(a) to be
accurate as of the Closing Date at least five Business Days prior to the
Closing.
(b) Except as set forth in SCHEDULE 3.9(b), with respect to all Business
Employees, neither Seller nor any Subsidiary currently maintains, contributes to
or has any liability under any Benefit Plan. With respect to each of the Benefit
Plans identified on SCHEDULE 3.9(b), Seller has made available to the Buyer true
and complete copies of the most recent summary plan or other written
description. Each Benefit Plan listed on SCHEDULE 3.9(b) has been operated in
material compliance with applicable law, including ERISA. Each Benefit Plan
which is an "employee pension benefit plan" within the meaning of Section 3(2)
of ERISA ("PENSION PLAN") and which is intended to be qualified under Section
401(a) of the Code, has received a favorable determination letter from the
Internal Revenue Service with respect to "TRA" (as defined in Section 1 of Rev.
Proc. 93-39), and Seller is not aware of any circumstances likely to result in
revocation of any such favorable determination letter. Except as disclosed on
SCHEDULE 3.9(b), neither Seller nor any Subsidiary has any obligations for
retiree health and life benefits under any Benefit Plan or has ever represented,
promised or contracted (whether in oral or written form) to any employee(s) that
such employee(s) would be provided with retiree health or life benefits. Any
amount that could be received (whether in cash, property, or vesting of
property) as a result of the transaction contemplated by this Agreement by any
officer, director, employee or independent contractor of the Seller or any
Subsidiary, who is a "disqualified individual" (as defined in proposed Treasury
Regulation Section 1.280G-1), under any Contract that will be assumed by the
Buyer, would not be characterized as an "excess parachute payment" (as defined
in Section 280G of the Code).
(d) As relates to the Business, there is not presently pending or
existing, and to Seller's knowledge there is not threatened, (i) any strike,
slowdown, picketing, or work
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stoppage, (ii) any application for certification of a collective bargaining
agent, or (iii) except as set forth in SCHEDULE 3.8(b), any controversies
pending, or to Seller's knowledge, threatened between Seller or any Subsidiary
and any of their respective employees that could reasonably be expected to have
a Material Adverse Effect.
3.10 CONTRACTS
SCHEDULE 3.10 contains a complete and accurate list of all outstanding
Contracts that would require over the full term thereof payments by or to Seller
or a Subsidiary of more than $250,000 (the "MATERIAL CONTRACTS"). The Material
Contracts include all existing contracts and commitments of Seller or a
Subsidiary that are (i) primarily related to the Business, or (ii) by which the
Purchased Assets may be bound or affected, in each case whether written or oral.
Each of such Material Contracts is valid, binding and enforceable against Seller
or the applicable Subsidiary and, to Seller's knowledge, the other parties
thereto in accordance with its terms and is in full force and effect. Except as
set forth on SCHEDULE 3.10, neither Seller nor any Subsidiary is in default or
breach of or is otherwise delinquent in performance under any such Material
Contracts which default or breach could reasonably be expected to have a
Material Adverse Effect, and, to Seller's knowledge, each of the other parties
thereto has performed in all material respects all obligations required to be
performed by it under, and is not in default in any material respect under, any
of such Contracts and no event has occurred that, with notice or lapse of time,
or both, would constitute such a default.
3.11 ENVIRONMENTAL MATTERS
Except as set forth in SCHEDULE 3.11 and in respect of the Business and
the Premises:
(a) the operations of the Business and the Premises comply in all
material respects with all applicable Environmental Laws;
(b) Seller and each Subsidiary has obtained all environmental, health
and safety Governmental Permits necessary for its operations, and all such
Governmental Permit are in good standing and Seller and each Subsidiary is in
compliance with all terms and conditions of such permits except where the
failure to obtain, maintain in good standing or be in compliance with, such
permits could not reasonably be expected to have a Material Adverse Effect;
(c) none of Seller, any Subsidiary or any of the Premises or the
operations of the Business, is subject to any on-going investigation by, order
from or agreement with any Person respecting (i) any Environmental Law, or (ii)
any remedial action arising from the Release or threatened Release of a
Hazardous Substance into the environment;
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(d) neither Seller nor any Subsidiary is subject to any judicial or
administrative proceeding, order, judgment, decree or settlement alleging or
addressing a violation of or liability under any Environmental Law;
(e) Seller or each applicable Subsidiary has filed all notices required
to be filed under any Environmental Law indicating past or present treatment,
storage or disposal of a Hazardous Substance or reporting a spill or release of
a Hazardous Substance into the environment except where the failure to file any
such notices could not reasonably be expected to have a Material Adverse Effect;
(f) there is not now, nor to Seller's knowledge, has there ever
been, on or in any Premise any aboveground or underground storage tanks;
(g) neither Seller nor any Subsidiary has received any written notice,
or to Seller's knowledge, other claim to the effect that it is or may be liable
to any Person as a result of the Release or threatened Release of a Hazardous
Substance;
(h) to Seller's knowledge, there have been no Releases, or threatened
Releases of any Hazardous Substances into, on or under any of the Premises,
in any case in such a way as to create any liability (including the costs of
investigation and remediation) under any applicable Environmental Law; and
(i) Seller has delivered to Buyer true and complete copies of all
asbestos and other environmental reports disclosing the presence of asbestos or
other Hazardous Materials on any of the Premises.
3.12 FINANCIAL STATEMENT; ABSENCE OF CHANGES
(a) SCHEDULE 3.12 contains true and complete copies of the following
financial statements of the Business (the "FINANCIAL STATEMENTS"):
(i) audited balance sheets as of September 30, 1999 and June
30, 2000 with a report by PricewaterhouseCoopers LLP;
(ii) audited statements of operations and cash flows for the years
ended September 30, 1998 and 1999 and for the nine months ended June 30, 2000
with a report by PricewaterhouseCoopers LLP; and
(iii) unaudited balance sheet as of June 30, 1999 and unaudited
statements of operations and cash flows for nine months ended June 30, 1999.
(b) The Financial Statements were prepared in accordance with GAAP
(except, in the case of the unaudited financial statements, for normal and
recurring year-end adjustments and the omission of footnotes). The Financial
Statements were prepared on the basis of the books and records of the Business
(in each case, as of the date of such Financial Statements)
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and present fairly, in all material respects, the financial position of the
Business as of the dates thereof and the results of its operations and cash
flows for each of the periods then ended in conformity with GAAP.
(c) The 9/30/2000 Inventory Statement was prepared in accordance with
GAAP and on a basis consistent with prior practices of Seller and fairly
presents the Inventory as of September 30, 2000.
(d) Since June 30, 2000, Seller and the Subsidiaries have conducted and
operated the Business in the ordinary course and the Business has not suffered
any change that could reasonably be expected to have a Material Adverse Effect.
3.13 INTELLECTUAL PROPERTY
(a) Seller or one of the Subsidiaries owns or has a valid right to grant
the licenses in all of the copyrights, know how, patents, service marks,
trademarks, trade secrets and other proprietary intellectual property rights
that it is assigning or licensing to Buyer pursuant to the Intellectual Property
Agreement (collectively, the "INTELLECTUAL PROPERTY").
(b) Except as set forth in SCHEDULE 3.13(b), to the knowledge of the
senior management of the Business and the members of Seller's intellectual
property legal department, none of the products of the Business manufactured and
currently sold by Seller infringe any intellectual property rights owned by any
other Third Party. Except as set forth in SCHEDULE 3.13 (b), to Seller's
knowledge, there are no claims or demands of any Third Party pertaining to the
Intellectual Property being assigned or licensed to Buyer pursuant to the
Intellectual Property Agreement, excluding immaterial assertions of rights which
have not been presented in the form of a specific claim or demand, with respect
to the operation of the Business by Seller or the Subsidiaries as of the date
hereof with respect to the Purchased Assets. Except as set forth in SCHEDULE
3.13(b), to the knowledge of the senior management of the Business and the
members of Seller's intellectual property legal department, no proceedings have
been instituted, are pending, or are threatened which challenge the rights of
Seller or any Subsidiary in respect any of the Intellectual Property, excluding
immaterial assertions of rights which have not been presented in the form of a
specific claim or demand.
(c) At the Closing, Seller or one of the Subsidiaries will provide,
either by assignment or license to Buyer in accordance with the Intellectual
Property Agreement, all of the Intellectual Property which is necessary for
Buyer to conduct the Business as it is presently conducted and to make, have
made, use, lease, import, offer to sell or sell the products, as such products
existed as of the Closing Date, of the Business. Buyer's sole remedy for breach
of this Section 3.13(c) shall be the assignment or licensing by Seller or one of
the Subsidiaries to Buyer, in accordance with the transfers and licenses
provided in the Intellectual Property Agreement, of those components of such
Intellectual Property which are required by Buyer to conduct the Business after
the Closing and to make, have made, use,
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lease, import, offer to sell or sell any products of the Business as to which
ownership or license rights were not adequately conveyed. Notwithstanding the
foregoing, under no circumstances shall Seller be required to grant to Buyer a
license, right, or other permission to use the trademarks "Lucent," "Lucent
Technologies," "Bell Labs" or the Lucent Innovation Ring logo, other than as set
forth in Section 5.8.
3.14 BROKERS
Other than Salomon Smith Barney Inc., the fees and expenses of which will
be paid by Seller, no broker, investment banker, financial advisor or other
Person is entitled to any broker's, finder's, financial advisor's or other
similar fee or commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of Seller or any
Affiliate.
3.15 TAXES
Seller has paid or will pay when due or finally settled all Taxes relating
to the Business or to the Purchased Assets which are or become due and payable
for all periods up to and including the Closing Date. Seller has properly filed
on a timely basis, or so will file, when due, all Returns relating to the
Business or the Purchased Assets for all periods up to and including the Closing
Date. There are no Encumbrances for Taxes (other than Permitted Encumbrances) on
the Purchased Assets.
3.16 PRODUCT LIABILITY AND RECALLS
(a) Except as set forth in SCHEDULE 3.16, since January 1, 1997, there
has been no action, suit, claim, inquiry, proceeding or investigation in any
case by or before any court or governmental body pending or, to the best
knowledge of Seller, threatened, against or involving the Business relating to
any product alleged to have been designed, manufactured or sold by the Business
and alleged to have been defective or improperly designed or manufactured.
(b) Except as set forth in Schedule 3.16, since January 1, 1997, there
has been no pending, or to the best knowledge of Seller, threatened recall or
investigation of any product sold by Seller in connection with the Business.
3.17 PRODUCT WARRANTY
SCHEDULE 3.17 includes copies of the standard terms and conditions of sale
for the Business (containing applicable guaranty, warranty and indemnity
provisions). Except as set forth in SCHEDULE 3.17, the products manufactured by
the Business have been sold by the Business in accordance with the standard
terms and conditions of sale.
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3.18 INVENTORY
The Inventory as reflected in the Financial Statements and the 9/30/2000
Inventory Statement (i) is stated at the lower of cost (determined principally
on a first-in, first-out basis) or market, and (ii) is of quality and quantity
usable or saleable in the ordinary course of the Business, except for obsolete
items and items of below-standard quality that have been written down in the
Financial Statements to net realizable values.
3.19 CUSTOMER AND SUPPLIERS
SCHEDULE 3.19 contains a list setting forth the 10 largest customers of
the Business, by dollar amount, over the 12 months ended September 30, 2000, and
the 10 largest suppliers of the Business, by dollar amount, over the 12 months
ended September 30, 2000. All purchase and sale orders and other commitments for
purchases and sales made by Seller in connection with the Business have been
made in the ordinary course of business in accordance with past practices, and
no payments have been made to any supplier or customers or any of their
respective representatives other than payments to such suppliers for the payment
of the invoiced price of supplies purchased or goods sold in the ordinary course
of business.
3.20 RESTRICTIONS ON THE BUSINESS
Except for this Agreement, to the best knowledge of Seller, there is no
agreement, judgment, injunction, order or decree binding upon Seller or any of
its Affiliates affecting Seller's or its Affiliates' conduct of the Business as
currently conducted.
3.21 NO OTHER REPRESENTATIONS OR WARRANTIES
Except for the representations and warranties contained in this Section 3,
none of Seller, any Affiliate or any other Person makes any representations or
warranties, and Seller hereby disclaims any other representations or warranties,
whether made by Seller or any Affiliate, or any of their officers, directors,
employees, agents or representatives, with respect to the execution and delivery
of this Agreement or any Collateral Agreement, the transactions contemplated
hereby or the Business, notwithstanding the delivery or disclosure to Buyer or
its representatives of any documentation or other information with respect to
any one or more of the foregoing. Notwithstanding anything to the contrary
herein, no representation or warranty contained in this Section 3 is intended
to, or do, cover or otherwise pertain to any assets that are not included in the
Purchased Assets or any liabilities that are not included in the Assumed
Liabilities.
4. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller that:
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4.1 ORGANIZATION AND QUALIFICATION
Each of Buyer and any Buyer Designee is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation or organization, and each of Buyer and any Buyer Designee has all
requisite corporate power and authority to carry on its business as currently
conducted and to own or lease and operate its properties. Each of Buyer and any
Buyer Designee is duly qualified to do business and is in good standing as a
foreign corporation (in any jurisdiction that recognizes such concept) in each
jurisdiction where the ownership or operation of its assets or the conduct of
its business requires such qualification, except for failures to be so qualified
or in good standing, as the case may be, that could not reasonably be expected
to have a material adverse effect on Buyer's or any Buyer Designee's business
taken as a whole.
4.2 AUTHORIZATION; BINDING EFFECT
(a) Each of Buyer and any Buyer Designee has all requisite corporate
power and authority to execute and deliver this Agreement and the Collateral
Agreements, as the case may be, and to effect the transactions contemplated
hereby and thereby and has duly authorized the execution, delivery and
performance of this Agreement and the Collateral Agreements, as the case may be,
by all requisite action (corporate or other).
(b) This Agreement has been duly executed and delivered by and this
Agreement is, and the Collateral Agreements when duly executed and delivered by
Buyer and any Buyer Designee will be, valid and legally binding obligations of
Buyer and any such Buyer Designee, enforceable against them in accordance with
their terms, except to the extent that enforcement of the rights and remedies
created hereby and thereby may be affected by bankruptcy, reorganization,
moratorium, insolvency and similar Laws of general application affecting the
rights and remedies of creditors and by general equity principles.
4.3 NO VIOLATIONS
(a) The execution, delivery and performance of this Agreement and the
Collateral Agreements by Buyer and any Buyer Designee and the consummation of
the transactions contemplated hereby and thereby do not and will not (i) result
in a breach or violation of any provision of Buyer's or any Buyer Designee's
charter or by-laws or similar organizational document, (ii) violate or result in
a breach of or constitute an occurrence of default under any provision of,
result in the acceleration or cancellation of any obligation under, or give rise
to a right by any party to terminate or amend its obligations under, any
material mortgage, deed of trust, conveyance to secure debt, note, loan,
indenture, lien, lease, agreement, instrument, order, judgment, decree or other
material arrangement or commitment to which Buyer or any Buyer Designee is a
party or by which it or its assets or properties are bound which violation,
breach or default could be reasonably expected to have a material adverse effect
on Buyer or the applicable Buyer Designee, or (iii) violate any material order,
judgment, decree, rule or
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regulation of any court or any Governmental Body having jurisdiction over Buyer
or any Buyer Designee or any of their respective properties which could be
reasonably expected to have a material adverse effect on Buyer or the applicable
Buyer Designee.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Person is required to be obtained by Buyer or
any Buyer Designee in connection with the execution and delivery of this
Agreement and the Collateral Agreements or the consummation of the transactions
contemplated hereby or thereby other than any (i) any filings required to be
made under the HSR Act and any applicable filings required under foreign
antitrust Laws, and (ii) such consents, approvals, orders, authorizations,
registrations, declarations or filings where failure of compliance would not,
individually or in the aggregate, have a material adverse effect on Buyer's or
any Buyer Designee's ability to consummate the transactions contemplated hereby.
4.4 BROKERS
No broker, investment banker, financial advisor or other Person is
entitled to any broker's, finder's, financial advisor's or other similar fee or
commission in connection with the transactions contemplated by this Agreement
based on arrangements made by or on behalf of Buyer or an Affiliate of Buyer.
4.5 NO OTHER SELLER REPRESENTATIONS AND WARRANTIES
(a) With respect to the Purchased Assets, the Business, or any other
rights or obligations to be transferred hereunder or under the Collateral
Agreements or pursuant hereto or thereto, Buyer has not been induced by and has
not relied upon any representations, warranties or statements, whether express
or implied, made by Seller, any Affiliate, or any agent, employee, attorney or
other representative of Seller or by any Person representing or purporting to
represent Seller that are not expressly set forth in this Agreement or in the
Collateral Agreements (including the Schedules and Exhibits hereto and thereto),
whether or not any such representations, warranties or statements were made in
writing or orally.
(b) Buyer acknowledges that it has made its own assessment of the future
of the Business and is sufficiently experienced to make an informed judgment
with respect thereto. Buyer further acknowledges that neither Seller nor any
Affiliate has made any warranty, express or implied, as to the future of the
Business or its profitability for Buyer, or with respect to any forecasts,
projections or business plans prepared by or on behalf of Seller and delivered
to Buyer in connection with the Business and the negotiation and the execution
of this Agreement.
(c) To the extent reasonably apparent from its context, disclosure by
Seller on any one Schedule delivered pursuant to this Agreement at or prior to
the Closing shall be disclosure as to all such Schedules and, to the extent such
disclosure conflicts with any
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representation or warranty of Seller, Seller shall have no liability for breach
of any such representation or warranty relating to such conflicts.
4.6 SUFFICIENCY OF FUNDS
Each of Buyer and any Buyer Designee (i) has funds available to pay their
respective portions of the Purchase Price and any expenses incurred by Buyer or
any Buyer Designee in connection with the transactions contemplated by this
Agreement; (ii) has the resources and capabilities (financial or otherwise) to
perform hereunder and under the Collateral Agreements; and (iii) has not
incurred any obligation, commitment, restriction or liability of any kind,
absolute or contingent, present or future, which would impair or adversely
affect such resources and capabilities.
4.7 NO OTHER REPRESENTATIONS OR WARRANTIES
Except for the representations and warranties contained in this Section 4,
none of Buyer, any Buyer Designee, any Affiliate or any other Person makes any
representations or warranties, and Buyer hereby disclaims any other
representations or warranties, whether made by Buyer, any Buyer Designee, or any
Affiliate, or any of their officers, directors, employees, agents or
representatives, with respect to the execution and delivery of this Agreement or
any Collateral Agreement or the transactions contemplated, notwithstanding the
delivery or disclosure to Seller or its representatives of any documentation or
other information with respect to any one or more of the foregoing.
5. CERTAIN COVENANTS
5.1 ACCESS AND INFORMATION
(a) Seller will give, and cause its Affiliates to give, to Buyer and its
Affiliates and to their respective officers, employees, accountants, counsel and
other representatives reasonable access during Seller's or the applicable
Affiliate's normal business hours throughout the period prior to the Closing to
all of Seller's or the applicable Affiliate's properties, books, contracts,
commitments, reports of examination and records directly relating to the
Business or the Purchased Assets (but excluding the Excluded Assets and Excluded
Liabilities and subject to any limitations that are reasonably required to
preserve any applicable attorney-client privilege or Third-Party confidentiality
obligation). Seller shall assist, and cause its Affiliates to assist, Buyer and
its Affiliates in making such investigation and shall cause its counsel,
accountants, engineers, consultants and other non-employee representatives to be
reasonably available to Buyer for such purposes; IT BEING UNDERSTOOD that Buyer
shall reimburse Seller or the applicable Affiliate promptly for reasonable and
necessary out of pocket expenses incurred by Seller or any Affiliate in
complying with any such request by or on behalf of Buyer.
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(b) After the Closing Date, Seller and Buyer will provide, and will
cause their respective Affiliates to provide, to each other and to their
respective officers, employees, counsel and other representatives, upon request
(subject to any limitations that are reasonably required to preserve any
applicable attorney-client privilege or Third-Party confidentiality obligation),
reasonable access for inspection and copying of all Business Records,
Governmental Permits, Licenses, Contracts and any other information existing as
of the Closing Date and relating to the Business or the Purchased Assets, and
will make their respective personnel reasonably available for interviews,
depositions and testimony in any legal matter concerning transactions,
operations or activities relating to the Business or the Purchased Assets, and
as otherwise may be necessary or desirable to enable the party requesting such
assistance to: (i) comply with reporting, filing or other requirements imposed
by any foreign, local, state or federal court, agency or regulatory body; (ii)
assert or defend any claims or allegations in any litigation or arbitration or
in any administrative or legal proceeding other than claims or allegations that
one party to this Agreement has asserted against the other; or (iii) subject to
clause (ii) above, perform its obligations under this Agreement. The party
requesting such information or assistance shall reimburse the other party for
all out-of-pocket costs and expenses incurred by such party in providing such
information and in rendering such assistance. The access to files, books and
records contemplated by this Section 5.1(b) shall be during normal business
hours and upon reasonable prior notice and shall be subject to such reasonable
limitations as the party having custody or control thereof may impose to
preserve the confidentiality of information contained therein.
(c) Buyer agrees to preserve all Business Records, Licenses and
Governmental Permits in accordance with its corporate policies related to
preservation of records. Buyer further agrees that, to the extent Business
Records, Licenses or Governmental Permits are placed in storage, they will be
indexed in such a manner as to make individual document retrieval possible in an
expeditious manner.
5.2 CONDUCT OF BUSINESS
From and after the date of this Agreement and until the Closing Date,
except as otherwise contemplated by this Agreement or the Schedules hereto or as
Buyer shall otherwise consent to in writing, Seller and each of the
Subsidiaries, with respect to the Business:
(a) will carry on the Business in the ordinary course consistent with
past practice including taking or refraining from taking any actions likely to
significantly change its existing relationships with customers, suppliers and
others having business relationships with Power Systems;
(b) will not permit, other than in the ordinary course of business
consistent with past practice or as may be required by Law or a Governmental
Body, all or any of the
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Purchased Assets (real or personal, tangible or intangible) presently and
actively used in the operation of the Business to be sold, licensed or subjected
to any Encumbrance (other than a Permitted Encumbrance);
(c) will not acquire, sell, lease, license, transfer or dispose of any
asset that would otherwise be a Purchased Asset except in the ordinary course of
business consistent with past practice;
(d) will not terminate or materially extend or materially modify any
Material Contract except in the ordinary course of business consistent with past
practice;
(e) will not do any other act which would cause any representation or
warranty of Seller in this Agreement to be or become untrue in any material
respect or intentionally omit to take any action necessary to prevent any such
representation or warranty from being untrue in any material respect at such
time;
(f) will not increase the compensation payable or to become payable to
any of the Business Employees, except for increases in the ordinary course of
business and consistent with past practice, or otherwise enter into or alter any
employment, consulting, or service agreement, except in the ordinary course of
business and consistent with past practice, or enter into any retention
agreements or agreements for enhanced or extraordinary severance with any
Business Employees other than at the request of Buyer;
(g) will not commence, enter into, or alter any profit sharing,
deferred compensation, bonus, stock option, stock purchase, pension, retirement,
or incentive plan or any fringe benefit plan for employees of the Business,
except in the ordinary course of business and consistent with past practice;
(h) will not sever or terminate any Business Employees except for
cause or in the ordinary course of business; or
(i) will not enter into any agreement or commitment with respect to
any of the foregoing.
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5.3 TAX REPORTING AND ALLOCATION OF CONSIDERATION
(a) Seller and Buyer acknowledge and agree that (i) Seller will be
responsible for and will perform all tax withholding, payment and reporting
duties with respect to any wages and other compensation paid by Seller or a
Subsidiary to any Business Employee in connection with operating the Business
prior to or on the Closing Date, and (ii) Buyer will be responsible for and will
perform all tax withholding, payment and reporting duties with respect to any
wages and other compensation paid by Buyer to any Transferred Employee in
connection with operating the Business after the Closing Date.
(b) Seller and Buyer recognize their mutual obligations pursuant to
Section 1060 of the Code to timely file IRS Form 8594 (the "ASSET ACQUISITION
STATEMENT") with each of their respective federal income tax returns.
Accordingly, within thirty (30) days after the parties finalize the Purchase
Price Adjustment pursuant to Section 2.3, Seller and Buyer agree to attempt in
good faith to (i) enter into a Purchase Price allocation agreement providing for
the allocation of the Purchase Price among the Purchased Assets consistent with
the provisions of Section 1060 of the Code and the Treasury Regulations
thereunder, and (ii) cooperate in the preparation of the Asset Acquisition
Statement for timely filing in each of their respective federal income tax
returns. If Seller and Buyer agree on a Purchase Price allocation, then neither
Seller nor Buyer shall file any Return taking a position inconsistent with such
allocation.
5.4 BUSINESS EMPLOYEES
(a) As of the Closing Date, Buyer shall make offers of employment to all
Business Employees listed on SCHEDULE 3.9(a) (including those absent due to
vacation, holiday, illness, leave of absence or short-term disability, but
excluding any Business Employees on long-term disability). Seller shall
cooperate in facilitating the performance of Buyer's obligation to make such
offers. Business Employees who accept Buyer's offer of employment, as of the
effective date of their employment with Buyer, shall be referred to as
"TRANSFERRED EMPLOYEES".
(b) As of the Closing Date, Buyer shall provide Transferred Employees,
until at least December 31, 2001, a total compensation package of salary and
benefits that, in the aggregate, are substantially similar to that offered by
Seller or its applicable Subsidiary immediately prior to the Closing Date.
Except as otherwise agreed to in this Section 5.4, Buyer shall be under no
obligation to establish any pension plan or any retiree medical, dental, or life
insurance plans for Business Employees. Except as expressly set forth in this
Section 5.4, Seller or its designated Affiliates shall retain or reimburse Buyer
for all liabilities and obligations with respect to benefits accrued under all
benefit plans or arrangements maintained, administered, or contributed to by
Seller or its Affiliates, including any such plans or arrangements applicable to
Business Employees, employees, or former employees (including any beneficiary
thereof). Except as expressly set forth in this Section
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5.4, no assets of any benefit plan or arrangement maintained, administered, or
contributed to by Seller or any Affiliate thereof shall be transferred to Buyer
or any Affiliate thereof. Buyer's benefit plans and policies, including
vacation, retirement, severance and welfare plans, shall recognize (i) for
purposes of satisfying any deductibles, co-pays and out-of-pocket maximums
during the coverage period that includes the Closing Date, any payment made by
any Transferred Employee towards deductibles, co-pays and out-of-pocket maximums
in any health or other insurance plan of Seller or a Subsidiary, and (ii) for
purposes of determining eligibility to participate, vesting and for any schedule
of benefits based on service (other than for benefits accrued under any defined
benefit plan not described in Section 5.4(g)), all service with Seller or a
Subsidiary, including service with predecessor employers that was recognized by
Seller or a Subsidiary and any prior unbridged service with Seller or a
Subsidiary, provided that such service shall not be recognized to the extent
such recognition would result in a duplication of benefits. Buyer will continue
to provide relocation assistance to those Transferred Employees receiving it as
of the Closing Date and tuition assistance to those Transferred Employees who
are receiving such benefits as of the Closing Date for the current academic
session. Buyer will honor the terms and conditions of Seller's international
assignee program, including, without limitation, repatriation upon completion of
assignment, completion bonuses, tax equalization and tax return preparation,
with respect to Transferred Employees who are on international assignment as of
the Closing Date, except that these costs shall be allocated between Buyer and
Seller based on the portion of the international assignment occurring before the
Closing Date (which shall be Seller's obligation) and on or after the Closing
Date (which shall be Buyer's obligation). Until at least December 31, 2001,
Buyer shall provide severance benefits to Nonrepresented Transferred Employees
in the United States equivalent to the benefits, if any, that would have been
paid to such Transferred Employees under the terms of the Lucent Management
Separation Plan in effect as of the Closing Date had such employees continued to
participate in such plan.
(c) Employment with Buyer of Transferred Employees shall be effective as
of the Business Day following the close of business on the Closing Date, except
that the employment of individuals receiving short-term disability benefits or
on approved leave of absence on the Closing Date will become effective as of the
date they present themselves for work with the Buyer.
(d) Buyer agrees that its health and welfare plans shall waive any
pre-existing condition exclusion (to the extent such exclusion was waived under
applicable health and welfare plans offered to the Transferred Employees by the
Seller or any Subsidiary) and any proof of insurability. Seller agrees to
transfer the cafeteria plan accounts and experience of Transferred Employees to
substantially equivalent plans that exist or will be established by Buyer to the
extent permitted by applicable plan terms and applicable law.
(e) (i) As soon as possible after the Closing Date, Buyer shall cause
one or more defined contribution savings plans intended to qualify under
sections 401(a) and 401(k)
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of the Code (the "BUYER NONREPRESENTED SAVINGS PLAN") to provide for the receipt
of Nonrepresented Transferred Employees' lump sum cash distributions, in the
form of an eligible rollover distribution, which includes outstanding
participant loans, from the Lucent Savings Plan, provided such rollovers are
made at the election of the Nonrepresented Transferred Employees and in
accordance with the terms of the Buyer Nonrepresented Savings Plan. Seller shall
cause the Lucent Savings Plan to permit the Nonrepresented Transferred Employees
to elect a lump sum cash distribution of benefits accrued through the Closing
Date in accordance with the Code.
(ii) As soon as possible following the Closing Date, but in no event
later than 120 days after the Closing Date, Buyer shall cause one or more
defined contribution savings plans intended to qualify under sections 401(a) and
40l(k) of the Code (the "BUYER REPRESENTED SAVINGS PLAN") to provide, for two
years after the Closing Date, an election to retain Lucent common stock or Avaya
Inc. common stock held in the Lucent Stock Fund, Avaya Stock Fund or Employer
Shares Fund within the Lucent Technologies Inc. Long Term Savings and Security
Plan ("LTSSP"). Upon the receipt by Seller of written evidence of (i) the
adoption of the Buyer Represented Savings Plan by Buyer, (ii) the creation of
the trust thereunder, (iii) the submission by Buyer of the Buyer Represented
Savings Plan to the Internal Revenue Service for a favorable determination
letter, and (iv) an opinion of Buyer's counsel satisfactory to Seller,
substantially as set forth in Exhibit H, to the effect that the terms of Buyer
Represented Savings Plan meet the applicable requirements of sections 401(a) and
(k) of the Code, Seller shall direct the trustee of the LTSSP to transfer to the
trust under the Buyer Represented Savings Plan liability for the account balance
of each participant in the LTSSP who is a Represented Transferred Employee (the
"TRANSFERRED SAVINGS PLAN PARTICIPANTS"), together with cash, cash equivalents
or other mutually acceptable property, the value of which on such transfer date
is equal to the liability. Upon completion of the transfer described herein,
Seller and the LTSSP shall be relieved of all liabilities for the payment of the
account balances of the Transferred Savings Plan Participants transferred to the
Buyer Represented Savings Plan. Buyer and Seller shall cooperate in the filing
of any IRS Forms 5310 required by the transfer of assets and liabilities
described herein, and anything contained herein to the contrary notwithstanding,
the transfer of assets and liabilities described herein shall not take place
until the 31st day following the filing of all required Forms 5310.
(f) Buyer agrees that effective as of the Closing Date, it will provide to
all Represented Transferred Employees pension plans and post retirement medical,
dental and life insurance plans in accordance with Section 5.4(m). Such pension
plan shall, as of the Closing Date and through the Second Transfer Date (as
defined in Section 5.4(g)), protect benefit rights and features as required by
the regulations promulgated under Section 411(d)(6) of the Code provided under
the Lucent Occupational Plan referred to in Section 5.4(g). Seller shall remain
responsible for any benefits payable under a Benefit Plan with respect to claims
incurred by Business Employees prior to the Closing Date except to the extent
that the liability for such benefits has been transferred to and assumed by
Buyer and
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the Buyer's plans in accordance with this Section 5.4. The medical and dental
plans maintained by Buyer shall recognize as dependents of the Transferred
Employees any Class 2 dependents recognized by Seller.
(g) In connection with the performance of its obligations under Section
5.4(f), Buyer shall, on or prior to a date (the "FIRST TRANSFER DATE") to be
mutually agreed by Buyer and Seller but in no event more than 30 days after the
Closing Date, establish or amend a defined benefit pension plan ("BUYER'S
PENSION PLAN"), with a trust thereunder (the "REPRESENTED TRUST"), for the
purpose of holding the pension plan liabilities and assets attributable to
Represented Transferred Employees as described herein. On the First Transfer
Date, Seller will transfer or cause to be transferred from the trust under the
Lucent Technologies Inc. Pension Plan (the "LUCENT OCCUPATIONAL PLAN") to the
Represented Trust cash or, to the extent agreed by the parties, marketable
securities in an amount equal to 90% of the estimated Pension Transfer Amount
for the Represented Transferred Employees, which obligation and associated
liability shall be assumed by the Buyer Pension Plan and Represented Trust, plus
interest on the amounts transferred from the Closing Date through the First
Transfer Date at a rate equal to 8% per annum. As of the date six months after
the First Transfer Date or such later date as may be agreed to by the parties
(the "SECOND TRANSFER DATE"), Seller shall transfer or cause to be transferred
from the trust under the Lucent Occupational Plan to the Represented Trust cash
or, to the extent agreed by the parties, marketable securities in an amount
equal to remaining balance of the Pension Transfer Amount, plus interest on the
amounts transferred from the Closing Date through the Second Transfer Date at a
rate equal to 8% per annum. The amount to be transferred as of the Second
Transfer Date shall be reduced by the aggregate amount of any pension benefit
payments made by the Lucent Occupational Plan on behalf of the Buyer Pension
Plan prior to the Second Transfer Date. In the event an amount to be transferred
on the Second Transfer Date is a negative amount, then Buyer shall transfer or
cause to be transferred from the Represented Trust back to the trust under the
Lucent Occupational Plan such amount in cash. Subject to the completion of the
foregoing asset transfers, as of the Closing Date, all of the obligations and
associated liabilities of the Lucent Occupational Plan relating to the
Represented Transferred Employees shall be assumed in full by the Represented
Trust and the Buyer Pension Plan.
(h) For purposes of this Section 5.4, "PENSION TRANSFER AMOUNT" shall mean
the greater of (A) and (B), where (A) shall be the minimum required transfer
amount determined in accordance with the terms of Seller's pension plans and the
requirements of Section 414(1) of the Code, utilizing the "safe harbor" rates
and assumptions set forth in the regulations promulgated under Section 4044 of
ERISA as of the Closing Date, except that the termination and retirement rate
assumptions utilized for purposes of this Section 5.4(h) shall be the
assumptions used by Seller to determine the funding requirements for the 2000
plan year and that no expense load, including any loading charge determined
under the Loading Assumptions set forth in Appendix C to Part 4044 of the PBGC
Regulations, shall be charged, and (B) shall be the sum of (I) and (II) less
(III), where (I) is the accumulated benefit
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obligation under FAS 87 as of the Closing Date with respect to Represented
Transferred Employees, (II) is the accumulated postretirement benefit obligation
for post-retirement medical and dental plans under FAS 106 as of the Closing
Date with respect to Represented Transferred Employees, and (III) is the amount
transferred under Section 5.4(i) with respect to the postretirement medical and
dental plans for Represented Transferred Employees. For purposes of the
preceding sentence, such accumulated benefit obligation and accumulated
postretirement benefit obligation shall be determined on the basis of the plan
provisions in effect on the Closing Date and the actuarial methods and
assumptions (based on the terms and conditions of the United States collective
bargaining agreement in effect as of September 30, 2000) utilized for purposes
of Seller's financial disclosures under FAS 87 and 106 for such plans as of
September 30, 2000. For purposes of Sections 5.4(g), (h), and (i), the term
"Transferred Employee" shall include Business Employees as of the date hereof
who terminate employment with the Seller or any Affiliate thereof between the
date of this Agreement and the Closing Date and who are hired by Buyer or an
Affiliate thereof within the first three months after the Closing Date.
(i) Assets of Seller's VEBAs will be transferred to Buyer's VEBAs as
described in this Section 5.4(i).
This Section 5.4(i) shall govern the transfer of assets from the Lucent
Postretirement Health VEBA for occupational employees to a corresponding Buyer
Postretirement Health VEBA, which Buyer shall establish and submit to the IRS
for a favorable ruling as to its tax-exempt status prior to the Second Transfer
Date. On or prior to the Second Transfer Date, Seller shall determine the
aggregate value, as of the Closing Date, of the accumulated postretirement
benefit obligation of each Lucent plan funded by such Lucent Postretirement
Health VEBA, with respect to all Represented Transferred Employees, and shall
transfer or cause to be transferred cash or, to the extent agreed by the
parties, marketable securities in an amount determined as set forth below. Such
amount shall be equal to the fair market value as of the Closing Date of the
assets of the plan funded by such Lucent VEBA multiplied by a fraction, the
numerator of which shall be the accumulated postretirement health benefit
obligation under FAS 106 for Represented Transferred Employees whose
postretirement health benefit is funded by such VEBA, and the denominator of
which shall be the accumulated postretirement health benefit obligation under
FAS 106 for all participants and dependents whose postretirement health benefit
is funded by such VEBA.
This Section 5.4(i) shall govern the transfer of assets from the Lucent
Postretirement Life VEBA to a corresponding Buyer Postretirement Life VEBA,
which Buyer shall establish and submit to the IRS for a favorable ruling as to
its tax-exempt status prior to the Second Transfer Date. On or prior to the
Second Transfer Date, Seller shall determine the aggregate value, as of the
Closing Date, of the accumulated postretirement benefit obligation of the Lucent
plan funded by such Lucent Postretirement Life VEBA, with respect to all
Represented Transferred Employees, and shall transfer or cause to be transferred
cash in an amount determined as set forth below. Such amount shall be equal to
the accumulated
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postretirement benefit obligation under FAS 106 for Represented Transferred
Employees whose postretirement life benefit is funded by such VEBA. Buyer and
Seller shall adopt, and shall use their reasonable best efforts to cause their
insurers to adopt, procedures to implement such asset transfers in a reasonable
and expeditious manner that is consistent with the underlying group life
insurance contracts and applicable legal requirements.
For purposes of this Section 5.4(i), all determinations shall be made as
of the Closing Date, based on the active and inactive census data as of the
Closing Date. For purposes of determining the accumulated postretirement benefit
obligation, the assumptions and methods used by Lucent in determining the
disclosure of accumulated postretirement benefit obligation under FAS 106 as of
September 30, 2000 shall be used. The amounts to be transferred as described
above shall be adjusted by the aggregate amount of any payments made by a Lucent
VEBA in respect of Represented Transferred Employees (and by the aggregate
amount of any payments made by a Buyer VEBA on behalf of the Lucent VEBA) prior
to such transfer, and increased by interest of 8% per annum on such amounts from
the Closing Date through the date of such transfer. Nothing in this Agreement
shall be interpreted to provide that any assets so transferred have reverted to
Seller or Buyer.
(j) Seller, on or prior to the Second Transfer Date, shall notify Buyer in
writing of Seller's determination of the amounts of assets required to be
transferred in accordance with the provisions of Sections 5.4(g), (h), and (i),
shall provide Buyer with a copy of the actuarial reports relating to the
determination of such amounts, together with such related materials as Buyer may
reasonably request, and, in the case of the transfers of pension assets
contemplated by Section 5.4(g) and (h), shall provide Buyer with a written
determination by Seller's actuary that the amounts of assets proposed to be
transferred are not less than the required amounts determined in accordance with
this Agreement.
(k) Buyer shall notify Seller in writing of Buyer's disagreement with any
determination made by Seller pursuant to Section 5.4(j) as soon as practicable
and in any event within 75 days after the date on which the information
specified in Section 5.4(j) is provided to Buyer. If no such notice is given by
Buyer prior to the expiration of the foregoing period, the determinations
contained in Seller's notice to Buyer shall be conclusive and binding upon the
parties. If Buyer gives written notice to Seller prior to the expiration of the
foregoing period setting forth any objections to the determinations made by
Seller, the parties shall attempt in good faith to reach an agreement as to all
matters in dispute. Buyer shall not be entitled to object to the determinations
of Seller based on any disagreement as to the rates or assumptions used by
Seller so long as such rates and assumptions are those specified in this Section
5.4. The determinations of Seller's actuary under Sections 5.4(h), (i), and (j)
shall be conclusive unless Buyer's actuary claims that the proper total of such
amounts differs from Seller's determination by more than 1%. If the parties,
notwithstanding such good faith effort, fail to resolve all matters in dispute
within 30 days after Buyer advises Seller of its objections, and the amount in
dispute is greater than 1% of the total amount determined by Seller's actuary
under Sections 5.4(h), (i), and (j), then any remaining disputed
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matters shall be finally and conclusively determined by a qualified independent
actuary selected by Seller and Buyer, which actuary shall not be the regular
actuary of either party. Promptly, but in no event later than 30 days after its
acceptance of its appointment, the actuary shall determine (based solely on
presentations by Seller and Buyer and not by independent review) only those
matters in dispute and shall render a written report as to the disputed matters
and the resulting calculation of the pension or other assets required to be
transferred by Seller in accordance with the provisions of Section 5.4(g) or
(i), which report shall be conclusive and binding upon the parties. The fees and
expenses of the actuary shall be shared equally by the parties.
(l) Seller hereby acknowledges that for FICA and FUTA tax purposes, Buyer
qualifies as a successor employer with respect to the Transferred Employees. In
connection with the foregoing, at Buyer's option, Seller agrees to follow the
"Alternative Procedures" set forth in Section 5 of Revenue Procedure 96-60.
Buyer shall notify Seller of its intention to follow the "Alternative
Procedures" on or immediately after the Closing Date. If the "Alternative
Procedures" are followed, Seller and Buyer understand that Buyer shall assume
Seller's entire obligation to furnish a Form W-2, Wage and Tax Statement, to the
Transferred Employees. In addition to all personnel files and records relating
to the Transferred Employees that Seller shall deliver to Buyer as of the
Closing Date or as otherwise required by this Agreement, Seller shall timely
provide Buyer with any and all other information (and in such format and media)
as it shall reasonably request to properly comply with the requirements in the
preceding sentence, which in no event shall be more than 10 business days from
the date of a written request for such information.
(m) Buyer or one or more Buyer Designee that purchases the assets of the
Business shall, on and as of the Closing Date, assume any and all collective
bargaining agreements and other labor agreements, as identified in SCHEDULE
5.4(m), applicable to the Transferred Employees who are represented by the
Communications Workers of America or the Confederacion de Trabajadores de Mexico
(other than provisions of such agreements that are specific to Seller or its
predecessors or Affiliates).
(n) Seller shall make and be responsible for incentive compensation
payments to Nonrepresented Transferred Employees for the period from October 1,
2000 to the Closing Date in accordance with its short-term incentive plan in
effect for such period.
5.5 COLLATERAL AGREEMENTS; LEASED EQUIPMENT
(a) (i) On or prior to the Closing Date, Buyer or a Buyer Designee shall
execute and deliver to Seller, and Seller or the applicable Subsidiary shall
execute and deliver to Buyer or a Buyer Designee the Collateral Agreements.
(ii) Prior to the Closing Date, Seller and Buyer shall negotiate in
good faith the schedules for the services to be attached to the Transition
Services Agreement.
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(b) At least ten Business Days prior to the Closing Date, Seller shall
provide Buyer with the costs and other terms applicable to the Leased Equipment
and Buyer shall decide whether such Leased Equipment will (a) transfer to Buyer
or a Buyer Designee as of the Closing Date by Buyer or a Buyer Designee assuming
the leases for such equipment, (b) become the property of Buyer or a Buyer
Designee as of the Closing Date by Buyer or a Buyer Designee paying for the
costs of purchasing such equipment pursuant to the leases (the "PURCHASED LEASED
EQUIPMENT"), or (c) remain the property of the Seller or a Subsidiary as of the
Closing Date (the "EXCLUDED LEASED EQUIPMENT").
5.6 REGULATORY COMPLIANCE
Buyer and Seller shall cooperate, and shall cause their respective
Affiliates to cooperate, with the other in making filings under the HSR Act and
any applicable filings required under foreign antitrust Laws, and each party
shall use its reasonable commercial efforts to resolve such objections, if any,
as the Antitrust Division of the Department of Justice or the Federal Trade
Commission or state antitrust enforcement or other Governmental Body may assert
under the antitrust Laws with respect to the transactions contemplated hereby.
In the event an action is instituted by any Person challenging the transactions
contemplated hereby as violative of the antitrust Laws, Buyer and Seller shall
use, and shall cause their respective Subsidiaries to use, their respective
reasonable commercial efforts to resist or resolve such action.
5.7 CONTACTS WITH SUPPLIERS, EMPLOYEES AND CUSTOMERS
Seller and Buyer agree to cooperate in contacting any suppliers to, or
customers of, the Business or any Business Employees in connection with or
pertaining to any subject of this Agreement.
5.8 USE OF LUCENT'S NAME; BRAZILIAN JV COMPANY NAME
(a) Buyer and Seller agree as follows:
(i) Within three (3) months after the Closing Date, Buyer and the
Buyer Designees shall, remove "Lucent," "Lucent Technologies" or other similar
mark (the "SELLER NAME") and any other trademark, design or logo previously or
currently used by Seller or any of its Affiliates that is not part of the
Intellectual Property from all buildings, signs and vehicles of the Business;
(ii) Immediately after the Closing Date, Buyer and the Buyer
Designees shall cease using the Seller Name and any other trademark, design or
logo previously or currently used by Seller or any of its Affiliates that is not
part of the Intellectual Property in all invoices, letterhead, advertising and
promotional materials, office forms or business cards;
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(iii) Within three (3) months after the Closing Date, Buyer and the
Buyer Designees shall cease using the Seller Name and any other trademark,
design or logo previously or currently used by Seller or any of its Affiliates
that is not part of the Intellectual Property in electronic databases, web
sites, product instructions, packaging (except as provided below) and other
materials, printed or otherwise (all such materials, together with buildings,
signs and vehicles of the Business described in clauses (i) and (ii) above,
"MARKED ASSETS"). Notwithstanding the foregoing, Buyer and the Buyer Designees
shall not be restricted in using any packaging materials that are in inventory
as of the Closing Date;
(iv) Buyer and the Buyer Designees shall not be required at any time
to remove the Seller Name and any other trademark, design or logo previously or
currently used by Seller that is not part of the Intellectual Property from
inventory of the Business that is in existence as of the Closing Date ("EXISTING
INVENTORY"), nor shall Buyer or the Buyer Designees be required at any time to
remove such Seller Name and any such other trademark, design or logo from
schematics, plans, manuals, drawings, machinery, tooling including hand tools,
and the like of the Business in existence as of the Closing Date to the extent
that such instrumentalities are used in the ordinary internal conduct of the
Business and are not generally observed by the public or are intended for use as
means to effectuate or enhance sales (such items, "MARKED INSTRUMENTALITIES").
Buyer and the Buyer Designees shall use Reasonable Efforts to remove the Seller
Name and any other trademark, design or logo previously or currently used by
Seller that is not part of the Intellectual Property from those assets of the
Business that are not Marked Instrumentalities or Existing Inventory, including
those assets (such as, but not limited to, tools, molds, and machines) used in
association with the manufacture of the products of the Business or otherwise
reasonably used in the conduct of the Business after the Closing Date (such
assets, "OTHER MARKED ASSETS"). For the purposes of this Section 5.8,
"REASONABLE EFFORTS" means Buyer and the Buyer Designees shall remove the Seller
Name from such Other Marked Assets but only at such time when such asset is not
operated or otherwise is taken out of service in the normal course of business
due to regular maintenance or repair (but only for such repairs or maintenance
where such removal could normally be undertaken, for example, repair or
maintenance of a mold cavity) whichever occurs first; PROVIDED that, in no event
shall Buyer or the Buyer Designees use the Seller Name after the date which is
two (2) years from the Closing Date. Neither Buyer nor the Buyer Designees shall
be required to perform such removal on such Other Marked Assets that are not or
no longer used to manufacture the products of the Business or other parts, or if
discontinuance of use of such Other Marked Assets is reasonably anticipated
during such time period.
(iv) Seller hereby grants to Buyer and the Buyer Designees a limited
right to use Seller's Name and associated trademarks, designs and logos with
regard to the Marked Assets, Existing Inventory, Other Marked Assets and Marked
Instrumentalities during the periods, if any, specified in clauses (i) - (iv)
above.
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(b) In no event shall Buyer or any Affiliate of Buyer advertise or hold
itself out as Lucent or an Affiliate of Lucent after the Closing Date.
(c) As soon as reasonably practicable after the Closing Date, but in no
event later than three (3) months following the Closing Date, Buyer shall change
the name of the Brazilian JV Company to delete any references to "Lucent".
5.9 NO HIRE AND NON-SOLICITATION OF EMPLOYEES
None of Seller, any of its respective representatives or any of its
Affiliates will at any time prior to one year from the date hereof, directly or
indirectly, hire (or continue the employment of any Business Employee that
rejects an offer of employment from Buyer) or solicit the employment of any
Transferred Employee without Buyer's prior written consent. The term "solicit
the employment" shall not be deemed to include generalized searches for
employees through media advertisements, employment firms or otherwise that are
not focused on persons employed by Buyer or any successor. This restriction
shall not apply to any Transferred Employee whose employment with the Buyer or
its successor is involuntarily terminated by Buyer or its successor after the
Closing. Solicitation of employment shall be deemed to occur if the persons who
perform such solicitation have knowledge of the existence of this Agreement or
if such persons have no knowledge of the existence of this Agreement but
Seller's employees with knowledge of the existence of this Agreement have
advance knowledge of any such solicitation.
5.10 NO NEGOTIATION OR SOLICITATION
Prior to the Closing Date, Seller and its Affiliates will not (and Seller
will cause each of its employees, officers and agents not to) (a) solicit,
initiate, entertain or encourage the submission of any proposal or offer from
any Person relating to the direct or indirect acquisition of the Business or any
portion of the Purchased Assets (other than in the ordinary course of business),
or (b) participate in any discussions or negotiations regarding, furnish any
information with respect to, assist or participate in, or facilitate in any
other manner any effort or attempt by any Person to do or seek any of the
foregoing. Seller will notify Buyer if any Person makes any proposal, offer,
inquiry or contact with respect to any of the foregoing within two Business Days
after receipt of any such offer or proposal.
5.11 NON-COMPETITION
(a) Seller agrees that, as part of the consideration for the payment of
the Purchase Price, for a period of four (4) years immediately following the
Closing Date, neither Seller nor any of its Affiliates will, directly or
indirectly, operate, perform or have any ownership interest in a business that
develops, manufactures, sells, installs (on a stand-alone basis and not as part
of Seller's communications equipment) or distributes (on a stand-alone basis and
not as part of Seller's communications equipment) products or perform services
in
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LUCENT TECHNOLOGIES PROPRIETARY
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competition with the Business, except that Lucent or its Affiliates may (i)
provide any service, engineering and installation functions currently performed
by Seller or an Affiliate related to the Business, (ii) purchase or otherwise
acquire by merger, purchase of assets, stock, controlling interest or otherwise
any Person or business or engage in any similar merger and acquisition activity
with any Person the primary business of which is not in competition with the
Business and/or (iii) continue the activities of the New Ventures Group and
Lucent Venture Partners or successors thereto. In addition, for these purposes,
ownership of securities of a company whose securities are publicly traded under
a recognized securities exchange not in excess of 10% of any class of such
securities shall not be considered to be competition with the Business. For
purposes of Section 5.11(b)(ii) above, a Person shall not be considered to be in
the "primary business" of competing with the Business if such Person derives
less than twenty-five percent (25%) of its revenues from products that compete
with the Business.
(b) Seller acknowledges that the restrictions set forth in Section 5.11(a)
constitute a material inducement to Buyer's entering into and performing this
Agreement. Seller further acknowledges, stipulates and agrees that a breach of
such obligation could result in irreparable harm and continuing damage to Buyer
for which there may be no adequate remedy at law and further agrees that in the
event of any breach of said obligation, Buyer may be entitled to injunctive
relief and to such other relief as is proper under the circumstances.
6. CONFIDENTIAL NATURE OF INFORMATION
6.1 CONFIDENTIALITY AGREEMENT
Buyer agrees that the Confidentiality Agreement shall apply to (a) all
documents, materials and other information that it shall have obtained regarding
Seller or its Affiliates during the course of the negotiations leading to the
consummation of the transactions contemplated hereby (whether obtained before or
after the date of this Agreement), any investigations made in connection
therewith and the preparation of this Agreement and related documents and (b)
all analyses, reports, compilations, evaluations and other materials prepared by
Buyer or its counsel, accountants or financial advisors that contain or
otherwise reflect or are based upon, in whole or in part, any of the provided
information; PROVIDED, HOWEVER, that subject to Section 6.2(a), the
Confidentiality Agreement shall terminate as of the Closing with respect to
Buyer's obligations thereunder and shall be of no further force and effect
thereafter with respect to information of Seller or a Subsidiary the ownership
of which is transferred to Buyer.
6.2 SELLER'S PROPRIETARY INFORMATION
(a) Except as provided in Section 6.2(b), after the Closing and for a
period of five (5) years following the Closing Date, Buyer agrees that it will
keep confidential all of Seller's
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and its Affiliates' Proprietary Information that is received from, or made
available by, Seller or a Subsidiary in the course of the transactions
contemplated hereby, including, for purposes of this Section 6.2, information
about Seller's and its Affiliates' business plans and strategies, marketing
ideas and concepts, especially with respect to unannounced products and
services, present and future product plans, pricing, volume estimates, financial
data, product enhancement information, business plans, marketing plans, sales
strategies, customer information (including customers' applications and
environments), market testing information, development plans, specifications,
customer requirements, configurations, designs, plans, drawings, apparatus,
sketches, software, hardware, data, prototypes, connecting requirements or other
technical and business information, except for such Proprietary Information as
is conveyed to Buyer as part of the Purchased Assets.
(b) Notwithstanding the foregoing, such Proprietary Information shall not
be deemed confidential and Buyer shall have no obligation with respect to any
such Proprietary Information that:
(i) at the time of disclosure was already known to Buyer other than
through this transaction, free of restriction as evidenced by documentation in
Buyer's possession;
(ii) is or becomes publicly known through publication, inspection of
a product, or otherwise, and through no negligence or other wrongful act of
Buyer;
(iii) is received by Buyer from a Third Party without similar
restriction and without breach of any agreement;
(iv) to the extent it is independently developed by Buyer; or
(v) is, subject to Section 6.2(c), required to be disclosed
under applicable Law or judicial process.
(c) If Buyer (or any of its Affiliates) is requested or required (by oral
question, interrogatory, request for information or documents, subpoena, civil
investigative demand or similar process) to disclose any Proprietary
Information, Buyer will promptly notify Seller of such request or requirement
and will cooperate with Seller such that Seller may seek an appropriate
protective order or other appropriate remedy. If, in the absence of a protective
order or the receipt of a waiver hereunder, Buyer (or any of its Affiliates) is
in the opinion of Buyer's counsel compelled to disclose the Proprietary
Information or else stand liable for contempt or suffer other censure or
significant penalty, Buyer (or its Affiliate) may disclose only so much of the
Proprietary Information to the party compelling disclosure as is required by
Law. Buyer will exercise its (and will cause its Affiliates to exercise their)
reasonable commercial efforts to obtain a protective order or other reliable
assurance that confidential treatment will be accorded to such Proprietary
Information.
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6.3 BUYER'S PROPRIETARY INFORMATION
(a) Except as provided in Section 6.3(b), after the Closing Date and for a
period of five (5) years thereafter, Seller agrees that it will keep
confidential all of Buyer's and its Affiliates' Proprietary Information that is
conveyed to Buyer or a Buyer Designee as part of the Purchased Assets,
including, for purposes of this Section 6.3, information about the Business'
business plans and strategies, marketing ideas and concepts, especially with
respect to unannounced products and services, present and future product plans,
pricing, volume estimates, financial data, product enhancement information,
business plans, marketing plans, sales strategies, customer information
(including customers' applications and environments), market testing
information, development plans, specifications, customer requirements,
configurations, designs, plans, drawings, apparatus, sketches, software,
hardware, data, prototypes, connecting requirements or other technical and
business information.
(b) Notwithstanding the foregoing, such Proprietary Information regarding
the Business shall not be deemed confidential and Seller shall have no
obligation with respect to any such Proprietary Information that:
(i) is or becomes publicly known through publication,
inspection of a product, or otherwise, and through no negligence or other
wrongful act of Seller;
(ii) is received by Buyer from a Third Party without similar
restriction and without breach of any agreement; or
(iii) is, subject to Section 6.3(c), required to be disclosed under
applicable Law or judicial process.
(c) If Seller (or any of its Affiliates) is requested or required (by oral
question, interrogatory, request for information or documents, subpoena, civil
investigative demand or similar process) to disclose any Proprietary Information
regarding the Business, Seller will promptly notify Buyer of such request or
requirement and will cooperate with Buyer such that Buyer may seek an
appropriate protective order or other appropriate remedy. If, in the absence of
a protective order or the receipt of a waiver hereunder, Seller (or any of its
Affiliates) is in the opinion of Seller's counsel compelled to disclose the
Proprietary Information or else stand liable for contempt or suffer other
censure or significant penalty, Seller (or its Affiliate) may disclose only so
much of the Proprietary Information to the party compelling disclosure as is
required by Law. Seller will exercise its (and will cause its Affiliates to
exercise their) reasonable commercial efforts to obtain a protective order or
other reliable assurance that confidential treatment will be accorded to such
Proprietary Information.
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6.4 CONFIDENTIAL NATURE OF AGREEMENT
Except to the extent that disclosure thereof is required under accounting,
stock exchange or Federal Securities Laws disclosure obligations, or labor
relations law, both parties agree that the terms and conditions of this
Agreement, and all attachments and amendments hereto and thereto shall be
considered Proprietary Information protected under this Article 6.
Notwithstanding anything in this Article 6 to the contrary, in the event that
any such Proprietary Information is also subject to a limitation on disclosure
or use contained in another written agreement between Buyer and Seller or either
of their respective Affiliates that is more restrictive than the limitation
contained in this Article 6, then the limitation in such agreement shall
supersede this Article 6.
7. CLOSING
At the Closing, the following transactions shall take place:
7.1 DELIVERIES BY SELLER OR THE SUBSIDIARIES
On the Closing Date, Seller shall, or shall cause a Subsidiary to, deliver
to Buyer or a Buyer Designee the following:
(a) the Collateral Agreements;
(b) all consents, waivers or approvals theretofore obtained by Seller with
respect to the sale of the Purchased Assets or the consummation of the
transactions contemplated by this Agreement or the Collateral Agreements;
(c) an opinion or opinions of Counsel for Seller dated the Closing Date
with respect to the matters described in Sections 3.1, 3.2, 3.3 and 3.4 (other
than subparagraph (a)(ii)) in a form and subject to such exceptions as are
customary for transactions similar to those contemplated hereby, which form
shall be reasonably acceptable to Buyer;
(d) a certificate of an appropriate officer of Seller, dated the Closing
Date, certifying to the fulfillment of the conditions set forth in Sections
8.2(a) and (b) and a certificate of an Assistant Secretary's of Seller, dated
the Closing Date, in customary form; and
(e) all such other bills of sale, assignments and other instruments of
assignment, transfer or conveyance as Buyer or a Buyer Designee may reasonably
request or as may be otherwise necessary to evidence and effect the sale,
transfer, assignment, conveyance and delivery of the Purchased Assets to Buyer
or a Buyer Designee and to put Buyer in actual possession or control of the
Purchased Assets.
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7.2 DELIVERIES BY BUYER
On the Closing Date, Buyer or a Buyer Designee shall deliver to Seller the
following:
(a) the Purchase Price as provided in Section 2.3;
(b) the Collateral Agreements;
(c) an opinion or opinions of Counsel for Buyer dated the Closing Date
with respect to the matters described in Sections 4.1, 4.2 and 4.3 (other than
subparagraph (a)(ii)) in a form and subject to such exceptions as are customary
for transactions similar to those contemplated hereby, which form shall be
reasonably acceptable to Seller;
(d) a certificate of an appropriate officer of Buyer, dated the Closing
Date, certifying to the fulfillment of the conditions set forth in Sections
8.3(a) and (b), and a certificate of an appropriate officer of Buyer, dated the
Closing Date, in customary form of a secretary's certificate; and
(e) all such other documents and instruments as Seller may reasonably
request or as may be otherwise necessary or desirable to evidence and effect the
assumption by Buyer or a Buyer Designee of the Assumed Liabilities.
7.3 CLOSING DATE
The Closing shall take place at the offices of Seller, 600 Mountain
Avenue, Murray Hill, New Jersey 07974, at 10:00 a.m. local time within five (5)
Business Days following the date on which the last of the conditions specified
in Article 8 to be satisfied or waived has been satisfied or waived, or at such
other place or time or on such other date as Seller and Buyer may agree upon in
writing (such date and time being referred to herein as the "CLOSING DATE").
7.4 CONTEMPORANEOUS EFFECTIVENESS
All acts and deliveries prescribed by this Article 7, regardless of
chronological sequence, will be deemed to occur contemporaneously and
simultaneously on the occurrence of the last act or delivery, and none of such
acts or deliveries will be effective until the last of the same has occurred.
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8. CONDITIONS PRECEDENT TO CLOSING
8.1 GENERAL CONDITIONS
The respective obligations of Buyer and Seller to effect the Closing of
the transactions contemplated hereby are subject to the fulfillment, prior to or
at the Closing, of each of the following conditions:
(a) NO INJUNCTIONS. No order of any court or administrative agency
shall be in effect that enjoins, restrains, conditions or prohibits
consummation of this Agreement or the Collateral Agreements.
(b) ANTITRUST LAWS. Any applicable waiting period under the HSR Act or
other applicable antitrust Laws relating to the transactions contemplated by
this Agreement or the Collateral Agreements shall have expired or been
terminated.
8.2 CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS
The obligations of Buyer to effect the Closing of the transactions
contemplated hereby are subject to the fulfillment, prior to or at the Closing,
of each of the following conditions, any of which may be waived in writing by
Buyer:
(a) REPRESENTATIONS AND WARRANTIES OF SELLER TRUE AT CLOSING. The
representations and warranties of Seller contained in this Agreement or in any
schedule, certificate or document delivered pursuant to the provisions hereof or
in connection with the transactions contemplated hereby shall be true and
correct in all material respects at and as of the Closing Date, as though such
representations and warranties were made at and as of the Closing Date, except
to the extent that such representations and warranties are made as of a
specified date, in which case such representations and warranties shall be true
in all material respects as of the specified date.
(b) PERFORMANCE BY SELLER. Seller and/or the applicable Subsidiary
shall have delivered all of the documents required under Section 7.1 and
shall have otherwise performed in all material respects all obligations and
agreements and complied in all material respects with all covenants and
conditions required by this Agreement to be performed or complied with by it
prior to or at the Closing, including executing the Collateral Agreements.
(c) MATERIAL ADVERSE EFFECT. There shall not have been any Material
Adverse Effect from the date hereof to the Closing Date.
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8.3 CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS
The obligations of Seller to effect the Closing of the transactions
contemplated hereby are subject to the fulfillment, prior to or at the Closing,
of each of the following conditions, any of which may be waived in writing by
Seller:
(a) REPRESENTATIONS AND WARRANTIES OF BUYER TRUE AT CLOSING. The
representations and warranties of Buyer contained in this Agreement or in any
certificate or document delivered pursuant to the provisions hereof or in
connection with the transactions contemplated hereby shall be true in all
material respects at and as of the Closing Date as though such representations
and warranties were made at and as of the Closing Date, except to the extent
that such representations and warranties are made as of a specified date, in
which case such representations and warranties shall be true in all material
respects as of the specified date.
(b) PERFORMANCE BY BUYER. Buyer or a Buyer Designee shall have delivered
all of the documents required under Section 7.1 and shall have otherwise
performed in all material respects all obligations and agreements and complied
in all material respects with all covenants and conditions required by this
Agreement to be performed or complied with by it prior to or at the Closing,
including executing the Collateral Agreements.
9. STATUS OF AGREEMENTS
The rights and obligations of Buyer and Seller under this Agreement shall
be subject to the following terms and conditions:
9.1 EFFECT OF BREACH
In the event of a material breach of any representation, certification or
warranty, or agreement or covenant of Seller under this Agreement that is
discovered by the Buyer prior to Closing and that cannot be or is not cured by
Seller upon prior notice and the passage of a reasonable period of time, the
Buyer may elect not to proceed with the Closing hereunder, which shall be the
Buyer's sole remedy for such breach.
9.2 SURVIVAL OF REPRESENTATIONS AND WARRANTIES
The representations and warranties of Buyer and Seller contained in this
Agreement shall survive the Closing for eighteen (18) months provided, however,
that (i) the representations and warranties in Sections 3.5(a) and 3.13(a)
relating to title matters shall survive the Closing and shall not terminate and
(ii) the representations and warranties in Section 3.11 relating to
environmental matters shall survive the Closing and shall terminate at the close
of business on the 120th day following the expiration of the applicable statute
of limitations with respect to the environmental liabilities in question.
Neither Seller nor Buyer
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shall have any liability whatsoever with respect to any such representations or
warranties after the survival period for such representation or warranty
expires.
9.3 GENERAL AGREEMENT TO INDEMNIFY
(a) Seller and Buyer shall indemnify, defend and hold harmless the other
party hereto and any director, officer or Affiliate of the other party (each an
"INDEMNIFIED PARTY") from and against any and all claims, actions, suits,
proceedings, liabilities, obligations, losses, and damages, amounts paid in
settlement, interest, costs and expenses (including reasonable attorney's fees,
court costs and other out-of-pocket expenses incurred in investigating,
preparing or defending the foregoing) (collectively, "LOSSES") incurred or
suffered by any Indemnified Party to the extent that the Losses arise by reason
of, or result from (i) the failure of any representation or warranty of such
party contained in this Agreement to have been true in all material respects
when made and as of the Closing Date except as expressly provided otherwise in
Section 8.2(a) or 8.3(a), or (ii) the breach by such party of any covenant or
agreement of such party contained in this Agreement to the extent not waived by
the other party.
(b) Seller further agrees to indemnify and hold harmless Buyer from and
against any Losses incurred by Buyer arising out of, resulting from, or relating
to: (i) the Excluded Liabilities; (ii) Buyer's waiver of any applicable Bulk
Sales Laws; (iii) any claim, demand or liability for the Taxes accruing in
connection with the Purchased Assets prior to and including the Closing Date or
Seller's agreement to pay one-half (1/2) of the real estate transfer taxes
referred to in Section 2.9; and (iv) any claims of any Business Employee
employed by Buyer in connection with any Benefit Plan of Seller or such Business
Employee's employment with Seller accruing prior to and including the Closing
Date.
(c) Buyer further agrees to indemnify and hold harmless Seller with
respect to: (i) any failure of Buyer to discharge any of the Assumed
Liabilities; (ii) any claim, demand or liability for the Taxes referred to in
Section 2.9 other than one-half (1/2) of the real estate transfer taxes
allocated to Seller; and (iii) any medical, health or disability claims of any
Transferred Employee, except for claims for expenses incurred on or before the
close of business on the Closing Date in accordance with the terms of the
applicable Benefit Plan of Seller.
(d) Amounts payable in respect of the parties' indemnification obligations
shall be treated as an adjustment to the Purchase Price. Buyer and Seller agree
to cooperate in the preparation of a supplemental Asset Acquisition Statement as
required by Section 5.3 and Treasury Reg. ss. 1.1060-1T(e) as a result of any
adjustment to the Purchase Price pursuant to the preceding sentence. Whether or
not the Indemnifying Party (as defined below) chooses to defend or prosecute any
Third-Party Claim (as defined in Section 9.4(a)), both parties hereto shall
cooperate in the defense or prosecution thereof and shall furnish such records,
information and testimony, and attend such conferences, discovery proceedings,
hearings,
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trials and appeals, as may be reasonably requested in connection therewith or as
provided in Section 5.1.
(e) The amount of the Indemnifying Party's liability under this Agreement
shall be determined taking into account any applicable insurance proceeds
actually received by, and other savings, including tax savings, that actually
reduce the overall impact of the Losses upon, the Indemnified Party. The
indemnification obligations of each party hereto under this Article 9 shall
inure to the benefit of the directors, officers and Affiliates of the other
party hereto on the same terms as are applicable to such other party.
(f) The Indemnifying Party's liability for all claims including those made
under Section 9.3(a)(i) shall be subject to the following limitations: (i) the
Indemnifying Party shall have no liability for such claims until the aggregate
amount of the Losses incurred shall exceed $7,000,000, in which case the
Indemnifying Party shall be liable only for the portion of the Losses exceeding
$7,000,000, and (ii) the Indemnifying Party's aggregate liability for all such
claims shall not exceed $300,000,000, provided, however, that the forgoing
limitations shall not be applicable to any claims under Sections 3.5(a) or
3.13(a) nor to Losses based on fraud or intentional misrepresentation. The
Indemnified Party may not make a claim for indemnification under Section
9.3(a)(i) for breach by the Indemnifying Party of a particular representation or
warranty after the expiration of the survival period specified in Section 9.2.
(g) The indemnification provided in this Article 9 shall be the sole and
exclusive remedy after the Closing Date for damages available to the parties to
this Agreement for breach of any of the terms, conditions, representations or
warranties contained herein or any right, claim or action arising from the
transactions contemplated by this Agreement; PROVIDED, HOWEVER, this exclusive
remedy for damages does not preclude a party from bringing an action for (i)
specific performance or other equitable remedy to require a party to perform its
obligations under this Agreement or any Collateral Agreement, or (ii) based on
fraud or intentional misrepresentation.
(h) Notwithstanding anything contained in this Agreement to the contrary,
no party shall be liable to the other party for indirect, special, punitive,
exemplary or consequential loss or damage (including any loss of revenue or
profit) arising out of this Agreement, PROVIDED, HOWEVER, the foregoing shall
not be construed to preclude recovery by the Indemnified Party in respect of
Losses directly incurred from (i) Third Party Claims or (ii) any claim based on
fraud or intentional misrepresentation. Both parties shall mitigate their
damages.
(i) The rights to indemnification under Section 9.3 shall not be subject
to set-off for any claim by the Indemnifying Party against any Indemnified
Party, whether or not arising from the same event giving rise to such
Indemnified Party's claim for indemnification.
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9.4 GENERAL PROCEDURES FOR INDEMNIFICATION
(a) The Indemnified Party seeking indemnification under this Agreement
shall promptly notify the party against whom indemnification is sought (the
"INDEMNIFYING PARTY") of the assertion of any claim, or the commencement of any
action, suit or proceeding by any Third Party, in respect of which indemnity may
be sought hereunder and will give the Indemnifying Party such information with
respect thereto as the Indemnifying Party may reasonably request, but failure to
give such notice shall not relieve the Indemnifying Party of any liability
hereunder (unless and to the extent that the Indemnifying Party has suffered
material prejudice by such failure). The Indemnifying Party shall have the
right, but not the obligation, exercisable by written notice to the Indemnified
Party within thirty (30) days of receipt of notice from the Indemnified Party of
the commencement of or assertion of any claim, action, suit or proceeding by a
Third Party in respect of which indemnity may be sought hereunder (a
"THIRD-PARTY CLAIM"), to assume the defense and control the settlement of such
Third-Party Claim that (i) involves (and continues to involve) solely money
damages, or (ii) involves (and continues to involve) claims for both money
damages and equitable relief against the Indemnified Party that cannot be
severed, where the claims for money damages are the primary claims asserted by
the Third Party and the claims for equitable relief are incidental to the claims
for money damages.
(b) The Indemnifying Party or the Indemnified Party, as the case may be,
shall have the right to participate in (but not control), at its own expense,
the defense of any Third-Party Claim that the other is defending, as provided in
this Agreement.
(c) The Indemnifying Party, if it has assumed the defense of any
Third-Party Claim as provided in this Agreement, shall not consent to a
settlement of, or the entry of any judgment arising from, any such Third-Party
Claim without the Indemnified Party's prior written consent (which consent shall
not be unreasonably withheld or delayed) unless such settlement or judgment
relates solely to monetary damages. The Indemnifying Party shall not, without
the Indemnified Party's prior written consent, enter into any compromise or
settlement that (i) commits the Indemnified Party to take, or to forbear to
take, any action, or (ii) does not provide for a complete release by such Third
Party of the Indemnified Party. The Indemnified Party shall have the sole and
exclusive right to settle any Third-Party Claim, on such terms and conditions as
it deems reasonably appropriate, to the extent such Third-Party Claim involves
equitable or other non-monetary relief against the Indemnified Party, and shall
have the right to settle any Third-Party Claim involving money damages for which
Indemnifying Party has not assumed the defense pursuant to this Section 9.4 with
the written consent of the Indemnifying Party, which consent shall not be
unreasonably withheld or delayed.
(d) In the event an Indemnified Party shall claim a right to payment
pursuant to this Agreement, such Indemnified Party shall send written notice of
such claim to the
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Indemnifying Party. Such notice shall specify the basis for such claim. As
promptly as possible after the Indemnified Party has given such notice, and
subject to the limitations set forth in Section 9.3, the Indemnified Party and
the Indemnifying Party shall establish the merits and amount of such claim by
mutual agreement, or, if necessary, by arbitration in a manner reasonably
determined by mutual agreement of such parties.
10. MISCELLANEOUS PROVISIONS
10.1 NOTICES
All notices and other communications hereunder shall be in writing and
shall be deemed to have been duly given upon receipt if (i) mailed by certified
or registered mail, return receipt requested, (ii) sent by Federal Express or
other express carrier, fee prepaid, (iii) sent via facsimile with receipt
confirmed, or (iv) delivered personally, addressed as follows or to such other
address or addresses of which the respective party shall have notified the
other.
(a) If to Seller, to: Lucent Technologies Inc.
Attn: Executive Vice President,
Corporate Operations
600 Mountain Avenue
Murray Hill, NJ 07974-0636
United States of America
Facsimile: (908) 582-3560
With a copy to: Lucent Technologies Inc.
Attn: Vice President - Law
600 Mountain Avenue
Murray Hill, NJ 07974-0636
United States of America
Facsimile: (908) 582-6978
(b) If to Buyer, to: Tyco Group S.a.r.l.
6, Avenue Emile Reuter
Second Floor
L-2420 Luxembourg
Attn: Managing Director
Facsimile: 352-021-181-281
With a copy to: Tyco International (US) Inc.
One Tyco Park
Exeter, New Hampshire 03833
Attn: General Counsel
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Facsimile: (603) 778-7700
10.2 EXPENSES
Except as otherwise provided in this Agreement, each party to this
Agreement will bear all the fees, costs and expenses that are incurred by it in
connection with the transactions contemplated hereby, whether or not such
transactions are consummated.
10.3 ENTIRE AGREEMENT; MODIFICATION
The agreement of the parties, which is comprised of this Agreement, the
Schedules and Exhibits hereto and the documents referred to herein and such
other written agreements between the parties dated the date hereof, sets forth
the entire agreement and understanding between the parties and supersedes any
prior agreement or understanding, written or oral, relating to the subject
matter of this Agreement. With respect to the Purchased Assets, the Business, or
any other rights or obligations to be transferred hereunder or pursuant hereto,
no party has been induced by or has relied upon any representations, warranties,
or statements, whether express or implied, made by any other party, its agents,
employees, attorneys or other representatives or by any Person representing or
purporting to represent the other party that are not expressly set forth in this
Agreement or the Collateral Agreements (including the Schedules and Exhibits
hereto and thereto), whether or not any such representations, warranties or
statements were made in writing or orally. No amendment, supplement,
modification or waiver of this Agreement shall be binding unless executed in
writing by the party to be bound thereby, and in accordance with Section 11.4.
10.4 ASSIGNMENT; BINDING EFFECT; SEVERABILITY
This Agreement may not be assigned by any party hereto without the other
party's written consent; provided that, Buyer may transfer or assign in whole or
in part to one or more Buyer Designee its the right to purchase all or a portion
of the Purchased Assets, but no such transfer or assignment will relieve Buyer
of its obligations hereunder. This Agreement shall be binding upon and inure to
the benefit of and be enforceable by the successors, legal representatives and
permitted assigns of each party hereto. The provisions of this Agreement are
severable, and in the event that any one or more provisions are deemed illegal
or unenforceable the remaining provisions shall remain in full force and effect
unless the deletion of such provision shall cause this Agreement to become
materially adverse to either party, in which event the parties shall use
reasonable commercial efforts to arrive at an accommodation that best preserves
for the parties the benefits and obligations of the offending provision.
10.5 GOVERNING LAW
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THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK IRRESPECTIVE OF THE CHOICE OF
LAWS PRINCIPLES OF THE STATE OF NEW YORK, AS TO ALL MATTERS, INCLUDING MATTERS
OF VALIDITY, CONSTRUCTION, EFFECT, ENFORCEABILITY, PERFORMANCE AND REMEDIES.
10.6 EXECUTION IN COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
10.7 PUBLIC ANNOUNCEMENT
Upon signing of this Agreement, Seller and Buyer shall prepare a mutually
agreeable release announcing the transaction contemplated hereby. Except for
such press release, neither Seller nor Buyer shall, without the approval of the
other, make any press release or other announcement concerning the existence of
this Agreement or the terms of the transactions contemplated by this Agreement,
except as and to the extent that any such party shall be so obligated by Law, in
which case the other party shall be advised and the parties shall use their
reasonable commercial efforts to cause a mutually agreeable release or
announcement to be issued; PROVIDED, HOWEVER, that the foregoing shall not
preclude communications or disclosures necessary to comply with accounting,
stock exchange or Federal Securities Law disclosure obligations.
10.8 NO THIRD-PARTY BENEFICIARIES
Nothing in this Agreement, express or implied, is intended to or shall (a)
confer on any Person other than the parties hereto and their respective
successors or assigns any rights (including Third-Party beneficiary rights),
remedies, obligations or liabilities under or by reason of this Agreement, or
(b) constitute the parties hereto as partners or as participants in a joint
venture. This Agreement shall not provide Third Parties with any remedy, claim,
liability, reimbursement, cause of action or other right in excess of those
existing without reference to the terms of this Agreement. Nothing in this
Agreement shall be construed as giving to any Business Employee, or any other
individual, any right or entitlement under any Benefit Plan, policy or procedure
maintained by Seller, except as expressly provided in such Benefit Plan, policy
or procedure. No Third Party shall have any rights under Section 502, 503 or 504
of ERISA or any regulations thereunder because of this Agreement that would not
otherwise exist without reference to this Agreement. No Third Party shall have
any right, independent of any right that exist irrespective of this Agreement,
under or granted by this Agreement, to bring any suit at law or equity for any
matter governed by or subject to the provisions of this Agreement.
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11. TERMINATION AND WAIVER
11.1 TERMINATION
This Agreement may be terminated at any time prior to the Closing Date by:
(a) MUTUAL CONSENT. The mutual written consent of Buyer and Seller;
(b) COURT OR ADMINISTRATIVE ORDER. Buyer or Seller if there shall be in
effect a non-appealable order of a court or government administrative agency of
competent jurisdiction prohibiting the consummation of the transactions
contemplated hereby.
(c) DELAY. Buyer or Seller if the Closing shall not have occurred by
January 31, 2001, provided that the terminating party is not otherwise in
material default or breach of this Agreement.
11.2 EFFECT OF TERMINATION
In the event of the termination of this Agreement in accordance with
Section 11.1, this Agreement shall become void and have no effect, without any
liability on the part of any party or its directors, officers or stockholders,
except for the obligations of the parties hereto as provided in Article 6,
Sections 10.2 and 10.7 and this Section 11.2.
11.3 WAIVER OF AGREEMENT
Any term or condition hereof may be waived at any time prior to the
Closing Date by the party hereto which is entitled to the benefits thereof by
action taken by its Board of Directors or its duly authorized officer or
employee, whether before or after the action of such party; PROVIDED, HOWEVER,
that such action shall be evidenced by a written instrument duly executed on
behalf of such party by its duly authorized officer or employee. The failure of
either party to enforce at any time any provision of this Agreement shall not be
construed to be a waiver of such provision nor shall it in any way affect the
validity of this Agreement or the right of such party thereafter to enforce each
and every such provision. No waiver of any breach of this Agreement shall be
held to constitute a waiver of any other or subsequent breach.
11.4 AMENDMENT OF AGREEMENT
This Agreement may be amended with respect to any provision contained
herein at any time prior to the Closing Date by action of the parties hereto
taken by their Boards of Directors or by their duly authorized officers or
employees, whether before or after such party's action; PROVIDED, HOWEVER, that
such amendment shall be evidenced by a written instrument duly executed on
behalf of each party by its duly authorized officer or employee.
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11.5 DISPUTES; WAIVER OF JURY TRIAL
(a) Prior to initiating any litigation with respect to this Agreement, the
parties shall first in good faith consult among appropriate officers of Buyer
and Seller, which shall begin promptly after one party has delivered
