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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON,
Washington, D.C. 20549

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FORM 10-K

 /X/    

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

            FOR THE FISCAL YEAR ENDED SEPTEMBER

For the fiscal year ended September 30, 2002

                                 2003

OR
 / /    

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
001-13836
                            (Commission
(Commission File Number)

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TYCO INTERNATIONAL LTD.
             (Exact
(Exact name of registrant as specified in its charter)

                    BERMUDA                                        04-2297459
        (Jurisdiction
Bermuda
98-0390500
(Jurisdiction of Incorporation)                 (IRS
(IRS Employer Identification No.)

          THE ZURICH CENTRE, SECOND FLOOR, 90 PITTS BAY ROAD, PEMBROKE HM 08, BERMUDA
                      (Address
Second Floor, 90 Pitts Bay Road, Pembroke HM 08, Bermuda
(Address of registrant's principal executive office)
441-292-8674
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of registrant's principal executive office)

                                          441-292-8674
                                (Registrant's telephone number)


                            ------------------------

          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:


              TITLE OF EACH CLASS                   NAME OF EACH EXCHANGE ON WHICH REGISTERED
        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
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/ý No / /.o.
        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. / /.ý.
        Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes /X/ý No / /.o.
        The aggregate market value of voting common shares held by nonaffiliates of registrant was $30,277,630,426approximately $25,608,291,520 as of December 27, 2002.March 31, 2003.
        The number of common shares outstanding as of December 20, 20022, 2003 was 1,995,888,624.

                      1,999,091,242.
DOCUMENTS INCORPORATED BY REFERENCE
        Portions of the registrant's proxy statement filed within 120 days of the close of the registrant's fiscal year in connection with the registrant's 20032004 annual shareholders'general meeting of shareholders are incorporated by reference into Part III of this Form 10-K.
        See pages 3133 to 3436 for the exhibit index.

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TABLE OF CONTENTS

                                                                          PAGE
                                                                        --------

PART


Page
Part I

Item 1.   Business....................................................      


Business


1

Item 2.   Properties..................................................     18



Properties


14

Item 3.


Legal Proceedings...........................................     18

Proceedings


14

Item 4.


Submission of Matters to a Vote of Security Holders.........     22

PARTHolders


24

Part II





Item 5.


Market For the Registrant's Common Shares and Related Security Holder Matters.....................................     24

Matters


26

Item 6    6.


Selected Financial Data.....................................     24

Data


27

Item 7.


Management's Discussion and Analysis of Financial Condition and Results of Operations...................................     26

Operations


28

Item 7A.


Quantitative and Qualitative Disclosures About Market Risk........................................................     26

Risk


28

Item 8.


Financial Statements and Supplementary Data.................     27

Data


29

Item 9.


Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................................     27

PARTDisclosure


29

Item 9A.


Controls and Procedures


29

Part III





Item 10.


Directors and Executive Officers of the Registrant..........     28

Registrant


32

Item 11.


Executive Compensation......................................     28

Compensation


32

Item 12.


Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters..................     28

Matters


32

Item 13.


Certain Relationships and Related Transactions..............     29

Transactions


32

Item 14.  Controls


Principal Accountant Fees and Procedures.....................................     29

Services


32

Part IV





Item 15.


Exhibits, Financial Statement Schedules and Reports on Form 8-K.........................................................     31

Signatures............................................................     35

8-K


33

Signatures


37

Index to Consolidated Financial Statements............................     Statements


38


                                       i

PART I

ITEM
Item 1. BUSINESS

INTRODUCTIONBusiness
Introduction
        Tyco International Ltd. ("we" or "Tyco") is a diversified manufacturing and service company that, through its subsidiaries:

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designs, manufactures, installs, monitors and services electronic security and fire protection systems;

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designs, manufactures and distributes electrical and electronic components, and designs, manufactures, installs, operates and maintains undersea fiber optic cable communications systems;

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designs, manufactures and distributes medical devices and supplies, imaging agents, pharmaceuticals and other specialtyadult incontinence and infant care products; and

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designs, manufactures, distributes and services engineered products including industrial valves and controls and steel tubular goods and provides environmental and other industrial consulting services.services; and

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designs, manufactures and distributes plastic products, adhesives and films.
        See Notes 3 and 4 to the Consolidated Financial Statements for certain segment and geographic financial data relating to our business.

    CIT Group, Inc., ("CIT"), which comprised the operations of the Tyco Capital
(financial services) business segment, was sold in an initial public offering in
July 2002. See Note 11 to the Consolidated Financial Statements for information
regarding the discontinued operations of this former business segment.
        Tyco's operating strategy is to be a low-cost, high-quality producer and provider in each of the markets we serve. We promote our leadership position by investing in existing businesses and developing new markets. Although acquisitions of complementary businesses have been an important part of Tyco's growth in recent years,the past, our current business strategy and near-term actions
focusnow focuses on enhancing internal growth withinand operational efficiency for existing Tyco businesses. We plan to achieve this goal through new product innovation, increased market share, increasing the service and repair components of our existing businesses and continued geographic expansion. WhileWe are also implementing initiatives across our business segments to achieve best-in-class operating practices utilizing six sigma measurements. Additionally, we may continueannounced that we are evaluating the proposed disposition of some non-core businesses to make selected
complementary acquisitions, we anticipate thatbe effected during the amount of acquisition
activity will be significantly reduced for the foreseeable future.next year. Leveraging the strengths of our existing operations, we seek to enhance value for our shareholders through operational excellence and maximization of cash flows. We are also strivingcontinuing to establishstrive towards the highest standards of corporate governance so that we can earn the respect and confidence of our shareholders, employees, suppliers and customers and the financial community.
I. FIRE AND SECURITY SERVICESFire and Security
        Tyco is the world's leading provider of both electronic security services and fire protection services. With fiscal 20022003 revenues of $10,637.6$11,292.8 million, our Fire and Security Services businesses currently comprise approximately31% of our total revenues. Fiscal 2002 and 2001 revenues totaled $10,639.0 million or 30% of our total revenues from continuing operations.and $7,473.0 million or 22% of our total revenues, respectively. The group's products and services include:

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designing, manufacturing, installing, monitoring and servicing electronic security systems;

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designing, manufacturing, installing and servicing a broad line of fire detection, suppression systems, and manufacturing and servicing of fire extinguishers and related products; and

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providing fully integrated solutions that integrate both electronic security, fire protection and fire detection systems.

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ELECTRONIC SECURITY SERVICES
Electronic Security Services
        We are the world's leading provider of electronic security products and services and event monitoring, which includes the monitoring of burglar alarms, fire alarms, heating systems, medical alert systems, such as
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our Personal Emergency Response Systems, and other activities where around-the-clock monitoring and response isare required. We offer regular inspection and maintenance services to ensure that systems will function properly and can be upgraded as technology or risk profiles change. We are also a leading supplier of electronic security solutions to the retail, commercial and industrial market places,
through electronic article surveillance,marketplaces, offering anti-theft, video surveillance, access control, electronic asset protection and security management systems, products and services. These and other security services are provided principally under thethrough our ADT trade name.operating companies.
        Electronically monitored security systems are tailored to our customers' specific needs and involve the installation and use on a customer's premises of devices designed for intrusion detection and access control, as well as reaction to various occurrences or conditions, such as movement, fire, smoke, flooding, environmental conditions, industrial processes and other hazards. These detection devices are connected to microprocessor-based control panels, which communicate to a monitoring center located(located remotely from the customer's premises,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.
        Whether systems are monitored by the customer at its premises or connected to one of our monitoring centers, we usually provide support and maintenance through service contracts. 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 normally
purchased by our customers.
        We market our electronic security services to commercial and residential customers through both a direct sales force and an authorized dealer network.
Duringnetwork, the ADT dealer program. Throughout fiscal 2002,2003, we refocussedre-focused our authorizedADT dealer program, encouraging
growth in some geographic areas while curtailing activities in others, as part
of an enhanced focus onorder to increase the return on investment.investment of accounts purchased through the program. A separate national accounts sales force services mostlarge commercial customers. We also utilize advertising, telemarketing and direct mail to market our services.
        We provide residential electronic security services primarily in North America and Europe, with a growing presence in the Asia-Pacific region. Our commercial customers include financial institutions, industrial and commercial businesses, federal, state and local governments, 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. It has been our experience that the majority of commercial and residential monitoring contracts are generally renewed after their initial terms. ContractIn general, relocations account for the largest number of residential discontinuances occur principally as a resultwhile business closures comprise the largest single factor impacting commercial contract attrition.
        Through our acquisition of customer relocation or closure.

    We out-source mostSensormatic in November 2001, we became the leader in anti-theft systems. The majority of the world's leading retailers use our systems to protect against shoplifting and employee theft. We manufacture these electronic componentsarticle surveillance systems and generally sell them through our direct sales force in North and South America, Europe, Australia and Asia. A growing trend in the loss protection industry is for security labels to be applied to goods at the point of manufacture. In most cases, we install.sell these labels directly to the manufacturers or their packaging agents. We also develop and distribute access control and video surveillance systems, which are sold through direct and distributor channels.
        We manufacture certain alarm, detection and activation devices and central monitoring station equipment both for installation by us and for sale to other installers.installers, although we out-source some of the electronic components we install.
        The security business in North America is highly competitive, with a number of major firms and some 12,000 smaller regional and local companies. Similarly, Tyco competes with several national
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companies and several thousand regional and local companies in Europe, the Middle East, the Asia-Pacific region, Latin America and South Africa. Competition is based primarily on price in 2
relation to quality of service. We believe that the quality of our electronic security servicesservice is higher than that of many of our competitors and, therefore, our prices may be higher than those charged by our competitors.

FIRE PROTECTION CONTRACTING AND SERVICES
Fire Protection Contracting and Services
        We design, fabricate, install and service automatic fire sprinkler systems, fire alarm and detection systems and special hazard suppression systems in buildings, and industrial plants and off-shore installations, as well as respiratory systems and other life-saving devices. Tyco's fire protection businesses utilize a worldwide network of sales offices, operating globally under various trade names including SimplexGrinnell, Wormald, Mather & Platt, Total Walther, O'Donnell Griffin, Dong Bang, Zettler, Ansul, Scott and Tyco.
        We install fire protection systems in both new and existing structures.buildings. Our fire protection systems are purchased by owners, architects, construction engineers and mechanical or general contractors. In recent years, the retrofitting of existing buildings has grown as a result of legislation mandating the installation of fire protection systems, especially in hotels, healthcare facilities, educational establishments and other buildings accessible to the general public. We continue to focus on system maintenance and inspection, which have become more significant parts of our 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 special hazard fire protection systems which incorporate specialized extinguishing agents such as foams, dry chemicals and gases.gases, in addition to spill control products designed to absorb, neutralize and solidify spills of hazardous materials. These are often especially suited to fire protection in certain manufacturing, power generation, petrochemical, offshore oil exploration, transportation, data processing, telecommunications, commercial food preparation, mining and marine applications.
        We manufacture and distribute Scott and Sabre breathing systems for use by firefighters and other first responders, military and civilian aircrews and passengers, and for industrial applications. Military forces from 25 countries use our breathing apparatus and 600,000 U.S. firefighters rely on our Scott Air-PakR brand of self-contained breathing apparatus. Scott and Sabre products are sold globally through a network of distributors. Scott is considered the world leader in respiratory protection innovation for first responders.
        In Australia, New Zealand and Asia, Tyco engages in the installation of electrical equipment in new and existing structures and provides specialized electrical contracting services, including applications for railroad, bridge and bridge
construction, primarily through its O'Donnell Griffin division.tunnel construction.
        The majority of the mechanical components (and, in North America, a high proportion of the pipe) used in our fire protection systems are manufactured by Tyco's Engineered Products and Services division.segment. We use computer-aided-design technology that reduces the time required to design systems for specific applications and coordinates the fabrication and delivery of system components. 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.

    Our Ansul subsidiary manufactures and sells various lines of dry chemical,
liquid and gaseous portable fire extinguishers and related products 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 and confined industrial and commercial spaces housing electronic and
other delicate equipment. Ansul also manufactures spill control products
designed to absorb, neutralize and solidify spills of hazardous materials.
        Competition in the fire protection contracting business varies by region. In North America, Tyco competes with hundreds of smaller contractors on a regional or local basis for the installation of fire protection, alarm and detection systems. 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 systems contracts primarily on the basis of price, service and quality.
II.    ELECTRONICSElectronics
        Tyco is the world's leading supplier of passive electronic components and a leading provider of undersea fiber optic networks and services. With fiscal 20022003 revenues of $10,528.0$10,355.0 million, our 3
Electronics businesses currently comprise approximately28% of our total revenues. Fiscal 2002 and 2001 revenues
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totaled $10,464.1 million or 30% of our total revenues from
continuing operations.and $13,545.6 million or 40% of our total revenues, respectively. The group's products and services include:

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designing, engineering and manufacturing electronic connector systems, fiber optic components, wireless devices, heat shrink products, circuit protection devices, magnetic devices, wire and cable, relays, sensors, touch screens, smart card components, identification and labeling products, energy systems, power products,systems and components, printed circuit boards and assemblies, electronic modules, application tooling, switches and battery assemblies; and

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designing, manufacturing, installing, operating and maintaining undersea fiber optic cable communications systems through Tyco Submarine Telecommunications and selling bandwidth on our own cable network.

TYCO ELECTRONICS
Tyco Electronics
        Tyco Electronics designs, manufacturesis comprised of the Electronic Components, Wireless, Electrical Contracting Services, Power Systems and marketsPrinted Circuit Group reporting units. These businesses design, manufacture and market a broad range of electronic, electrical and electro-optic passive and active devices and a number of interconnection systems and connector-intensive assemblies, as well as wireless products including radar sensors, global positioning satellite systems components, silicon and gallium arsenide semiconductors and microwave sub-systems. Tyco Electronics' products have potential uses wherever an electronic, electrical, computer or telecommunications system is involved. Tyco Electronics manufactures and sells more than 500,000 parts in over 750 global product lines, including power systems, terminals, fiber optic components, printed circuit board and cable connectors and assemblies, cable and cabling systems, and related application tools and application tooling equipment. Products are sold under the AMP, Agastat, Axicom, Augat, Buchanon, Critchley, Dulmison, Elo-Touch, M/A-COM, Potter & Brumfield, Raychem, Schrack and Tyco Electronics tradenames,trade names, among others.
        Tyco Electronics markets via direct sales and distributors to customers including original equipment manufacturers ("OEMs") and their subcontractors, utilities, government agencies, value-added resellers and those who install, maintain and repair equipment. For the fiscal year ended September 30, 2002,2003, direct sales represent 86%87% of revenue while the remaining revenue is via distributors. These customers are found in the automotive, communications equipment manufacturers, telecommunications service providers, computer, aerospace, military, household appliance, industrial machinery and equipment, consumer electronics, commercial energy and networking industries. In total, Tyco Electronics serves over 250,000 customers located in over 55 countries, and maintains a strong local presence in the geographic areas in which it operates, including the Americas, Europe and the Asia-Pacific region.
        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. Competition is on the basis of breadth of product offering, product innovation, price, quality and service.

TYCO TELECOMMUNICATIONS

    
Tyco Submarine Telecommunications
        Tyco Submarine Telecommunications (formerly TyCom) is a leading provider of undersea fiber optic networks and services. Tyco Submarine Telecommunications' products and services include: designing, manufacturing and installing undersea cable communications systems; servicing and maintaining major undersea cable networks; and designing, manufacturing and installing a global undersea fiber optic network, known as the Tyco Global Network-TM-Network ("TGN"). Tyco Submarine Telecommunications operates, maintains and sells bandwidth capacity on the TGN. In the near term, due to market conditions in the telecommunications industry, the focus of Tyco Submarine Telecommunications is on maintenance services on existing systems, small network construction projects and selling bandwidth capacity on the TGN. As part of its divestiture program, Tyco intends to sell the TGN.
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III.  HEALTHCARE AND SPECIALTY PRODUCTSHealthcare
        Tyco is a world leader in the medical products industry and has a strong
leadership position in the plastics industry. With fiscal 20022003 revenues of $9,777.4$8,571.9 million, our Healthcare businesses currently comprise 23% of our total revenues. Fiscal 2002 and Specialty Products businesses comprise
approximately 27%2001 revenues totaled $7,899.1 million or 22% of our total revenues from continuing operations.and $7,065.3 million or 21% of our total revenues, respectively. The group's products include:

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a wide variety of medical devices and supplies, including laparoscopic instruments; sutures and surgical staplers; electro-surgical instruments; pulse oximeters; ventilators; imaging reagents; needles and syringes; wound care; incontinent care; and products for vascular therapytherapy;

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imaging reagents and wound care;delivery systems; bulk and unit dose pharmaceuticals; and

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retail brand adult incontinence care, infant care and feminine hygiene products; and

    - polyethylene film and film products such as flexible plastic packaging;
      plastic bags and sheeting; coated and laminated packaging materials; tapes
      and adhesives; plastic garment hangers; disposable dinnerware; and
      pipeline coatings for the oil, gas and water distribution industries.

TYCO HEALTHCARE GROUPproducts.
        The Tyco Healthcare Group consists of seventhree primary businessreporting units: Medical Devices & Supplies, Pharmaceuticals and Retail.
Medical Devices & Supplies
        Medical Devices & Supplies consists of five primary divisions: Medical, Surgical, Respiratory, Imaging, Pharmaceutical, Retail and International.
Medical
        The MedicalKendall Division consists primarily of Kendall, Sherwoodmarkets and Ludlow
Technical Products. Tyco Healthcare's Medical Division manufactures and markets a broad range of wound care products; needles and syringes; sharps disposables; vascular therapy products; electrodes; operating room kits and trays; urological care products; enteral feeding products; incontinence care products; and nursing care products. These products are marketed via a combination of direct sales representatives and third-party distributors to hospitals, surgi-centers, alternate care facilities and homes.homes worldwide.
        The Medical Division consists of many market-leading brands such as KERLIX and CURITY wound care dressings, WINGS adult incontinence products, SCD compression devices, T.E.D. anti-embolism stockings, MONOJECT MAGELLAN safety needles and syringes, SHARPSAFETY needle stick prevention products and KANGAROO enteral feedings systems. Ludlow Technical Products' significant brands aresystems, DEVON O.R. surgical kits, and MEDI-TRACE diagnostic and monitoring electrodes.
Surgical
        The Surgical Division comprises the following companies: United States
Surgical, Davis & Geck ("USS/DG"), Valleylab and Radionics. This group of
companies develops, manufactures and markets a broad spectrum of widely recognized surgical products that are used around the world in operating rooms, worldwide. Some of
these products are also used in emergency rooms, surgi-centers and physician offices.
        U.S. Surgical is a market leader in innovative wound closure products and advanced surgical devices. Its Auto Suture divisionbusiness offers a complete line of surgical devices and laparoscopic instruments for general and specialty procedures. Its USS/DG division offers a fully integrated suture line that
combinesThe recently formed Syneture business is the evolution of U.S. Surgical's reputation as an innovator with Surgical/Davis & Geck's century
of specializedGeck from a product-driven suture experience. Leading brand namesorganization to one focused on clinical solutions for U.S. Surgical include
ENDO GIAwound closure with advanced suture and VITAL VUE endoscopic instruments, DEXON sutures and PREMIUM skin
staplers.biosurgery therapies. Valleylab is a leading manufacturer and marketer of a wide array of electro-surgical, and ultrasonic devices, as is Radionics, which produces devices
for neurosurgery, neurological pain treatment and radiation therapy.ablation devices. Among Valleylab and Radionics'Valleylab's leading brand names are the FORCE FX electro-surgical generator; the LIGASURE vessel occlusion system; the CUSA EXCEL ultrasonic
surgical system;system and the COOL-TIP RF (radio frequency) system.
Respiratory
        Tyco Healthcare's Respiratory Group consists of the Nellcor, Mallinckrodt
Critical Care and Puritan Bennett businesses. This division develops and markets an extensive line of products and services that: help facilitate and monitor anesthesia; diagnose and treat respiratory disease; and provide life support for critically ill patients. These products are sold around the world and are used in the hospital and the home.

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        Nellcor continues to drive advancements in pulse oximetry technology with the recent introduction of the OXIMAX pulse oximetry system. For critically ill patients or for those undergoing surgery, the MALLINCKRODT endotracheal, theand SHILEY tracheostomytracheotomy tubes and the DAR breathing systems are industry leaders. Puritan
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Bennett is known around the world for its critical care ventilators, and recently releasedthe HELIOS liquid oxygen system for patients in need of oxygen therapy at home.
Imaging
        Mallinckrodt Imaging is devoted to improving the diagnostic sciences of X-ray, MRI and Nuclear medicine. By developing, manufacturing, and marketing contrast agents, radiopharmaceuticals and delivery systems, Mallinckrodt Imaging helps enhance the utility and quality of images obtained via these procedures. For nearly a century, Mallinckrodt Imaging has partneredpartners with radiologists, cardiologists urologists and nuclear medicine physicians to improve the quality of diagnosis in multiple disease states through well known branded productsdiagnostic pharmaceuticals, including CONRAY and OPTIRAY X-ray contrast media, agents, OPTIMARK MRI contrast media, agents and thallium and TECHNESCAN MAG3 radiopharmaceutical agents.radiopharmaceutical. The Mallinckrodt family of imaging products is sold into hospitals, radiopharmacies and alternate site imaging centers throughout the world.
International
        Tyco Healthcare International is responsible for the marketing, distribution and export of all Tyco Healthcare Group products (excluding Pharmaceuticals and Retail products) outside of the United States. Tyco Healthcare International markets directly to hospitals and medical professionals, as well as through independent distributors, with a worldwide presence. Although the mix of product lines offered varies from country to country, its operations are organized primarily into four geographic regions: Europe, Japan, the Asia-Pacific region and Latin America.
Pharmaceuticals
        Tyco Healthcare's Mallinckrodt Pharmaceutical Division comprises three businesses--Bulkbusinesses—Bulk Pharmaceuticals (active pharmaceutical ingredients), Dosage Pharmaceuticals and Specialty Chemicals. These businesses are connected by
common chemical manufacturing technology and shared facilities. The Bulk Pharmaceuticals business is the largest producer of narcotics in the United States and of acetaminophen worldwide. Ninety-five percent of these products are used within the pharmaceutical industry to manufacture dosage form drugs. The Dosage Pharmaceuticals segmentbusiness has three distinct segments:divisions: generic narcotic pharmaceuticals, branded central nervous systems products and contract pharmaceutical manufacturing for third parties. These products are sold to major wholesalers and drug store chains.chains primarily in the United States. The Specialty Chemicals business includes a wide array of specialty chemicals targeted at: research and development and analytical laboratories; process materials used to manufacture biopharmaceuticals; and specialty chemicals used to manufacture semiconductor chips, many of which are sold under the J.T. Baker name.name in the United States.
Retail
        The Retail Division of Tyco Healthcare consists of the Confab and Paragon
Trade Brands businesses. This division develops, manufactures and markets a wide variety of retail brand products for the United States and CanadianNorth American retail markets. The Retail Division supplies a broad majority of retail mass merchandisers, food stores and drug stores in these markets. The division is recognized within continental North America as the industry leader for retail brand adult incontinent care, infant care and feminine hygiene products. Through our "first-to-market" approach, Tyco Healthcare's Retail Division helps retailers such as Wal-Mart, Target, Kroger, Albertson's, CVS, Walgreens, Loblaw and Toys R Us manage their categories and build their own store brand presence with the high-quality products consumers demand.

    Tyco Healthcare International is responsible for the marketing, distribution
and export of all Tyco Healthcare Group products (excluding pharmaceuticals)
outside of the United States. Tyco Healthcare International markets directly to
hospitals and medical professionals, as well as through independent
distributors, with a worldwide presence. Although the mix of product lines
offered varies from country to country, its operations are organized primarily
into four geographic regions: Europe, Japan, the Asia-Pacific region and Latin
America.
        Tyco Healthcare's competitors include Johnson & Johnson, Becton Dickinson and C.R. Bard, among others, and competition is based on breadth of product offerings, quality of product, service and price.

TYCO PLASTICS AND ADHESIVES
IV.    Engineered Products and Services
        Tyco is the world's leading manufacturer of industrial valves and controls. With fiscal 2003 revenues of $4,684.4 million, our Engineered Products and Services businesses currently comprise 13%
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of our total revenues. Fiscal 2002 and 2001 revenues totaled $4,709.3 million or 13% of our total revenues and $4,170.8 million or 12% of our total revenues, respectively. The group's products and services include:
•
manufacturing and servicing industrial, commercial, water and wastewater valves and related devices, as well as providing other engineered products solutions;

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manufacturing steel pipe and tubular goods, security fence products and electrical raceway products, including steel conduit, pre-wired armored cable, flexible conduit, steel support systems and fasteners, cable tray and cable ladder;

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providing a broad range of consulting, engineering and construction management and operating services for water, wastewater, environmental, transportation and infrastructure markets; and

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manufacturing and distributing of fire sprinkler devices, valves, steel and plastic pipe and fittings and pipe couplings used in commercial, residential and industrial fire protection systems.
        Tyco Engineered Products and Services is comprised of four primary business units: Tyco Flow Control, Tyco Electrical & Metal Products, Tyco Infrastructure Services and Tyco Fire & Building Products.
Tyco Flow Control
        Tyco Flow Control manufactures both standard and highly specialized gate, globe, check, butterfly, ball, safety relief and other valves in a wide variety of configurations, body types, materials, pressure ratings and sizes. We also manufacture related equipment, instrumentation and products such as valve actuators, gauges, positioners, valve control systems and vapor control products. These products are manufactured in Tyco's facilities located in North America, Europe, South America and the Asia-Pacific region. The group's products are used in various applications including power generation, chemical, petrochemical, oil and gas, water distribution, wastewater, pulp and paper, commercial irrigation, mining, industrial process, food and beverage, plumbing and HVAC. Tyco Flow Control also provides engineering, design, inspection, maintenance, repair and commissioning services.
        Tyco's valves and related products are sold under many 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, Bailey Birkett, Cash, Erhard, Schmieding and Frischhut.
        We sell valves and related products in most geographic areas directly through our internal sales force and in some geographic areas through a network of independent distributors and manufacturers' 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.
        In Australia, Tyco Flow Control also manufactures ductile iron and steel pipe, steel pipe 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.
        Tyco Thermal Controls manufactures and sells self-regulating and polymeric heaters, mineral insulated heaters and cable products, specialty heaters and related controllers and instrumentation. These products are sold under the RAYCHEM HTS, PYROTENAX and ISOPAD brand names on a worldwide basis. Our Tracer Industries unit provides turnkey design, installation and service of industrial heat tracing systems.
Tyco Electrical & Metal Products
        Tyco Electrical & Metal Products manufactures steel and related products primarily in North America and Europe. Our products include steel electrical conduit, pre-wired armored cable, flexible electrical conduit, metal framing systems, cable tray and cable ladder and related products utilized in
7

the construction, industrial and original equipment markets. In North America, our Allied Tube & Conduit ("Allied") division is the leading manufacturer of steel electrical conduit, and our AFC Cable Systems division 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.
        Allied manufactures and distributes welded steel tubular products in North America and in the United Kingdom. In the United Kingdom, welded and drawn steel tubing is manufactured under the trade names of Newman Monmore, Newman Phoenix, Tyco Tube Components and HUB LeBas. We manufacture and distribute specialty steel strip products in the United Kingdom under the JB&S Lees, Firth Cleveland Steel Strip and Ductile Stourbridge trade names. In Brazil, tube is manufactured and sold under the trade names of Frefer and Dinaco. These businesses serve a wide spectrum of customers and applications ranging from automotive, fire protection, security and safety containment, recreational equipment, commercial construction and traffic control systems. Products compete on the basis of price, availability and breadth of product line.
Tyco Infrastructure Services
        Tyco Infrastructure Services provides a broad range of environmental, consulting and engineering services through its Earth Tech business. Earth Tech's principal services consist of a full-spectrum of water, wastewater, environmental and hazardous waste management services. We also provide infrastructure and transportation 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, Ireland, Mexico, Brazil, Germany, Portugal, Sweden, China, Australia and Thailand. Earth Tech competes with a number of international, national, regional and local companies on the basis of price and the breadth and quality of services.
Tyco Fire & Building Products
        Tyco Fire & Building Products manufactures and sells a wide variety of products to fire protection contractors and fabricators of fire protection systems. These products include a complete line of fire sprinkler devices, specialty valves, plastic pipe and pipe fittings and ductile iron pipe couplings. We manufacture these products in the United States, the United Kingdom, Germany, China and Malaysia and sell them under the GEM, STAR, CENTRAL, GRINNELL and CENTRAL SPRAYSAFE brand names. In North America, a complete line of steel sprinkler pipe is manufactured by our metal products unit (Allied), thus enabling us to offer a complete line of fire protection systems and services. Tyco also produces a complete line of specialty fastening products for the building industry that are manufactured in the United Kingdom under the trade names of Lindapter and Ancon and metal framing and support products that are manufactured in the United Kingdom and Germany.
        Central Sprinkler maintains a network of distribution facilities in the United States that 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, building products 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.
8
V. Plastics and Adhesives
        Tyco Plastics &and Adhesives consists of Tyco Plastics, A&E Products, Tyco Adhesives and Ludlow Coated Products. 6
With fiscal 2003 revenues of $1,897.2 million, our Plastics and Adhesives businesses currently comprise 5% of our total revenues. Fiscal 2002 and 2001 revenues totaled $1,878.3 million or 5% of our total revenues and $1,747.4 million or 5% of our total revenues, respectively. The group's products include:
•
polyethylene film and film products such as flexible plastic packaging, plastic bags and sheeting, coated and laminated packaging materials, tapes and adhesives; and

•
plastic garment hangers, disposable dinnerware, and pipeline coatings for the oil, gas and water distribution industries.
Tyco Plastics
        Tyco Plastics manufactures polyethylene-based film, packaging products, bags and sheeting in a wide range of sizes, gauges, strengths, stretch capacities, clarities and colors. Tyco Plastics' products include: RUFFIES, a national brand consumer trash bag sold to mass merchants, grocery chains and other retail outlets, and FILM-GARD, a leading plastic sheeting product sold to consumers and professional contractors through Do-It-Yourself outlets, home improvement centers and hardware stores. FILM-GARD products are produced in various sizes for a variety of uses, including painting, renovation, construction, landscaping and agriculture. Additionally, in the United States, Tyco Plastics is the largest producer of stretch film, the largest producer of can liners for the away-from-home market, and a leading supplier of custom packaging products used for primary food packaging and the beverage industries. Tyco Plastics sells its products directly to retailers for resale, to distributors for resale or directly to end-users. Tyco Plastics competes with other nationally recognized brands as well as many smaller regional producers on the basis of price, delivery, breadth of product line and specialized product capabilities. Manufacturing facilities are located throughout the United States, Canada and the United Kingdom to ensure superior customer service and competitive transportation costs.
A&E Products
        A&E Products is the leading manufacturer of plastic garment hangers worldwide, operating from over 50 distribution points in 30 countries. A&E Products also operates hanger-recycling facilities in the United States and Europe. The reused hangers are purchased from various retailers and then sorted, processed and packaged for sale back to the apparel market. A&E Products' Catering division manufactures and markets disposable dinnerware products to the retail and foodservice industries. The Catering division markets their many product lines under brand names including SCROLLWARE, PRESTIGE, LEGACY and their
newest line, OPULENCE.
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. Tyco Adhesives also produces duct, foil, strapping, packaging and electrical tapes and spray adhesives for industrial and consumer markets worldwide, and manufactures cloth and medical tapes for Tyco Healthcare and others. Products are sold under the MANULI tapes, POLYKEN, NASHUA tape, RAYCHEM, BETHAM, NATIONAL and PATCO brand names.
Ludlow Coated Products
        Ludlow Coated Products produces a variety of specialty laminates and coated products principally derived from paper, film, foil and fabrics. Ludlow's products are key components of many end use products such as industrial packaging steel wrap and food packaging materials and also include housewraps, material handling slip sheets and flexible intermediate bulk containers. Ludlow markets its
9

specialty laminates and coated products through its own sales force and through independent manufacturers' representatives. Ludlow competes with many large manufacturers of laminates and coated products on the basis of price, service, marketing coverage and custom application engineering, and sells its products to manufacturers, producers and converters. It has various specialized competitors in different markets.

IV. ENGINEERED PRODUCTS AND SERVICES

    Tyco is the world's leading manufacturer of industrial valves and controls.
With fiscal 2002 revenues of $4,700.7 million, our Engineered Products and
Services businesses comprise approximately 13% of our total revenues from
continuing operations. The group's products and services include:

    - manufacturing and servicing valves and related devices, as well as other
      engineered products solutions;

    - manufacturing steel pipe and tubular goods and electrical raceway
      products, including steel conduit, pre-wired armored cable, flexible
      conduit, steel support systems and fasteners, cable tray and cable ladder;

    - providing a broad range of consulting, engineering and construction
      management and operating services for water, wastewater, environmental,
      transportation and infrastructure markets; and

    - manufacturing and distributing of fire sprinkler devices, valves, steel
      pipe and fittings and pipe couplings used in commercial, residential and
      industrial fire protection systems.

                                       7

    Tyco Engineered Products and Services comprises four primary business units:
Tyco Flow Control, Tyco Electrical & Metal Products, Tyco Infrastructure
Services and Tyco Fire & Building Products.

TYCO FLOW CONTROL

    Tyco Flow Control manufactures both standard and highly specialized gate,
globe, check, butterfly, ball, safety relief and other valves in a wide variety
of configurations, body types, materials, pressure ratings and sizes. We also
manufacture related equipment, instrumentation and products such as valve
actuators, gauges, positioners, valve control systems and vapor control
products. These products are manufactured in Tyco's facilities located in North
America, Europe, South America and the Asia-Pacific region. The group's products
are used in various applications including power generation, chemical,
petrochemical, oil and gas, water distribution, wastewater, pulp and paper,
commercial irrigation, mining, industrial process, food and beverage, plumbing
and HVAC. Tyco Flow Control also provides engineering, design, inspection,
maintenance, repair and commissioning services.

    Tyco's valves and related products are sold under many 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, Bailey
Birkett, Cash, Erhard, Schmieding and Frischhut.

    We sell valves and related products in most geographic areas directly
through our internal sales force and in some geographic areas through a network
of independent distributors and manufacturers' 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.

    In Australia, Tyco Flow Control also manufactures ductile iron and steel
pipe, steel pipe 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.

    Tyco Thermal Controls manufactures and sells self-regulating and polymeric
heaters, mineral insulated heaters and cable products, specialty heaters and
related controllers and instrumentation. These products are sold under the
Raychem HTS, Pyrotenax and Isopad brand names on a worldwide basis. Our Tracer
Industries unit provides turnkey design, installation and service of industrial
heat tracing systems.

TYCO ELECTRICAL & METAL PRODUCTS

    Tyco Electrical & Metal Products manufactures electrical raceway and related
products primarily in North America and Europe. Our products include steel
electrical conduit, pre-wired armored cable, flexible electrical conduit, metal
framing systems, cable tray and cable ladder and related products utilized in
the construction, industrial and original equipment markets. In North America,
Allied Tube & Conduit ("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.

    Allied manufactures and distributes welded steel tube products in North
America and in the United Kingdom. In the United Kingdom, welded and drawn steel
tubing is manufactured under the trade names of Newman Monmore, Newman Phoenix,
Tyco Tube Components and HUB LeBas. We manufacture and distribute specialty
steel strip products in the United Kingdom under the JB&S Lees, Firth Cleveland
Steel Strip and Ductile Stourbridge trade names. In Brazil, tube is manufactured
and sold under the trade names of Frefer and Dinaco. These businesses serve a
wide spectrum of customers

                                       8

and applications ranging from automotive, fire protection, security and safety
containment, recreational equipment, commercial construction and traffic control
systems. Products compete on the basis of price, availability and breadth of
product line.

TYCO FIRE & BUILDING PRODUCTS

    Tyco Fire & Building Products manufactures and sells a wide variety of
products to fire protection contractors and fabricators of fire protection
systems. These products include a complete line of fire sprinkler devices,
specialty valves, plastic pipe and pipe fittings and ductile iron pipe
couplings. We manufacture these products in the United States, the United
Kingdom, Germany, China and Malaysia and sell them under the GEM, Star, Central,
Grinnell and Central Spraysafe brand names. In North America, a complete line of
sprinkler pipe is manufactured by our metal products unit (Allied), thus
enabling us to offer a complete line of fire protection systems and services.
Tyco also produces a complete line of specialty fastening products for the
building industry that are manufactured in the United Kingdom under the trade
names of Lindapter and Ancon and metal framing and support products that are
manufactured in the United Kingdom and Germany.

    Central Sprinkler maintains a network of distribution facilities in the
United States that 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, building products 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.

TYCO INFRASTRUCTURE SERVICES

    Tyco Infrastructure Services provides a broad range of environmental,
consulting and engineering services through its Earth Tech business. Earth
Tech's principal services consist of a full-spectrum of water, wastewater,
environmental and hazardous waste management services. We also provide
infrastructure and transportation 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, Ireland, Mexico,
Brazil, Germany, Portugal, Sweden, China, Australia and Thailand. Earth Tech
competes with a number of international, national, regional and local companies
on the basis of price and the breadth and quality of services.

BACKLOG
Backlog
        At September 30, 2002,2003, we had a backlog of unfilled orders of $11,591.3$11,533.9 million, compared to a backlog of $11,174.2$11,015.5 million at September 30, 2001.2002. We expect that approximately 79%83% of our backlog 9
at September 30, 20022003 will be filled during fiscal 2003.2004. Backlog by reportable industry segment is as follows ($ in millions):

                                                             SEPTEMBER 30,
                                                         ---------------------
                                                           2002        2001
                                                         ---------   ---------

Fire and Security Services.............................  $ 6,811.2   $ 6,252.9
Engineered Products and Services.......................    2,263.9     2,023.0
Electronics............................................    2,076.5     2,719.9
Healthcare and Specialty Products......................      439.7       178.4
                                                         ---------   ---------
                                                         $11,591.3   $11,174.2
                                                         =========   =========
 
 
September 30,
 
 
2003
 
2002
Fire and Security
 
$
6,964.7
 
$
6,691.5
Electronics
 
 
2,071.0
 
 
2,076.5
Engineered Products and Services
 
 
2,061.4
 
 
1,873.4
Healthcare
 
 
327.4
 
 
239.7
Plastics and Adhesives
 
 
109.4
 
 
134.4
 
 
 
 
 
$
11,533.9
 
$
11,015.5
 
 
 
        Backlog for Fire and Security Services includes recurring "revenue in
force,"revenue-in-force," which represents one year's fees for security monitoring and maintenance services under contract. The amount of recurring revenue in forcerevenue-in-force at September 30, 2003 and 2002 and 2001 is $3,492.0$3,606.7 million and $3,099.6$3,483.9 million, respectively. Within the Fire and Security Services segment, backlog increased primarily due to an increase in recurring revenue in force as a result of growth
in certain geographies in ADT's dealer program, offset in part byfavorable foreign currency exchange rates.
        Within the curtailment, and in certain end-markets, the termination of the ADT dealer
program. Backlog also increased due to growth at our U.K. Fire Protection
business and the acquisition of Sensormatic, which resulted in an addition of
approximately $57 million to backlog.Electronics segment, backlog remained level. Backlog for Engineered Products and Services increased primarily due to acquisitions completed in fiscal 2002. Fiscal 2001 backlog for this segment has
been increased by $175.1 million as a result of certain long term contracts not
previously reported offset by an adjustment to reflect net revenues instead of
gross revenues at Tyco Infrastructure Services. Of the $643.4 million decrease
within the Electronics segment, backlog decreased approximately $500 million as
there were noseveral new contracts for undersea cable communication systems signed in
fiscal 2002 asand, to a result of the downturn in the telecommunications industry.
Backlog also decreased in the electronics components grouplesser extent, due to the
cancellation and/or delay of orders by customers primarily in end-markets
including the communications, computer and consumer electronics industries.favorable foreign currency exchange rates. Backlog in the Healthcare and Specialty Products segmentPlastics and Adhesives segments represents unfilled orders, which, in the nature of the business,businesses, are normally shipped shortly after purchase orders are received. We do not view backlog in the Healthcare and Specialty Products segmentPlastics and Adhesives segments to be a significant indicator of the level of future sales activity.

PROPERTIES
Properties
        Our operations are conducted in facilities throughout the world aggregating approximately 126.5120.2 million square feet of floor space, of which approximately 69.566.0 million square feet are owned and approximately 57.054.2 million square feet are leased. These facilities house manufacturing, distribution and warehousing operations, as well as sales and marketing, engineering and administrative offices.
        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 the Asia-Pacific region. Fire protection components are manufactured at locations in North America, the United Kingdom, Germany, Australia, New Zealand, South Korea and Japan. 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, Latin America and South Africa. The Fire and Security Services segment occupies approximately 27.524.4 million square feet, of which 5.77.1 million square feet are owned and 21.817.3 million square feet are leased.
        The Electronics segment has manufacturing facilities in North America, Central and South America, Europe, Asia and Australia. The group occupies approximately 34.631.5 million square feet, of which 22.520.0 million square feet are owned and 12.111.5 million square feet are leased.
10

        The Healthcare and Specialty Products segment has manufacturing facilities in North America, Europe and Asia. The group occupies approximately 35.323.9 million square feet, of which 22.513.8 million square feet are owned and 12.810.1 million square feet are leased.
        The Engineered Products and Services segment has manufacturing, warehouses and distribution centers throughout North America, Europe, the Asia-Pacific region and Central and South America. The group occupies approximately 28.828.7 million square feet, of which 18.817.3 million square feet are owned and 10.011.4 million square feet are leased.
        The Plastics and Adhesives segment has manufacturing facilities in North America, Europe & Asia. The group occupies approximately 11.3 million square feet, of which 7.8 million square feet are owned and 3.5 million square feet are leased.
        In the opinion of management, our properties and equipment 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 2022 to Consolidated Financial Statements for a description of our rental obligations.

RESEARCH AND DEVELOPMENT
Research and Development
        The amounts expended for Tyco-sponsored research and development during fiscal 2003, fiscal 2002 and fiscal 2001 and fiscal 2000 were $670.6 million, $633.4 million $572.0 million and $527.5$572.0 million, respectively. Customer-funded research and development expenditures were $22.8 million, $20.4 million and $40.4 million, respectively.
        Tyco-sponsored research and $18.6 million, respectively.developement expense by segment is as follows: ($ in millions):
 
 
For the Year Ended September 30,

 

 

2003

 

2002

 

2001
Electronics
 
$
372.2
 
$
381.3
 
$
410.4
Healthcare
 
 
156.9
 
 
134.3
 
 
135.6
Fire and Security
 
 
102.8
 
 
87.0
 
 
13.8
Engineered Products and Services
 
 
32.5
 
 
23.6
 
 
4.7
Plastics and Adhesives
 
 
6.2
 
 
7.2
 
 
7.5
 
 
 
 
 
 
$
670.6
 
$
633.4
 
$
572.0
 
 
 
 
        Approximately 5,8425,500 full-time scientists, engineers and other technical personnel were engaged in our product research and development activities as of September 30, 2002.2003.
        Research activity at Tyco Electronics focuses specifically on new product development and a continuous expansion of technical capabilities. Tyco Healthcare focuses on technologies to complement existing product lines and applying expertise to refine and successfully commercialize such products and technologies and on acquiring rights to new products. Research activity in Fire and Security Services relates mostly to the design of fire and intrusion alarm products and emergency alarm systems, as well as products related to electronic article surveillance. The Engineered Products and Services segment focuses on improvements in hydraulic design, which controls the motion of fluids, resulting in new fire protection devices and flow control products. RAW AND OTHER PURCHASED MATERIALSTyco Plastics and Adhesives research activities consist primarily of new and improved product development.
Raw and Other Purchased Materials
        We are a large buyer of steel and plastic resin in the United States. We are also a large buyer of copper, brass, gold, electronic components, chemicals and additives, thin and flexible copper clad materials, zinc, paper, ink, foil, adhesives, cloth, wax, pulp and cotton. Certain of the components used in the Fire Protection business, principally certain valves and fittings, are purchased for installation in
11

fire protection systems or for distribution. OurThe majority of our electronic security systems are purchased from suppliers and are manufactured to our specification. Materials are purchased from a large number of independent sources around the world. There have been no shortages in materials which have had a material adverse effect on our businesses. We actively manageFrom time to time, we may decide to hedge our exposure to prices in base and precious metals by the usage of forward contracts with banks that have at least an A+/A1 credit rating by SStandard & PPoor's and Moody's. In addition, long-term supply contracts, using fixed or variable pricing, are entered into in order to manage our exposure to potential supply disruptions.

PATENTS AND TRADEMARKS
Patents and Trademarks
        We own a portfolio of patents, which principally relate to electrical and electronic products, healthcare and specialty products, fire protection devices, electronic security systems, flow control products, pipe, tubing and tubingcable manufacture, and cable manufacture.plastic and adhesive products. We also own a portfolio of trademarks and are a licensee underof various patents.patents and trademarks. All product names indicated in CAPS throughout the document are trademarks owned by, or licensed to, the Company or its subsidiaries. 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. In addition, management believes that the likelihood of losing key trademarks is remote. In several cases, one product may be sold under more than one tradename, which also helps minimize risk. In addition,
management believes thatpatent or trademark minimizing our risk of loss of business due to the likelihoodloss of losing key patents or trademarks is
remote.such intellectual property. The patents and licenses have estimated useful lives ranging from 5 to 40 years. As of September 30, 2002,2003, we had approximately $140.1$130.4 million of trademarks not subject to amortization.

                                       11

EMPLOYEES
Employees
        Tyco employed approximately 267,500258,600 people at September 30, 2002,2003, of which approximately 113,600102,900 are employed in the United States and 153,900155,700 are outside the United States. We have collective bargaining agreements with labor unions covering approximately 66,90048,200 employees at certain of our North American, European and Asia-Pacific businesses. We believe that our relations with the labor unions are generally satisfactory. In April 1994, following lengthy negotiations, contracts between our Grinnell subsidiary and a local union of the United Association of Plumbers and Pipefitters was not renewed. Employees in those locations, representing 64% of Grinnell Fire Protection's North American union employees at the time, went on strike. The strike ended in January 2001. In January 2002, Grinnell Fire Protection and Simplex Time Recorder Co. began doing business as SimplexGrinnell LP (an indirect wholly-owned subsidiary of Tyco). SimplexGrinnell has reinstated relevant terms of the expired collective bargaining agreement and has resumed negotiations with the local union over a new agreement. SimplexGrinnell is currently participatingmade the majority of payments necessary in a proceeding to
determine what payments are necessaryorder to compensate certain employees (approximately 2% of SimplexGrinnell's employee population) for losses they may have experienced as a result of changes in their wages and benefits that Grinnell implemented in 1994. The action1994 and the company continues in proceedings to resolve all outstanding issues relative to the employees impacted. Despite the Company's good faith attempts to continue negotiations, the Union called another strike in September 2003. This strike has not had and is not expected to
have, any material adverse effect on our business or results ofthe Company's operations.

PROPOSED LEGISLATION
Proposed Legislation and Governmental Scrutiny
        In the normal course of business, we provide services and sell products to various government agencies. Changes in legislation or governmental policies can have an impact on our worldwide operations. WeIn addition, we have been the focus of increased governmental scrutiny arising from actions taken by prior management. For example, we are currently assessing the potential impact of various legislative proposals that would deny U.S. federal government contracts to U.S. companies that move their corporate location abroad. Tyco becameabroad, and we recently responded to a Bermuda-based companyGovernmental Services Administration ("GSA") action due to concerns the GSA has expressed as a result of the alleged serious criminal
12

misconduct of our former CEO, CFO and General Counsel. The legislative proposals could cover the 1997 business
combinationacquisition of Tyco International Ltd., a Massachusetts corporation, andby ADT Limited (a public company that had been located in Bermuda since the 1980's with origins dating back to the United Kingdom since the early 1900's). Currently,
Tyco's revenues related, as a result of which ADT changed its name to U.S. federal governmentTyco International Ltd. and became the parent to the Tyco group. During the fourth quarter of fiscal 2003, the State of California adopted legislation that purports to limit the eligibility of certain Bermuda and other foreign-chartered companies to participate in certain state contracts. Although the California law provides that waivers may be issued permitting such companies to participate in state contracts account for less
than 3% of net revenues for the fiscal year ended September 30, 2002.under certain circumstances, it is unclear how that waiver authority will be exercised. In addition, various stateother states and other municipalities in the U.S. have proposed similar legislation. There also is also other similarsimilarly proposed tax legislation, which could substantially increase our corporate income taxes and, consequently, decrease future net income and increase our future cash outlay for taxes.
        Tyco's revenues related to U.S. federal government and California state contracts account for less than 2% and 0.1%, respectively, of total net revenues for the fiscal year ended September 30, 2003. We are unable to predict, with any level of certainty, the likelihood or final form in which any proposed legislation might become law, or the nature of regulations that may be promulgated under any such future legislative enactments.enactments or the impact such enactments and increased regulatory scrutiny may have on our governmental business or on non-governmental customers' willingness to do business with us. As a result of these uncertainties, we are unable to assess the impact on us of any proposed legislation or regulatory scrutiny in this area.area and can provide no assurances that they will not be materially adverse.
        See Item 3. "Legal Proceedings" for a description of investigations initiated by certain government agencies.

ENVIRONMENTAL MATTERS
Environmental Matters
        We are subject to numerous foreign, federal, state and local environmental protection and health and safety laws governing, among other things, the generation, storage, use and transportation of hazardous materials; emissions or discharges of substances into the ground, air or water;environment; and the health and safety of our employees. ComplianceThe cost of compliance with environmental laws, however, has not had, and based on current information and applicable laws, is not expected to have, a material adverse effect upon our capital expenditures, earnings or competitive position. See Item 3. "Legal Proceedings" for a description of a pending legal proceeding regarding alleged Clean Water Act violations involving one of our businesses within the Electronics segment.

                                       12
        Certain environmental laws assess liability on current or previous owners or operators of real property for the cost of removal or remediation of hazardous substances at their properties or at properties at which they have disposed of hazardous substances. In addition to clean-upcleanup actions brought by governmental authorities, private parties could bring personal injury or other claims due to the presence of or exposure to hazardous substances. We have received notification from the United States Environmental Protection Agency, and from 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 and may berequire that we reimburse the basisgovernment or otherwise pay for monetary sanctions.the cost of cleanup of those sites and for natural resource damages. We have projects underway at several current and former manufacturing facilities to investigate and remediate environmental contamination resulting from past operations.
13
         The ultimate cost of cleanup at disposal sites and manufacturing facilities is difficult to predict given uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations and alternative cleanup methods. Based upon our experience, current information and applicable laws, we believe that it is probable that we will incur remedial costs in the range of approximately $160$142 million to $460$451 million. As of September 30, 2002,2003, we believe that the best estimate within this range is approximately $248$270 million, of which $221$32 million is included in accrued expenses and other current liabilities and $27$238 million is included in other long-term liabilities on the Consolidated Balance Sheet. Included within the $248 million is
$193 million related to the acquisition of Mallinckrodt. In view of our financial position and reserves for environmental matters of $248$270 million, we believe that any potential payment of such estimated amounts or additional monetary sanctionsdamages will not have a material adverse effect on our consolidated financial position, annual results of operations or liquidity.

RISK FACTORS

    YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE INVESTING IN
OUR PUBLICLY-TRADED SECURITIES. THE RISKS DESCRIBED BELOW ARE NOT THE ONLY ONES
FACING US. OUR BUSINESS IS ALSO SUBJECT TO THE RISKS THAT AFFECT MANY OTHER
COMPANIES, SUCH AS COMPETITION, TECHNOLOGICAL OBSOLESCENCE, LABOR RELATIONS,
GENERAL ECONOMIC CONDITIONS, GEOPOLITICAL CHANGES AND INTERNATIONAL OPERATIONS.
ADDITIONAL RISKS NOT CURRENTLY KNOWN TO US OR THAT WE CURRENTLY BELIEVE ARE
IMMATERIAL ALSO MAY IMPAIR OUR BUSINESS OPERATIONS AND OUR LIQUIDITY.

RISKS RELATING TO RECENT DEVELOPMENTS AT TYCO

    CONTINUING NEGATIVE PUBLICITY MAY ADVERSELY AFFECT OUR BUSINESS.

    As a result of actions taken by our former senior management, Tyco has been
the subject of continuing negative publicity focusing on former senior
management's actions. Some of these press reports have suggested that the
accounting treatment of several of our prior acquisitions may have been
improper, that certain of our operating companies may have improperly conducted
business or recorded revenues and assets and that information may have been
withheld from the SEC in connection with an inquiry into our accounting
practices. As a result of this negative publicity, the prices of our publicly
traded securities have declined significantly and we have experienced reluctance
on the part of certain customers and suppliers to continue working with us on
customary terms. A number of suppliers have requested letters of credit to
support our purchase orders. We also believe that many of our loyal employees
are operating under stressful conditions. Continuing negative publicity could
have a material adverse effect on our results of operations and liquidity and
the market price of our publicly traded securities.

    PENDING LITIGATION COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR LIQUIDITY AND
    FINANCIAL CONDITION.

    As a result of actions taken by our former senior management, Tyco and
certain members of our former senior management are named defendants in a number
of purported class actions alleging

                                       13

violations of the disclosure provisions of the federal securities laws, a number
of derivative actions and several ERISA claims, and are subject to an SEC
inquiry and investigations by the District Attorney of New York County and the
U.S. Attorney for the District of New Hampshire. We recently signed a consent
agreement with the State of New Hampshire Bureau of Securities Regulation that
resolved the Bureau's investigation into the conduct of Tyco's previous
management, pursuant to which we agreed to pay a total of $5 million as an
administrative settlement to the State of New Hampshire and paid $100,000 to
cover the cost of the Bureau's investigation. We may be obliged to indemnify our
directors and our former directors and officers who also are named as defendants
in some or all of these matters. In addition, our insurance carrier may decline
coverage, or such coverage may be insufficient to cover our expenses and
liability, if any, in some or all of these matters. We believe that we have
meritorious defenses and we are vigorously defending these matters. However, we
are currently unable to estimate what our ultimate liability, if any, in these
matters may be, and it is possible that we will be required to pay judgments or
settlements and incur expenses in aggregate amounts that are material.

    OUR SENIOR MANAGEMENT TEAM IS NEW TO TYCO AND IS REQUIRED TO DEVOTE
    SIGNIFICANT ATTENTION TO MATTERS ARISING FROM ACTIONS OF PRIOR MANAGEMENT.

    In the past few months, we have replaced our senior management team with
entirely new members and our entire board of directors determined not to stand
for reelection at our next annual general meeting of shareholders. It will take
some time for our new management team and our new board of directors to learn
about our various businesses and to develop strong working relationships with
our cadre of operating managers at our various subsidiary companies. Our new
senior management team's ability to complete this process is hindered by their
need to spend significant time and effort dealing with internal and external
investigations, developing effective corporate governance procedures,
strengthening reporting lines and reviewing internal controls. During this
period and in order to complete this process, our new executives will be in part
dependent on advisors, including certain former directors. We cannot assure you
that this major restructuring of our board of directors and senior management
team will not adversely affect our results of operations, at least in the near
term, especially in light of the significant attention they are required to
devote to such other matters.

    CONTINUED SCRUTINY RESULTING FROM ONGOING GOVERNMENT INVESTIGATIONS MAY HAVE
    AN ADVERSE EFFECT ON OUR BUSINESS.

    We and others have received various subpoenas and requests from the SEC, the
District Attorney of New York County, the U.S. Attorney for the District of New
Hampshire and others seeking the production of voluminous documents in
connection with various investigations into our governance, management,
operations, accounting and related controls. We cannot predict when these
investigations will be completed, nor can we predict what the results of these
investigations may be. It is possible that we will be required to pay material
fines, consent to injunctions on future conduct, lose the ability to conduct
business with government instrumentalities or suffer other penalties, each of
which could have a material adverse effect on our business. We cannot assure you
that the effects and result of these various investigations will not be material
and adverse to our business, financial condition and liquidity.

    Tyco and its subsidiaries' income tax returns are routinely examined by
various regulatory tax authorities. In connection with such examinations, tax
authorities, including the Internal Revenue Service, have raised issues and
proposed tax deficiencies. We are reviewing the issues raised by the tax
authorities and are contesting such proposed deficiencies. Amounts related to
these tax deficiencies and other tax contingencies that management has assessed
as probable and estimable have been accrued through the income tax provision. We
believe but cannot assure you that ultimate resolution of these tax deficiencies
and contingencies will not have a material adverse effect on our results of
operations, financial position or cash flows.

                                       14

    ONGOING SEC STAFF REVIEW

    As of the filing date of this Form 10-K, we continue to be engaged in a
dialogue with the SEC's Division of Corporation Finance, as part of a routine
review of our periodic filings. While we believe that we have resolved the
material accounting issues prior to filings there can be no assurance that the
resolution of the remaining comments issued by the Staff will not necessitate
one or more amendments to this or prior periodic reports.

    INSTANCES OF BREAKDOWNS IN OUR INTERNAL CONTROLS AND PROCEDURES COULD HAVE
    AN ADVERSE EFFECT ON US.

    We learned of instances of breakdowns of certain internal controls during
fiscal 2002. This began in January 2002 when our Board of Directors learned of
an unauthorized payment to our former Lead Director, Frank E. Walsh, and
eventually led to the Board replacing our senior management team. These
instances included abuse of our employee relocation loan programs, unapproved
bonuses, attempted unauthorized credits to employee loans, undisclosed
compensation arrangements, unreported perquisites, self-dealing transactions and
other misuses of corporate trust, and have been widely reported in the press. We
believe the publicity resulting from such instances negatively impacted our
results of operations and cash flow in fiscal 2002. In addition, such publicity
contributed to a deterioration in our financial condition as we lost access to
the commercial paper market and credit ratings on our term debt declined during
fiscal 2002 from ratings as of the end of fiscal 2001. See Item 14. "Controls
and Procedures".

RISKS RELATING TO OUR BUSINESS

    CYCLICAL INDUSTRY AND ECONOMIC CONDITIONS HAVE AFFECTED AND MAY CONTINUE TO
    ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

    Our operating results in some of our markets can be affected adversely by
the general cyclical pattern of those industries. For example, in our Fire and
Security Services segment, demand for our products and services is significantly
affected by levels of new home and commercial construction and consumer and
business discretionary spending. Most importantly, our core electronics business
is heavily dependent on the end markets it serves and therefore has been
affected by the weak demand and declining capital investment in the
communications, computer, consumer electronics, industrial machine and aerospace
industries. This cyclical impact can be amplified because some of our business
segments purchase products from other business segments. For example, our
Fire and Security Services segment purchases sprinkler and other components for
fire protection systems from our Engineered Products and Services segment.
Therefore, a drop in demand for our fire prevention products, due to lower new
residential or office construction or other factors, can cause a drop in demand
for certain of our engineered products.

    OUR OPERATIONS EXPOSE US TO THE RISK OF MATERIAL ENVIRONMENTAL LIABILITIES.

    We are subject to numerous foreign, federal, state and local environmental
protection and health and safety laws governing, among other things: the
generation, storage, use and transportation of hazardous materials; emissions or
discharges into the ground, air or water; and the health and safety of our
employees. Certain environmental laws assess liability on current or previous
owners or operators of real property for the cost of removal or remediation of
hazardous substances at their properties or at properties at which they have
disposed of hazardous substances. In addition to clean-up actions brought by
governmental authorities, private parties could bring personal injury or other
claims due to the presence of or exposure to hazardous substances. In addition,
we remain responsible for certain environmental issues at manufacturing
locations sold by us. As described under "Business--Environmental Matters", we
are involved in a number of projects to investigate and remediate environmental
contamination at hazardous waste disposal sites and various current and former
manufacturing facilities.

                                       15

    The ultimate cost of cleanup at disposal sites and manufacturing facilities
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, current information and
applicable laws, we believe that it is probable that we will incur remedial
costs in the range of approximately $160 million to $460 million. As of
September 30, 2002, we believe that the best estimate within this range is
approximately $248 million, of which $221 million is included in accrued
expenses and other current liabilities and $27 million is included in other
long-term liabilities on the Consolidated Balance Sheet. We can not assure you
that the cost of cleanup will not exceed our estimates or that we will not be
subject to additional environmental claims for personal injury or cleanup in the
future based on our past, present or future business activities. The Office of
the U.S. Attorney for the District of Connecticut initiated in June 2001 an
investigation of one of the subsidiaries in our Electronics segment.
Subsequently, we were notified that the subsidiary was the target of a federal
Grand Jury investigation concerning alleged Clean Water Act violations. We
understand that the government investigation concerns manufacturing facilities
in Manchester and Stafford, Connecticut. We also understand that employees at
these plants are subjects of the investigation. A former supervisor at the
Manchester plant (who is no longer an employee) has pleaded guilty to a felony
violation of the Clean Water Act. We do not believe that the investigation will
have a material impact on the financial condition of our company and its
subsidiaries, taken as a whole. We are cooperating fully in the investigation.

    WE MAY BE REQUIRED TO RECOGNIZE ADDITIONAL IMPAIRMENT CHARGES IN CONNECTION
    WITH TYCO TELECOMMUNICATIONS.

    The undersea cable network industry continues to experience massive
overcapacity, extensive system underutilization and very competitive pricing. We
expect that the insolvency of various industry participants will create further
downward pressure on prices. We periodically review the carrying value of Tyco
Telecommunication's systems to determine if it exceeds their fair value. As a
result of these reviews we recorded a charge of $2.5 billion in fiscal 2002
related to the impairment of the Tyco Global Network. We cannot assure you that
continuing pricing pressure, or technological advances that may cause Tyco
Telecommunication's systems to become obsolete, will not require us to recognize
further impairments in the future. The amount of the TGN remaining on the
balance sheet as of September 30, 2002 was $581.6 million.

    OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH.

    We are highly leveraged. As of September 30, 2002, our total indebtedness
was $24,205.8 million, our shareholders' equity was $24,790.6 million and our
ratio of debt to equity was 1 to 1. We must repay $7,719.0 million of debt
maturing within the next fiscal year. Based on our current projected cash flows,
we believe that we have sufficient funds to repay debt maturing within the next
fiscal year. However, we intend to refinance a portion of our indebtedness. Our
ability to refinance this indebtedness will depend, in part, on events beyond
our control, including the results of ongoing litigation and governmental
investigations and actions taken by rating agencies. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

    Our substantial indebtedness could have important consequences. For example,
it could:

    - require us to dedicate a substantial portion of our cash flow from
      operations to payments on our indebtedness, thereby reducing the
      availability of our cash flow to fund working capital, capital
      expenditures, research and development efforts and other general corporate
      purposes;

    - increase our vulnerability to general adverse economic and industry
      conditions;

    - limit our flexibility in planning for, or reacting to, changes in our
      business and the industry in which we operate;

                                       16

    - restrict us from making strategic acquisitions, introducing new
      technologies or exploiting business opportunities; and

    - increase the difficulty or cost to us of refinancing such indebtedness.

    WE MAY NOT BE ABLE TO GROW OUR BUSINESS AT THE SAME RATE AS WE HAVE IN THE
    RECENT PAST DUE TO REDUCED ACQUISITION ACTIVITY AND CAPITAL CONSTRAINTS.

    Acquisitions of complementary products and businesses have been an important
part of Tyco's growth in recent years. Our current business strategy and
near-term actions will focus on conserving cash and enhancing internal growth
within our existing businesses. Our business requires substantial capital
expenditures for new technology and product innovation, expansion or replacement
of facilities and equipment, compliance with environmental laws and regulations
and other operations. In addition, we will require access to significant capital
in order to repay substantial indebtedness which matures in fiscal 2003 and in
future periods. This reduction in acquisition activity and concentration of
available capital resources to repay indebtedness, combined with our reduced
share price, will limit our ability to make acquisitions of other companies and
to purchase new contracts under ADT's dealer program. As a result, we anticipate
that we will not experience growth in the foreseeable future that is comparable
to the growth we experienced in the recent past.

    THE PRICE OF TYCO COMMON SHARES HAS DECLINED CONSIDERABLY IN THE LAST YEAR
    AND MAY FLUCTUATE WIDELY IN THE FUTURE.

    The market price of the Tyco common shares has declined considerably over
the past year. During the same period, there have been disclosures regarding
allegations of breach of fiduciary duties, fraud and other wrongful conduct on
the part of certain former officers and directors of Tyco. See "Price Range of
Common Shares and Dividends." In addition, our common shares, and the global
stock markets generally, have experienced significant price and volume
fluctuations over the past year. We cannot assure you that the price of our
common shares will not decline further or will not continue to experience
significant price and volume fluctuations. In addition, we believe that factors
such as quarterly fluctuations in financial results, earnings below analysts'
estimates and financial performance and other activities of other publicly
traded companies in our industries could cause the price of the common shares to
fluctuate substantially.

    PROPOSED LEGISLATION AND NEGATIVE PUBLICITY REGARDING BERMUDA COMPANIES
    COULD INCREASE OUR TAX BURDEN AND AFFECT OUR OPERATING RESULTS.

    Several members of the United States Congress have introduced legislation
relating to the tax treatment of U.S. companies that have undertaken certain
types of expatriation transactions, which could be deemed to cover our merger in
1997 with ADT, as a result of which Tyco became a Bermuda company. If enacted,
any such legislation could have the effect of substantially reducing or
eliminating the tax benefits of our structure and materially increasing our
future tax burden or otherwise adversely affecting our business. Other federal
and state legislative proposals, if enacted, could limit or even prohibit our
eligibility to be awarded U.S. or state government contracts. We are unable to
predict the likelihood or final form in which any proposed legislation might
become law or the nature of regulations that may be promulgated under any such
future legislative enactments. As a result of these uncertainties, we are unable
to assess the impact on us of any proposed legislation in this area.

    There has recently been negative publicity regarding, and criticism of, U.S.
companies' use of, or relocation to, offshore jurisdictions, including Bermuda.
As a Bermuda company this negative publicity could harm our reputation and
impair our ability to generate new business if companies or government agencies
decline to do business with us as a result of the negative public image of
Bermuda companies or the possibility of our clients receiving negative media
attention from doing business with a Bermuda company.

                                       17

AVAILABLE INFORMATION
Available Information
        Our Internet website is HTTP:http://INVESTORS.TYCOINT.COM/EDGAR.CFM.www.tyco.com. We make available free of charge on our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, reports filed pursuant to Section 16 and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the SEC. ITEMIn addition, we have posted the charters for our Audit Committee, Compensation Committee, and Nominating and Governance Committee, as well as our Board of Governance Principles, on our website at www.tyco.com under the headings "Our Commitment—Governance." These charters and principles are not incorporated by reference. We will also provide a copy of these documents to shareholders upon request.
Item 2. PROPERTIESProperties
        See Item 1. "Business--Properties""Business—Properties" for information relating to our owned and leased properties.

ITEM
Item 3. LEGAL PROCEEDINGS

SECURITIES CLASS ACTIONSLegal Proceedings
Securities Class Actions
        As previously reported in our Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002,periodic filings, Tyco and certain of our current and former directors and officers have been named as defendants in more than two dozen securities class actions.

    All but two
        Most of the securities class actions asserthave now been transferred to the United States District Court for the District of New Hampshire by the Judicial Panel on Multidistrict Litigation for coordinated or consolidated pretrial proceedings. In six of the actions, plaintiffs have moved to have their cases remanded to state courts.
        On January 28, 2003, the court-appointed lead plaintiffs in the New Hampshire securities actions filed a Consolidated Securities Class Action Complaint against certain of our former directors and officers, our auditors and Tyco. As to Tyco and certain of its former directors and officers, the complaint asserts causes of action under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and Section 14(a) of that Act and Rule 14a-9 promulgated thereunder, as well as Sections 11 and 12(a)(2) of the Securities Act of 1933. Claims against our former directors and officers are also asserted under Sections 20(a) and 20A of the Securities Exchange Act of 1934.1934 and Section 15 of the Securities Act of 1933. The plaintiffs in each of these actions seek class certification, declaratory
relief, compensatory damages, rescission, disgorgement and attorneys' fees and
expenses. These complaints allegecomplaint asserts that the Tyco defendants are responsible for Tycoviolated the securities laws by making materially false and misleading statements and omissions concerning, among other allegations,things, the following: Tyco's mergers and acquisitions and the earnings performanceaccounting therefor, as well as allegedly undisclosed acquisitions; misstatements of certain
companies that we acquired and our accounting therefor;Tyco's financial results; the impact of a new accounting standard (SAB 101, promulgated in 1999) on our earnings performance; undisclosedcompensation of certain of our former executives; their improper use of our funds for personal benefit and their improper self-dealing real estate transactions; their sales of Tyco stock by certain former executives of Tyco; our
undisclosedshares; payment of $20 million to one of our directors;former directors and a charity of which he is a trustee; and the fact thatcriminal investigation of our former Chief Executive OfficerOfficer. The plaintiffs seek class certification, compensatory damages, rescission, disgorgement and attorneys' fees and expenses.
        On March 31, 2003, Tyco made a motion to dismiss the consolidated class action complaint. The other defendants moved to dismiss shortly thereafter. Tyco's motion remains pending before the Court.
14
        A class action complaint was filed in the United States District Court for the Southern District of Florida,Ezra Charitable Trust v. Tyco International Ltd. & E. Breen on May 28, 2003, plaintiff purports to represent a class of purchasers of Tyco securities between December 30, 2002 and March 12, 2003. Plaintiff names as defendants Tyco and Edward D. Breen, Tyco's Chairman and Chief Executive Officer. The complaint asserts a cause of action under criminal investigation. AllSection 10(b) of thesethe Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder against both defendants. As against defendant Breen, the complaint asserts a cause of action under Section 20(a) of the Securities Exchange Act of 1934. The complaint alleges that defendants violated the securities laws by making materially false and misleading statements and omissions concerning, among other things, Tyco's financial and operating condition and financial prospects for Tyco and its ADT business segment and the results of its investigation of its former management. The Judicial Panel on Multidistrict Litigation has transferred this action to the United States District Court for the District of New Hampshire.
        Three plaintiffs filed a civil complaint in the Superior Court of the State of California (Los Angeles County) inHess v. Tyco International, Ltd., et al. on June 2, 2003. Plaintiffs name as defendants Tyco and twelve of our former officers and directors. The complaint asserts four causes of action under the California Corporate Securities Laws of 1968. The complaint alleges that plaintiffs purchased, in exchange for releases of claims against Tyco, Tyco common shares based on Tyco's materially false and misleading statements and omissions about the Company's finances, business operations and share value. The Company has not been served with the complaint.
        Four plaintiffs filed a civil complaint in the United States District Court for the Eastern District of Michigan inWilson v. Tyco International Ltd. et al on June 3, 2003. Plaintiffs name as defendants Tyco International Ltd., Tyco International (US), Tyco Acquisition Corp. VII and Earth Tech EMS Holdings Inc., d/b/a Earth Tech. The complaint asserts causes of action for breach of contract, negligent misrepresentation, fraudulent misrepresentation and exemplary damages. Plaintiffs allege that during the course of negotiations for the acquisition of two companies by Earth Tech, a division of Tyco, defendants made material misrepresentations to plaintiffs and that after the contracts of sale had been finalized, breached material terms of the contracts. Plaintiffs also allege that defendants engaged in accounting manipulations that caused significant harm to the two companies and that, as a result, plaintiffs were denied fair payment for their companies, which lost fair market value. The Judicial Panel on Multidistrict Litigation has conditionally transferred this action to the United States District Court for the District of New Hampshire. On December 9, 2003, the Judicial Panel on Multidistrict Litigation vacated the conditional transfer order.
        A class actions are now pendingaction complaint was filed on July 1, 2003 in the United States District Court for the Southern District of Florida,Chang v. Tyco International Ltd. & Breen. Plaintiff purports to represent a class of purchasers of Tyco Securities between December 30, 2002 and March 12, 2003. Plaintiffs name as defendants Tyco and Edward D. Breen, Tyco's Chairman and Chief Executive Officer. The complaint asserts a cause of action under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder against both defendants. As against defendant Breen, the complaint asserts a cause of action under Section 20(a) of the Securities Exchange Act of 1934. The complaint alleges that defendants violated the securities laws by making materially false and misleading statements and omissions concerning, among other things, Tyco's financial and operating condition and financial prospects for Tyco and its ADT business segment and the results of its investigation of its former management. The Judicial Panel on Multidistrict Litigation has transferred this action to the United States District Court for the District of New Hampshire.
        A class action was filed on July 28, 2003 in the United States District Court for the District of New Hampshire,Jersey,Stumpf v. Tyco International, Ltd. et. al. Plaintiff purports to represent a class of purchasers of TyCom, LTD ("TyCom") securities between July 26, 2000 and October 19, 2001. Plaintiff names as defendants, Tyco, TyCom, Goldman, Sachs & Co., Merrill Lynch Pierce, Fenner & Smith, Citigroup and certain former Tyco and TyCom executives. The complaint asserts causes of action under Sections 11 and 15 of the Securities Act of 1933 and under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder against Tyco, TyCom, and certain former executives. The complaint
15

alleges the TyCom registration statement and prospectus was inaccurate, misleading and failed to disclose facts necessary to make the registration statement and prospectus not misleading. Further, the complaint alleges the defendants violated securities laws by virtuemaking materially false and misleading statements and omissions concerning, among other things, executive compensation and Tyco's and TyCom's finances and business prospects. On November 10, 2003, the District Court of New Jersey granted one plaintiff's motion for appointment as lead plaintiff and consolidated the action withO'Loughlin v. Tyco International, Inc. et al., described below. The Judicial Panel on Multidistrict Litigation has transferred this action to the United States District Court for the District of New Hampshire.
        A law firm issued a press release on August 8, 2003 announcing that it was retained by former Tyco shareholders to file claims against Tyco and Merrill Lynch Pierce, Fenner & Smith. The press release states that the complaint will assert causes of action against Tyco and Merrill Lynch Pierce, Fenner & Smith under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder for issuing a series of materially false and misleading statements. The press release also states that a claim will be brought against Merrill Lynch Pierce, Fenner & Smith under federal and state securities laws for issuing fraudulent research reports about Tyco in the hopes of attracting investment banking business for Merrill Lynch Pierce, Fenner & Smith. The Company has not been served with the complaint.
        A class action was filed on September 26, 2003 in the United States District Court for the District of New Jersey,O'Loughlin v. Tyco International, Ltd. et. al., purporting to represent a class of purchasers of TyCom securities between July 26, 2000 to October 19, 2001. Plaintiffs name as defendants, Tyco, TyCom, Goldman, Sachs & Co., Merrill Lynch Pierce, Fenner & Smith, Citigroup and certain ordersformer Tyco and TyCom executives. The complaint asserts causes of action under Sections 11 and 15 of the Securities Act of 1933 and under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder against Tyco, TyCom, and certain former executives. The complaint alleges the TyCom registration statement and prospectus was inaccurate, misleading and failed to disclose facts necessary to make the registration statement and prospectus not misleading. Further, the complaint alleges the defendants violated securities laws by making materially false and misleading statements and omissions concerning, among other things, executive compensation and Tyco's and TyCom's finances and business prospects. Tyco has sought an order from the Judicial Panel on Multidistrict Litigation to transfer this action to the United States District Court for the District of New Hampshire.
        As previously reported in our periodic filings, on November 27, 2002, the State of New Jersey, on behalf of several state pension funds, filed a complaint in the United States District Court for the District of New Jersey against Tyco, our auditors, and certain of our former directors and officers. The Judicial Panel on Multidistrict Litigation transferred the action to the United States District Court for the District of New Hampshire. On March 24, 2003, the plaintiffs filed an amended complaint. By order dated March 26, 2003, the District Court of New Hampshire assigned the case to the Securities Actions pending before it.
        As against all defendants, the amended complaint asserts causes of action under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, for common law fraud, aiding and abetting common law fraud, conspiracy to commit fraud and negligent misrepresentation. Claims are asserted against the individual defendants under Section 20(a) of the Securities Exchange Act of 1934, Section 15 of the Securities Act of 1933, Section 24(d) of the New Jersey Uniform Securities Law, Sections 421-B:25(II) & (III) of the New Hampshire Uniform Securities Law, and for breaches of fiduciary duties. Claims are also asserted against certain of the individual defendants under Section 20A of the Securities Exchange Act of 1934; against Tyco under Section 12(a)(2) of the Securities Act of 1933, Section 24(c) of the New Jersey Uniform Securities Law, and the New Jersey RICO Statute on the basis of respondeat superior liability; against Tyco and certain of the individual defendants under Section 14(a) of the Securities Act of 1933 and Rule 14a-9 promulgated thereunder; and against Tyco, our auditors, and certain of the individual defendants for violation of, aiding and abetting violation of, and conspiracy to violate the New Jersey RICO Statute. Finally, claims are
16

asserted against the individual defendants and our auditors for aiding and abetting the individual defendants' breaches of fiduciary duties.
        The amended complaint asserts that transferred to that court for
coordinated or consolidated pretrial proceedingsthe defendants violated the securities laws and otherwise engaged in fraudulent acts by making materially false and misleading statements and omissions concerning, among other things, the following: unauthorized and improper compensation of certain of our former executives; their improper use of our funds for personal benefit and their improper self-dealing real estate transactions; their improper accounting practices; payment of $20 million to one of our former directors and a charity of which he is a trustee; criminal conduct of certain former executives; and the criminal investigation of our former Chief Executive Officer. Plaintiffs seek damages, including treble damages and punitive damages, along with attorneys' fees and costs.
        As previously reported in our periodic filings, a class actions
that had been filed in other courts.

    The remaining securities class actions are BRAZEN V. TYCO
INTERNATIONAL LTD. ET AL, whichaction was filed in June 2002 in the Circuit Court ofCookCounty, Illinois and PREMUROSO V. TYCO INTERNATIONAL LTD., ET AL., which
was filed in NovemberJune 2002, in the Circuit Court for Palm Beach County, Florida.
Plaintiffs in each of these actions assertBrazen v. Tyco International et al. Plaintiff asserts claims under the Securities Act of 1933, and seekseeks class certification, compensatory damages and attorneys' fees and expenses. The BRAZEN complaintPlaintiff purports to bring suit on behalf of persons who exchanged their Mallinckrodt Inc. stock for shares of Tyco in connection with the October 17, 2000 merger of the two companies. ThisThe complaint alleges that the registration statement filed in connection with the Mallinckrodt acquisition contained false and misleading statements concerning, among other things, financial disclosures concerning certain of our mergers and acquisitions and accounting therefor.therefore.
        The PREMUROSOdefendants removed the action from Illinois state court to the United States District Court for the Northern District of Illinois. The plaintiff moved to have his action remanded to the Illinois state court. In December 2002, the Judicial Panel on Multidistrict Litigation transferred the action to the United States District Court for the District of New Hampshire. On August 7, 2003, plaintiff renewed his motion for remand, and on August 25, 2003, Tyco opposed the motion. The motion is pending before the Court.
        As previously reported in our periodic filings, in November 2002, a class action complaint,Schuldt Limited Partnership v. Tyco International Ltd., et al., was filed in the Circuit Court for Palm Beach County, Florida, asserting causes of action against Tyco and certain of our former directors and officers under the Securities Act of 1933. Defendants removed the case to the United States District Court for the Southern District of Florida. The Judicial Panel on Multidistrict Litigation has transferred the action to the United States District Court for the District of New Hampshire. Plaintiff has moved to have the action remanded to the Florida state court.
        The complaint purports to bring suit on behalf of persons who exchanged their Sensormatic Electronics Corp. ("Sensormatic") stock for shares of Tyco in connection with our acquisition of Sensormatic in November 2001. ThisSensormatic. The complaint alleges that the registration statement filed in connection with the Sensormatic acquisition contained false and misleading statements concerning, among other things, financial disclosures concerning certain of our mergers and acquisitions and the accounting therefor,therefor. Plaintiff seeks class certification, compensatory damages and omitted disclosure of improper
conduct by former officers of Tyco.

    The defendants removed the BRAZEN action from state court to the United
States District Court for the Northern District of Illinois. Inattorneys' fees and expenses.
        As previously reported in our periodic filings, in December 2002, the Judicial Panel on Multidistrict Litigation issued an order transferring the
action to the United States District Court for the District of New Hampshire.
The plaintiff in BRAZEN has also made a motion to remand the action to state
court in Illinois. The

                                       18

defendants filed a motion to remove the PREMUROSO action from state court to
United States District Court for the District of New Hampshire. The plaintiff
has not yet responded to the defendants' motion. However, the plaintiff in the
PREMUROSO action subsequently voluntarily dismissed their case without
prejudice.

    In December 2002, a newfour additional class action complaint, SCHULDT LIMITED PARTNERSHIP
V. TYCO INTERNATIONAL LTD., ET AL., wascomplaints were filed in the Circuit Court for Palm Beach County, Florida. The allegationsFlorida:(1) Hromyak v. Tyco International Ltd., et al.; (2) Rappold v. Tyco International Ltd., et al.; (3) Myers v. Tyco International Ltd., et al.; and (4) Goldfarb v. Tyco International Ltd., et al. Plaintiffs in SCHULDT are identical to thoseeach of these actions also assert claims against Tyco, certain of our former directors and officers, and in three instances our auditors under the previously-dismissed PREMUROSO complaint. The defendants haveSecurities Act of 1933, and seek class certification, compensatory damages and attorneys' fees and expenses. Defendants removed the
SCHULDT actionthese four actions from Florida state court to the United States District Court for the Southern District of Florida. The plaintiffsJudicial Panel on Multidistrict Litigation transferred the actions to the United States District Court for the District of New Hampshire. Plaintiffs in these actions have moved to have their cases remanded to the Florida state court.
        TheHromyak complaint purports to bring suit on behalf of persons who exchanged their United States Surgical Corporation ("US Surgical") stock for shares of Tyco in connection with our acquisition of US Surgical in or about October of 1998. The complaint alleges that the registration statement filed in connection with the US Surgical acquisition contained false and misleading statements concerning, among other things, financial disclosures concerning certain of our mergers and acquisitions and accounting therefor.
17
         TheRappold complaint purports to bring suit on behalf of persons who exchanged their InnerDyne, Inc. ("InnerDyne") stock for shares of Tyco in connection with our acquisition of InnerDyne in or about December of 2001. The complaint alleges that the registration statement filed in connection with the InnerDyne acquisition contained false and misleading statements concerning, among other things, financial disclosures concerning certain of our mergers and acquisitions and accounting therefor.
        TheMyers complaint purports to bring suit on behalf of persons who exchanged their TyCom shares for shares of Tyco in connection with our acquisition of TyCom in or about December of 2001. The complaint alleges that the registration statement filed in connection with the TyCom acquisition contained false and misleading statements concerning, among other things, financial disclosures concerning certain of our mergers and acquisitions and accounting therefor.
        TheGoldfarb complaint purports to bring suit on behalf of persons who exchanged their Scott Technologies, Inc. ("Scott") stock for shares of Tyco in connection with our acquisition of Scott in or about May of 2001. The complaint alleges that the registration statement filed in connection with the Scott acquisition contained false and misleading statements concerning, among other things, financial disclosures concerning certain of our mergers and acquisitions and accounting therefor.
        Defendants removed these four actions from Florida state court to the United States District Court for the Southern District of Florida and they have been transferred by the Judicial Panel on Multidistrict Litigation to the United States District Court for the District of New Hampshire. Plaintiffs in these four actions have moved to have their cases remanded to the Florida state court.
        On January 31, 2003 a civil action was filed in the United States District Court for the District of New Jersey,Cirella v. Tyco International et al. Plaintiff names as defendants, Tyco International Ltd., Dennis Kozlowski, Mark H. Swartz and Mark A. Belnick. Plaintiff Philip M. Cirella alleges that he was a shareholder in CIT who received common shares of Tyco when it acquired CIT in 2000, and later purchased additional Tyco shares with Marguerite Cirella. Plaintiffs assert a cause of action against all defendants for violation of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 and a cause of action against the individual defendants for violation of Section 20(a) of the Exchange Act. The complaint alleges that the defendants failed to disclose related-party transactions, including the following: providing interest free loans, forgiving personal loans, purchasing personal properties, using company funds to purchase personal items, selling individual Tyco shares while concealing information from investors, and failing to disclose an ongoing criminal investigation of Kozlowski, all of which resulted in an artificially inflated share price. Plaintiffs seek compensatory damages and costs against all defendants and punitive exemplary damages against the individual defendants. The Judicial Panel on Multidistrict Litigation has transferred the action to the United States District Court for the District of New Hampshire.
        A class action was filed on December 9, 2003, in the Circuit Court of Cook County, Illinois,Davis v. Kozlowski, et.al. purporting to represent a class of persons who held Tyco securities prior to December 13, 1999 through June 3, 2003. Plaintiff names as defendants L. Dennis Kozlowski, Mark Swartz, Mark Belnick, Frank Walsh, Michael Ashcroft, PricewaterhouseCoopers LLP, Phua Young and Merrill Lynch Pierce Fenner & Smith. The complaint asserts claims of common law fraud against all defendants, breach of fiduciary against individual defendants, negligent misrepresentation against PricewaterhouseCoopers and aiding and abetting a breach of fiduciary duty against PricewaterhouseCoopers and Merrill Lynch Pierce Fenner & Smith. The Company has not yet responded to
defendants' motion.

SHAREHOLDER DERIVATIVE LITIGATIONreceived service of the complaint.
18

Shareholder Derivative Litigation
        As previously reported in our Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002, Tyco and certain of our current and former
directors are defendants in four pendingperiodic filings, five actions have been filed purporting to bring suit derivatively on behalf of Tyco against certain former officers and certain current and former directors of Tyco and against Tyco as a nominal defendant.

    Each
        Two of these actions were filed in the United States District Court for the District of New Hampshire. A third action was transferred to that Court by the Judicial Panel on Multidistrict Litigation. The fourth derivative action is pending in the Supreme Court of the State of New York (New York County). Plaintiffs in that state court action have agreed to stay the action pending resolution of the federal action. The fifth derivative action,O'Brien v. Ashcroft, et al., was filed in the Superior Court of New Hampshire (Rockingham County) on January 7, 2003. The complaint alleges causes of action against thirteen of our former officers and directors for breach of fiduciary duties, ultra vires acts and waste of corporate assets. These claims are based on allegations of, among other things, unauthorized and improper compensation of certain of our former executives; their improper use of our funds for personal benefit; and payment of $20 million to one of our former directors and a charity of which he is trustee. The complaint alleges causes of action against our auditors, PricewaterhouseCoopers LLP ("PwC"), for aiding and abetting breach of fiduciary duty, professional negligence and breach of contract. These claims are based on allegations that PwC, among other things, violated Generally Accepted Accounting Standards and Generally Accepted Accounting Principles in connection with its auditing of the Company's financial statements and negligently performed its professional duties in a manner that permitted the wrongful conduct of the individual defendants. On October 31, 2003, the O'Brien action was voluntarily dismissed without prejudice by the plaintiff to allow the plaintiff to invervene in the consolidated derivative class action pending in the United States District Court for the District of New Hampshire.
        On January 29, 2003, plaintiffs in the actions pending in the United States District Court for the District of New Hampshire filed a Verified Stockholders' First Consolidated and Amended Derivative Complaint against certain former officers and certain former directors of Tyco, our auditors, and Tyco as a nominal defendant. As to our former personnel, the complaint asserts causes of action that includefor breach of fiduciary duty gross mismanagement,and waste of corporate assets and/or
conversion.assets. As against our auditors, the complaint asserts causes of action for negligence, negligent misrepresentations, and breach of contract. The actions allegeaction alleges that individual defendants engaged in, permitted and/orand /or acquiesced in the following alleged improper conduct of former officers
of Tyco: the use of ourconduct: using Tyco funds for personal benefit, including misappropriation of funds from our Key Employee Loan Program and relocation programs; engaging in improper self-dealing real estate transactions involving our assets;transactions; entering into improper undisclosed retention agreements; and/orand filing false and misleading financial statements with the Securities and Exchange CommissionSEC that were based on improper accounting methods, including the use of reserves to
improperly increase earnings after acquisitions.methods. Plaintiffs seek money damages and attorneys' fees and expenses.
        On March 17, 2003, Tyco moved to dismiss the consolidated and amended complaint on the ground that Tyco is already pursuing claims against four of its former officers and directors, and Tyco should remain in one case, an order enjoiningcontrol of its claims and potential claims. The other defendants have since moved to dismiss as well. These motions remain pending before the payment of any severance benefitscourt.
        Plaintiffs filed a Motion for Leave to one of our former officers.

    TwoFile their Verified Stockholders' Second Consolidated and Amended Derivative Complaint on June 12, 2003. The proposed second amended complaint drops as defendants Tyco's auditors, and adds as defendants each of the actionsmembers of the current Board of Directors of Tyco. The second amended complaint alleges that the defendants who are pendingcurrent directors of Tyco engaged in, permitted and/or acquiesced in the United States District Court for the
Districtfollowing alleged improper conduct: making misstatements and omissions in order to disclose certain accounting issues slowly over time to maintain an allegedly artificial inflation of New Hampshire. The Judicial Panel on Multidistrict Litigation has
issued a conditional transfer order transferring a third action to the United
States District Court for the District of New Hampshire, to which the plaintiff
has objected. The matter has been fully briefedTyco's share price; making misstatements and a decision is expected from
the Judicial Panelomissions in the near future.February 2003 proxy statement against reincorporation in Delaware and against a proposal to separate the positions of CEO and Chairman; and other allegedly improper conduct. Plaintiffs seek money
19

damages and attorneys' fees and expenses. Tyco has opposed plaintiffs' motion for leave to file the amended complaint. The fourth derivative actionmotion is pending inbefore the Supreme Court of the State of New York (New York County). Plaintiffs in
that action have agreed to stay the actioncourt.
ERISA Litigation and join with the plaintiffs in New
Hampshire in prosecuting one derivative action.

ERISA LITIGATION AND INVESTIGATIONInvestigation
        As previously reported in our Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002,periodic filings, Tyco and certain of our current and former employees, officers and directors, have been named as defendants in putativeeight class action
litigationactions brought under the Employee Retirement Income Security Act ("ERISA"). The complaints purportpurported to bring claims on behalf of participants in the Tyco International (US) Inc. Retirement Savings and Investment Plans and/orand the retirement plansparticipants therein.
        Two of the companies that Tyco acquired.

    Eight such ERISA actions six of which were transferred by the Judicial
Panel on Multidistrict Litigation, are pending and have been consolidatedfiled in the United States District Court for the District of New Hampshire, and the six remaining actions were transferred to that Court by the Judicial Panel on Multidistrict Litigation. All eight actions have been consolidated in the District Court in New Hampshire.
        On February 3, 2003, the plaintiffs filed a Consolidated Amended Complaint asserting causes of action under ERISA. That complaint named as defendants Tyco and certain of its present and former officers and directors, its wholly-owned subsidiary Tyco International (US) Inc., its retirement committee, and certain of its present and former officers, directors and employees. The complaints
allege failurecomplaint asserts that the defendants breached their fiduciary duties under ERISA by negligently misrepresenting and negligently failing to disclose material information regardingconcerning, among other things, the financial status
of Tyco, including alleged misreporting of revenues, improper accounting
practices,following: related-party transactions and manipulation of accounting rules with respect toexecutive compensation; Tyco's mergers and acquisitions.acquisitions and the accounting therefor, as well as allegedly undisclosed acquisitions; and misstatements of Tyco's financial results. The complaints further allege breach of ERISA'scomplaint also asserts that the defendants breached their fiduciary duty of
prudence.duties by allowing the Plans to invest in Tyco shares when it was not a prudent investment. The plaintiffs seek a declaration that the defendants are not entitled to recoverprotection under ERISA's safe harbor provision; an order compelling the defendants to make good to the Plans all losses they allegedly experienced duecaused by the defendants' alleged breaches of fiduciary duty; imposition of a constructive trust on any amounts by which any defendant was unjustly enriched; an order enjoining future violations of ERISA; actual damages in the amount of any losses the Plans suffered; costs and attorneys' fees, and an order for equitable restitution and other appropriate equitable monetary relief.
        On April 4, 2003, Tyco and several other defendants moved to their investments, throughdismiss the plans, in our stock.

                                       19
consolidated complaint. Shortly thereafter the other defendants also moved to dismiss. Tyco's motion to dismiss remains pending before the court.
        We and certain of our current and former executives have received requests from the United States Department of Labor for information concerning the administration of the Tyco International (US) Inc. Retirement Savings and Investment Plans. The current focus of the Department's inquiry concerns losses allegedly experienced by the plans due to investments in our stock.shares. The Department of Labor has authority to bring suit on behalf of the plans and their participants against those acting as fiduciaries to the plans for recovery of losses and additional penalties, although it has not informed us of any intention to do so.

TYCO LITIGATION AGAINST FORMER SENIOR MANAGEMENT AND DIRECTOR

    TYCO INTERNATIONAL LTD V. MARK
Tyco Litigation Against Former Senior Management
Tyco International Ltd v. Mark A. BELNICK, UNITED STATES DISTRICT COURT,
SOUTHERN DISTRICT OF NEW YORK, FILED JUNEBelnick, United States District Court, Southern District of New York, No. 02-CV-4644, Filed June 17, 2002.2002. As previously reported in our Current Report on Form 8-K filed on September 17, 2002,periodic filings, we have filed a civil complaint against our former Executive Vice President and Chief Corporate Counsel for breach of fiduciary duty and other wrongful conduct. The action alleges that the defendant: solicited and accepted cash and stockshare bonuses without Board approval; took interest-free loans from our relocation program without Board approval; failed to disclose to the Board and to the SEC his Retention Agreement and compensation; failed to advise the Board of the improper conduct of other officers;
20

refused to cooperate with internal investigations; and engaged in other improper conduct. The actioncomplaint asserts causes of action for breach of fiduciary duty, inducement to breach fiduciary duty, conspiracy to breach fiduciary duty, fraud and other wrongful conduct and seeks to recover compensation and profits received from employment at Tyco, repayment of all loans fraudulently procured, with interest, damages for the harm caused to us, and punitive damages. Discovery in this action has been stayed as a result of a motion by the New York County District Attorney's OfficeOffice. The Judicial Panel on Multidistrict Litigation has transferred this action to delay discovery
until after the completionUnited States District Court for the District of its prosecutionNew Hampshire.
Tyco International Ltd. v. Frank E. Walsh, Jr., United States District Court, Southern District of Mr. Belnick and other former
Tyco officers.

    TYCO INTERNATIONAL LTD V. FRANK E. WALSH, JR., UNITED STATES DISTRICT COURT,
SOUTHERN DISTRICT OF NEW YORK, FILED JUNENew York, No. 02-CV-4633, Filed June 17, 2002.2002. As previously reported in our Current Report on Form 8-K filed on September 17, 2002,periodic filings, we have filed a civil complaint against a former director for breach of fiduciary duty, inducing breaches of fiduciary duty, and related wrongful conduct involving a $20 million payment in connection with a 2001 acquisition by Tyco. The action alleges causes of action for restitution, breach of fiduciary duty and inducing breach of fiduciary duty, conversion, unjust enrichment, and a constructive trust, and seeks recovery for all of the losses suffered by us as a result of the defendant director's conduct. Discovery in this action has not yet begun. On December 17, 2002, Mr. Walsh paid $20 million in restitution to Tyco, which was deposited by the Company in January 2003, as a result of a plea bargain agreement with the New York County District Attorney. See
"--Subpoenas and document requests from Governmental Entities". Our claims against Mr. Walsh are still pending. TheDiscovery in this action has been stayed as a result of a motion by the New York County District Attorney's OfficeOffice. The Judicial Panel on Multidistrict Litigation has filed a motiontransferred this action to stay all discovery until after the completionUnited States District Court for the District of its pending prosecutionNew Hampshire.
Tyco International Ltd. v. L. Dennis Kozlowski, United States District Court, Southern District of several former Tyco officers. A decision is expected
in the near future.

    TYCO INTERNATIONAL LTD. V. L. DENNIS KOZLOWSKI, UNITED STATES DISTRICT
COURT, SOUTHERN DISTRICT OF NEW YORK, FILED SEPTEMBERNew York, No. 02-CV-7317, Filed September 12, 2002.2002, Amended April 1, 2003. As previously reported in our Current Report on Form 8-K filed on September 17, 2002,periodic filings, we have filed a civil complaint against our former Chairman and Chief Executive Officer for breach of fiduciary duty and other wrongful conduct. The actionCompany amended that complaint on April 1, 2003. The amended complaint alleges that the defendant misappropriated millions of dollars from our Key Employee Loan Program and relocation program; awarded millions of dollars in unauthorized bonuses to himself and certain other Tyco employees; engaged in improper self-dealing real estate transactions involving our assets; and conspired with certain other former Tyco employees in committing these acts. The actionamended complaint alleges causes of action for breach of fiduciary duty, fraud, unjust enrichment, breach of contract, conversion, a constructive trust, and other wrongful conduct. The amended complaint seeks recovery for all of the losses suffered by us as a result of the former Chairman and Chief Executive Officer's conduct, and of all remuneration, including restricted and unrestricted shares and options, obtained by Mr. Kozlowski during the course of this conduct. Discovery in this action has been stayed as a result of a motion by the New York County District Attorney's Office. The Judicial Panel on Multidistrict Litigation transferred this action to the United States District Court for the District of New Hampshire.
Tyco International Ltd. v. Mark H. Swartz, United States District Court, Southern District of New York, No. 03-CV-2247 (TPG), Filed April 1, 2003. As previously reported in our periodic filings, we filed an arbitration claim against Mark H. Swartz, our former Chief Financial Officer and director, on October 7, 2002. That arbitration claim alleged that Mr. Swartz breached his fiduciary duty and otherwise engaged in wrongful conduct relating to his employment by Tyco. As a consequence of Mr. Swartz's refusal to submit to the jurisdiction of the American Arbitration Association, we filed a civil complaint against him on April 1, 2003, for breach of fiduciary duty and other wrongful conduct. The action alleges that the defendant misappropriated millions of dollars from our Key Employee Loan Program and relocation program; approved and implemented awards of millions of dollars in unauthorized bonuses to himself and certain other Tyco employees; awarded millions of dollars in other unauthorized payments to himself; engaged in improper self-dealing real estate transactions involving our assets; and conspired with certain other former Tyco employees in committing these acts. The
21

complaint alleges causes of action for breach of fiduciary duty, fraud, unjust enrichment, conversion, a constructive trust, and other wrongful conduct. The action seeks recovery for all of the losses suffered by us as a result of the former Chief Financial Officer and director's conduct, and of all remuneration, including restricted and unrestricted shares and options, obtained by Mr. Swartz during the course of this conduct. Discovery inMr. Swartz moved to dismiss Tyco's complaint and Tyco has responded to the motion, which remains pending for written decision. The Judicial Panel on Multidistrict Litigation has transferred this action has not yet begun. Theto the United States District Court for the District of New York County District Attorney's Office has filed a motion to stay all discovery
until after the completion of its

                                       20

pending prosecution of Mr.Hampshire.
Tyco International, Ltd. v. L. Dennis Kozlowski and other former Tyco officers. A decision
is expected in the near future.

    TYCO INTERNATIONAL LTD. V. MARK H. SWARTZ, AMERICAN ARBITRATION ASSOCIATION
ARBITRATION PROCEEDING, FILED OCTOBER 7, 2002. As previously reported in our
Current Report on Form 8-K filed on October 8, 2002, we have filed an
arbitration claim against Mark H. Swartz, our former Chief Financial Officer.
The action alleges that the defendant breached his fiduciary duties and
otherwise engaged in wrongful conduct relating to this employment by Tyco and
misappropriated Tyco funds and other assets and seeks to recover from
Mr. Swartz all damages suffered by Tyco as a result of such breach, wrongful
conduct and misappropriation. The Demand was filed with the American Arbitration
Association inUnited States District Court Southern District Of New York, City, New York. DiscoveryNo. 02-CV-9705, Filed December 6, 2002. As previously disclosed in this action has not yet
begun.

    TYCO INTERNATIONAL, LTD V. L. DENNIS KOZLOWSKI AND MARK H. SWARTZ, UNITED
STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK, FILED DECEMBER 6, 2002. Weour periodic filings, we have filed a civil complaint against our former Chairman and Chief Executive Officer and our former Chief Financial Officer pursuant to Section 16(b) of the Securities Exchange Act of 1934 for disgorgement of short-swing profits from prohibited transactions in our common shares believed to exceed $40 million. The action seeks disgorgement of profits, interest, attorneys' fees and costs. SUBPOENAS AND DOCUMENT REQUESTS FROM GOVERNMENTAL ENTITIES

    WeThe Judicial Panel on Multidistrict Litigation has transferred this action to the United States District Court for the District of New Hampshire.
Subpoenas, Document Requests From Governmental Entities and Criminal Proceedings
        As previously disclosed in our periodic filings, we and others have received various subpoenas and requests from the SEC, the District Attorney of New York County, the U.S. Attorney for the District of New Hampshire and others seeking the production of voluminous documents in connection with various investigations into our governance, management, operations, accounting and related controls. We are cooperating fully with these investigations and are complying with these requests.
        On October 23, 2002, we signed a consent agreement with the Bureau of Securities Regulation of the State of New Hampshire that resolved the Bureau's investigation into the conduct of Tyco's previous management. Under the terms of the consent agreement, we will pay a total of $5 million as an administrative settlement to the State of New Hampshire and have paid $100,000 to cover the cost of the Bureau's investigation. We signed the consent agreement without admitting any wrongdoing with respect to the Bureau's allegations.
        On December 17, 2002, Frank E. Walsh, Jr., a former director of Tyco, pleaded guilty to a felony violation of New York law in the Supreme Court of the State of New York (New York County) and settled a civil action for violation of federal securities laws brought by the Securities and Exchange CommissionSEC in United States District Court for the Southern District of New York. Both the felony charge and the civil action were brought against Mr. Walsh based on a $20 million payment by Tyco, $10 million of which went to Mr. Walsh with the balance going to a charity of which Mr. Walsh is trustee. The payment was purportedly made for Mr. Walsh's assistance in arranging our acquisition of The CIT Group, Inc. The felony charge accused Mr. Walsh of intentionally concealing information concerning the payment from Tyco's directors and shareholders while engaged in the sale of Tyco securities in the State of New York. The SEC action alleged that Mr. Walsh knew that the registration statement covering the sale of Tyco securities as part of the CIT acquisition contained a material misrepresentation concerning fees payable in connection with the acquisition. Pursuant to the plea, Mr. Walsh agreed to pay $20 million in restitution to Tyco and to pay other fines to the State of New York. Pursuant to the settlement, Mr. Walsh consented to an order permanently enjoining him from violating provisions of the federal securities laws, requiring him to pay restitution to Tyco and permanently barring him from serving as an officer or director of a publicly held company. Tyco received Mr. Walsh's restitution payment of $20 million.
        On February 3, 2003, the New York County District Attorney announced a superseding indictment against Mark Belnick. This new indictment added three additional charges against Mr. Belnick, including grand larceny in the first degree, a felony violation of New York State's securities law (the
22

Martin Act), and an additional charge of falsifying business records. The superseding indictment includes the original six counts of falsifying business records which had been included in the original indictment filed in September 2002. The new grand larceny count charges Mr. Belnick with stealing $12 million from Tyco by accepting payment of a special bonus, in addition to his salary and annual bonus, that had not been approved by the Board of Directors. The Martin Act count charges Mr. Belnick with participation in a scheme to defraud, whereby Messrs. Belnick, Kozlowski, Swartz, and others knowingly made false representations concerning Tyco's financial condition in order to obtain money for themselves. There is no trial date yet scheduled for the criminal charges against Mr. Belnick.
        On February 19, 2003, a federal grand jury in Concord, New Hampshire returned an indictment against Mark Swartz accusing him of failing to report a bonus that he received from Tyco. In particular, Swartz allegedly received a $12.5 million bonus in 1999, but did not include this bonus on December 17, 2002.

                                       21

INTELLECTUAL PROPERTY LITIGATION

    APPLIED MEDICAL RESOURCES CORP. V.his tax return. On motion of the United States Attorney for the District of New Hampshire, the court dismissed the indictment for lack of venue, without prejudice to subsequent prosecution of the action in another venue.
        The United States Department of Labor served document subpoenas on Tyco and Fidelity Management Trust Company for documents concerning the administration of the Tyco International (US) Inc. Retirement Savings and Investment Plans. The current focus of the Department's inquiry remains the losses allegedly experienced by the plans due to investments in our stock. The Department of Labor has authority to bring suit on behalf of the plans and their participants against those acting as fiduciaries to the plans for recovery of losses and additional penalties, although it has not informed us of any intention to do so. The company is continuing to cooperate with the Department's investigation.
Intellectual Property Litigation
        Applied Medical Resources Corp. v. U.S. SURGICAL CORP.Surgical Corp. is a patent infringement action in which U.S. Surgical Corp., a subsidiary of Tyco, is the defendant. In February 2002, the U.S. District Court for the Central District of California held that U.S. Surgical's VERSASEALVersaseal universal seal system, contained in certain surgical trocar and access devices manufactured by U.S. Surgical, infringed certain of the plaintiff's patents. The court entered a permanent injunction against U.S. Surgical, based upon infringement of one of the three patents involved in the suit,suit. The Federal Circuit affirmed the appeal ofdistrict court's permanent injunction ruling in September 2003 for the Versaseal product, which is pendingno longer on the market. In October 2003, the U.S. District Court ruled in U.S. Surgical's favor holding that two other patents involved in the U.S. Court
of Appeals for the Federal Circuit.case were invalid and unenforceable. A trial on invalidity ofdamages for the other two
patents and on damagesearlier infringement ruling is currently scheduled for April 2003. If there is
ultimately a determination of liability, theJanuary 2004. The amount of damages will be strongly contested by us. We estimate that damages could range from $32 million to $83 million, with the possibility of enhanced damages up to treble damages if there is a finding of willful infringement. We currently do not expect, however, to incur losses beyond what we have already accrued.

ENVIRONMENTAL INVESTIGATION
        On July 31, 2003, Applied Medical filed another patent infringement suit against U.S. Surgical in the United States District Court for the Central District of California. The complaint alleges that U.S. Surgical's Versaseal Plus trocar product infringes Applied Medical's U.S. Patent No. 5,385,553. Applied Medical seeks injunctive relief and unspecified monetary damages, including enhanced damages for alleged willful infringement. Applied Medical has recently filed a motion for a preliminary injunction, for which a hearing will be held on or after December 8, 2003. Tyco has not yet estimated the damages to which Applied Medical may be entitled, nor has the effect of the grant of a preliminary injunction been assessed.
Environmental Investigation
        As previously reported in our Annual Report on Form 10-K for the year ended
September 30,periodic filings, we became aware in June 2001 that the Office of the U.S. Attorney for the District of Connecticut had initiated in June 2001 an investigation of one of the subsidiariesa subsidiary in our Electronics segment. Subsequently, we were notified that the subsidiary was the target of a federal Grand Jury investigation concerning alleged Clean Water Act violations. We understand that the
23

government investigation concerns manufacturing facilitiesplants in Manchester and Stafford, Connecticut. We also
understandConnecticut, and that employeesthe Connecticut Department of Environmental Protection has referred the matter to the Connecticut Attorney General's Office which is conducting a parallel civil investigation which is likely to result in the imposition of a civil penalty, the amount of which cannot be estimated at these plants are subjectsthis time. Three former employees of the investigation. A
former supervisor at TPCG's Manchester plant (who is no longer an employee) hasplants have each pleaded guilty to a felony violation of the Clean Water Act. We do not believe that the investigationany fines or penalties will have a material impact on the financial condition of Tyco and its subsidiaries, taken as a whole. We are cooperating fully in the investigation.

    See also
        On October 9, 2003, the discussions under Connecticut Commissioner of Environmental Protection filed a complaint in the Hartford Superior Court,Commissioner v. Printed Circuits, Inc. f/k/a Tyco Printed Circuit Group, alleging the company exceeded its permitted electroplating wastewater discharge limits between December 2000 and July 2002, exceeded its permitted stormwater discharge limits between October 2000 and October 2001, and failed to properly operate and maintain wastewater collection and treatment systems, thereby causing discharges in excess of permitted effluent limits. We are unable to estimate what our ultimate liability may be and it is possible that we will be subject to injunctive orders and be required to pay civil penalties not to exceed twenty-five thousand dollars per day for each violation.
Item 1. "Business--Environmental Matters" and
"--Risk Factors"

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSSubmission of Matters to a Vote of Security Holders
        Not applicable.

EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers of the Registrant
        Tyco's executive officers and executive officers of certain subsidiaries are as follows:
Edward D. Breen—Mr. Breen, age 46,47, has been our Chairman and Chief Executive Officer since July 2002. Prior to joining Tyco, Mr. Breen was President and Chief Operating Officer of Motorola from January 2002 to July 2002; Executive Vice President and President of Motorola's Networks Sector from January 2001 to January 2002; Executive Vice President and President of Motorola's Broadband Communications Sector from January 2000 to January 2001; Chairman, President and Chief Executive Officer of General Instrument Corporation ("GI") from December 1997 to January 2000; and, prior to December 1997, President of GI'sGeneral Instrument's Broadband Networks Group. Mr. Breen also serves as a director of McLeod USA Incorporated.

    Jerry R. Boggess,
David J. FitzPatrick—Mr. FitzPatrick, age 58, President of Tyco Fire and Security Services since
August 1993. Mr. Boggess49, has been Vice President of Tyco since February 1996;
and associated with Tyco and its predecessors since 1968 (except from 1983 to
1989 when he was President of Cosco Fire Protection, a division of Zurn
Industries).

    David J. FitzPatrick, age 48,our Executive Vice President and Chief Financial Officer since September 2002. Prior to joining Tyco, Mr. FitzPatrick was Senior Vice President and Chief Financial 22
Officer of United Technologies Corporation from June 1998 to September 2002; and
Vice President and Corporate Controller for Eastman Kodak Company from
March 1995 to May 1998.

    Juergen W. Gromer, age 57, President of Tyco Electronics since April 1999.
Mr. Gromer was Senior Vice President, Worldwide Sales and Service, of AMP
Incorporated (acquired by Tyco in April 1999) from 1998 to April 1999;
President, Global Automotive Division, and Corporate Vice President of AMP from
1996 to 1998; and Vice President and General Manager of various divisions of AMP
from 1990 to 1996.

    2002.
William B. Lytton—Mr. Lytton, age 54,55, has been our Executive Vice President and General Counsel since September 2002. Prior to joining Tyco, Mr. Lytton was Senior Vice President and General Counsel for International Paper Company ("IP") from January 1999 to September 2002; and Vice President and General Counsel for IPInternational Paper from 1996 to 1999.

    Robert P. Mead,
Eric M. Pillmore—Mr. Pillmore, age 52, President of Tyco Engineered Products and Services
since April 2002; Vice President of Tyco and its predecessors since
August 1993. Mr. Mead was President of the Flow Control Products segment from
May 1993 to May 2001; and50, has been associated with Tyco and its predecessors
since 1973.

    Richard J. Meelia, age 53, President of Tyco Healthcare and Specialty
Products since 1995. Mr. Meelia has been Vice President of Tyco since June 2000
and was Group President of Kendall Healthcare Products Company (acquired by Tyco
in October 1994) from January 1991 to 1995.

    Eric M. Pillmore, age 49,our Senior Vice President of Corporate Governance since August 2002. Prior to joining Tyco, Mr. Pillmore was Senior Vice President, Chief Financial Officer and Secretary of Multilink Technology Corporation from July 2000 to August 2002. From April 2000 to May 2000, Mr. Pillmore was Senior Vice President of Finance and Chief Financial Officer of McData Corporation. From January 2000 to April 2000, Mr. Pillmore was Senior Vice President of Finance and Director of Motorola's Broadband Communications Sector. From December 1997 to January 2000, Mr. Pillmore was Chief Financial Officer of GI.

                                       23
General Instrument Corporation.
Juergen W. Gromer—Dr. Gromer, age 59, has been President of Tyco Electronics since April 1999. Dr. Gromer was Senior Vice President, Worldwide Sales and Service, of AMP Incorporated (acquired by Tyco in April 1999) from 1998 to April 1999; President, Global Automotive Division, and Corporate
24

Vice President of AMP from 1996 to 1998; and Vice President and General Manager of various divisions of AMP from 1990 to 1996.
Robert P. Mead—Mr. Mead, age 53, has been President of Tyco Engineered Products and Services (formerly Tyco Flow Control Products) since May 1993; except for a temporary six-month period when he served as a Senior Vice President for Tyco International (US) Inc. from October 2000 to March 2001. Mr. Mead has been associated with Tyco and its predecessors since 1973.
Richard J. Meelia—Mr. Meelia, age 54, has been President of Tyco Healthcare since 1995. Mr. Meelia is a director of Aspect Medical Systems, Inc., a manufacturer of brain monitoring equipment.
David E. Robinson—Mr. Robinson, age 44, has been President of Tyco Fire & Security since March 2003 and prior to that he was President of Tyco Plastics and Adhesives since November 2002. Prior to joining Tyco, Mr. Robinson was Executive Vice President and President of Motorola's Broadband Communications Sector from January 2001 to June 2002; Senior Vice President and General Manager, Digital Network Systems, for Motorola's Broadband Communications Sector from January 2000 to January 2001, and for General Instrument Corporation from April 1998 to January 2000; and Vice President and General Manager, Digital Network Systems from November 1995 to April 1998.
Terry A. Sutter—Mr. Sutter, age 46, has been President of Tyco Plastics & Adhesives since March 2003. Prior to joining Tyco, Mr. Sutter was President of the Specialty Chemicals division of Cytec Industries since August 2002. Prior to joining Cytec, Mr. Sutter was at AlliedSignal where he was President, Industry Solutions from July 2001 to August 2002; Vice President and General Manager, Flourine Solutions from July 1999 to July 2001; and Vice President, Marketing and Business Development, Specialty Chemicals from July 1998 to July 1999.
Martina Hund-Mejean—Ms. Hund-Mejean, age 43, has been our Senior Vice President, Treasurer since December 2002. Prior to joining Tyco, Ms. Hund-Mejean served as Senior Vice President and Treasurer at Lucent Technologies, Inc. from November 2000 to December 2002. Prior to joining Lucent she spent 12 years at General Motors where she held various positions of ascending importance, including most recently Assistant Treasurer from 1998 to 2000.
John E. Evard, Jr.—Mr. Evard, Jr., age 57, has been our Senior Vice President, Tax since December 2002. Prior to joining Tyco, Mr. Evard was Vice President, Tax of United Technologies Corporation. Prior to joining United Technologies, Mr. Evard held a number of positions at CNH Global N.V. and its predecessor company, Case Corp., including Senior Vice President, Corporate Development, and General Tax Counsel from December 1989 to August 2000.
Laurie Siegel—Ms. Siegel, age 47, has been our Senior Vice President, Human Resources since January 2003. Ms. Siegel was at Honeywell International from 1994 to 2003, where she held positions in the Human Resources function. After leading the compensation organization from 1994 to 1997, she served as Corporate Vice President of Human Resources until 1999. Thereafter, she served as Vice President of Human Resources in the Aerospace and Specialty Materials divisions.
Dana S. Deasy—Mr. Deasy, age 44, has been our Senior Vice President and Chief Information Officer since July 2003. Prior to joining Tyco, Mr. Deasy served as Vice President and Chief Information Officer of The Americas for Siemens Corporation. Prior to joining Siemens in October 1999, Mr. Deasy was the Chief Information Officer of General Motors Locomotive Group from June 1997 to September 1999.
Charles H. Young—Mr. Young, age 40, has been our Senior Vice President of Corporate Marketing and Communications since July 2003. Prior to joining Tyco, Mr. Young was the General Manager of Global Marketing for GE Medical Systems. During his 15-year tenure with GE, he held a number of positions of increasing responsibility, including global marketing leader for GE Medical, General Manager of Corporate Communications for GE Medical, and Director of Communications and Public Affairs for GE Global Research.
25

PART II

ITEM
Item 5. MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED SECURITY HOLDER
  MATTERSMarket for the Registrant's Common Shares and Related Security Holder Matters
        The number of registered holders of Tyco's common shares at December 20,
20022, 2003 was 44,884.51,262.
        Tyco common shares are listed and traded on the New York Stock Exchange ("NYSE") and the Bermuda Stock Exchange under the symbol "TYC," and on the
London Stock Exchange under the symbol "TYI."TYC." 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. 

                                       FISCAL 2002                          FISCAL 2001
                            ----------------------------------   ----------------------------------
                            MARKET PRICE RANGE                   MARKET PRICE RANGE
                            -------------------   DIVIDEND PER   -------------------   DIVIDEND PER
QUARTER                       HIGH       LOW      COMMON SHARE     HIGH       LOW      COMMON SHARE
- -------                     --------   --------   ------------   --------   --------   ------------

First.....................  $60.0900   $44.7000     $0.0125      $58.8750   $44.5000     $0.0125
Second....................   58.8000    22.0000      0.0125       63.2100    41.4000      0.0125
Third.....................   32.6000     8.3000      0.0125       59.3000    40.1500      0.0125
Fourth....................   18.4500     7.0000      0.0125       55.2900    39.2400      0.0125
                                                    -------                              -------
                                                    $0.0500                              $0.0500
                                                    =======                              =======


DIVIDEND POLICYAs of December 12, 2003, Tyco delisted its common shares from the Official List of the UK Listing Authority and from trading on the London Stock Exchange plc. Tyco common shares will continue to be listed on the New York Exchange and on the Bermuda Stock Exchange.
 
 
Year Ended September 30, 2003
 
Year Ended September 30, 2002
 
 
Market Price Range
 
 
 
Market Price Range
 
 
Quarter
 
Dividend Per
Common Share
 
Dividend Per
Common Share
 
High
 
Low
 
High
 
Low
First
 
$
18.7000
 
$
11.9000
 
$
0.0125
 
$
60.0900
 
$
44.7000
 
$
0.0125
Second
 
 
18.3400
 
 
11.2000
 
 
0.0125
 
 
58.8000
 
 
22.0000
 
 
0.0125
Third
 
 
20.2000
 
 
12.8400
 
 
0.0125
 
 
32.6000
 
 
8.3000
 
 
0.0125
Fourth
 
 
22.0000
 
 
17.7500
 
 
0.0125
 
 
18.4500
 
 
7.0000
 
 
0.0125
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
0.0500
 
 
 
 
 
 
 
$
0.0500
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividend Policy
        We may from time to time enter into financing agreements that contain financial covenants and restrictions, some of which may limit the ability of Tyco to pay dividends. Future dividends on our common shares, if any, will be at the discretion of Tyco's boardBoard of directorsDirectors and will depend on, among other things, our results of operations, cash requirements and surplus, financial condition, contractual restrictions and other factors that the boardBoard of directorsDirectors may deem relevant.

ITEM
26

Item 6. SELECTED FINANCIAL DATASelected Financial Data
        The following table sets forth selected consolidated financial information of Tyco as at and for the fiscal years ended September 30, 2003, 2002, 2001, 2000, 1999 and 1998.1999. This selected financial information should be read in conjunction with Tyco's Consolidated Financial Statements and related notes. The selected
financial data reflect
 
 
Year Ended September 30,
 
 
2003(1)(2)
 
2002(3)
 
2001(4)(5)
 
2000(6)
 
1999(7)(8)
 
 
(in millions, except per share data)

Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net revenues
 
$
36,801.3
 
$
35,589.8
 
$
34,002.1
 
$
28,927.5
 
$
22,494.1
 
Income (loss) from continuing operations
 
 
1,034.7
 
 
(2,838.2
)
 
3,894.9
 
 
4,318.5
 
 
873.7
 
Cumulative effect of accounting changes, net of tax
 
 
(75.1
)
 
—
 
 
(683.4
)
 
—
 
 
—
 
Net income (loss)
 
 
979.6
 
 
(9,179.5
)
 
3,464.0
 
 
4,318.5
 
 
873.7
 
Basic earnings (loss) per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
 
0.52
 
 
(1.43
)
 
2.16
 
 
2.56
 
 
0.53
 
 
 
Cumulative effect of accounting changes, net of tax
 
 
(0.04
)
 
—
 
 
(0.38
)
 
—
 
 
—
 
 
 
Net income (loss)
 
 
0.49
 
 
(4.62
)
 
1.92
 
 
2.56
 
 
0.53
 
Diluted earnings (loss) per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
 
0.52
 
 
(1.43
)
 
2.13
 
 
2.52
 
 
0.52
 
 
 
Cumulative effect of accounting changes, net of tax
 
 
(0.04
)
 
—
 
 
(0.37
)
 
—
 
 
—
 
 
 
Net income (loss)
 
 
0.49
 
 
(4.62
)
 
1.89
 
 
2.52
 
 
0.52
Cash dividends per common share(9)
 
 
0.05
 
 
0.05
 
 
0.05
 
 
0.05
 
 
0.05
Consolidated Balance Sheet Data (End of Period):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
63,545.0
 
$
65,499.8
 
$
70,413.2
 
$
39,995.6
 
$
32,106.2
 
Long-term debt
 
 
18,250.7
 
 
16,529.1
 
 
19,596.0
 
 
9,461.8
 
 
9,109.4
 
Shareholders' equity
 
 
26,369.0
 
 
24,081.3
 
 
31,080.3
 
 
16,612.7
 
 
12,136.7
(1)
In fiscal 2003, Tyco consolidated variable interest entities in accordance with the combined resultstransition provisions of FIN 46, as more fully described in Notes 12 and 30 to the Consolidated Financial Statements. As a result, Tyco recorded a cumulative effect adjustment of $75.1 million, net of tax.

(2)
Income from continuing operations in the fiscal year ended September 30, 2003 includes charges for the impairment of long-lived assets of $814.7 million, charges recorded for changes in estimates of $388.7 million which arose from the Company's intensified internal audits and financial positiondetailed controls and operating reviews (includes net restructuring credits of $72.5, of which credits totaling $12.9 million are included in cost of sales, charges for the impairment of long-lived assets of $10.2 million, charges of $243.1 million included in selling, general and administrative expenses, charges of $123.4 million included in cost of sales, a charge of $75.6 million relating to the write-down of investments and other expense of $8.5 million, both of which are included in other (expense) income, net and a charge of $0.4 million included in interest expense), charges for the impairment of goodwill of $278.4 million, other loss of $151.8 million related to the retirement of debt, other charges of $148.6 million ($34.0 million is included in cost of sales and $114.6 million is included in selling, general and administrative expenses), a charge of $91.5 million for a retroactive incremental premium on prior period directors and officers insurance included in selling, general and administrative expenses, a charge of $11.5 million relating to the write-down of investments, other interest expense of $2.4 million, other expense of $0.1 million, income from the early retirement of debt of $24.1 million, other interest income of $18.7 million, and net restructuring credits of $12.3 million (charges of $2.4 million are included in cost of sales). Net income also includes $20.0 million of income from the discontinued operations of Tyco United States Surgical Corporation ("U.S. Surgical")Capital. See Notes 5, 6, 8, 11, 17 and AMP
Incorporated ("AMP"). During fiscal 1999,

                                       24

subsidiaries of Tyco merged with U.S. Surgical and AMP. Both merger transactions
were accounted for under31 to the pooling of interests accounting method.


                                                           YEAR ENDED SEPTEMBER 30,
                                          ----------------------------------------------------------
                                           2002(1)    2001(2)(3)    2000(4)     1999(5)     1998(6)
                                          ---------   ----------   ---------   ---------   ---------
                                                     (IN MILLIONS, EXCEPT PER SHARE DATA)

Consolidated Statements of Operations
  Data:
  Net revenues..........................  $35,643.7   $34,036.6    $28,931.9   $22,496.5   $19,061.7
  (Loss) income from continuing
    operations..........................   (3,070.4)    4,401.5      4,519.9     1,067.7     1,168.6
  Cumulative effect of accounting
    changes, net of tax.................         --      (683.4)          --          --          --
  Net (loss) income.....................   (9,411.7)    3,970.6      4,519.9     1,022.0     1,166.2
  Basic (loss) earnings per common
    share(7):
    (Loss) income from continuing
      operations........................      (1.54)       2.44         2.68        0.65        0.74
    Cumulative effect of accounting
      changes, net of tax...............         --       (0.38)          --          --          --
    Net (loss) income...................      (4.73)       2.20         2.68        0.62        0.74
  Diluted (loss) earnings per common
    share(7):
    (Loss) income from continuing
      operations........................      (1.54)       2.40         2.64        0.64        0.72
    Cumulative effect of accounting
      changes, net of tax...............         --       (0.37)          --          --          --
    Net (loss) income...................      (4.73)       2.17         2.64        0.61        0.72
Cash dividends per common share(7)......                        See(8) below.
Consolidated Balance Sheet Data (End of
  Period):
  Total assets..........................  $66,414.4   $71,022.6    $40,404.3   $32,344.3   $23,440.7
  Long-term debt........................   16,486.8    19,596.0      9,461.8     9,109.4     5,424.7
  Shareholders' equity..................   24,790.6    31,737.4     17,033.2    12,369.3     9,901.8


- ------------------------------

(1) Consolidated Financial Statements.
27
(3)
Loss from continuing operations in the fiscal year ended September 30, 2002 includes net restructuring and other unusual charges of $1,954.3$1,874.7 million (of which $635.4 million is included in cost of sales and $115.0 million is included in selling, general and administrative expenses), charges of $3,489.5$3,309.5 million for the impairment of long-lived assets, goodwill impairment charges of $1,343.7 million, charges related to prior years of
    $261.6 million, and a charge for the write-off of purchased research and development of $17.8 million. In addition, loss from continuing operations for the fiscal year ended September 30, 2002 includes a loss on investments of $270.8 million, a net gain on the sale of businesses of $7.2$23.6 million and $30.6 million of income relating to the early retirement of debt. Net (loss)
    incomeloss also includes a $6,282.5 million loss from the discontinued operations of Tyco Capital and a $58.8 million loss on sale of Tyco Capital for the year ended September 30, 2002. See Notes 5, 6, 7, 8, 11 and 1617 to the Consolidated Financial Statements. As further described in Note 1 to the
    Consolidated Financial Statements, during the fourth quarter of fiscal 2002,
    we identified various adjustments relating to prior year financial
    statements. The effects of these adjustments are not material individually
    or in the aggregate to any prior year, and therefore prior year financial
    statements have not been restated. Instead, these adjustments that aggregate
    $261.6 million on a pre-tax income from continuing operations basis or
    $199.7 million on an after-tax income from continuing operations basis have
    been recorded effective October 1, 2001. The pre-tax adjustments and the
    fiscal years in which they arose are as follows: $125.4 million in fiscal
    2001, $79.9 million in fiscal 2000, $63.4 million in fiscal 1999, ($8.1)
    million in fiscal 1998, and $1.0 million in fiscal 1997.

(2) 

(4)
In fiscal 2001, we changed our revenue recognition accounting policy to conform to the requirements of Staff Accounting Bulletin No. 101 issued by the Staff of the Securities and Exchange Commission, as more fully described in Note 12 to the Consolidated Financial Statements. As a result, Tyco recorded a cumulative effect adjustment of $653.7 million, net of tax. Pro forma amounts for the periods prior to fiscal 2001 have not been presented since the effect of the change in accounting principles for these periods could not be reasonably determined. Tyco also recorded a cumulative effect adjustment of (FOOTNOTES CONTINUED ON FOLLOWING PAGE)

                                       25

(FOOTNOTES CONTINUED FROM PRECEDING PAGE)

    $29.7 million, net of tax, in accordance with the transition provisions of SFAS No. 133, also discussed in Note 12 to the Consolidated Financial Statements.

(3) 

(5)
Income from continuing operations in the fiscal year ended September 30, 2001 includes a net charge of $418.5$585.3 million, of which $184.9 million is included in cost of sales, for restructuring and other unusual charges, a charge for the write-off of in-process research and development of $184.3 million and charges of $120.1 million for the impairment of long-lived assets. Income from continuing operations for the fiscal year ended September 30, 2001 also includes a net gain on sale of businesses of $410.4 million, a loss on investments of $133.8 million, a loss of $26.3 million relating to the early retirement of debt and a net gain on the sale of common shares of a subsidiary of $64.1$24.5 million. Net (loss) income includes $252.5 million of income from discontinued operations of Tyco Capital for the year ended September 30, 2001. See Notes 5, 6, 7, 8, 9 and 11 to the Consolidated Financial Statements.

(4) 

(6)
Income from continuing operations 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 unusual charges, and charges of $99.0 million for the impairment of long-lived assets. Income from continuing operations for the fiscal year ended September 30, 2000 also includes a pre-tax gain of $1,760.0 million related to the sale by a subsidiary of its common shares, and a loss of $0.3 million relating to the early retirement of debt. See Notes 5, 6, 8

(7)
During fiscal 1999, subsidiaries of Tyco merged with United States Surgical Corporation ("U.S. Surgical") and 9 toAMP Incorporated ("AMP"). Both merger transactions were accounted for under the Consolidated
    Financial Statements.

(5) pooling of interests accounting method. The selected financial data reflect the combined results of operations and financial position of Tyco, U.S. Surgical and AMP.


Income from continuing operations in the fiscal year ended September 30, 1999 includes charges of $1,035.2 million for merger, restructuring and other unusual 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 U.S. Surgical and AMP and AMP's profit improvement plan. Income from continuing operations in the fiscal year ended September 30, 1999 also includes a loss of $63.7 million relating to the early retirement of debt.

(6) Income from continuing operations in the fiscal year ended September 30,
    1998 includes charges of $80.5 million related primarily to costs to exit
    certain businesses in U.S. Surgical's operations and restructuring charges
    of $12.0 million related to the continuing operations of U.S. Surgical. 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. Income from continuing operations in the
    fiscal year ended September 30, 1998 also includes a net loss of
    $3.6 million relating to the early retirement of debt.

(7) 

(8)
Per share amounts have been retroactively restated to give effect to the mergers with U.S. Surgical and AMP; and a two-for-one stock splitssplit on
    October 22, 1997 and October 21, 1999, both of which werewas effected in the form of a stock dividend.

(8) 

(9)
Tyco has paid a quarterly cash dividend of $0.0125 per common share for all periods presented. U.S. Surgical paid quarterly dividends of $0.04 per share
    in the year ended September 30, 1998. AMP paid dividends of $0.27 per share in the first two quarters of the year ended September 30, 1999, and $0.26
    per share in the first quarter and $0.27 per share in the last three
    quarters of the year ended September 30, 1998.1999. The payment of dividends by Tyco in the future will depend on business conditions, Tyco's financial condition and earnings and other factors.

ITEM
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
  OF OPERATIONSManagement'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 123126 to 160172 of this Form 10-K.

ITEM
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative and Qualitative Disclosures About Market Risk
        See Management's Discussion and Analysis of Financial Condition and Results of Operations, which appears on pages 123126 to 160172 of this Form 10-K.

                                       26

ITEM
28

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAFinancial Statements and Supplementary Data
        The following consolidated financial statements and schedule are filed as part of this Annual Report:
        Financial Statements:
        Management's Responsibility for Financial Statements
        Report of Independent Accountants

       Auditors

Consolidated Statements of Operations for the fiscal years ended September 30, 2003, 2002 2001 and 20002001
        Consolidated Balance Sheets at September 30, 20022003 and 2001

       2002

Consolidated Statements of Shareholders' Equity for the fiscal years ended September 30, 2003, 2002 2001 and 2000

       2001


Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2003, 2002 2001 and 20002001
        Notes to Consolidated Financial Statements
        Financial Statement Schedule:
        Schedule II--ValuationII—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 NotesNote 31 to Consolidated Financial Statements for Summarized Quarterly Financial Data (unaudited).

ITEM
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
  FINANCIAL DISCLOSUREChanges in and Disagreements with Accountants on Accounting and Financial Disclosure
        None.

                                       27

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    Information concerning the Directors
Item 9A. Controls and Executive Officers is hereby
incorporated by reference to our definitive proxy statement, which will be filed
with the Commission within 120 days after the close of our fiscal year.

ITEM 11. EXECUTIVE COMPENSATION

    Information concerning executive compensation is hereby incorporated by
reference to our definitive proxy statement, which will be filed with the
Commission within 120 days after the close of our fiscal year.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
  RELATED STOCKHOLDER MATTERS

    Information concerning security ownership of certain beneficial owners and
management is hereby incorporated by reference to our definitive proxy
statement, which will be filed with the Commission within 120 days after the
close of our fiscal year.

EQUITY COMPENSATION PLAN INFORMATION

    The following table provides information as of September 30, 2002 with
respect to Tyco's common shares issuable under our equity compensation plans:


                                                                                         NUMBER OF SECURITIES
                                                                                          REMAINING AVAILABLE
                                                                                          FOR FUTURE ISSUANCE
                                           NUMBER OF SECURITIES                              UNDER EQUITY
                                            TO BE ISSUED UPON       WEIGHTED-AVERAGE      COMPENSATION PLANS
                                               EXERCISE OF         EXERCISE PRICE OF     (EXCLUDING SECURITIES
                                           OUTSTANDING OPTIONS,   OUTSTANDING OPTIONS,    REFLECTED IN COLUMN
PLAN CATEGORY                              WARRANTS AND RIGHTS    WARRANTS AND RIGHTS            (A))
- -------------                              --------------------   --------------------   ---------------------
                                                   (A)                    (B)                     (C)

Equity compensation plans approved by
  security holders.......................
  LTIP(1)(2).............................        51,850,730              $33.61                 18,562,935
  1994 Restricted Stock Plan(3)..........                --                  --                 34,401,602
  ESPP(4)................................                --                  --                  3,505,482
                                               ------------                                 --------------
  Subtotal...............................        51,850,730                  --                 56,470,019
                                               ------------                                 --------------
Equity compensation plans not approved by
  security holders.......................
  LTIP II(1).............................        81,876,362               38.09                 14,610,528
  SAYE(5)................................           763,834               38.79                  9,224,350
  Irish Bonus Plan(4)....................                --                  --                  1,180,233
                                               ------------                                 --------------
  Subtotal...............................        82,640,196                  --                 25,015,111
                                               ------------                                 --------------
    Total................................       134,490,926                                     81,485,130
                                               ============                                 ==============


- ------------------------------

(1) The Tyco International Ltd. Long Term Incentive Plan ("LTIP") allows for the
    granting of share options and other equity or equity-based grants to Board
    members, officers and non-officer employees. LTIP II allows for the granting
    of share options and other equity or equity-based grants to employees who
    are not officers of Tyco. See Note 23 to Consolidated Financial Statements.

(2) Excludes 21,606,501 outstanding share options assumed in connection with
    acquisitions at a weighted-average exercise price of $46.45. No additional
    options may be granted under those assumed plans. Includes 1,700,000
    Deferred Stock Units.

                                       28

(3) 1994 Restricted Stock Ownership Plan for Key Employees ("1994 Restricted
    Stock Plan") provides for the issuance of restricted share grants to
    officers and non-officer employees. The number of shares available for
    issuance under the 1994 Restricted Stock Plan was reduced to 999,524 in
    October 2002, but will automatically increase by 0.05% of the total common
    shares outstanding on each of October 1, 2003 and October 1, 2004. See
    Note 23 to Consolidated Financial Statements.

(4) This table includes an aggregate of 5,367,199 shares available for future
    issuance under the Tyco Employee Stock Purchase Plan ("ESPP") and the Tyco
    International (Ireland) Employee Share Scheme ("Irish Bonus Plan"), which
    represents the number of remaining shares registered for issuance under
    these two plans. All of the shares delivered to participants under the ESPP
    and Irish Bonus Plan are purchased in the open market. All shares delivered
    to participants under the Irish Bonus Plan are purchased on a pre-tax basis.
    See Note 23 to Consolidated Financial Statements.

(5) Tyco International Ltd. UK Savings Related Share Option Plan ("SAYE") is an
    Inland Revenue approved plan for UK employees that grants employees options
    to purchase shares at the end of three years of service at a 15% discount
    off the market price at time of grant. Employees make monthly contributions
    which are at the election of the employee used for the purchase price or
    returned to the employee. See Note 23 to Consolidated Financial Statements.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    Information concerning certain relationships and related transactions is
hereby incorporated by reference to our definitive proxy statement, which will
be filed with the Commission within 120 days after the close of our fiscal year.

ITEM 14. CONTROLS AND PROCEDURESProcedures
        We learned of instances of breakdowns of certain internal controls during fiscal 2002. This began in January 2002, whenAs a result, our Board of Directors learned of
an unauthorized payment to our former Lead Director, Frank E. Walsh, and
eventually led to the Board replacing our senior management team. These
instances included abuse of our employee relocation loan programs, unapproved
bonuses, attempted unauthorized credits to employee loans, undisclosed
compensation arrangements, unreported perquisites, self-dealing transactions and
other misuses of corporate trust, and have been widely reported in the press. We
believe the publicity resulting from such instances negatively impacted our
results of operations and cash flow in fiscal 2002. In addition, such publicity
contributed to a deterioration in our financial condition as we lost access to
the commercial paper market and credit ratings on our term debt declined during
fiscal 2002 from ratings as of the end of fiscal 2001.

    Our former Chief Executive Officer resigned on June 3, 2002, our former
Chief Corporate Counsel was dismissed on June 10, 2002 and our former Chief
Financial Officer resigned on August 1, 2002. In addition, these members of our
former senior management team have each been indicted by the State of New York
for violations of criminal law. On September 12, 2002, our former Chief
Executive Officer and our former Chief Financial Officer were charged with 39
violations of New York state criminal law, including enterprise corruption and
obtaining monies by theft and fraud, and our former Chief Corporate Counsel was
charged with falsifying business records in violation of New York state criminal
law.

    Our Board of Directors retained the law firm of Boies, Schiller & Flexner
LLPoutside counsel in April 2002 to conduct an investigation. The scope of the investigation
consisted of a review and analysis of transactions between and among Tyco and
its subsidiaries and our directors and officers. The findings of the first phase (Phase 1) were reported on September 17, 2002 in a Current Report on Form 8-K. In connection with the Phase 1 findings and at the direction of the Board
and our new Chief Executive Officer, theThe investigation was expanded to a second phase (Phase 2), which involved a more comprehensive review of Tyco's accounting and financial reporting. The scope of the Phase 2 review included an examination
of Tyco's reported revenues, profits, cash flow, internal auditing and control
procedures, use of reserves, and non-recurring charges, as well as corporate
governance issues such as the personal use of corporate assets and the use of
corporate funds to pay personal expenses, and employee loan and loan forgiveness
programs. Phase 2 of the investigation was completed by the Boies firm in late
December 2002.

                                       29

    It was concluded that:

    - There was no significant or systemic fraud affecting Tyco's prior
      financial statements;

    - There were a number of accounting entries and treatments that were
      incorrect and required correction;

    - The incorrect accounting entries and treatments are not individually or in
      the aggregate material to the overall financial statements of Tyco; and

    - Our prior senior management engaged in a pattern of aggressive accounting
      which, even when in accordance with generally accepted accounting
      principles, was intended to increase reported earnings above what they
      would have been if more conservative accounting had been employed;

    - Reversal or restatement of prior accounting entries and treatments
      resulting from the aggressive accounting pursued by prior senior
      management would not materially adversely affect our reported revenue,
      earnings and cash flow for 2003 and thereafter.

    These findingsconclusions were reported on December 30, 2002 in a Current Report on Form 8-K.
        While most of the matters identified by the review as "aggressive accounting" were determined by Tyco, in consultation with its auditors, to be in accordance with generally accepted accounting principles, there were as
indicated above, certain adjustments (19 in total) identified as relating to years preceding fiscal 2002. These adjustments which included adjustments from
the recording of previously unrecorded audit adjustments aggregated $36.1
million and2002 that were recordedincorporated in the first quarter of fiscal 2002. These adjustments
are discussed further in Note 1 to our Consolidated Financial Statements
included elsewhere herein.restated financial statements previously filed with the Securities and Exchange Commission on July 29, 2003.
        Additionally, our new senior management team in conjunction with our new Board of Directors reviewed overall company policies and procedures in areas that were viewed as important. Specific areas of focus included acquisition accounting, restructuring, financial and legal controls, reserve utilization, incentive compensation and a number of other areas relevant to our financial statements. New seniorSenior management determined that Tyco's existing policies and standards of approval needed substantial improvement and found that there were instances in which documentation of important financial reporting matters was substandard; there had been limited review of bonuses and incentive compensation across Tyco; and the manner in which former senior management managed Tyco did not reflect a commitment to sound corporate governance nor the processes required to ensure the highest
29

standards of financial integrity and accounting rigor to which the new senior management team and our Board of Directors is committed and our shareholders deserve.

    New senior
        Senior management believes that prior senior management's primary focus was on earnings-per-share accretive acquisitions which resulted in our growing considerably over the past several years, including the acquisition of approximately 700 companies of varying size and in varying businesses around the world, but which also strained the internal control environment and limited our investment in these areas. In addition, new senior management believes that
prior senior management during the past three years placed undue reliance on
non-recurring charges and pro forma financial information. New seniorSenior management also believes that the rapid pace of acquisitions and attendant restructurings made it difficult to ascertain the level of our organic growth.

    New senior
        Senior management is committed to improvingcontinuing to improve the state of our internal controls, corporate governance and financial reporting. OurIn fiscal 2003, our new Board of Directors and new senior management have initiated the following actions:

    - Added new nominees for the Board of Directors;

    - 
•
Created new Board and Committee charters;

                                       30

    - 

•
Created a new employee code of conduct;

    - Createdguide to ethical conduct and conducted worldwide employee meetings to train employees;

•
Established company-wide compliance training for all employees;

•
Chartered a new mission, values and goals statements;

    - Compliance Risk Committee;

•
Conducted the Phase 2 review;

    - 

•
Instituted detailed operating reviews with the Chief Executive Officer and Chief Financial Officer and each business segment;

    - 

•
Realigned reporting such that the business segment chief financial officers and general counsels report directly to our Chief Financial Officer and our General Counsel, respectively, and instituted similar reporting within each business segment;

    - 

•
Reviewed total incentive compensation spending with the Compensation Committee of the Board of Directors;

    - 

•
Issued a new delegation of authority to govern, among other business processes, the expenditure or commitment of funds;

    - Initiated

•
Developed a controllership assessment processcontroller's manual to identifyprovide guidance on applying accounting principles generally accepted in the status of
      key routines and controls;

    - United States;

•
Conducted a thorough review of internal audit processes and procedures;

    - 

•
Required internal representation letters, similar to the certifications by our Chief Executive Officer and Chief Financial Officer, for key general manager and financial and legal executives; and

    - 

•
Instituted a code of conduct for all financial executives.executives;

•
Developed a corporate policy manual to provide broadly applicable and consistent direction on authority, procedures and accountability with respect to business operations;

•
Instituted an account reconciliation process to improve controls over core accounting records;

•
Created an Ombudsman network;

•
Continued to conduct intensified internal audits, and detailed controls and operating reviews, and reported the results of such audits and reviews;

•
Developed a treasury department policies and procedures manual to provide guidance on the utilization of funds;

•
Expanded the resources and responsibilities of the internal audit function, with a senior internal audit officer who reports directly to the Audit Committee of the Board of Directors; and

•
Created a disclosure committee that includes a cross functional team, including, but not limited to, senior personnel from the legal, finance, and corporate goverance departments, which is
30
responsible for reviewing SEC periodic filings for adequacy of disclosure and communicating material findings to the Company's CEO and CFO.
        Although the framework has been put in place to materially improve the control structure of Tyco, it will take some time to realize all of the benefits from our initiatives. Our Board of Directors and new senior management are committed not only to a sound internal control environment but also to be recognized as a leader in corporate governance. We have committed considerable resources to date on the aforementioned reviews and remedies. A review of controls of a company the size of Tyco, which includes approximately 2,300 subsidiaries, is not a one-time event. We are committed to ongoing periodic reviews of our controls and their effectiveness, the results of which will be reported to our shareholders. We are undertaking a thorough review of our internal and disclosure controls including, but not limited to, information technology systems and financial reporting as part of the Company's compliance with Section 404 of the Sarbanes-Oxley Act of 2002, but at this time we have not completed our review of the existing controls and their effectiveness and, therefore, cannot assure you at this time that these controls and procedures fully satisfy the requirements of Section 404.
        As disclosed in the Company's previously filed Form 10-Q for the quarter ended March 31, 2003, the Company conducted intensified internal audits and detailed controls and operating reviews that resulted in the Company identifying and recording pre-tax charges of $506.0 million in the quarter for charges related to prior periods. These charges resulted from capitalizing certain selling expenses to property, plant and equipment and other non-current assets, mostly in the Fire and Security segment, and reconciliation items relating to balance sheet accounts where certain account analysis or periodic reconciliations were deficient, resulting in adjustments primarily related to the Engineered Products and Services segment. Additionally, charges related to the correction of balances primarily related to corporate pension and deferred compensation accruals, asset reserve adjustments and other accounting adjustment (i.e., purchase accounting accruals, deferred commissions, accounting related to leases in the Fire and Security and Engineered Products and Services segments). The restatement filed in July 2003 with the SEC includes adjustments to reverse the charges recorded in the quarter ended March 31, 2003 and reflect those charges in the historic periods to which they relate.
Our controls are improving and new senior management has no reason to believe that the financial statements included in this report are not fairly stated in all material respects. There can be no assurances, however, that new problems will not be found in the future. We do not expect that our disclosure controls and procedures, or our internal controls will prevent all errors and all fraud because a control system cannot provide absolute assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some person or by collusion of two or more people. Because of the inherent limitations in any control system, error or fraud may occur and not be detected. We expect to continue to improve our controls with each passing quarter. It will take some time, however, before we have in place the rigorous controls that our Board of Directors and new senior management desires and our shareholders deserve.

ITEM
        As of the end of the period covered by this report, an evaluation was performed of the effectiveness of the design and operation of the Company's disclosure controls and procedures by senior management. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that these procedures and controls are effective, given the cautions stated above. Other than as described above, this quarter, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls. The Company will continue to make ongoing assessments of these controls and procedures periodically.
31

PART III
Item 10.    Directors and Executive Officers of the Registrant
        Information concerning Directors and Executive Officers may be found under the caption "Election of Directors" in our definitive proxy statement for our 2004 Annual General Meeting of Shareholders (the "2004 Proxy Statement"), which will be filed within the Commission within 120 days after the close of our fiscal year. Such information is incorporated herein by reference. The information in the 2004 Proxy Statement set forth under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by reference.
Code of Ethics
        We have adopted the Tyco Guide to Ethical Conduct, which applies to all employees, officers and directors of Tyco. The Guide to Ethical Conduct meets the requirements of a "code of ethics" as defined by Item 406 of Regulation S-K, and applies to our Chief Executive Officer, Chief Financial Officer (who is both our principal financial and principal accounting officer), as well as all other employees, as indicated above. The Guide to Ethical Conduct also meets the requirements of a code of business conduct and ethics under NYSE listing standards. The Guide to Ethical Conduct is posted on our website at www.tyco.com under the headings "Our Commitment—Governance". We will also provide a copy of the Guide to Ethical Conduct to shareholders upon request. We intend to disclose any amendments to the Guide of Ethical Conduct, as well as any waivers for executive officers or directors, on our website at www.tyco.com.
Item 11.    Executive Compensation
        Information concerning executive compensation may be found under the captions "Executive Officer Compensation," "Corporate Governance—Compensation of Non-Employee Directors," and "Board Compensation Committee Report on Executive Compensation—Compensation Committee Interlocks and Insider Participation" of our 2004 Proxy Statement. Such information is incorporated herein by reference.
Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
                  Matters
        The information in the 2004 Proxy Statement set forth under the captions "Executive Officer Compensation—Equity Compensation Plan Information" and "Security Ownership of Certain Beneficial Owners and Management" is incorporated herein by reference.
Item 13.    Certain Relationships and Related Transactions
        The information in the 2004 Proxy Statement set forth under the caption "Certain Relationships and Related Transactions" is incorporated herein by reference.
Item 14.    Principal Accountant Fees and Services
        The information in the 2004 Proxy Statement set forth under the captions "Audit and Non-Audit Fees" and "Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of the Independent Auditor" is incorporated herein by reference.
32

PART IV
Item 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORMExhibits, Financial Statement Schedules and Reports on Form 8-K
(a)
(1) and (2) Financial Statements and Schedules--SeeSchedules—See Item 8.
(3)    Exhibit Index:

       EXHIBIT
       NUMBER                                     EXHIBIT
- ---------------------                             -------
Exhibit
Number
Exhibit

2.1


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).

2.2


Agreement for the Purchase and Sale of Assets, dated November 13, 2000, by and between Lucent Technologies and Tyco Group S.a.r.L. (Incorporated by reference to an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 2000).


                                       31

       EXHIBIT
       NUMBER                                     EXHIBIT
- ---------------------                             -------

2.3


Amendment No. 1 dated December 29, 2000 to Agreement for the Purchase and Sale of Assets, dated November 13, 2000, by and between Lucent Technologies and Tyco Group S.a.r.L. (Incorporated by reference to an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 2001 filed December 28, 2001).

2.4


Agreement and Plan of Merger dated March 12, 2001, by and between Tyco Acquisition Corp. XIX (NV) and The CIT Group, Inc., including guarantee of Tyco International Ltd. (Incorporated by reference to the Registrant's Form S-4 filed March 29, 2001).

2.5


Agreement and Plan of Merger dated August 3, 2001 by and between Tyco Acquisition Corp. XXIV (NV) and Sensormatic Electronic Corporation, including guarantee of Tyco International Ltd. (Incorporated by reference to the Registrant's Form S-4 filed August 24, 2001).

2.6


Amendment dated August 23, 2001 to Agreement and Plan of Merger dated August 3, 2001 by and between Tyco Acquisition Corp. XXIV(NV) and The CIT Group, Inc. (Incorporated by reference to the Registrant's Form S-4 filed September 13, 2001).

2.7


Agreement and Plan of Amalgamation dated October 18, 2001, by and between TGN Holdings, Ltd. and TyCom Ltd., including guarantee of Tyco International Ltd. (Incorporated by reference to the Registrant's Form S-4 filed October 23, 2001).

3.1


Memorandum of Association (as altered) (Incorporating all amendments to May 26, 1992)July 2, 1997) (Incorporated by reference to an
                        Exhibit to the Registrant's Annual Report on Form 10-K for
                        the fiscal year ended December 31, 1992).

         3.2            Certificate of Incorporation on change of name dated
                        July 2, 1997 (Incorporated by reference to an Exhibit to the
                        Registrant's Current Report dated July 2, 1997 on Form 8-K
                        filed July 10, 1997).

         3.3            Bye-Laws (Incorporating all amendments to March 27, 2001).
                        (Incorporated by reference to an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001)2003 filed on May 15, 2003 to make this exhibit electronically available because it was last filed with the Commission in paper format.)

3.2


Certificate of Incorporation (Incorporating all amendments to July 2, 1997) (Incorporated by reference to the Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 filed on May 15, 2003 to make this exhibit electronically available because it was last filed with the Commission in paper format.)

3.3


Bye-Laws of Tyco International Ltd. (incorporating all amendments as of March 6, 2003). (Incorporated by reference to the Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 filed on May 15, 2003).

4.1


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 (Incorporated by reference to an Exhibit to the Registrant's and TIG's Co-Registration Statement on Form S-3 filed June 9, 1998).

33

4.2


Certain instruments defining the rights of holders of TIG's and Tyco International Ltd.'s long-term debt, none of which authorize a total amount of indebtedness in excess of 10% of the total assets of Tyco International Ltd. and its subsidiaries on a consolidated basis, have not been filed in exhibits. Tyco International Ltd. agrees to furnish a copy of these agreements to the Commission upon request.

4.3


Indenture by and among TIG, Tyco, and State Street Bank and Trust Company, as trustee, dated as of February 12, 2001 relating to Zero Coupon Convertible Debentures due 2021 (Incorporated by reference to an Exhibit to the Registrants' and TIG's Co-Registration on Form S-3 filed March 16, 2001).

4.4


364-Day Revolving Credit Agreement dated as of February 7, 2001January 31, 2003 among TIG, Tyco International Group S.A., Tyco International Ltd., Sensormatic Electronics Corporation, Scott Technologies, Inc., Innerdyne, Inc., the banks named therein and The Chase Manhattan
                        Bank of America, N.A., as Administrative Agent (Incorporated by reference to anthe Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001)2003 filed on May 15, 2003).

4.5


Amendment No. 1 dated May 25, 2001 among TIG, Tyco, the banks named therein and The Chase Manhattan Bank, as Agent, relating to the 364-Day Credit Agreement dated February 7, 2001 (Incorporated by reference to an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 2001).


                                       32

       EXHIBIT
       NUMBER                                     EXHIBIT
- ---------------------                             -------

4.6


Indenture dated November 17, 2000 between Tyco and State Street Bank and Trust Company, as trustee relating to Zero Coupon Convertible Debentures due 2020 (Incorporated by reference to the Registrant's Form S-3 filed December 8, 2000).

4.7


Five-year Credit Agreement dated as of February 7, 2001 among TIG, Tyco, the Banks named therein and The Chase Manhattan Bank, as Agent (Incorporated by reference to an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001).

4.8


Amendment No. 1 dated May 25, 2001 among TIG, Tyco, the banks named therein and The Chase Manhattan Bank, as Agent, relating to the Five-year Credit Agreement dated February 7, 2001 (Incorporated by reference to an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 2001 filed December 28, 2001).

4.9


Indenture by and among Tyco International Group S.A. and U.S. Bank, N.A., as trustee, dated as of January 13, 2003 relating to Series A 2.750% Convertible Senior Debentures due 2018 and Series B 3.125% Convertible Senior Debentures due 2023 (Incorporated by reference to the Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 2002 filed on February 14, 2003).

4.10


Supplemental Indenture No. 1, dated January 10, 2003, by and among Tyco International Group S.A., Tyco International Ltd. and U.S. Bank, N.A. (formerly, State Street Bank and Trust Company). (Incorporated by reference to the Registrants' and TIG's Schedule TO filed January 14, 2003).

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).(1)

10.2


1981 Key Employee Loan Program (Incorporated by reference to Former Tyco's Form 10-K for the fiscal year ended May 31, 1982).(1)(2)

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).(1)(2)
34

10.4


1983 Key Employee Loan Program, as amended December 9, 1993 (Incorporated by reference to Former Tyco's Form 10-K for the fiscal year ended June 30, 1994).(1)(2)

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).(1)

10.6


Tyco International Ltd. Supplemental Executive Retirement Plan (Incorporated by reference to Former Tyco's Form 10-K for the fiscal year ended June 30, 1995).(1)(2)

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).(1)

10.8


Retention Agreement for L. Dennis Kozlowski dated January 22, 2001 and Amendment thereto dated August 1, 2001 (Incorporated by reference to an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 2001).(1)

10.9


Retention Agreement for Mark H. Swartz dated January 22, 2001 and Amendment thereto dated August 1, 2001 (Incorporated by reference to an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 2001).(1)

10.10


Retention Agreement for Richard J. Meelia dated February 14, 2002 (Incorporated by reference to an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 2001).(1)

10.11


Retention Agreement for Mark A. Belnick dated February 28, 2002 (Incorporated by reference to an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002).(1)

10.12


Edward D. Breen Employment Contract dated July 25, 2002 (Incorporated by reference to an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).(1)

10.13


Memo Summarizing Mark H. Swartz's Severance Arrangement (Incorporated by reference to an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).(1)


                                       33

       EXHIBIT
       NUMBER                                     EXHIBIT
- ---------------------                             -------

10.14


Memo Summarizing John F. Fort III's Interim Consulting Arrangement (Incorporated by reference to an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).(1)

10.15


Memo Summarizing Joshua M. Berman's Compensation Arrangement (Incorporated by reference to an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).(1)

10.16


David J. FitzPatrick Employment Contract dated September 18, 2002 (Filed herewith)(Incorporated by reference to an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 2002 filed on December 30, 2002).(1)

10.17


William B. Lytton Employment Contract dated September 30, 2002 (Filed herewith)(Incorporated by reference to an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 2002 filed on December 30, 2002).(1)

10.18


Tyco International Ltd. UK Savings Related Share Option Plan (Filed herewith)(Incorporated by reference to an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 2002 filed on December 30, 2002).(1)

10.19


Tyco Employee Stock Purchase Plan, (Filed herewith)(1)

        as amended May 2003 (incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-8 dated July 30, 2003).

35

10.20


Tyco International (Ireland) Employee Share Scheme (Incorporated by reference to an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 2002 filed on December 30, 2002).

10.21


Eric M. Pillmore Employment Contract effective August 12, 2002 and executed on January 29, 2003 (Incorporated by reference to the Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 filed on May 15, 2003).(1)

10.22


Tyco International (US) Inc. Deferred Compensation Plan as amended through June 2002. (Incorporated by reference to the Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 filed on May 15, 2003).

10.23


Juergen Gromer Employment Contract effective October 1, 1999 and executed on June 19, 2000 (Filed herewith).

18.1


Preferability Letter (Incorporated by reference to the Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 filed on May 15, 2003).

21.1


Subsidiaries of the registrant (Filed herewith).

23.1


Consent of PricewaterhouseCoopers LLP (Filed herewith).

24.1


Power of Attorney (Filed herewith).

31.1


Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).

31.2


Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).

32.1


Certification by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith).


- ------------------------------

(1)
Management contract or compensatory plan.

(2)
In July 1997, a wholly-owned subsidiary of what was formerly called ADT Limited ("ADT") merged with Tyco International Ltd., a Massachusetts Corporation at the time ("Former Tyco"). Upon consummation of the merger, ADT (the continuing public company) changed its name to Tyco International Ltd. ("Tyco"). Former Tyco became a wholly-owned subsidiary of Tyco and changed its name to Tyco International (US) Inc. ("Tyco US").
        (b)    Reports on Form 8-K
        Current Report on Form 8-K filedfurnished under Item 9 on July 26, 2002 including,29, 2003 to include, as an exhibit, the press release of Tyco International Ltd. dated July 25, 200229, 2003 announcing the appointmentCompany's filing of Edward D. Breen as Chairman ofrestated financial statements for the Board of Directorsfiscal year ended September 30, 2002, the quarter ended December 31, 2002 and Chief Executive
Officer of Tyco International Ltd.the quarter ended March 31, 2003.
        Current Report on Form 8-K filedfurnished under Item 9 in place of Item 12 (in accordance with interim guidance provided by the Securities and Exchange Commission in Release No. 33-8216 issued March 27, 2003) on September 17, 2002 includingJuly 29, 2003 to include, as an exhibit, the "Boies
Report" and, as exhibits, the following press releases:

    - Dated August 6, 2002release of Tyco International Ltd. dated July 29, 2003 announcing the appointmentCompany's results for the third fiscal quarter.
        Current Report on Form 8-K furnished under Item 9 on August 8, 2003 to include, as an exhibit, the press release of John A. Krol to the
      Board of Directors.

    - AlsoTyco International Ltd. dated August 6, 20028, 2003 announcing the appointmentCompany's request for accelerated effectiveness of Eric M. Pillmore
      to the newly created position of Senior Vice President of Corporate
      Governance for Tyco.

    - Dated September 11, 2002 announcing the appointment of David J.
      FitzPatrick as Executive Vice President and Chief Financial Officer for
      Tyco.

    - Dated September 12, 2002 announcing the appointment of William B. Lytton
      as Executive Vice President and General Counsel for Tyco.

    - Also dated September 12, 2002 announcing the nomination of Jerome B. York,
      Mackey J. McDonald, George W. Buckley, Bruce S. Gordon and Sandra Wijnberg
      to fill expected vacanciesits shelf registration statement on the Board.

    (c) See Item 15(a)(3) above.

    (d) See Item 15(a)(2) above.

                                       34
Form S-3.
36

SIGNATURES
        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.



TYCO INTERNATIONAL LTD.



By:
                                                          /s/ 

/s/  DAVID J. FITZPATRICK      -----------------------------------------
                                                            
David J. FitzPatrick
                                                        EXECUTIVE VICE PRESIDENT AND
                                                          CHIEF FINANCIAL OFFICER
                                                    (PRINCIPAL FINANCIAL AND ACCOUNTING
                                                                  OFFICER)

Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: December 30, 200217, 2003
        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 on December 30, 200217, 2003 in the capacities indicated below.

                    NAME                                           TITLE
                    ----                                           -----

             /s/
Name
Title



/s/  EDWARD D. BREEN      
Edward D. Breen
Chairman, Chief Executive Officer and - --------------------------------------------   Director (Principal Executive Officer)
               Edward D. Breen

          /s/ 

/s/  DAVID J. FITZPATRICK      
David J. FitzPatrick


Executive Vice President and Chief Financial - --------------------------------------------   Officer (Principal Financial and Accounting David J. FitzPatrick               Officer)
            /s/ RICHARD S. BODMAN
- --------------------------------------------   

*
Dennis C. Blair


Director
              Richard S. Bodman

            /s/ GEORGE W. BUCKLEY
- --------------------------------------------   Director
              

*
George W. Buckley

              /s/ JOHN F. FORT
- --------------------------------------------   


Director
                John F. Fort

             /s/ STEPHEN W. FOSS
- --------------------------------------------   

*
Bruce S. Gordon


Director
               Stephen W. Foss
              /s/ JOHN A. KROL
- --------------------------------------------   Director
                

*
John A. Krol

              /s/ WENDY E. LANE
- --------------------------------------------   


Director
                Wendy E. Lane

           /s/ MACKEY J. MCDONALD
- --------------------------------------------   

*
H. Carl McCall


Director

*
Mackey J. McDonald
            /s/ W. PETER SLUSSER
- --------------------------------------------   


Director
              W. Peter Slusser

             /s/ JOSEPH F. WELCH
- --------------------------------------------   

*
Brendan R. O'Neill


Director
               Joseph F. Welch
             /s/ JEROME B. YORK
- --------------------------------------------   

*
Sandra S. Wijnberg


Director

*
Jerome B. York


Director


                                       35

                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Edward D. Breen, certify that:

1.  I have reviewed
* William B. Lytton, by signing his name hereto, does sign this annual reportdocument on Form 10-K of Tyco International Ltd.;

2.  Based on my knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact necessary to
    make the statements made, in lightbehalf of the circumstances underabove noted individuals, pursuant to powers of attorney duly executed by such individuals which such
    statements were made, not misleading with respecthave been filed as Exhibit 24.1 to the period covered by
    this annual report;

3.  Based on my knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in all material
    respects the financial condition, results of operations and cash flows of
    the registrant as of, and for, the periods presented in this annual report;

4.  The registrant's other certifying officer and I are responsible for
    establishing and maintaining disclosure controls and procedures (as defined
    in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

    a)  designed such disclosure controls and procedures to ensure that material
       information relating to the registrant, including its consolidated
       subsidiaries, is made known to us by others within those entities,
       particularly during the period in which this annual report is being
       prepared;

    b)  evaluated the effectiveness of the registrant's disclosure controls and
       procedures as of a date within 90 days prior to the filing date of this
       annual report (the "Evaluation Date"); and

    c)  presented in this annual report our conclusions about the effectiveness
       of the disclosure controls and procedures based on our evaluation as of
       the Evaluation Date;

5.  The registrant's other certifying officer and I have disclosed, based on our
    most recent evaluation, to the registrant's auditors and the audit committee
    of registrant's board of directors (or persons performing the equivalent
    functions):

    a)  all significant deficiencies in the design or operation of internal
       controls which could adversely affect the registrant's ability to record,
       process, summarize and report financial data and have identified for the
       registrant's auditors any material weaknesses in internal controls; and

    b)  any fraud, whether or not material, that involves management or other
       employees who have a significant role in the registrant's internal
       controls; and

6.  The registrant's other certifying officer and I have indicated in this
    annual report whether there were significant changes in internal controls or
    in other factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including any
    corrective actions with regard to significant deficiencies and material
    weaknesses.

Report.

Date: December 30, 2002

                                    /s/ EDWARD D. BREEN
                               ----------------------------
                                     Edward D. Breen
                                 CHIEF EXECUTIVE OFFICER


/s/  WILLIAM B. LYTTON      
William B. Lytton
Attorney-in-fact


                                       36

                    CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, David J. FitzPatrick, certify that:

1.  I have reviewed this annual report on Form 10-K of Tyco International Ltd.;

2.  Based on my knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact necessary to
    make the statements made, in light of the circumstances under which such
    statements were made, not misleading with respect to the period covered by
    this annual report;

3.  Based on my knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in all material
    respects the financial condition, results of operations and cash flows of
    the registrant as of, and for, the periods presented in this annual report;

4.  The registrant's other certifying officer and I are responsible for
    establishing and maintaining disclosure controls and procedures (as defined
    in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

    a)  designed such disclosure controls and procedures to ensure that material
       information relating to the registrant, including its consolidated
       subsidiaries, is made known to us by others within those entities,
       particularly during the period in which this annual report is being
       prepared;

    b)  evaluated the effectiveness of the registrant's disclosure controls and
       procedures as of a date within 90 days prior to the filing date of this
       annual report (the "Evaluation Date"); and

    c)  presented in this annual report our conclusions about the effectiveness
       of the disclosure controls and procedures based on our evaluation as of
       the Evaluation Date;

5.  The registrant's other certifying officer and I have disclosed, based on our
    most recent evaluation, to the registrant's auditors and the audit committee
    of registrant's board of directors (or persons performing the equivalent
    functions):

    a)  all significant deficiencies in the design or operation of internal
       controls which could adversely affect the registrant's ability to record,
       process, summarize and report financial data and have identified for the
       registrant's auditors any material weaknesses in internal controls; and

    b)  any fraud, whether or not material, that involves management or other
       employees who have a significant role in the registrant's internal
       controls; and

6.  The registrant's other certifying officer and I have indicated in this
    annual report whether there were significant changes in internal controls or
    in other factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including any
    corrective actions with regard to significant deficiencies and material
    weaknesses.


Date: December 30, 2002

                                 /s/ DAVID J. FITZPATRICK
                               ----------------------------
                                  David J. FitzPatrick
                                 CHIEF FINANCIAL OFFICER
37

TYCO INTERNATIONAL LTD.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Index to Consolidated Financial Information

                                                                PAGE
                                                              --------

Page

Management's Responsibility for Financial Statements........        Statements


39

Report of Independent Accountants...........................        Auditors


40

Consolidated Statements of Operations.......................        Operations


41

Consolidated Balance Sheets.................................        Sheets


42

Consolidated Statements of Shareholders' Equity.............        Equity


43

Consolidated Statements of Cash Flows.......................        Flows


44

Notes to Consolidated Financial Statements..................        Statements


45

Management's Discussion and Analysis of Financial Condition and Results of Operations.................................       123
  Operations


126

Results of Operations


126

Liquidity and Capital Resources...........................       145
  Resources


148

Off-Balance Sheet Arrangements


158

Risk Factors


161

Quantitative and Qualitative Disclosures About Market Risk....................................................       157
  Risk


167

Accounting and Technical Pronouncements...................       159
  Pronouncements


170

Forward-Looking Information...............................       160
Information


171

Schedule II--ValuationII—Valuation and Qualifying Accounts..............       161
Accounts


173
38

MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS

    The financial statements
Discussion of Tyco International Ltd. and its subsidiariesManagement's Responsibility
        We are
the responsibility of the Company's management and have been prepared in
accordance with generally accepted accounting principles in the United States of
America.

    Management is responsible for the preparation, integrity and objectivityfair presentation of the consolidated financial statements including estimates and judgments reflectedrelated information appearing in them and fulfills
this responsibility primarily by establishing and maintaining accounting systems
and practices adequately supported by internal accounting controls.report. We take these responsibilities very seriously and are committed to building ourselvesbeing recognized as a recognized leader in governance, controls, and clarity and transparency of financial statements. We are committed to making honesty, integrity and transparency the hallmarks of how we run Tyco. We believe that to succeed in today's environment requires more than just compliance with laws and regulations—it requires a culture based upon the highest levels of integrity and ethical values. Expected behavior starts with our Board of Directors and our senior team leading by example and includes every one of Tyco's approximately 258,600 global employees, as well as our customers, suppliers and business partners. One of our most crucial objectives is restoring public, employee and shareholder confidence in Tyco. We believe this can be accomplished; first, by issuing financial information and related disclosures that are accurate, complete and transparent so investors are well informed; second, by supporting a leadership culture based on an ethic of uncompromising integrity and accountability; and third, by recruiting, training and retaining high-performance individuals who have just begunthe highest ethical standards. We take full responsibility for meeting this missionobjective, adopting appropriate accounting standards, designing and it will take some timemaintaining adequate systems of internal and disclosure controls and devoting our full commitment and the necessary resources to developthese items.
Dedication to Governance, Controls and additional timeFinancial Reporting
        For a number of us at Tyco, 2003 was our first full year in our roles. We have made significant progress designing, maintaining and monitoring internal controls over financial reporting and disclosures and improving our corporate governance practices, many of which are discussed in this Annual Report on Form 10-K. We believe that a strong control environment is a dynamic process and therefore, intend to permeatecontinue to devote substantial resources to this effort. The Company has continually assessed and improved its controls during 2003, and we believe the entire organization globally.
Internal controls are designed to provide reasonable assurance that the Company's assets are safeguarded, that transactions are executed in accordance with management's authorizations and that the financial records are reliable for the purpose of preparingour financial statements. Even an effective
        While we are pleased with our corporate governance and control improvements during 2003, we still have much more to accomplish in a dynamic and quite complex environment. We recognize that a culture and control environment cannot be completely implemented in one year. With the goal of identifying and remediating control deficiencies in a timely manner, we are continuing to devote substantial resources to document and test the effectiveness of all aspects of our internal control system, no matter how well designed, has inherent limitations, includingand disclosure controls. This is being done at approximately 2,300 subsidiaries throughout the possibilityworld. It will take some time and experience, however, before we are confident that we have in place all of the circumvention or overriding ofrigorous and effective controls that we and therefore,
can provide only reasonable assurance with respect to financial statement
preparation and such safeguarding of assets.

    The Company assessed its internal control system within the past 90 days.
Based on this assessment, notwithstanding the instances of breakdowns described
in the Company's Annual Report on Form 10-K (see Item 14--Controls and
Procedures), management believes the internal accounting controls in use at the
time of this filing are likely to provide reasonable assurance that the
Company's assets are safeguarded, that transactions are executed in accordance
with management's authorizations, and that the financial records are reliable
for the purpose of preparing financial statements. Such reasonable assurance is
based in part on additional procedures performed by the Company in light of the
instances of breakdowns of internal controls which occurred during fiscal 2002.
We are enhancing our internal controls by implementing additional policies and
procedures to improve the assurance level. Many of the difficulties the Company
faced during fiscal 2002 highlight the business imperative of high quality
controls and corporate governance. However, given the short tenure of senior
management with the Company and the ongoing internal investigations of the
Company's controls, management has not had the opportunity to conduct a
comprehensive review of its approximately 2,300 subsidiaries. Even with a more
thorough review, no assurances can be given that control problems will not be
discovered in the future.

    PricewaterhouseCoopers LLP, independent accountants, are retained to audit
Tyco International Ltd.'s consolidated financial statements. Their accompanying
report is based on audits conducted in accordance with auditing standards
generally accepted in the United States of America, which include the
consideration of the Company's internal controls to establish a basis for
determining the nature, timing and extent of audit tests to be applied.

    The Audit Committee of the Board of Directors consistingdesire.
        We welcome the oversight of directors who
are not officers or employees of the Company,our financial reporting activities by our independent auditors, PricewaterhouseCoopers LLP (PwC). In its audit testing, PwC takes into consideration our internal control environment. Our Audit Committee meets regularly and separately with management, the independent accountantsPwC and theour internal auditors to review matters
relatingdiscuss financial reports, controls and auditing.
        We, our Board, and Audit Committee are all committed to excellence in governance, financial reporting internal accounting controls and auditing.

controls.

          /s/ 

/s/  EDWARD D. BREEN      /s/
Edward D. Breen
Chairman and Chief Executive Officer


/s/  DAVID J. FITZPATRICK      -------------------------------------       ----------------------------------------------
            Edward D. Breen                               
David J. FitzPatrick
  CHAIRMAN AND CHIEF EXECUTIVE OFFICER    EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

Executive Vice President and
Chief Financial Officer
39

REPORT OF INDEPENDENT ACCOUNTANTS

AUDITORS
To the Board of Directors
and Shareholders of Tyco International Ltd.
        In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Tyco International Ltd. and its subsidiaries at September 30, 20022003 and 2001,2002, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2002,2003, 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 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 consolidated 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 provide a reasonable basis for our opinion.
        As discussed in Notes 1, 12 and 17, the Company adopted provisions of Financial Accounting Standards Board Interpretation No. 46,Consolidation of Variable Interest Entities, in fiscal year 2003, Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets, in fiscal year 2002 and SEC Staff Accounting Bulletin No. 101,Revenue Recognition in Financial Statements in fiscal year 2001.
PRICEWATERHOUSECOOPERS LLP

Boston, Massachusetts
New York, New York
December 23, 2002

                                       
November 4, 2003
(except for Note 33, for which the date is
November 18, 2003)
40

TYCO INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS

                        (IN MILLIONS, EXCEPT SHARE DATA)


                                                                    YEAR ENDED SEPTEMBER 30,
                                                              ------------------------------------
                                                                 2002         2001         2000
                                                              ----------   ----------   ----------

Revenue from product sales..................................  $ 28,794.8   $ 28,987.4   $ 24,958.4
Service revenue.............................................     6,848.9      5,049.2      3,973.5
                                                              ----------   ----------   ----------
NET REVENUES................................................    35,643.7     34,036.6     28,931.9
Cost of product sales.......................................    19,510.8     18,334.4     15,959.8
Cost of services............................................     3,570.2      2,615.9      1,971.4
Selling, general and administrative expenses................     8,086.8      6,361.5      5,252.0
Restructuring and other unusual charges, net................     1,203.9        233.6        175.3
Charges for the impairment of long-lived assets.............     3,489.5        120.1         99.0
Goodwill impairment.........................................     1,343.7           --           --
Write-off of purchased in-process research and
  development...............................................        17.8        184.3           --
                                                              ----------   ----------   ----------
OPERATING (LOSS) INCOME.....................................    (1,579.0)     6,186.8      5,474.4
Interest income.............................................       117.3        128.3         75.2
Interest expense............................................    (1,077.0)      (904.8)      (844.8)
Other (expense) income, net.................................      (233.0)       250.3         (0.3)
Net gain on sale of common shares of a subsidiary...........       (39.6)        64.1      1,760.0
                                                              ----------   ----------   ----------
(Loss) income from continuing operations before income taxes
  and minority interest.....................................    (2,811.3)     5,724.7      6,464.5
Income taxes................................................      (257.7)    (1,275.7)    (1,925.9)
Minority interest...........................................        (1.4)       (47.5)       (18.7)
                                                              ----------   ----------   ----------
(LOSS) INCOME FROM CONTINUING OPERATIONS....................    (3,070.4)     4,401.5      4,519.9
(Loss) income from discontinued operations of Tyco Capital
  (net of tax expense of $316.1 million and $195.0 million
  for the year ended September 30, 2002 and 2001,
  respectively).............................................    (6,282.5)       252.5           --
Loss on sale of Tyco Capital, net of $0 tax.................       (58.8)          --           --
                                                              ----------   ----------   ----------
(Loss) income before cumulative effect of accounting
  changes...................................................    (9,411.7)     4,654.0      4,519.9
Cumulative effect of accounting changes, net of tax.........          --       (683.4)          --
                                                              ----------   ----------   ----------
NET (LOSS) INCOME...........................................  $ (9,411.7)  $  3,970.6   $  4,519.9
                                                              ==========   ==========   ==========
BASIC (LOSS) EARNINGS PER COMMON SHARE:
  (Loss) income from continuing operations..................  $    (1.54)  $     2.44   $     2.68
  (Loss) income from discontinued operations of Tyco
    Capital, net of tax.....................................       (3.16)        0.14           --
  Loss on sale of Tyco Capital, net of tax..................       (0.03)          --           --
  (Loss) income before cumulative effect of accounting
    changes.................................................       (4.73)        2.58         2.68
  Cumulative effect of accounting changes...................          --        (0.38)          --
  Net (loss) income per common share........................       (4.73)        2.20         2.68
DILUTED (LOSS) EARNINGS PER COMMON SHARE:
  (Loss) income from continuing operations..................  $    (1.54)  $     2.40   $     2.64
  (Loss) income from discontinued operations of Tyco
    Capital, net of tax.....................................       (3.16)        0.14           --
  Loss on sale of Tyco Capital, net of tax..................       (0.03)          --           --
  (Loss) income before cumulative effect of accounting
    changes.................................................       (4.73)        2.54         2.64
  Cumulative effect of accounting changes...................          --        (0.37)          --
  Net (loss) income per common share........................       (4.73)        2.17         2.64
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
  Basic.....................................................     1,988.5      1,806.9      1,688.0
  Diluted...................................................     1,988.5      1,831.6      1,713.2

ADJUSTED INCOME AND PER SHARE INFORMATION, EXCLUDING
  GOODWILL AMORTIZATION (NOTE 16):
  Income from continuing operations.........................               $  4,897.8   $  4,845.2
  Basic earnings per common share...........................                     2.71         2.87
  Diluted earnings per common share.........................                     2.67         2.83

  Income before cumulative effect of accounting changes.....                  5,210.1      4,845.0
  Basic earnings per common share...........................                     2.88         2.87
  Diluted earnings per common share.........................                     2.85         2.83

  Net income................................................                  4,526.7      4,845.0
  Basic earnings per common share...........................                     2.51         2.87
  Diluted earnings per common share.........................                     2.47         2.83

(in millions, except per share data)
 
 
Year Ended September 30,
 
 
 
2003
 
2002
 
2001
 
Revenue from product sales
 
$
29,427.7
 
$
28,741.8
 
$
28,953.1
 
Service revenue
 
 
7,373.6
 
 
6,848.0
 
 
5,049.0
 
 
 
 
 
 
Net revenues
 
 
36,801.3
 
 
35,589.8
 
 
34,002.1
 
Cost of product sales
 
 
19,740.2
 
 
19,495.1
 
 
18,319.7
 
Cost of services
 
 
4,151.7
 
 
3,570.2
 
 
2,615.9
 
Selling, general and administrative expenses
 
 
8,813.4
 
 
8,181.6
 
 
6,745.3
 
Restructuring and other (credits) charges, net
 
 
(74.3
)
 
1,124.3
 
 
400.4
 
Charges for the impairment of long-lived assets
 
 
824.9
 
 
3,309.5
 
 
120.1
 
Goodwill impairment
 
 
278.4
 
 
1,343.7
 
 
—
 
Write-off of purchased in-process research and development
 
 
—
 
 
17.8
 
 
184.3
 
 
 
 
 
 
Operating income (loss)
 
 
3,067.0
 
 
(1,452.4
)
 
5,616.4
 
Interest income
 
 
107.2
 
 
117.3
 
 
128.3
 
Interest expense
 
 
(1,148.0
)
 
(1,077.0
)
 
(904.8
)
Other (expense) income, net
 
 
(223.4
)
 
(216.6
)
 
250.3
 
Net gain on sale of common shares of a subsidiary
 
 
—
 
 
—
 
 
24.5
 
 
 
 
 
 
Income (loss) from continuing operations before income taxes and minority interest
 
 
1,802.8
 
 
(2,628.7
)
 
5,114.7
 
Income taxes
 
 
(764.5
)
 
(208.1
)
 
(1,172.3
)
Minority interest
 
 
(3.6
)
 
(1.4
)
 
(47.5
)
 
 
 
 
 
Income (loss) from continuing operations
 
 
1,034.7
 
 
(2,838.2
)
 
3,894.9
 
Income (loss) from discontinued operations of Tyco Capital (net of tax expense of $0, $316.1 million and $195.0 million for the years ended September 30, 2003, 2002 and 2001, respectively)
 
 
20.0
 
 
(6,282.5
)
 
252.5
 
Loss on sale of Tyco Capital, net of $0 tax
 
 
—
 
 
(58.8
)
 
—
 
 
 
 
 
 
Income (loss) before cumulative effect of accounting changes
 
 
1,054.7
 
 
(9,179.5
)
 
4,147.4
 
Cumulative effect of accounting changes, net of tax benefit of $40.4 million and $351.9 million for the year ended September 30, 2003 and 2001, respectively
 
 
(75.1
)
 
—
 
 
(683.4
)
 
 
 
 
 
Net income (loss)
 
$
979.6
 
$
(9,179.5
)
$
3,464.0
 
 
 
 
 
 

Basic earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 
 
Income (loss) from continuing operations
 
$
0.52
 
$
(1.43
)
$
2.16
 
 
Income (loss) from discontinued operations of Tyco Capital, net of tax
 
 
0.01
 
 
(3.16
)
 
0.14
 
 
Loss on sale of Tyco Capital, net of tax
 
 
—
 
 
(0.03
)
 
—
 
 
Income (loss) before cumulative effect of accounting changes
 
 
0.53
 
 
(4.62
)
 
2.30
 
 
Cumulative effect of accounting changes
 
 
(0.04
)
 
—
 
 
(0.38
)
 
Net income (loss) per common share
 
 
0.49
 
 
(4.62
)
 
1.92
 
Diluted earnings (loss) per common share:
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
0.52
 
$
(1.43
)
$
2.13
 
 
Income (loss) from discontinued operations of Tyco Capital, net of tax
 
 
0.01
 
 
(3.16
)
 
0.14
 
 
Loss on sale of Tyco Capital, net of tax
 
 
—
 
 
(0.03
)
 
—
 
 
Income (loss) before cumulative effect of accounting changes
 
 
0.53
 
 
(4.62
)
 
2.26
 
 
Cumulative effect of accounting changes
 
 
(0.04
)
 
—
 
 
(0.37
)
 
Net income (loss) per common share
 
 
0.49
 
 
(4.62
)
 
1.89
 
Weighted-average number of common shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 
1,995.0
 
 
1,988.5
 
 
1,806.9
 
 
Diluted
 
 
2,002.7
 
 
1,988.5
 
 
1,831.6
 
See Notes to Consolidated Financial Statements.
41

TYCO INTERNATIONAL LTD.
CONSOLIDATED BALANCE SHEETS

                        (IN MILLIONS, EXCEPT SHARE DATA)


                                                                  SEPTEMBER 30,
                                                              ---------------------
                                                                2002        2001
                                                              ---------   ---------

ASSETS
Current Assets:
  Cash and cash equivalents.................................  $ 6,186.8   $ 1,779.2
  Restricted cash...........................................      196.2          --
  Accounts receivables, less allowance for doubtful accounts
    ($629.1 at September 30, 2002 and $550.4 at
    September 30, 2001).....................................    5,848.6     6,453.2
  Inventories...............................................    4,716.0     5,101.3
  Deferred income taxes.....................................    1,338.1       980.2
  Other current assets......................................    1,478.9     1,532.3
                                                              ---------   ---------
    Total current assets....................................   19,764.6    15,846.2
Net Assets of Discontinued Operations.......................         --    10,598.0
Tyco Global Network.........................................      581.6     2,342.4
Property, Plant and Equipment, Net..........................    9,969.5     9,970.3
Goodwill, Net...............................................   26,093.2    23,264.0
Intangible Assets, Net......................................    6,562.6     5,476.9
Other Assets................................................    3,442.9     3,524.8
                                                              ---------   ---------
      TOTAL ASSETS..........................................  $66,414.4   $71,022.6
                                                              =========   =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
  Loans payable and current maturities of long-term debt....  $ 7,719.0   $ 2,023.0
  Accounts payable..........................................    3,170.0     3,692.6
  Accrued expenses and other current liabilities............    5,270.8     5,181.8
  Contracts in process--billings in excess of cost..........      522.1       935.0
  Deferred revenue..........................................      731.3       973.5
  Income taxes payable......................................    2,218.9     1,845.0
                                                              ---------   ---------
    Total current liabilities...............................   19,632.1    14,650.9
Long-Term Debt..............................................   16,486.8    19,596.0
Other Long-Term Liabilities.................................    5,462.1     4,736.9
                                                              ---------   ---------
      TOTAL LIABILITIES.....................................   41,581.0    38,983.8
                                                              ---------   ---------
Commitments and Contingencies (Note 20)
Minority Interest...........................................       42.8       301.4
Shareholders' Equity:
  Preference shares, $1 par value, 125,000,000 shares
    authorized, one share outstanding at September 30, 2002
    and 2001................................................         --          --
  Common shares, $0.20 par value, 2,500,000,000 shares
    authorized; 1,995,699,758 and 1,935,464,840 shares
    outstanding, net of 22,522,250 and 17,026,256 shares
    owned by subsidiaries at September 30, 2002 and 2001,
    respectively............................................      399.1       387.1
  Capital in excess:
    Share premium...........................................    8,146.9     7,962.8
    Contributed surplus, net of deferred compensation of
      $51.2 at September 30, 2002 and $85.3 at
      September 30, 2001....................................   15,042.7    12,561.3
  Accumulated earnings......................................    2,794.1    12,305.7
  Accumulated other comprehensive loss......................   (1,592.2)   (1,479.5)
                                                              ---------   ---------
      TOTAL SHAREHOLDERS' EQUITY............................   24,790.6    31,737.4
                                                              ---------   ---------
      TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............  $66,414.4   $71,022.6
                                                              =========   =========

(in millions, except share data)
 
 
September 30,
 
 
 
2003
 
2002
 
Assets
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
4,186.7
 
$
6,185.7
 
 
Restricted cash
 
 
141.8
 
 
196.2
 
 
Accounts receivable, less allowance for doubtful accounts ($726.2 at September 30, 2003 and $638.0 at September 30, 2002)
 
 
5,714.8
 
 
5,831.9
 
 
Inventories
 
 
4,292.2
 
 
4,607.9
 
 
Deferred income taxes
 
 
855.2
 
 
1,356.0
 
 
Other current assets
 
 
2,048.8
 
 
1,461.7
 
 
 
 
 
 
 
Total current assets
 
 
17,239.5
 
 
19,639.4
 
Property, Plant and Equipment, Net
 
 
10,299.8
 
 
10,442.6
 
Goodwill
 
 
25,938.7
 
 
26,020.5
 
Intangible Assets, Net
 
 
5,790.0
 
 
5,805.8
 
Other Assets
 
 
4,277.0
 
 
3,591.5
 
 
 
 
 
 
Total Assets
 
$
63,545.0
 
$
65,499.8
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
Loans payable and current maturities of long-term debt
 
$
2,718.4
 
$
7,719.0
 
 
Accounts payable
 
 
2,716.7
 
 
3,173.8
 
 
Accrued expenses and other current liabilities
 
 
3,999.1
 
 
5,348.7
 
 
Contracts in process—billings in excess of cost
 
 
327.6
 
 
523.6
 
 
Deferred revenue
 
 
810.5
 
 
758.5
 
 
 
 
 
 
 
 
Total current liabilities
 
 
10,572.3
 
 
17,523.6
 
Long-Term Debt
 
 
18,250.7
 
 
16,529.1
 
Other Long-Term Liabilities
 
 
8,239.7
 
 
7,288.9
 
 
 
 
 
 
Total Liabilities
 
 
37,062.7
 
 
41,341.6
 
 
 
 
 
Commitments and Contingencies (Note 22)
 
 
 
 
 
 
 
Minority Interest
 
 
113.3
 
 
76.9
 
Shareholders' Equity:
 
 
 
 
 
 
 
 
Preference shares, $1 par value, 125,000,000 shares authorized, one share outstanding at September 30, 2003 and 2002
 
 
—
 
 
—
 
 
Common shares, $0.20 par value, 4,000,000,000 shares authorized; 1,998,189,621 and 1,995,699,758 shares outstanding, net of 21,144,265 and 22,522,250 shares owned by subsidiaries at September 30, 2003 and 2002, respectively
 
 
399.6
 
 
399.1
 
 
Capital in excess:
 
 
 
 
 
 
 
 
 
 
Share premium
 
 
8,161.4
 
 
8,146.9
 
 
 
 
Contributed surplus, net of deferred compensation of $45.5 at September 30, 2003 and $51.2 at September 30, 2002
 
 
15,120.1
 
 
15,042.7
 
Accumulated earnings
 
 
2,961.2
 
 
2,081.2
 
Accumulated other comprehensive loss
 
 
(273.3
)
 
(1,588.6
)
 
 
 
 
 
Total Shareholders' Equity
 
 
26,369.0
 
 
24,081.3
 
 
 
 
 
 
Total Liabilities and Shareholders' Equity
 
$
63,545.0
 
$
65,499.8
 
 
 
 
 
See Notes to Consolidated Financial Statements.
42

TYCO INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                                 (IN MILLIONS)

                                                        COMMON                                               ACCUMULATED
                                          NUMBER OF     SHARES                 CONTRIBUTED                      OTHER
FOR THE YEARS ENDED                         COMMON     $0.20 PAR     SHARE      SURPLUS--    ACCUMULATED    COMPREHENSIVE
SEPTEMBER 30, 2000, 2001, 2002              SHARES       VALUE      PREMIUM      COMMON        EARNINGS     (LOSS) INCOME
- ------------------------------            ----------   ---------   ---------   -----------   ------------   --------------

BALANCE AT SEPTEMBER 30, 1999...........   1,690.2      $338.0     $4,881.5     $ 3,607.6     $ 3,992.3       $  (450.1)
Comprehensive income:
  Net income............................                                                        4,519.9
  Currency translation adjustment.......                                                                         (384.0)
  Unrealized gain on marketable
    securities..........................                                                                        1,075.7
  Minimum pension liability
    adjustment..........................                                                                            7.5
  Total comprehensive income............
Exchange of ADT Liquid Yield Option
  Notes.................................       1.7         0.4                       16.0
Dividends...............................                                                          (84.6)
Restricted stock grants, net of
  surrenders............................       3.1         0.6                        0.4
Options exercised.......................      17.2         3.5        351.8
Repurchase of common shares by
  subsidiary............................     (43.3)       (8.7)                  (1,876.4)
Equity-related compensation expense,
  including amortization of deferred
  compensation..........................                                            128.2
Issuance of common shares and options
  for acquisitions......................      15.6         3.1                      784.8
Tax benefit on share options............                                            125.7
                                           -------      ------     --------     ---------     ---------       ---------
BALANCE AT SEPTEMBER 30, 2000...........   1,684.5       336.9      5,233.3       2,786.3       8,427.6           249.1
Comprehensive income:
  Net income............................                                                        3,970.6
  Currency translation adjustment.......                                                                         (199.7)
  Unrealized loss on marketable
    securities..........................                                                                       (1,202.2)
  Unrealized loss on derivative
    instruments.........................                                                                          (65.7)
  Minimum pension liability
    adjustment..........................                                                                         (261.0)
  Total comprehensive income............
Sale of common shares...................      39.0         7.8      2,188.8
Exchange of ADT Liquid Yield Option
  Notes.................................       0.6         0.1                        5.8
Dividends...............................                                                          (92.5)
Restricted stock grants, net of
  surrenders............................       2.7         0.5                        0.2
Options exercised.......................      21.5         4.3        540.7
Repurchase of common shares by
  subsidiary............................     (25.0)       (5.0)                  (1,321.1)
Equity-related compensation expense,
  including amortization of deferred
  compensation..........................                                            107.7
Issuance of common shares and options
  for acquisitions......................     211.3        42.3                   10,711.7
Issuance of common shares for litigation
  settlement............................       0.9         0.2                       39.8
Tax benefit on share options............                                            230.9
                                           -------      ------     --------     ---------     ---------       ---------
BALANCE AT SEPTEMBER 30, 2001...........   1,935.5       387.1      7,962.8      12,561.3      12,305.7        (1,479.5)
Comprehensive loss:
  Net loss..............................                                                       (9,411.7)
  Currency translation adjustment.......                                                                          114.7
  Unrealized gain on marketable
    securities..........................                                                                          113.4
  Unrealized gain on derivative
    instruments.........................                                                                           65.0
  Minimum pension liability
    adjustment..........................                                                                         (405.8)
  Total comprehensive loss..............
Exchange of ADT Liquid Yield Option
  Notes.................................       0.6         0.1                        6.2
Dividends...............................                                                          (99.9)
Restricted stock grants, net of
  surrenders............................       1.6         0.3                        2.7
Options exercised.......................       8.1         1.6        184.1
Repurchase of common shares by
  subsidiary............................     (15.7)       (3.1)                    (786.1)
Equity-related compensation expense,
  including amortization of deferred
  compensation..........................                                             92.9
Issuance of common shares and options
  for acquisitions......................      65.6        13.1                    3,111.4
Tax benefit on share options............                                             54.3
                                           -------      ------     --------     ---------     ---------       ---------
BALANCE AT SEPTEMBER 30, 2002...........   1,995.7      $399.1     $8,146.9     $15,042.7     $ 2,794.1       $(1,592.2)
                                           =======      ======     ========     =========     =========       =========



FOR THE YEARS ENDED                                   COMPREHENSIVE
SEPTEMBER 30, 2000, 2001, 2002              TOTAL     INCOME (LOSS)
- ------------------------------            ---------   --------------

BALANCE AT SEPTEMBER 30, 1999...........  $12,369.3
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 ADT Liquid Yield Option
  Notes.................................       16.4
Dividends...............................      (84.6)
Restricted stock grants, net of
  surrenders............................        1.0
Options exercised.......................      355.3
Repurchase of common shares by
  subsidiary............................   (1,885.1)
Equity-related compensation expense,
  including amortization of deferred
  compensation..........................      128.2
Issuance of common shares and options
  for acquisitions......................      787.9
Tax benefit on share options............      125.7
                                          ---------
BALANCE AT SEPTEMBER 30, 2000...........   17,033.2
Comprehensive income:
  Net income............................    3,970.6     $ 3,970.6
  Currency translation adjustment.......     (199.7)       (199.7)
  Unrealized loss on marketable
    securities..........................   (1,202.2)     (1,202.2)
  Unrealized loss on derivative
    instruments.........................      (65.7)        (65.7)
  Minimum pension liability
    adjustment..........................     (261.0)       (261.0)
                                                        ---------
  Total comprehensive income............                $ 2,242.0
                                                        =========
Sale of common shares...................    2,196.6
Exchange of ADT Liquid Yield Option
  Notes.................................        5.9
Dividends...............................      (92.5)
Restricted stock grants, net of
  surrenders............................        0.7
Options exercised.......................      545.0
Repurchase of common shares by
  subsidiary............................   (1,326.1)
Equity-related compensation expense,
  including amortization of deferred
  compensation..........................      107.7
Issuance of common shares and options
  for acquisitions......................   10,754.0
Issuance of common shares for litigation
  settlement............................       40.0
Tax benefit on share options............      230.9
                                          ---------
BALANCE AT SEPTEMBER 30, 2001...........   31,737.4
Comprehensive loss:
  Net loss..............................   (9,411.7)    $(9,411.7)
  Currency translation adjustment.......      114.7         114.7
  Unrealized gain on marketable
    securities..........................      113.4         113.4
  Unrealized gain on derivative
    instruments.........................       65.0          65.0
  Minimum pension liability
    adjustment..........................     (405.8)       (405.8)
                                                        ---------
  Total comprehensive loss..............                $(9,524.4)
                                                        =========
Exchange of ADT Liquid Yield Option
  Notes.................................        6.3
Dividends...............................      (99.9)
Restricted stock grants, net of
  surrenders............................        3.0
Options exercised.......................      185.7
Repurchase of common shares by
  subsidiary............................     (789.2)
Equity-related compensation expense,
  including amortization of deferred
  compensation..........................       92.9
Issuance of common shares and options
  for acquisitions......................    3,124.5
Tax benefit on share options............       54.3
                                          ---------
BALANCE AT SEPTEMBER 30, 2002...........  $24,790.6
                                          =========

(in millions)
For the Years Ended
September 30, 2001, 2002, 2003
 
Number of
Common
Shares
 
Common
Shares
$0.20 Par
Value
 
Share
Premium
 
Contributed
Surplus—
Common
 
Accumulated
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
 
Comprehensive
Income (Loss)
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Balance at September 30, 2000
 
1,684.5
 
$
336.9
 
$
5,233.3
 
$
2,786.3
 
$
7,989.1
 
$
267.1
 
$
16,612.7
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
3,464.0
 
 
 
 
 
3,464.0
 
$
3,464.0
 
 
Currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(204.9
)
 
(204.9
)
 
(204.9
)
 
Unrealized loss on marketable securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1,162.6
)
 
(1,162.6
)
 
(1,162.6
)
 
Unrealized loss on derivative instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(65.7
)
 
(65.7
)
 
(65.7
)
 
Minimum pension liability adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(261.0
)
 
(261.0
)
 
(261.0
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
1,769.8
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sale of common shares
 
39.0
 
 
7.8
 
 
2,188.8
 
 
 
 
 
 
 
 
 
 
 
2,196.6
 
 
 
 
Dividends
 
 
 
 
 
 
 
 
 
 
 
 
 
(92.5
)
 
 
 
 
(92.5
)
 
 
 
Restricted stock grants, net of surrenders
 
2.7
 
 
0.5
 
 
 
 
 
0.2
 
 
 
 
 
 
 
 
0.7
 
 
 
 
Options exercised
 
21.5
 
 
4.3
 
 
540.7
 
 
 
 
 
 
 
 
 
 
 
545.0
 
 
 
 
Repurchase of common shares by subsidiary
 
(25.0
)
 
(5.0
)
 
 
 
 
(1,321.1
)
 
 
 
 
 
 
 
(1,326.1
)
 
 
 
Equity-related compensation expense, including amortization of deferred compensation
 
 
 
 
 
 
 
 
 
 
107.7
 
 
 
 
 
 
 
 
107.7
 
 
 
 
Issuance of common shares and options for acquisitions
 
211.3
 
 
42.3
 
 
 
 
 
10,947.3
 
 
 
 
 
 
 
 
10,989.6
 
 
 
 
Issuance of common shares for litigation settlement
 
0.9
 
 
0.2
 
 
 
 
 
39.8
 
 
 
 
 
 
 
 
40.0
 
 
 
 
Tax benefit on share options
 
 
 
 
 
 
 
 
 
 
230.9
 
 
 
 
 
 
 
 
230.9
 
 
 
 
Exchange of convertible debt due 2010
 
0.6
 
 
0.1
 
 
 
 
 
5.8
 
 
 
 
 
 
 
 
5.9
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2001
 
1,935.5
 
 
387.1
 
 
7,962.8
 
 
12,796.9
 
 
11,360.6
 
 
(1,427.1
)
 
31,080.3
 
 
 
 
Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
 
 
 
 
 
 
 
 
 
 
 
 
(9,179.5
)
 
 
 
 
(9,179.5
)
$
(9,179.5
)
 
Currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
105.5
 
 
105.5
 
 
105.5
 
 
Unrealized gain on marketable securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
73.8
 
 
73.8
 
 
73.8
 
 
Unrealized gain on derivative instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
65.0
 
 
65.0
 
 
65.0
 
 
Minimum pension liability adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(405.8
)
 
(405.8
)
 
(405.8
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
(9,341.0
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends
 
 
 
 
 
 
 
 
 
 
 
 
 
(99.9
)
 
 
 
 
(99.9
)
 
 
 
Restricted stock grants, net of surrenders
 
1.6
 
 
0.3
 
 
 
 
 
2.7
 
 
 
 
 
 
 
 
3.0
 
 
 
 
Options exercised
 
8.1
 
 
1.6
 
 
184.1
 
 
 
 
 
 
 
 
 
 
 
185.7
 
 
 
 
Repurchase of common shares by subsidiary
 
(15.7
)
 
(3.1
)
 
 
 
 
(786.1
)
 
 
 
 
 
 
 
(789.2
)
 
 
 
Equity-related compensation expense, including amortization of deferred compensation
 
 
 
 
 
 
 
 
 
 
92.9
 
 
 
 
 
 
 
 
92.9
 
 
 
 
Issuance of common shares and options for acquisitions
 
65.6
 
 
13.1
 
 
 
 
 
2,875.8
 
 
 
 
 
 
 
 
2,888.9
 
 
 
 
Tax benefit on share options
 
 
 
 
 
 
 
 
 
 
54.3
 
 
 
 
 
 
 
 
54.3
 
 
 
 
Exchange of convertible debt due 2010
 
0.6
 
 
0.1
 
 
 
 
 
6.2
 
 
 
 
 
 
 
 
6.3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2002
 
1,995.7
 
 
399.1
 
 
8,146.9
 
 
15,042.7
 
 
2,081.2
 
 
(1,588.6
)
 
24,081.3
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
979.6
 
 
 
 
 
979.6
 
$
979.6
 
 
Currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,445.4
 
 
1,445.4
 
 
1,445.4
 
 
Unrealized gain on marketable securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.0
 
 
2.0
 
 
2.0
 
 
Unrealized gain on derivative instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.7
 
 
2.7
 
 
2.7
 
 
Minimum pension liability adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(134.8
)
 
(134.8
)
 
(134.8
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
2,294.9
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends
 
 
 
 
 
 
 
 
 
 
 
 
 
(99.6
)
 
 
 
 
(99.6
)
 
 
 
Restricted stock grants, net of surrenders
 
1.1
 
 
0.2
 
 
 
 
 
(0.2
)
 
 
 
 
 
 
 
 
 
 
 
 
Options exercised
 
1.4
 
 
0.3
 
 
14.5
 
 
 
 
 
 
 
 
 
 
 
14.8
 
 
 
 
Repurchase of common shares by subsidiary
 
 
 
 
 
 
 
 
 
 
(1.2
)
 
 
 
 
 
 
 
(1.2
)
 
 
 
Equity-related compensation expense, including amortization of deferred compensation
 
 
 
 
 
 
 
 
 
 
38.1
 
 
 
 
 
 
 
 
38.1
 
 
 
 
Expiration of pre-existing put option rights assumed in acquisition
 
 
 
 
 
 
 
 
 
 
3.1
 
 
 
 
 
 
 
 
3.1
 
 
 
 
Tax benefit on share options
 
 
 
 
 
 
 
 
 
 
37.5
 
 
 
 
 
 
 
 
37.5
 
 
 
 
Exchange of convertible debt due 2010
 
 
 
 
 
 
 
 
 
 
0.1
 
 
 
 
 
 
 
 
0.1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2003
 
1,998.2
 
$
399.6
 
$
8,161.4
 
$
15,120.1
 
$
2,961.2
 
$
(273.3
)
$
26,369.0
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements.
43

TYCO INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (IN MILLIONS)


                                                                  YEARS ENDED SEPTEMBER 30,
                                                              ----------------------------------
                                                                2002         2001        2000
                                                              ---------   ----------   ---------

CASH FLOWS FROM OPERATING ACTIVITIES:
(Loss) income from continuing operations....................  $(3,070.4)  $  4,401.5   $ 4,519.9
Adjustments to reconcile net (loss) income from continuing
  operations to net cash provided by operating activities:
  Non-cash restructuring and other unusual charges
    (credits), net..........................................      851.5        145.2       (84.2)
  Write-off of purchased in-process research and
    development.............................................       17.8        184.3          --
  Charges for the impairment of long-lived assets...........    3,489.5        120.1        99.0
  Goodwill impairment.......................................    1,343.7           --          --
  Minority interest in net income of consolidated
    subsidiaries............................................        1.4         47.5        18.7
  Net loss (gain) on sale of businesses.....................       (7.2)      (410.4)         --
  Loss on investments.......................................      270.8        133.8          --
  Net loss (gain) on sale of common shares of subsidiary....       39.6        (64.1)   (1,760.0)
  Depreciation..............................................    1,465.5      1,243.1     1,095.0
  Goodwill and intangible assets amortization...............      567.4        897.5       549.4
  Deferred income taxes.....................................     (535.6)       219.0       507.8
  Provision for losses on accounts receivable and
    inventory...............................................      493.9        593.5       354.3
  Debt and refinancing cost amortization....................      194.0        108.4         6.8
  Charges related to prior years (see Note 1)...............      222.0           --          --
  Other non-cash items......................................      (26.0)        81.8        60.0
    Changes in assets and liabilities, net of the effects of
     acquisitions and divestitures:
      Accounts receivable...................................    1,014.5       (434.1)     (992.4)
      (Decrease in) proceeds under sale of accounts
       receivable program...................................      (56.4)       490.6       100.0
      Contracts in progress.................................     (336.5)      (192.5)       28.9
      Inventories...........................................      (47.2)      (678.8)     (850.0)
      Other current assets..................................      (51.9)       313.7       100.2
      Accounts payable......................................     (833.7)      (249.1)      443.9
      Accrued expenses and other current liabilities........      272.2       (606.1)       53.1
      Income taxes..........................................      335.1        370.7       896.4
      Deferred revenue......................................      (35.5)       304.1        (0.2)
      Other.................................................      117.0        (94.2)      128.4
                                                              ---------   ----------   ---------
        Net cash provided by operating activities from
        continuing operations...............................    5,695.5      6,925.5     5,275.0
        Net cash provided by (used in) operating activities
        from discontinued operations........................    1,462.9       (260.2)         --
                                                              ---------   ----------   ---------
        Net cash provided by operating activities...........    7,158.4      6,665.3     5,275.0
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net..............   (1,708.7)    (1,797.5)   (1,703.8)
Construction in progress--Tyco Global Network...............   (1,146.0)    (2,247.7)     (111.1)
Acquisition of businesses, net of cash acquired.............   (3,084.8)   (10,956.6)   (4,246.5)
Cash paid for purchase accounting and holdback/earn-out
  liabilities...............................................     (624.1)      (894.4)     (544.2)
Net proceeds from the sale of CIT...........................    4,395.4           --          --
Disposal of other businesses, net of cash sold..............      138.7        904.4        74.4
Net purchases of investments................................      (16.8)      (142.8)     (353.4)
Restricted cash.............................................     (196.2)          --          --
Other.......................................................      (83.2)      (177.2)      (52.9)
                                                              ---------   ----------   ---------
        Net cash used in investing activities from
        continuing operations...............................   (2,325.7)   (15,311.8)   (6,937.5)
        CIT cash balance acquired...........................         --      2,156.4          --
        Net cash provided by investing activities from
        discontinued operations.............................    2,684.3      1,516.8          --
                                                              ---------   ----------   ---------
        Net cash provided by (used in) investing
        activities..........................................      358.6    (11,638.6)   (6,937.5)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from debt......................................    1,951.3      8,535.6       680.4
Proceeds from sale of common shares.........................         --      2,196.6          --
Proceeds from exercise of options...........................      185.7        545.0       355.3
Net proceeds from sale of common shares by subsidiary.......         --           --     2,130.7
Dividends paid..............................................     (100.3)       (90.0)      (86.2)
Repurchase of Tyco common shares............................     (789.2)    (1,326.1)   (1,885.1)
Repurchase of minority interest shares of subsidiary........         --       (270.0)         --
Capital contributions to Tyco Capital.......................     (200.0)      (675.0)         --
Other.......................................................       (9.7)       (15.4)      (29.8)
                                                              ---------   ----------   ---------
        Net cash provided by financing activities from
        continuing operations...............................    1,037.8      8,900.7     1,165.3
        Net cash used in financing activities from
        discontinued operations.............................   (2,874.6)    (2,605.0)         --
                                                              ---------   ----------   ---------
        Net cash (used in) provided by financing
        activities..........................................   (1,836.8)     6,295.7     1,165.3
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........    5,680.2      1,322.4      (497.2)
TYCO CAPITAL'S CASH AND CASH EQUIVALENTS TRANSFERRED TO
  DISCONTINUED OPERATIONS...................................   (1,272.6)      (808.0)         --
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............    1,779.2      1,264.8     1,762.0
                                                              ---------   ----------   ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................  $ 6,186.8   $  1,779.2   $ 1,264.8
                                                              =========   ==========   =========
SUPPLEMENTARY CASH FLOW DISCLOSURE:
Interest paid...............................................  $   943.8   $    896.5   $   814.2
                                                              =========   ==========   =========
Income taxes paid...........................................  $   668.3   $    798.9   $   491.1
                                                              =========   ==========   =========

(in millions)
 
Year Ended September 30,
 
 
2003
 
2002
 
2001
 
Cash Flows From Operating Activities:
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
1,034.7
 
$
(2,838.2
)
$
3,894.9
 
Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
 
Non-cash restructuring and other (credits) charges, net
 
(45.9
)
 
796.5
 
 
312.0
 
 
Write-off of purchased in-process research and development
 
—
 
 
17.8
 
 
184.3
 
 
Charges for the impairment of long-lived assets
 
824.9
 
 
3,309.5
 
 
120.1
 
 
Goodwill impairment
 
278.4
 
 
1,343.7
 
 
—
 
 
Minority interest in net income of consolidated subsidiaries
 
3.6
 
 
1.4
 
 
47.5
 
 
Net gain on sale of businesses
 
—
 
 
(23.6
)
 
(410.4
)
 
Loss on investments
 
87.2
 
 
270.8
 
 
133.8
 
 
Net gain on sale of common shares of subsidiary
 
—
 
 
—
 
 
(24.5
)
 
Depreciation
 
1,471.9
 
 
1,464.1
 
 
1,242.7
 
 
Goodwill and intangible assets amortization
 
725.0
 
 
620.9
 
 
942.3
 
 
Deferred income taxes
 
348.9
 
 
(585.2
)
 
107.3
 
 
Provision for losses on accounts receivable and inventory
 
581.1
 
 
501.6
 
 
598.2
 
 
Debt and refinancing cost amortization
 
116.4
 
 
194.0
 
 
108.4
 
 
Loss on the retirement of debt
 
151.8
 
 
—
 
 
—
 
 
(Gain) loss on the early extinguishment of debt
 
(24.1
)
 
(33.0
)
 
0.7
 
 
Other non-cash items
 
99.2
 
 
42.4
 
 
136.5
 
 
 
Changes in assets and liabilities, net of the effects of acquisitions and divestitures:
 
 
 
 
 
 
 
 
 
 
 
 
Accounts receivable
 
331.9
 
 
1,071.5
 
 
(427.0
)
 
 
 
(Decrease) increase in sale of accounts receivable programs
 
(119.0
)
 
(56.4
)
 
490.6
 
 
 
 
Contracts in progress
 
(86.2
)
 
(334.3
)
 
(191.7
)
 
 
 
Inventories
 
419.2
 
 
(37.1
)
 
(655.7
)
 
 
 
Other current assets
 
(22.1
)
 
(54.9
)
 
327.7
 
 
 
 
Accounts payable
 
(627.6
)
 
(833.8
)
 
(248.0
)
 
 
 
Accrued expenses and other current liabilities
 
(559.9
)
 
195.3
 
 
(555.3
)
 
 
 
Income taxes
 
200.6
 
 
335.1
 
 
370.7
 
 
 
 
Deferred revenue
 
2.3
 
 
(25.1
)
 
327.7
 
 
 
 
Other
 
153.8
 
 
68.4
 
 
(121.7
)
 
 
 
 
 
 
 
 
Net cash provided by operating activities from continuing operations
 
5,346.1
 
 
5,411.4
 
 
6,711.1
 
 
 
 
 
Net cash provided by (used in) operating activities from discontinued operations
 
20.0
 
 
1,462.9
 
 
(260.2
)
 
 
 
 
 
 
 
 
Net cash provided by operating activities
 
5,366.1
 
 
6,874.3
 
 
6,450.9
 
Cash Flows From Investing Activities:
 
 
 
 
 
 
 
 
 
Purchase of property, plant and equipment, net
 
(1,169.6
)
 
(1,678.8
)
 
(1,773.4
)
Construction of Tyco Global Network
 
(112.7
)
 
(1,146.0
)
 
(2,247.7
)
Acquisition of businesses, net of cash acquired
 
(44.0
)
 
(1,683.8
)
 
(9,962.0
)
Acquisition of customer accounts (ADT dealer program)
 
(596.8
)
 
(1,139.3
)
 
(798.1
)
Cash paid for purchase accounting and holdback/earn-out liabilities
 
(271.8
)
 
(624.1
)
 
(878.7
)
Net proceeds from the sale of CIT
 
—
 
 
4,395.4
 
 
—
 
Disposal of other businesses, net of cash sold
 
8.5
 
 
138.7
 
 
904.4
 
Cash invested in short-term investments
 
(392.1
)
 
—
 
 
—
 
Net sales (purchases) of long-term investments
 
9.2
 
 
(16.8
)
 
(142.8
)
Increase in current and non-current restricted cash
 
(228.4
)
 
(196.2
)
 
—
 
Other
 
57.7
 
 
(94.8
)
 
(177.2
)
 
 
 
 
 
 
 
 
Net cash used in investing activities from continuing operations
 
(2,740.0
)
 
(2,045.7
)
 
(15,075.5
)
 
 
 
 
CIT cash balance acquired
 
—
 
 
—
 
 
2,156.4
 
 
 
 
 
Net cash provided by investing activities from discontinued operations
 
—
 
 
2,684.3
 
 
1,516.8
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by investing activities
 
(2,740.0
)
 
638.6
 
 
(11,402.3
)
Cash Flows From Financing Activities:
 
 
 
 
 
 
 
 
 
Net (repayments of) proceeds from debt (Note 29)
 
(4,618.6
)
 
1,951.3
 
 
8,535.6
 
Proceeds from sale of common shares
 
—
 
 
—
 
 
2,196.6
 
Proceeds from exercise of options
 
14.8
 
 
185.7
 
 
545.0
 
Dividends paid
 
(100.9
)
 
(100.3
)
 
(90.0
)
Repurchase of Tyco common shares
 
(1.2
)
 
(789.2
)
 
(1,326.1
)
Repurchase of minority interest shares of subsidiary
 
—
 
 
—
 
 
(270.0
)
Capital contributions to Tyco Capital
 
—
 
 
(200.0
)
 
(675.0
)
Other
 
(8.0
)
 
(9.7
)
 
(15.4
)
 
 
 
 
 
 
 
 
Net cash (used in) provided by financing activities from continuing operations
 
(4,713.9
)
 
1,037.8
 
 
8,900.7
 
 
 
 
 
Net cash used in financing activities from discontinued operations
 
—
 
 
(2,874.6
)
 
(2,605.0
)
 
 
 
 
 
 
 
 
Net cash (used in) provided by financing activities
 
(4,713.9
)
 
(1,836.8
)
 
6,295.7
 
Effect of currency translation on cash
 
88.8
 
 
2.1
 
 
(21.0
)

Net (decrease) increase in cash and cash equivalents

 

(1,999.0

)

 

5,678.2

 

 

1,323.3

 
Tyco Capital's cash and cash equivalents transferred to discontinued operations
 
—
 
 
(1,272.6
)
 
(808.0
)
Cash and cash equivalents at beginning of year
 
6,185.7
 
 
1,780.1
 
 
1,264.8
 
 
 
 
 
Cash and cash equivalents at end of year
$
4,186.7
 
$
6,185.7
 
$
1,780.1
 
 
 
 
 
        See Notes to Consolidated Financial Statements.
44

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    BASIS OF PRESENTATION--TheBasis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation—The Consolidated Financial Statements include the consolidated accounts of Tyco International Ltd., a company incorporated in Bermuda, and its subsidiaries (Tyco and all its subsidiaries, hereinafter "we," the "Company" or "Tyco") and have been prepared in United States dollars, and in accordance with generally accepted accounting principlesGenerally Accepted Accounting Principles in the United States ("GAAP"). As described in Note 11, CIT Group Inc. ("CIT"), which comprised 
Business—the
operations of the Tyco Capital business segment, was sold in an initial public
offering ("IPO") in July 2002. Consequently, the results of Tyco Capital are
presented as discontinued operations. References to Tyco refer to its continuing
operations, with the exception of the discussions regarding discontinued
operations in Note 11. The continuing operations of Tyco represent what was
referred to as Tyco Industrial in prior filings.

    INVESTIGATION--With the arrival of new senior management, the Company has
engaged in a number of internal reviews aimed at determining what, if any,
misconduct may have been committed by prior senior management. An initial review
of prior management's transactions with the Company was conducted by the law
firm of Boies, Schiller & Flexner LLP. The details of their findings were made
public in a Form 8-K filed on September 17, 2002. In July 2002, our new CEO and
our Board of Directors ordered a further review of corporate governance
practices and the accounting of selected acquisitions. This review has been
referred to as the "Phase 2 review."

    The Phase 2 review was conducted by the law firm of Boies, Schiller &
Flexner LLP and the Boies firm was in turn assisted by forensic accountants. The
review received the full cooperation of Tyco's auditors, PricewaterhouseCoopers
LLP, as well as Tyco's new senior management team. The review included an
examination of Tyco's reported revenues, profits, cash flow, internal auditing
and control procedures, accounting for major acquisitions and reserves, the use
of non-recurring charges, as well as corporate governance issues such as the
personal use of corporate assets and the use of corporate funds to pay personal
expenses, employee loan and loan forgiveness programs. Approximately 25 lawyers
and 100 accountants worked on the review from August into December 2002. In
total, at considerable cost, more than 15,000 lawyer hours and 50,000 accountant
hours were dedicated to this review. The review team examined documents and
interviewed Tyco personnel at more than 45 operating units in the United States
and in 12 foreign countries.

    As a result of the Phase 2 Review, the Company identified certain
adjustments relating to years preceding fiscal 2002. Such adjustments were
recorded in the first quarter of fiscal 2002, and are discussed further below.

    CHARGES RELATING TO PRIOR YEARS RECORDED IN FISCAL 2002--During the fourth
quarter of fiscal 2002, the Company identified various adjustments relating to
prior year financial statements. Management concluded the effects of these
adjustments, as well as any unrecorded proposed audit adjustments, were not
material individually or in the aggregate to the current year or any prior year.
Accordingly, prior year financial statements have not been restated. Instead,
these adjustments, which aggregate $261.6 million on a pre-tax income basis or
$199.7 million on an after-tax income basis, have been recorded effective
October 1, 2001. The nature and amounts of these adjustments are principally as
follows:

    - The Company determined the amounts reimbursed from dealers under ADT's
      authorized dealer program exceeded the costs actually incurred. The
      cumulative effect of reimbursements recorded in years prior to fiscal 2002
      in excess of costs incurred, net of the effect of the deferred credit,
      which would have been amortized as described further in Note 1, is
      $185.9 million.

                                       45

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    - The Company determined that the net gain of $64.1 million on the issuance
      of TyCom shares previously reported for fiscal 2001 should have been lower
      by $39.6 million.

    - The Company identified several adjustments, both as a result of the
      Phase 2 review and the recording of previously unrecorded audit
      adjustments, which are more appropriately recorded as expenses, rather
      than as part of the Company's acquisition accounting. The cumulative
      effect of the adjustments necessary to revise the prior accounting is a
      pre-tax charge of $36.1 million.

    The fiscal years to which the charges relate are as follows ($ in millions):


                                                              PRIOR TO
                                                               FISCAL     FISCAL     FISCAL
TYPE OF ADJUSTMENT                                              2000       2000       2001      TOTAL
- ------------------------------------------------------------  --------   --------   --------   --------

ADT dealer reimbursements...................................   $33.6      $53.5      $ 98.8     $185.9
Gain on issuance of shares of TyCom.........................      --         --        39.6       39.6
Other adjustments...........................................    22.7       26.4       (13.0)      36.1
                                                               -----      -----      ------     ------
Totals......................................................   $56.3      $79.9      $125.4     $261.6
                                                               =====      =====      ======     ======


    These adjustments would have impacted income (loss) from continuing
operations and net income (loss). Income (loss) from continuing operations would
have been impacted as follows: fiscal 2000 $4,464 million compared with
$4,520 million; fiscal 2001 $4,297 million compared with $4,402 million; and
fiscal 2002 $(2,871) million compared with $(3,070) million. Net income (loss)
would have been impacted as follows: fiscal 2000 $4,464 million compared with
$4,520 million; fiscal 2001 $3,866 million compared with $3,971 million; and
fiscal 2002 $(9,212) million compared with $(9,412) million.

    See Note 28 for the effect of these adjustments on previously issued
unaudited quarterly financial information for fiscal 2002.

    BUSINESS--the Company operates in the following business segments:

    - 
•
Fire and Security Services designs, manufactures, installs, monitors and services electronic security systems and fire protection systems.

    - 

•
Electronics designs, manufactures and distributes electrical and electronic components, and designs, manufactures, installs, operates and maintains undersea fiber optic undersea cable communications systems.

    - 

•
Healthcare and Specialty Products designs, manufactures and distributes medical devices and supplies, imaging agents, pharmaceuticals and other specialtyadult incontinence and infant care products.

    - 

•
Engineered Products and Services designs, manufactures, distributes and services engineered products including industrial valves and controls and steel tubular goods and provides environmental and other industrial consulting services.

    PRINCIPLES OF CONSOLIDATION--Tyco

•
Plastics and Adhesives designs, manufactures and distributes plastic products, adhesives and films.
Principles of Consolidation—Tyco is a holding company whose assets consist of its investments in its subsidiaries, intercompany balances, long-term debt and holdings of cash and cash equivalents. The businesses of the consolidated group are conducted through Tyco'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. Also, in accordance with FIN 46, the Company consolidates variable interest entities in which the Company bears a majority of the risk to its potential losses or stands to gain from a majority of its expected returns. The results of companies acquired or disposed of during the fiscal year are included in the

                                       46

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Consolidated Financial Statements from the effective date of acquisition or up to the date of disposal. All significant intercompany balances and transactions have been eliminated in consolidation.

    REVENUE RECOGNITION--The
Revenue Recognition—The Company adopted Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements" in the fourth quarter of fiscal 2001 retroactive to the beginning of the fiscal year and is now
recognizing revenues from the installation of owned security systems and deferring the associated direct incremental costs over the estimated customer lives.
        Revenue from the sale of products is recognized according to the terms of the sales arrangement, which is customarily when the products reach the free-on-board shipping point. Revenue from the sale of services is recognized as services are rendered. Subscriber billings for services not yet rendered are deferred and recognized as revenue as the services are rendered, and the associated deferred revenue is included in current liabilities or long-term liabilities, as appropriate.
        Contract sales for the installation of fire protection systems, undersea fiber optic 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
45

completion. Cost to completion for undersea cable systems is measured based on the ratio of costs incurred to total estimated costs, while cost to completion for the installation of fire protection systems and other construction related projects is measured using the efforts-expended method based on direct labor hours expended and actual material used. 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.
        Certain of the Company's long-term contracts have warranty obligations. Estimated warranty costs for each contract are determined based on the contract terms and technology specific issues. These costs are included in total estimated contract costs accrued over the construction period of the respective contracts under percentage-of-completion accounting. In addition, certain
product sales also have normal warranty provisions. The Company accrues
estimated product warranty costs at the time of sale and any additional amounts
are recorded when such costs are probable and can be reasonably estimated.
        The Company's global undersea fiber optic network, on which it sells bandwidth capacity, is known as the Tyco Global Network ("TGN"). The Company's sales of bandwidth capacity are generally structured as either service arrangements or operating leases. The Company recognizes revenue associated with the service arrangement ratably over the service period and recognizes revenue associated with the operating leases over the lease term. In 2003, we decided to sell the TGN (see Note 16). We will continue to recognize revenue through the disposal date.
        At September 30, 2003, accounts receivable and other long-term receivables included retainage provisions of $174.5 million, of which $100.7 million remained unbilled. At September 30, 2002, accounts receivable and other long-term receivables included retainage provisions of $164.8 million, of which $84.9 million remained unbilled. At September 30, 2001, accounts receivable and other long-term
receivables included retainage provisions of $100.7 million, of which
$73.7 million remained unbilled. These retention provisions relateconsist primarily toof electronics contracts, fire protection contracts as well as transportation, water and electronics contracts andenvironmental-related contracts. These retention provisions become due upon contract completion and acceptance. Of the balance of $164.8$174.5 million at September 30, 2002, $128.32003, $138.8 million is included in accounts receivable and is expected to be collected during fiscal 2003.

    RESEARCH AND DEVELOPMENT--Research2004.
Research and Development—Research and development expenditures are expensed when incurred and are included in cost of sales. Customer-funded research and development are costs incurred by

                                       47

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Tyco that are reimbursed by customers. There is no net impact on research and development expense on the Consolidated Statement of Operations for customer-funded research and development. Research and development expense in our Consolidated Statement of Operations reflects company-sponsored research and development only.

    ADVERTISING--Advertising
Advertising—Advertising costs are expensed when incurred and are included in selling, general and administrative expenses.

    SALE OF COMMON SHARES OF A SUBSIDIARY--Gains
Sale of Common Shares of a Subsidiary—Gains on the sale of all common shares issued by a subsidiary are included in the Consolidated Statement of Operations.

    TRANSLATION OF FOREIGN CURRENCY--Assets and liabilities
Translation of Foreign Currency—For the Company's non-U.S. subsidiaries operating outside the United States which account in a functional currency other than U.S. dollars other than those operatingand do not operate in highly inflationary environments, assets and liabilities 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) income 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
46

at year-end exchange rates. Translation adjustments for the assets and liabilities of these subsidiaries are included in net income.
        Gains and losses resulting from foreign currency transactions, the amounts of which are not material in any period presented, are included in net income.

    CASH AND CASH EQUIVALENTS--All
Cash and Cash Equivalents—All highly liquid investments purchased with maturity of three months or less from the time of purchase are considered to be cash equivalents.
        On occasion, the Company is required to post cash collateral to secure reimbursements or indemnity obligations under letters of credit and performance guarantees in respect of various construction projects. The amount of restricted cash in collateral amountswas $444.8 million (of which $141.8 million is included in current assets and $303.0 million is included in long-term assets) and $196.2 million (all of which is included in current assets) at September 30, 2003 and 2002, was $196.2 million. There was
no restricted cash at September 30, 2001.

    INVENTORIES--Inventoriesrespectively.
Allowance for Doubtful Accounts—The allowance for doubtful accounts receivable reflects our best estimate of probable losses inherent in our receivable portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available evidence.
Inventories—Inventories are recorded at the lower of cost (primarily first-in, first-out) or market value.

    PROPERTY, PLANT AND EQUIPMENT--Property,
Property, Plant and Equipment—Property, plant and equipment is recorded at cost less accumulated depreciation. Maintenance and repair expenditures are charged to expense when incurred. For the years ended September 30, 2003, 2002 2001
and 2000,2001, the Company capitalized interest of $110.7$25.2 million, $76.3$100.1 million and $10.8$76.3 million, respectively. The increasedecrease in capitalized interest in fiscal 2003 is primarily due to 48

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)the completion of construction of the TGN, which began during the last quarter of fiscal 2000.TGN. The straight-line method of depreciation is used over the estimated useful lives of the related assets as follows:
Buildings and related improvements...  improvements
5 to 50 years
Leasehold improvements...............  improvements
Remaining term of the lease
Subscriber systems(1)................  systems
10 to 14 years
Other plant, machinery, equipment and
furniture and fixtures
2 to 2520 years
  furniture and fixtures.............
Tyco Global Network--placed in         15 years
  service............................


- ------------------------
(1)  Security monitoring systems.

    The
        As expenditures were incurred to build the TGN, is being constructed and is recorded at costthe costs were classified within the Consolidated Balance Sheets as part of Construction in Progress—Tyco Global Network. WhenAs certain geographic segments of the TGN arewere completed and are available for capacity sales, the costs of that segment arewere removed from construction in progress and reclassified to placed in service. The portion of the TGN that has beenwas placed in service is recorded within the Consolidated Balance Sheet as Tyco Global Network--placedNetwork—placed in service at September 30, 2002 (see Note 26)28). As of September 30, 2003, the TGN had been impaired and entirely written-off (see Note 6).
        The Company generally divides its electronic security assets into various asset pools: internally generated residential systems, internally generated commercial systems and customer accounts acquired through the ADT dealer program. Subscriber systems represent internally generated residential systems and internally generated commercial systems (customer accounts acquired through the ADT dealer program are recorded as intangible assets). For internal purposes, we divide internally generated commercial accounts into three smaller groups consisting of small business, core commercial and
47

national commercial accounts. The internally generated residential and commercial account pools are generally amortized using the straight-line method over a ten-year period (a fourteen-year period for national commercial accounts and a fourteen-year period with write-off of specific accounts upon discontinuance for residential and commercial accounts in certain non-U.S. geographic locations).
        Gains and losses arising on the disposal of property, plant and equipment are included in the Consolidated Statements of Operations and were not material.

    LONG-LIVED ASSETS--Thematerial in any period presented.
Long-Lived Assets—The Company periodically evaluates the net realizable value of long-lived assets, including property, plant and equipment and amortizable intangible assets, relying on a number of factors including operating results, business plans, economic projections and anticipated future cash flows. When indicators of impairment are present, the carrying values of the assets are evaluated in relation to the operating performance and estimated future undiscounted cash flows of the underlying business. An impairment in the carrying value of an asset is recognized whenever anticipated future cash flows (undiscounted) from an asset are estimated to be less than its carrying value. The amount of the impairment recognized is the difference between the carrying value of the asset and its fair value. GOODWILL AND OTHER INTANGIBLE ASSETS--EffectiveFair values are based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates, reflecting varying degrees of perceived risk.
Goodwill—Effective October 1, 2001, the beginning of Tyco's fiscal year 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," under which goodwill is no longer amortized but instead is assessed for impairment at least annually. Underannually and as triggering events occur. In making this assessment, management relies on a number of factors including operating results, business plans, economic projections, anticipated future cash flows, and transactions and market place data. There are inherent uncertainties related to these factors and management's judgment in applying them to the transition provisionsanalysis of SFAS No. 142,
there was no goodwill impairment at October 1, 2001. Additionally, theimpairment.
        The Company has elected to make July 1 the annual impairment assessment date for all reporting units, and will perform additional impairment tests when triggering events occur. SFAS No. 142 defines a reporting unit as an operating segment or one level below an operating segment. Our reporting units as of September 30, 20022003 were as follows: Electronic Security Services, Fire Protection Electronics,Contracting and Services, Electronic Components, Wireless, Electrical Contracting Services, Power Systems, Printed Circuit Group, Submarine Telecommunications, Healthcare, PlasticsMedical Devices & Supplies, Retail, Pharmaceuticals, Flow Control and Adhesives, Flow Control,Fire Products, Electrical and Metal Products, Infrastructure Services, Plastics, A&E Products, Adhesives and Tyco Infrastructure.Ludlow Coated Products. When changes occur in the composition of one or more segments or reporting units, the goodwill is reassigned to the segments/reporting units affected based on their relative fair value as prescribed by SFAS No. 142.
        Goodwill valuations have historically been calculated using an income approach based on the present value of future cash flows of each reporting unit. This approach includes many assumptions related to future growth rates, discount factors, future tax rates, etc. Changes in economic and operating conditions impacting these assumptions could result in a goodwill impairment in future periods.
        Disruptions to the business such as end market conditions and protracted economic weakness, unexpected significant declines in operating results of reporting units, the divestiture of a significant component of a reporting unit, and market capitalization declines may result in our having to perform a SFAS No. 142 first step valuation analysis for all of Tyco's reporting units prior to the required
48

annual assessment. These types of events and the resulting analysis could result in additional charges for goodwill and other asset impairments in the future.
        See Note 1617 for more information on SFAS No. 142, and Note 11, "Discontinued Operations of Tyco Capital (CIT Group Inc.)," for further information regarding the impairment of goodwill relating to Tyco Capital.
        During fiscal 2001, and 2000, goodwill was amortized on a straight-line basis over periods ranging from 10 to 40 years. In accordance with the guidance of SFAS No. 142, goodwill associated with acquisitions consummated after June 30, 2001 was not amortized during the fourth quarter of fiscal 2001.
Intangible Assets—Intangible assets primarily include contracts and related customer relationships, and intellectual property and other items. Theproperty. Certain contracts and related customer
relationships are being amortized on a straight-line basis over the estimated
useful life ranging from 5 to 40 years. Intellectual property consists primarily

                                       49

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of patents, trademarks and unpatented technology, which are being amortized on a
straight-line basis over a range of 5 to 40 years.

    Contracts and related customer relationships result from the Company purchasing residential security monitoring contracts from an external network of independent dealers who operate under ADT's authorizedthe ADT dealer program. The
purchase price of customerAcquired contracts is recorded as an intangible asset and amortized to selling, general and administrative expense on a straight-line
basis over the period of the economic benefits expected to be obtained from therelated customer relationships which is presently estimated to be ten years. The
resulting amortization approximates the pattern in which the Company estimates
it will obtain those benefits and considers customer attrition.are recorded at their contractually determined net purchase price. The Company incurs costs associated with maintaining and operating its ADT dealer program, including brand advertising costs and for due diligence performed by the Company with
respectcosts relating to contracts offered byfor sale to the Company under the ADT dealer program. In certain programs, dealers for purchase. Dealers reimbursepaid the Company a non-refundable amount for each of the contracts purchasedsold to the Company representing their reimbursement of thosesuch dealer program costs. This non-refundable charge represents dealer reimbursement to the Company for costs described above. Theincurred by the Company recognizes thisassociated with maintaining and operating the ADT dealer program. Accordingly, each acquired contract and related customer relationship was recorded at its contractually determined purchase price, net of a non-refundable chargeamount charged to dealers at the time the contract iswas accepted for purchase. The
costs incurred by the Company and the related reimbursements are included in
selling, general and administrative expenses within the Consolidated Statements
of Operations. To the extent that the amount of dealer reimbursement of the
Company's administrative and connection costs exceed the actual costs incurred,
the excess is recorded as a deferred credit and amortized on a straight
line-basis over the estimated period of the economic benefits, which is
estimated to be ten years. Prior to fiscal 2002, the Company recognized in
earnings the entire amount of reimbursements from dealers.
        During the first six to twelve months (twelve months in certain circumstances) after the purchase of the customer contract, any cancellation of monitoring service, including those that result from customer payment delinquencies, results in a chargeback by the Company to the dealer of the full amount of the contract purchase price. The non-refundable charge to the dealer was retained by the Company even in the event of customer cancellation. The Company records the chargeback amount from the dealer as a reduction of the previously recorded intangible asset.

    INVESTMENTS--The
        Intangible assets arising from the ADT dealer program described above are amortized in pools determined by the month of contract acquisition on an accelerated basis over the period and pattern of economic benefit that is expected to be obtained from the customer relationship. Based upon attrition studies of the ADT dealer program customer base, conducted by an independent appraiser, the Company believes that the accelerated method that presently best achieves the matching objective above is the double-declining balance method based on a ten-year life for the first eight years of the estimated life of the customer relationship, converting to the straight-line method of amortization for the remaining four years of the estimated relationship period. Actual attrition data is regularly reviewed in order to assess the continued applicability of the accelerated method of amortization described above.
        Other contracts and related customer relationships, as well as intellectual property consisting primarily of patents, trademarks and unpatented technology, are being amortized on a straight-line basis over five to forty years.
Investments—The Company invests in both debt and equity securities. The Company accounts for its long-term investments in marketable equity securities that represent less than twenty percent ownership by
49

adjusting the securities to market value at the end of each accounting period. Unrealized gains and losses are credited or charged to shareholders' equity for available for sale securities unless an unrealized loss is deemed to be other than temporary, in which case such loss is charged to earnings. Debt and equity securities that are classified as trading securities are recorded at fair value, and the unrealized gains and losses are credited or charged to earnings. Debt securities whichthat the Company has the ability and positive intent to hold to maturity are carried at amortized cost. Management determines the proper classification of investments in debt obligations with fixed maturities and equity securities for which there is a readily determinable market value at the time of purchase and reevaluates such classifications 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.
        Other equity 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. At September 30, 20022003 and 2001,2002, such investments were recorded at the lower of cost or estimated net realizable value.

                                       50

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
        For equity 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 current and long-term assets, as appropriate, on the Consolidated Balance Sheets. These amounts were
$328.0 million and $740.1 million at September 30, 2002 and 2001, ofSheets (see Note 28).
Restricted Investments—Restricted investments, which $219.6 million and $708.1 million wereare included in long-termother current and non-current assets, respectively.

    SHARE PREMIUM AND CONTRIBUTED SURPLUS--Inas appropriate, on the Consolidated Balance Sheets, consist of fixed income securities with maturities in excess of three months. These investments are restricted as they are currently being used as collateral for certain insurance obligations.
Share Premium and Contributed Surplus—In accordance with the Bermuda Companies Act of 1981, when Tyco 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 Tyco 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 Tyco is credited, where applicable, to contributed surplus, which is, subject to certain conditions, a distributable reserve.

    INCOME TAXES--Deferred
Income Taxes—Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been reflected in the Consolidated Financial Statements. Deferred tax liabilities and assets are determined based on the differences between the book values and the tax basesbasis of particular 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.

    FINANCIAL INSTRUMENTS--All
Financial Instruments—All derivative instruments are reported on the balance sheet at fair value. Changes in a derivative's fair value are recognized currently in earnings unless specific hedge criteria
50

are met. IfAt its inception, if the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized as a charge or credit to earnings.
        The fair value estimates are based on relevant market information, including current market rates and prices, assuming adequate market liquidity. Fair value estimates for interest rate and cross-currency swaps are provided to the Company by bankshigh-quality third-party financial institutions known to be high volume participants in this market.
        The Company uses derivative instruments to manage exposures to foreign currency, commodity price and interest rate risks. The Company's objectives for utilizing derivatives is to manage these risks using the most effective methods to eliminate or reduce the impacts of these exposures. The Company documents relationships between hedging instruments and hedged items, and links derivatives designated as fair value, cash flow or foreign currency hedges to specific assets and liabilities on the Consolidated Balance Sheet or to specific firm commitments or forecasted transactions. The Company also assesses and documents, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows associated with the hedged items.
        As part of managing the exposure to changes in market interest rates, the Company, as an end-user, enters into various interest rate swap transactions, all of which are transacted in over-the-counter

                                       51

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) markets, with other financial institutions acting as principal counterparties. To ensure both appropriate use as a hedge and hedge accounting treatment, all derivatives entered into are designated according to a hedge objective against specified liabilities such as a specifically underwritten debt issue. The Company's primary hedge objectives include the conversion of fixed-rate liabilities to variable rates. The derivatives associated with these objectives are classified as fair value hedges.
        As part of managing the exposure to changes in foreign currencies, the Company utilizes forward and option contracts transacted in over-the-counter markets, with financial institutions acting as principal counterparties. The objective of these hedging contracts is to minimize impacts to cash flows due to changes in foreign exchange rates on intercompany loans, booked accounts and notes receivable and accounts payable, and forecasted transactions. Only in very limited circumstances is hedge accounting designated. The remaining hedges are marked to market.
        The Company's derivative instruments present certain market and counterparty risks; however, concentration of counterparty risk is mitigated as Tyco deals with a variety of major banks worldwide with long-term Standard & Poor's and Moody's credit ratings of A+/A1 or higher and its accounts receivable are spread
among a number of major industries, customers and geographic areas.higher. In addition, only conventional derivatives are utilized thereby affording optimum clarity as to the market risk. None of the Company's derivative instruments outstanding at year end would result in a significant loss to the Company if a counterparty failed to perform according to the terms of its agreement. At this time, the Company does not require collateral or other security to be furnished by the counterparties to its derivative instruments.

    USE OF ESTIMATES--The
Accrued Product Warranty—The Company generally accrues estimated product warranty costs at the time of sale, and any additional amounts are recorded when such costs are probable and can be reasonably estimated. Manufactured products are warranted against defects in material and workmanship when properly used for their intended purpose, installed correctly, and appropriately maintained. Generally, product warranties are implicit in the sale; however, the customer may purchase
51

an extended warranty. Manufactured equipment is also warranted in the same manner as product warranties. However, in most instances the warranty is either negotiated in the contract or sold as a separate component. Warranty period terms range from 90 days (e.g., consumable products) up to 20 years (e.g., power system batteries.) The amount of the accrued warranty liability is determined based on historical information such as past experience, product failure rates or number of units repaired, estimated cost of material and labor, and in certain instances estimated property damage.
Use of Estimates—The preparation of consolidated financial statements in conformity with GAAP requires management to make extensive use of estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Significant estimates in these Consolidated Financial Statements include restructuring and other unusual charges (credits),and credits, purchase accounting reserves,liabilities, 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, fair values of financial instruments, estimated contract revenues and related costs, environmental and legal 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 2001,Changes in estimates are recorded in results of operations in the FASB issuedperiod that the event or circumstances giving rise to such changes occur.
Accounting Pronouncements—Effective October 1, 2002, the Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 which addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs is
effective for fiscal years beginning after June 15, 2002. We do not expect the
adoption of this new standard to have a material impact on our results of
operations or financial position.

    In July 2001, the FASB issued SFAS No. 144, "Impairment or Disposal of
Long-Lived Assets," which is effective for fiscal years beginning after
December 15, 2001. The provisions of this statement provide a single accounting
model for impairment of long-lived assets. We do not expect the adoption of this
new standard to have a material impact on our results of operations or financial
position.

    In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," which is effective for fiscal years beginning after May 15, 2002.
This statement rescinds the indicated statements and amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. SFAS
No. 145 encourages early adoption of the provision of this standard that
rescinds SFAS No.4, "Reporting Gains and Losses from Extinguishments of Debt."
Accordingly, the Company elected to early adopt this provision during the fourth
quarter of fiscal 2002, which resulted in increased pre-tax income of
$30.6 million in fiscal 2002. We reclassified

                                       52

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
prior year extraordinary losses related to the early retirement of debt to other
(expense) income in our Consolidated Statements of Operations, which decreased
pre-tax income by $26.3 million and $0.3 million in fiscal 2001 and 2000,
respectively. However, net income remains unchanged in both periods. See Note 8
for further information.costs. The adoption of the remaining provisions of this new standard did not have a material impact on our results of operations or financial position.

    In July
        Effective October 1, 2002, the FASB issuedCompany adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The provisions of this statement provide a single accounting model for impairment of long-lived assets. The initial adoption of this new standard did not have a material impact on our results of operations or financial position.
        Effective January 1, 2003, the Company adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which is effective for exit or disposal activities that are initiated after December 31, 2002. This statement nullifies the FASB's Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This statement requires that liabilities associated with exit or disposal activities initiated after adoption
be recognized and measured at fair value when incurred as opposed to at the date an entity commits to the exit or disposal plans. We expect theThe initial adoption of this new standard todid not have ana material impact on our results of operations or financial position.
        Effective January 1, 2003, the timingCompany adopted SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure," which amends SFAS No. 123, "Accounting for Stock-Based Compensation" to provide transition methods for a voluntary change to measuring compensation cost in connection with employee share option plans using a fair value based method. The Statement also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures about the method of accounting for compensation cost associated with employee share option plans, as well as the effect of the method used on reported results. The Company adopted the disclosure requirements
52

of SFAS No. 148 and has not changed its method for measuring the compensation cost of share options.
        Tyco continues to use the intrinsic value based method and does 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. As a result, the adoption of SFAS No. 148 had no impact on our results of operations or financial position. Had the fair value based provisions of SFAS No. 123 been adopted by Tyco, the effect on net income and earnings per common share for fiscal 2003, fiscal 2002 and fiscal 2001 would have been as follows ($ in millions):
 
 
2003
 
2002
 
2001
 
Net income (loss)—as reported
 
$
979.6
 
$
(9,179.5
)
$
3,464.0
 
Add: Share-based employee compensation expense included in
reported net income, net of tax
 
 
8.1
 
 
—
 
 
—
 
Less: Total share-based employee compensation expense determined under fair value based method for all awards, net of tax
 
 
(320.8
)
 
(415.4
)
 
(387.1
)
 
 
 
 
 
Net income (loss)—pro forma
 
$
666.9
 
$
(9,594.9
)
$
3,076.9
 
 
 
 
 
 
Income (loss) per share:
 
 
 
 
 
 
 
 
 
 
 
Basic—as reported
 
$
0.49
 
$
(4.62
)
$
1.92
 
 
Basic—pro forma
 
 
0.33
 
 
(4.83
)
 
1.70
 
 
Diluted—as reported
 
 
0.49
 
 
(4.62
)
 
1.89
 
 
Diluted—pro forma
 
 
0.33
 
 
(4.83
)
 
1.68
 
        On the dates of grant using the Black-Scholes option-pricing model and assumptions set forth below, the estimated weighted-average fair value of Tyco options granted during fiscal 2003 and 2002 was $6.34 and $14.31, respectively, and the estimated weighted-average fair value of Tyco and TyCom options granted during fiscal 2001 was $19.72 and $9.11, respectively.
        The following weighted-average assumptions were used for fiscal 2003, fiscal 2002 and fiscal 2001:
 
 
2003
 
2002
 
2001
 
 
 
Tyco
 
Tyco
 
Tyco
 
TyCom
 
Expected stock price volatility
 
 
64
%
 
52
%
 
39
%
80
%
Risk free interest rate
 
 
2.48
%
 
4.03
%
 
5.18
%
4.71
%
Expected annual dividend per share
 
$
0.05
 
$
0.05
 
$
0.05
 
—
 
Expected life of options
 
 
4.3 years
 
 
5.0 years
 
 
4.4 years
 
4.0 years
 
        The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of what the effects may be in future years. SFAS No. 123 does not apply to awards prior to 1995. Additional awards in future years are anticipated.
        During fiscal 2003, the Company adopted FASB Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees." FIN 45 requires increased disclosure of guarantees, including those for which likelihood of payment is remote, and product warranty information (see Note 20). FIN 45 also requires that guarantors recognize a liability for certain types of guarantees equal to the fair value of the guarantee upon its issuance. The adoption of FIN 45 did not have a material impact on our results of operations or financial position.
53
        In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities." This interpretation clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," relating to consolidation of certain entities. FIN 46 requires identification of the Company's participation in variable interest entities ("VIE's"), which are defined as entities with a level of invested equity that is not sufficient to fund future activities to permit them to operate on a stand alone basis, or whose equity holders lack certain characteristics of a controlling financial interest. For entities identified as VIE's, FIN 46 sets forth a model to evaluate potential consolidation based on an assessment of which party to VIE's, if any, future restructuring
charges.

    RECLASSIFICATIONS--Certainbears a majority of the risk to its expected losses, or stands to gain from a majority of its expected returns. FIN 46 also sets forth certain disclosures regarding interests in VIE's that are deemed significant, even if consolidation is not required. The Company adopted FIN 46's accounting provisions as of July 1, 2003. See Notes 12 and 30 for further discussion of the impact of FIN 46.
        In November 2002, the EITF reached a consensus on EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF No. 00-21 provides guidance on how to determine when an arrangement that involves multiple revenue-generating activities or deliverables should be divided into separate units of accounting for revenue recognition purposes. It further states, that if this division is required, the arrangement consideration should be allocated among the separate units of accounting. The guidance in the consensus is effective for revenue arrangements entered into in fiscal periods that began after June 15, 2003. The adoption of this new standard did not have a material impact on our results of operations or financial position.
        In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149, which is to be applied prospectively, is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of this new standard did not have a material impact on our results of operations or financial position.
        In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) and is effective for instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this new standard did not have a material impact on our results of operations or financial position.
Reclassifications—Certain prior year amounts have been reclassified to conform with current year presentation.

    STOCK SPLITS--Per share amounts
2.    Acquisitions and share data have been retroactively
restated to give effect to the two-for-one stock split on October 21, 1999,
effected in the form of a 100% stock dividend (see Note 23).

2.  ACQUISITIONS AND DIVESTITURES

FISCAL 2002

    During fiscal 2002, theDivestitures
        The Company purchased businesses for an aggregate cost
of $5,151.5 million, consisting of $3,084.8 million in cash, net of
$158.0 million of cash acquired, the issuance of approximately 47.8 million
common shares valued at $1,918.8 million, plus the fair value of stock options
and pre-existing put option rights assumed of $147.9 million ($102.6 million of
the put option rights have been paid in cash). The Company purchasedsubstantially all of the voting equity interests in each of the businesses acquired. In connection with
these acquisitions, the Company recorded purchase accounting liabilities of
$194.6 millionacquired for the costs of integrating the acquired companies and
transaction costs. Details regarding these purchase accounting liabilities are
set forth below. Tyco also issued approximately 17.7 million common shares
valued at $819.9 million in connection with its amalgamation with TyCom (see
Note 9).all periods presented. In addition, the Company recorded $235.6 millioneach acquisition was accounted for the fair value of
shares issued and options assumed in connection with the fiscal 2001 acquisition
of Mallinckrodt. Fair value of debt of acquired companies aggregated
$799.1 million. During fiscal 2002, the Company paid $474.8 million of cash foras a purchase, accounting liabilities related to current and prior years'
acquisitions. In addition, 
54

the Company paid cash of approximately
$149.3 million relating to holdback and earn-out liabilities primarily related
to certain prior year acquisitions. Holdback liabilities represent a portion of
the purchase price withheld from the seller pending finalization of the acquired
company's net assets or purchase price paid over time. "Earn-out" liabilities
are payments to the sellers that are the result of the acquired company having
achieved certain milestones subsequent to its acquisition by Tyco. These
earn-out payments are tied to certain performance measures, such as revenue,
gross margin or earnings growth over a specified period of time, and are accrued
when the milestones are met and contingent consideration becomes determinable
and distributable. The Company also issued 44,139 common shares

                                       53

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.  ACQUISITIONS AND DIVESTITURES (CONTINUED)
valued at $2.3 million relating to earn-out liabilities during fiscal 2002. The
value of these earn-out common shares is based upon the fair value of the stock
at the time of issuance. The cash portions of the acquisition costs were funded
utilizing net proceeds from the issuance of long-term debt. The results of operations of the acquired companies have been included in Tyco'sthe Company's consolidated results from their respective acquisition dates. 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 valuation data are obtained. The excess of (i) the total consideration paid for the acquired company over (ii) the fair value of tangible and intangible assets acquired less liabilities assumed and purchase accounting liabilities recordedestablished is recorded as goodwill. Once the appraisals or valuation data are obtained, the Company will
recordrecords adjustments to the fair value of net assets acquired and liabilities assumed. Purchase price allocations for certain fiscal 2002 acquisitions are preliminary.preliminary in the year acquired. As the Company finalizes integration/exit plans, it expects to recognize additional purchase accounting liabilities. Several factors impact the finalization of integration/exit plans, such as identifying acquired facilities that are duplicative of Tyco's existing operations. Once this is determined, approval needs to be obtained from management having the appropriate level of authority, the estimated cost of the integration/exit activities needs to be determined and negotiation with employee bargaining groups needs to be completed in order to finalize the plan. As a result, final adjustments often extend to the end of a one yearone-year period after acquisition. These additional purchase accounting liabilities increase the amount of goodwill recorded, and any changes to the fair value of net assets could increase or decrease goodwill. The Company expects to record adjustments to goodwill related to some companies acquired in fiscal 2002.2003. However, the Company does not expect the impact of any of these adjustments to be material to its financial statements.

    As a result of acquisitions completed in fiscal 2002, and adjustments to the
fair value of assets and liabilities and increases to purchase accounting
liabilities recorded for acquisitions completed prior to fiscal 2002, the
Company recorded approximately $4,071.4 million in goodwill and
$2,025.2 million in other intangible assets in fiscal 2002. These amounts
include adjustments consisting of a $68.9 million decrease to goodwill and a
$40.5 million decrease to other intangible assets related to fair value
adjustments associated with prior year acquisitions. The adjustments to goodwill
relate primarily to fiscal 2001 acquisitions of Lucent Technologies' Power
Systems ("LPS"), acquired in December 2000, Edison Select ("Edison"), acquired
in August 2001, Deutsche Armaturen AG ("DAAG"), acquired in September 2001, and
Scott Technologies ("Scott"), acquired in May 2001. Adjustments to goodwill for
LPS relate to the closure of a manufacturing plant and the adjustment of certain
opening balance sheet items, primarily property, plant and equipment, and
inventory. Finalization of the exit plan relating to the LPS acquisition was
completed during the quarter ended December 31, 2001. Adjustments for Edison
relate primarily to severance, and to a lesser extent, facility closures and the
adjustment of certain opening balance sheet items to fair value. Adjustments for
DAAG relate primarily to facility closures and related severance and the
adjustment of certain opening balance sheet items to fair value; and for Scott
relate primarily to the adjustment of certain opening balance sheet items to
fair value. In addition, during the latter half of fiscal 2002, the Company
recorded the estimated fair value of intangible assets acquired related to its
acquisition of Sensormatic using among other factors, appraisals, in the amount
of $564.8 million. The $564.8 million consists of the following: developed
technology of $348.2 million, trademarks of $135.9 million, customer base of
$67.3 million, and in-process research and development of $13.4 million.

                                       54

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.  ACQUISITIONS AND DIVESTITURES (CONTINUED)
        Acquisitions were an important part of Tyco's growth during fiscal 2002.prior years. When Tyco makesmade acquisitions thatit sought to complement existing products and services, enhance the Company's product lines and/or expand its customer base. The Company begins
formulating exit plans as part of the acquisition approval process. Tyco determinesdetermined what it iswas willing to pay for aneach acquisition partially based on its expectation that it cancould cost effectively integrate the products and services of an acquired companycompanies into Tyco's existing infrastructure and improve earnings by removing overhead costs in areas where there are duplicate sales, administrative or other facilities and functions. In addition, the Company utilizesutilized existing infrastructure (e.g., established sales force, distribution channels, customer relations, etc.) of acquired companies to cost effectively introduce Tyco's products to new geographic areas. The Company also targetstargeted companies that arewere perceived to be experiencing depressed financial performance. All of these factors contributecontributed to acquisition prices in excess of the fair value of identifiable net assets acquired and the resultant goodwill. However, beginning in fiscal 2003, the Company completed significantly fewer acquisitions as compared to the past few years due to its focus on enhancing internal growth within its existing businesses.
Fiscal 2003
        During fiscal 2003, the Company purchased seven businesses within the Healthcare, Engineered Products and Services, Fire and Security and Electronics segments for an aggregate cost of $44.0 million in cash, net of $1.1 million of cash acquired. In addition, the Company paid $596.8 million of cash during fiscal 2003, to acquire approximately 635,500 customer contracts for electronic security services through the Company's dealer program. During fiscal 2003, the Company paid $171.5 million of cash for utilization of purchase accounting liabilities related to prior years' acquisitions. In addition, the Company paid cash of approximately $100.3 million relating to holdback and earn-out liabilities related to certain prior period acquisitions. Holdback liabilities represent a
55

portion of the purchase price withheld from the seller pending finalization of the acquisition balance sheet. Certain acquisitions have provisions that would require Tyco to make additional "earn-out" payments to the sellers if the acquired company achieves certain milestones subsequent to its acquisition by Tyco. These earn-out payments are tied to certain performance measures, such as revenue, gross margin or earnings growth and are generally treated as additional purchase price. The cash portions of acquisition costs for the business and customer contracts were funded utilizing cash from operations. The results of operations of the acquired companies have been included in Tyco's consolidated results from their respective acquisition dates.
        As a result of acquisitions completed in fiscal 2003, and adjustments to the fair value of assets and liabilities recorded for acquisitions completed prior to fiscal 2003, the Company recorded a net decrease of $462.4 million in goodwill and an additional $40.7 million in other intangible assets in fiscal 2003. The net decrease in goodwill includes $480.5 million associated with prior years' acquisitions, primarily Sensormatic Electronics Corporation ("Sensormatic"), acquired in November 2001, Mallinckrodt, Inc. ("Mallinckrodt"), acquired in October 2000, Lucent Technologies' Power Systems ("LPS"), acquired in December 2000, and Deutsche Armaturen AG ("DAAG"), acquired in September 2001, slightly offset by an increase of $18.1 million due to current year acquisitions. Adjustments for Sensormatic primarily relate to fair value adjustments as well as the finalization of deferred tax adjustments related to previously recorded purchase accounting liabilities. Adjustments for LPS and Mallinckrodt primarily relate to reductions in purchase accounting liabilities due to actual costs being less than originally estimated. See roll forwards of purchase accounting accruals below. Adjustments for DAAG relate to fair value adjustments. The increase in intangible assets is due to adjustments associated with prior years' acquisitions.
56
        The following table shows the fair values of assets and liabilities and
purchase accounting liabilities recorded for purchase acquisitions completed in fiscal 2002,2003, adjusted to reflect changes in the fair values of assets and liabilities and purchase accounting liabilities and holdback/earn-out liabilities recorded for purchase acquisitions completed prior to fiscal 20022003 ($ in millions):
Accounts receivables........................................  $  538.1
Inventories.................................................     299.0
Other current assets........................................     169.0
Property, plant and equipment...............................     352.0
Goodwill....................................................   4,071.4
Intangible assets...........................................   2,025.2
Other assets................................................     491.3
                                                              --------
                                                               7,946.0
                                                              --------
Accounts payable............................................     212.8
Accrued expenses and other current liabilities..............     982.6
Holdback/earn-out liability.................................     161.4
Other long-term liabilities.................................    (168.0)
Fair value of debt assumed..................................     799.1
Minority interest...........................................    (248.9)
                                                              --------
                                                               1,739.0
                                                              --------
                                                              $6,207.0
                                                              ========
Cash consideration paid (net of $158.0 million of cash
  acquired).................................................  $3,084.8
Share consideration paid and fair value of stock options
  assumed(1)................................................   3,122.2
                                                              --------
                                                              $6,207.0
                                                              ========


- ------------------------------

(1) The value
Accounts receivable
 
$
41.3
 
Inventories
 
 
36.1
 
Prepaid expenses and other current assets
 
 
(0.3
)
Deferred income taxes
 
 
(90.6
)
Property, plant and equipment, net
 
 
67.8
 
Goodwill
 
 
(462.4
)
Intangible assets
 
 
40.7
 
Other assets
 
 
11.8
 
 
 
 
 
 
 
(355.6
)
 
 
 
Accounts payable
 
 
1.7
 
Accrued expenses and other current liabilities
 
 
(346.8
)
Holdback/earn-out liabilities
 
 
13.0
 
Deferred income taxes
 
 
(66.2
)
Other long-term liabilities
 
 
(1.3
)
 
 
 
 
 
 
(399.6
)
 
 
 
Cash consideration paid (net of $1.1 million of cash acquired)
 
$
44.0
 
 
 
 
        Purchase accounting liabilities recorded during fiscal 2003 in connection with fiscal 2003 purchase acquisitions were immaterial.
        At September 30, 2003, holdback/earn-out liabilities of common shares issued is based upon the average of the
    volume-weighted average trading prices$211.7 million remained on the New York Stock Exchange for
    three days beforeConsolidated Balance Sheet, of which $93.1 million are included in accrued expenses and three daysother current liabilities and $118.6 million are included in other long-term liabilities. In addition, a total of $199.0 million of purchase accounting liabilities related mostly to fiscal 2001 and 2002 acquisitions remained on the Consolidated Balance Sheet, of which $79.7 million are included in accrued expenses and other current liabilities and $119.3 million are included in other long-term liabilities. At September 30, 2003, the Company had a contingent liability of $80 million related to the fiscal 2001 acquisition of Com-Net by the Electronics segment. The $80 million is the maximum amount payable to the former shareholders of Com-Net only after the measurement date. The stock
    options assumed relate toconstruction and installation of a communications system for the acquisitionState of Sensormatic in the first
    quarter of fiscal 2002Florida is finished and the acquisition of Mallinckrodt in fiscal 2001.
    The value ofState has approved the stock options was determined using the Black-Scholes
    valuation modelsystem based on the following assumptions: 39.0% volatilityguidelines set forth in the contract. The $80 million is not accrued at September 30, 2003, as the outcome of this contingency cannot be reasonably determined.
        The pro forma effects of fiscal 2003 acquisitions and divestitures on the Company's results of operations are not material.
57

Fiscal 2002
        During fiscal 2002, the Company purchased approximately 130 businesses for Sensormatic and 36.0% volatility for Mallinckrodt; two-year expected life
    for in-the-money options and three-year expected life for out-of-the-money
    options, except if the remaining terman aggregate cost of the options was less, in which case
    one-half$3,750.5 million, consisting of the remaining term was used; annual dividends of $0.05; and
    risk-free interest rates based on U.S. stripped Treasuries.

                                       55

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.  ACQUISITIONS AND DIVESTITURES (CONTINUED)
    Fiscal 2002 acquisitions include, among others, SBC/Smith Alarm Systems
("Smith Alarm") and Century Tube Corporation ("Century") in October 2001;
Sensormatic Electronics Corporation ("Sensormatic"), Transpower Technologies,
DSC Group and Water & Power Technology ("Water & Power") in November 2001; Linq
Industrial Fabrics, Inc. ("Linq") and the purchase of the remaining minority
public interest of TyCom in December 2001; Paragon Trade Brands, Inc.
("Paragon") and Communications Instruments, Inc. ("CII") in January 2002; and
Clean Air Systems in February 2002.

    Smith Alarm, a security monitoring company for both residential and
commercial customers, was purchased for $78.2$1,683.8 million in cash, and has been
integrated withinnet of $158.0 million of cash acquired, the Fire and Security Services segment. Century, a
manufacturerissuance of steel tubing, was purchased for $125.5 million in cash and has
been integrated within the Engineered Products and Services segment.
Sensormatic, a leading supplier of electronic security solutions to the retail,
commercial and industrial market places, was purchased for approximately 47.8 million Tyco common shares valued at $1,918.8 million, plus the fair value of stock options and pre-existing put option rights assumed of $147.9 million and has($102.6 million of the put option rights have been integrated within the Fire and Security Services segment. The
primary reason for thepaid in cash). Fiscal 2002 acquisitions include, among others, SBC/Smith Alarm Systems, Century Tube Corporation, Sensormatic, acquisition was that it presented Tyco with
an opportunity to expand Tyco's security product range to include electronic
article surveillance systems of which Sensormatic was the recognized market
leader. Additionally, the acquisition allowed us to expand our presence in the
access control and video systems businesses. Sensormatic was a global company
with approximately $1.1 billion in revenue and a talented workforce, including
an established research and development group. The acquisition presented us with
many synergy opportunities in each of our operating regions around the world. Transpower Technologies, a designer and manufacturer of inductors and isolation
transformers, was purchased for $62.6 million in cash and has been integrated
within the Electronics segment. DSC Group a manufacturer of security alarms,
fire alarms and panels, was purchased for $90.6 million in cash and has been
integrated within the Fire and Security Services segment.("DSC"), Water & Power a
provider of water treatment products and services, was purchased for
$40.8 million in cash and has been integrated within the Engineered Products and
Services segment. Linq, a manufacturer of flexible intermediate bulk containers,
was purchased for $32.5 million in cash and has been integrated within the
Healthcare and Specialty Products segment. TyCom is a leading provider of
undersea fiber optic networks and services. In December 2001, the Company
completed its amalgamation with TyCom, and TyCom shares not already owned by
Tyco were converted into approximately 17.7 million Tyco common shares valued at
$819.9 million.Technology, LINQ Industrial Fabrics, Inc., Paragon a global supplier of infant disposable diapers and
other absorbent personal care products, was purchased for $706.8 million in cash
and has been integrated within the Healthcare and Specialty Products segment.
The primary reason for the Paragon acquisition was to acquire a leader in the
global supply of disposable absorbent personal care products. Additionally, the
acquisition allowed us to expand our presence in the disposable private label
diapers and training pants sectors. The acquisition presented us with many
synergy opportunities such as consolidation of manufacturing facilities and
administrative functions and elimination of duplicate sales and marketing
overhead. CII, a provider of advanced control electronic solutions in high
performance relays, general-purpose relays, transformers, and EMI/RFI filters,
was purchased for $214.0 million in cash and has been integrated within the
Electronics segment.Trade Brands, Inc. ("Paragon"), Communications Instruments, Inc., Clean Air Systems a manufacturerand the purchase of pollution control
systems in industrial plants and products including industrial valves, controls
and pneumatics, was purchased for $31.8 million in cash and has been integrated
within the Engineered Products and Services segment.remaining minority public interest of TyCom. In addition, to the
acquisitions listed above,during fiscal 2002 Tyco paid cash of $1,401.0$1,139.3 million to acquirefor approximately 1.4 million customer contracts for electronic security services through the ADT dealer program.
        In connection with these acquisitions, the Company recorded purchase accounting liabilities of $194.6 million for the costs of integrating the acquired companies and transaction costs. Details regarding these purchase accounting liabilities are set forth below. Tyco also issued approximately 17.7 million common shares valued at $819.9 million in connection with its dealer programamalgamation with TyCom (see Note 9). Fair value of debt of acquired companies aggregated $799.1 million. During fiscal 2002, the Company paid $474.8 million of cash for purchase accounting liabilities related to current and $459.0prior years' acquisitions. In addition, the Company paid cash of $149.3 million relating to acquire approximately 120 other
smaller companies.holdback and earn-out liabilities primarily related to certain prior year acquisitions. The acquisitions comprised

                                       56

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.  ACQUISITIONS AND DIVESTITURES (CONTINUED)
primarily businesses which: manufacture a broad rangeCompany also issued 44,139 common shares valued at $2.3 million relating to earn-out liabilities during fiscal 2002. The value of electronic products;
manufacture a wide rangethese earn-out common shares is based upon the fair value of products usedthe stock at the time of issuance. The cash portions of the acquisition costs were funded utilizing net proceeds from the issuance of long-term debt. The results of operations of the acquired companies have been included in the disposable medical products
industry as well as other plastic products; manufacture fire and security
products; manufacture valves and related products; and provide electronic
security services. All acquisitions were integrated within the Electronics, Fire
and Security Services, Healthcare and Specialty Products, or Engineered Products
and Services segments.Tyco's consolidated results from their respective acquisition dates.
        The following table summarizes the purchase accounting liabilities recorded in connection with the fiscal 2002 purchase acquisitions ($ in millions):

                                 SEVERANCE          FACILITIES-RELATED
                            --------------------   ---------------------     DISTRIBUTOR &
                            NUMBER OF              NUMBER OF                    SUPPLIER
                            EMPLOYEES    AMOUNT    FACILITIES    AMOUNT    CANCELLATION FEES     OTHER      TOTAL
                            ---------   --------   ----------   --------   ------------------   --------   --------

Original liabilities
  established.............    4,286      $ 96.7        183       $60.5            $ 6.4          $ 31.0     $194.6
Fiscal 2002 utilization...   (2,833)      (57.6)      (101)       (8.7)            (3.3)          (23.6)     (93.2)
                             ------      ------       ----       -----            -----          ------     ------
Ending balance at
  September 30, 2002......    1,453      $ 39.1         82       $51.8            $ 3.1          $  7.4     $101.4
                             ======      ======       ====       =====            =====          ======     ======


    Purchase accounting liabilities
 
 
Severance
 
Facilities-Related Accrual
 
 
 
 
 
 
 
 
 
Distributor
& Supplier
Cancellation
Fees
 
 
 
 
 
 
 
Number of
Employees
 
Accrual
 
Number of
Facilities
 
Accrual
 
Other
Accrual
 
Total
 
Balance at September 30, 2002
 
1,453
 
$
39.1
 
82
 
$
51.8
 
$
3.1
 
$
7.4
 
$
101.4
 
Additions to fiscal 2002 acquisition reserves
 
570
 
 
15.3
 
22
 
 
3.2
 
 
0.5
 
 
6.8
 
 
25.8
 
Fiscal 2003 utilization
 
(854
)
 
(24.3
)
(62
)
 
(11.0
)
 
(1.3
)
 
(4.6
)
 
(41.2
)
Foreign currency translation adjustment
 
—
 
 
1.1
 
—
 
 
1.9
 
 
0.3
 
 
0.5
 
 
3.8
 
Reclassifications
 
—
 
 
(0.1
)
—
 
 
0.6
 
 
(1.5
)
 
0.3
 
 
(0.7
)
Reductions of estimates of fiscal 2002 acquisition reserves
 
(659
)
 
(10.6
)
(37
)
 
(8.2
)
 
(0.5
)
 
(8.1
)
 
(27.4
)
 
 
 
 
 
 
 
 
 
Balance at September 30, 2003
 
510
 
$
20.5
 
5
 
$
38.3
 
$
0.6
 
$
2.3
 
$
61.7
 
 
 
 
 
 
 
 
 
 
58
        During fiscal 2003, the Company recorded during fiscal 2002 consist of
$96.7 million for severance and related costs; $60.5 million for costs
associated with the shut down and consolidation of certain facilities, including
unfavorable leases, lease terminations and other related fees, and other costs;
$6.4 million for distributor and supplier contractual cancellation fees; and
$31.0 million for transaction and other costs. Theseadditions to purchase accounting liabilities relate primarilyas it continued to formulate the acquisitionsintegration plans of Sensormatic, CII and
Paragon.

    In connection with fiscal 2002 purchase acquisitions, Tyco began to
formulate plans at the datesuch as Paragon and Eberle Controls GmbH. Finalization of each acquisition for workforce reductions and the
closure and consolidationcomponents of an aggregate of 183 facilities. The costs of
employee terminations relate to the elimination of 2,700 positions in the United
States, 522 positions in Latin America, 481 positions in Canada, 442 positions
in Europe and 141 positions in the Asia-Pacific region, consisting primarily of
manufacturing and distribution, administrative, technical, and sales and
marketing personnel. Facilities designated for closure include 94 facilities in
the United States, 48 facilities in Europe, 24 facilities in the Asia-Pacific
region, 14 facilities in Canada and 3 facilities in Latin America, consisting
primarily of administrative offices, sales offices, manufacturing plants and
distribution centers. At September 30, 2002, 2,833 employees had been terminated
and 101 facilities had been closed or consolidated related to fiscal 2002
acquisitions.

    Tyco has not yet finalized its business integration plans for all of its
fiscal 2002 acquisitions. Accordingly, purchase accounting liabilities are
subject to revisionassociated with acquisitions resulted in future quarters. There are approximately 25 acquisitions,
with estimated purchase accounting liabilities additions aggregating
approximately $65.0 million, for which business integration plans have not been
finalized. Individually, other than Paragon, none of these acquisitions are
expected to have increases in purchase accounting liabilities in excess of $5
million as of September 30, 2002. With regards to Paragon, Eberle and CII, we
anticipate additional purchase accounting liabilities of approximately
$30 million, $8$25.8 million and $5 million, respectively, will be recorded for
severance,a corresponding increase to goodwill and deferred tax assets. These additions reflect the termination of an additional 570 employees, the closure of an additional 22 facilities, additional distributor and supplier cancellation fees and other acquisition related costs consisting primarily of professional fees and other costs.
        During fiscal 2003, the Company reduced its estimate of purchase accounting liabilities relating to fiscal 2002 acquisitions by $27.4 million primarily because actual costs were less than originally estimated since the Company severed 659 fewer employees and closed 37 fewer facilities than originally anticipated due to revisions to integration plans. Goodwill and related deferred tax assets were reduced by an equivalent amount.
        Also during fiscal 2003, we reclassified certain fair value adjustments related to the finalizationwrite-down of the
integration plans. In addition, the Company has engaged third-party valuation
firms to independently appraise the fair value of certain assets acquired. Tyco
is still in the process of obtaining

                                       57

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.  ACQUISITIONS AND DIVESTITURES (CONTINUED)
independent valuations in order to finalize estimates for the fair values of
certain assets acquired and liabilities assumed.

    At September 30,fiscal 2002 holdback/earn-out liabilities of $268.2 million
remained on the Consolidated Balance Sheet, of which $124.5 million are included
in accrued expenses and other current liabilities and $143.7 million are
included in other long-term liabilities. These liabilities are payable in cash.
In addition, a total of $101.4 millionacquisitions out of purchase accounting liabilitiesaccruals and into the appropriate asset or liability account. In addition, we reclassified certain amounts related to fiscal 2002 acquisitions remainedto separately classify distributor and supplier cancellation fees and to correct the categorization of other accruals. These reclassifications had no effect on the Consolidated Balance Sheet,amount of which $56.9 million are included in accrued expenses and other current
liabilities and $44.5 million are included in other long-term liabilities. Tyco
expectsgoodwill that the terminationwas recorded.
        Termination of employees and consolidation of facilities related to allfiscal 2002 such acquisitions will beare substantially complete, within two years of
the related dates of acquisition, except for long-term non-cancellable lease obligations and certain long-term severance arrangements.
        During fiscal 2002, the Company sold certain of its businesses for net proceeds of approximately $138.7 million in cash that consist primarily of certain businesses within the Healthcare and Specialty Products and Fire and Security Services segments. In connection with these dispositions, the Company recorded a net gain of $7.2 million (excluding a previous charge of
$125.3 million for impairment associated with these assets which were held for
sale).$23.6 million.
        The following unaudited pro forma data summarize the results of operations for the periods indicated as if fiscal 2002 and 2001 acquisitions and divestitures and the amalgamation with TyCom 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 to adjustments forto interest expense and income taxes. No effect has been given to cost reductions or operating synergies in this presentation. These pro forma amounts do not purport to be indicative of the results that would have actually been achieved if the acquisitions, divestitures and amalgamation had occurred as of the beginning of the periods presented or that may be achieved in the future.

                                                    FOR YEAR ENDED SEPTEMBER 30,
                                                -------------------------------------
                                                     2002(1)             2001(2)
                                                -----------------   -----------------
                                                (IN MILLIONS, EXCEPT PER SHARE DATA)

Net revenues..................................      $36,108.5           $40,140.6
(Loss) income from continuing operations......       (3,073.2)            4,345.0
Net (loss) income.............................       (9,414.5)            3,646.6
Basic (loss) earnings per common share:
  (Loss) income from continuing operations....          (1.54)               2.21
  Net (loss) income...........................          (4.71)               1.94
Diluted (loss) earnings per common share:
  (Loss) income from continuing operations....          (1.54)               2.18
  Net (loss) income...........................          (4.71)               1.83


- ------------------------------

59
 
 
For Year Ended September 30,
(in millions, except per share data)

 
2002(1)
 
2001(2)
Net revenues
 
$
36,054.6
 
$
40,106.1
(Loss) income from continuing operations
 
 
(2,841.0
)
 
3,838.2
Net (loss) income
 
 
(9,182.3
)
 
3,139.6
Basic (loss) earnings per common share:
 
 
 
 
 
 
 
(Loss) income from continuing operations
 
$
(1.42
)
$
1.95
 
Net (loss) income
 
 
(4.60
)
 
1.60
Diluted (loss) earnings per common share:
 
 
 
 
 
 
 
(Loss) income from continuing operations
 
$
(1.42
)
$
1.93
 
Net (loss) income
 
 
(4.60
)
 
1.58
(1)
Includes charges for the impairment of long-lived assets of $3,489.5$3,309.5 million; net restructuring and other unusual charges of $1,954.3$1,874.7 million; goodwill impairment charges of $1,343.7 million; charges
    related to prior years of $261.6 million (see Note 1); a loss on investments of $270.8 million; a net gain on the sale of businesses of $7.2$23.6 million; gain on the early extinguishment of debt of $30.6 million; and loss from discontinued operations of $6,341.3$6,282.5 million, net of tax; and a loss on the sale of discontinued operations of $58.8 million, net of tax. Excludes chargecharges of $17.8 million for the write-off of purchased in-process research and development associated with the acquisitionacquisitions of Sensormatic and DSC discussed in Note 7.

                                       58

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.  ACQUISITIONS AND DIVESTITURES (CONTINUED)


(2)
Includes a net gain on sale of businesses of $410.4 million related primarily to the sale of ADT Automotive; a loss of $133.8 million related to the write-down of an investment; a net gain of $64.1$24.5 million on the sale of shares of a subsidiary; charges for the impairment of long-lived assets of $120.1 million; net restructuring and other unusual charges totaling $418.5$585.3 million; loss on the early extinguishment of debt of $26.3 million; income from discontinued operations of $252.5 million, net of tax; and cumulative effect of accounting changes of $683.4 million, net of tax. Excludes a charge of $184.3 million for the write-off of purchased in-process research and development associated with the acquisition of Mallinckrodt discussed in Note 7.

    During fiscal
Fiscal 2001 Tyco entered into an agreement to acquire C.R.
Bard, Inc., a healthcare products manufacturer. On February 6, 2002, Tyco and
C.R. Bard, Inc. mutually terminated the merger agreement. Each party bore its
own costs, and no break up fee was paid.

    During fiscal 2002, Tyco entered into an agreement to acquire McGrath
RentCorp, a leading provider of modular offices and classrooms and electronic
test equipment. On July 1, 2002, McGrath RentCorp elected to terminate the
transaction agreement. Tyco reimbursed McGrath's cost and expenses in the amount
of $1.25 million.

FISCAL 2001
        During fiscal 2001, the Company purchased approximately 240 companies and
business lines for an aggregate cost of $10,098.7$9,339.7 million, consisting of $6,313.8$5,319.2 million in cash, net of $343.4 million of cash acquired, and the issuance of approximately 78.2 million common shares valued at $3,784.9$3,904.6 million, plus the fair value of stock options assumed of $115.9 million. Of this $6,313.8 million,Fiscal 2001 purchase acquisitions include, among others, Mallinckrodt Inc., CIGI Investment Group, Inc., InnerDyne, Inc., LPS, Simplex Time Recorder Co., Scott, and the electronic security systems businesses of Cambridge Protection Industries, L.L.C. In addition, during fiscal 2001 Tyco paid $994.6$798.1 million for approximately 1.0 million customer contracts for electronic security services through itsthe ADT dealer program. The Company purchased all of the voting equity
interests in each of the businesses acquired.
        In connection with these acquisitions, the Company recorded purchase accounting liabilities of $1,021.3 million for the costs of integrating the acquired companies and transaction costs. Also during fiscal 2001, Tyco purchased CIT for an aggregate cost of $9,455.5 million, consisting of $2,486.4 million in cash, net of $2,156.4 million of cash acquired, and the issuance of approximately 133.0 million common shares valued at $6,650.5 million, plus the fair value of options assumed of $318.6 million. CIT was subsequently disposed of in fiscal 2002 and has been presented as discontinued operations.

    During fiscal 2001, $788.7 million of cash was paid during the year for
purchase accounting liabilities related to current and prior years'
acquisitions. In addition, the Company paid approximately $105.7 million
relating to holdback and earn-out liabilities primarily related to certain prior
year acquisitions. Fiscal 2001 purchase acquisitions include, among others,
Mallinckrodt Inc., CIGI Investment Group, Inc., InnerDyne, Inc., LPS, Simplex
Time Recorder Co., Scott, CIT and the electronic security systems businesses of
Cambridge Protection Industries, L.L.C. Certain acquisitions have provisions to
defer a portion of the purchase price to cover holdback liabilities for items
such as the finalization of the acquired company's net assets, during a
specified period of time or to pay the purchase price over a period of time. At
September 30, 2002, the Company has a contingent liability of $80 million
related to the fiscal 2001 acquisition of Com-Net by the Electronics segment.
The $80 million is the maximum payable to the former shareholders of Com-Net
only after the construction and installation of the communications system is
finished and the State of Florida has approved the system based on the
guidelines set forth in the contract. The $80 million is not accrued at
September 30, 2002, as the outcome of this contingency cannot be reasonably
determined.operations (see Note 11).
60

        The cash portions of the acquisition costs were funded utilizing net proceeds from the issuance of long-term debt and Tyco common shares and net proceeds from the disposal of businesses. Fair value of debt of acquired companies aggregated $40,643.2 million, including $39,050.9 million of debt of CIT. Each

                                       59

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.  ACQUISITIONS AND DIVESTITURES (CONTINUED)
acquisition
        During fiscal 2001, $773.0 million of cash was accountedpaid during the year for as a purchase accounting liabilities related to current and prior years' acquisitions. In addition, the results of operations of
the acquired companies have been included in the Company's consolidated results
from their respective acquisition dates.Company paid approximately $105.7 million relating to holdback and earn-out liabilities primarily related to certain prior year acquisitions.
        The following table summarizes the purchase accounting liabilities recorded in connection with the fiscal 2001 purchase acquisitions ($ in millions):

                                           SEVERANCE          FACILITIES-RELATED
                                      --------------------   ---------------------     DISTRIBUTOR &
                                      NUMBER OF              NUMBER OF                    SUPPLIER
                                      EMPLOYEES    AMOUNT    FACILITIES    AMOUNT    CANCELLATION FEES     OTHER      TOTAL
                                      ---------   --------   ----------   --------   ------------------   --------   --------

Original liabilities established....   10,270     $ 413.3        349       $302.2          $179.9         $ 224.6    $1,120.0
Liabilities
 
 
Severance
 
Facilities-Related Accrual
 
 
 
 
 
 
 
 
 
Distributor
& Supplier
Cancellation
Fees
 
 
 
 
 
 
 
Number of
Employees
 
Accrual
 
Number of
Facilities
 
Accrual
 
Other
Accrual
 
Total
 
Balance at September 30, 2002
 
2,196
 
$
129.7
 
100
 
$
207.5
 
$
28.7
 
$
29.1
 
$
395.0
 
Fiscal 2003 utilization
 
(1,281
)
 
(56.6
)
(66
)
 
(44.6
)
 
(9.4
)
 
(11.7
)
 
(122.3
)
Foreign currency translation adjustment
 
—
 
 
8.6
 
—
 
 
0.4
 
 
0.5
 
 
1.8
 
 
11.3
 
Reclassifications
 
—
 
 
(0.4
)
—
 
 
3.3
 
 
—
 
 
(6.6
)
 
(3.7
)
Reductions of estimates of fiscal 2001 acquisition reserves
 
(897
)
 
(67.5
)
(25
)
 
(68.6
)
 
(16.2
)
 
(10.5
)
 
(162.8
)
 
 
 
 
 
 
 
 
 
Balance at September 30, 2003
 
18
 
$
13.8
 
9
 
$
98.0
 
$
3.6
 
$
2.1
 
$
117.5
 
 
 
 
 
 
 
 
 
 
        During fiscal 2003, the Company reduced its estimate of discontinued
  operations........................     (354)      (47.2)        --        (19.3)             --           (32.2)      (98.7)
                                       ------     -------       ----       ------          ------         -------    --------
Original liabilities continuing
  operations........................    9,916       366.1        349        282.9           179.9           192.4     1,021.3
Fiscal 2001 utilization.............   (7,847)     (203.2)      (172)       (21.6)          (94.3)         (140.9)     (460.0)
                                       ------     -------       ----       ------          ------         -------    --------
Ending balance at September 30,
  2001..............................    2,069       162.9        177        261.3            85.6            51.5       561.3
Additions to fiscal 2001 acquisition
  liabilities.......................    8,570       179.4        493         85.3            25.9            48.8       339.4
Fiscal 2002 utilization.............   (7,060)     (180.7)      (328)       (69.6)          (44.5)          (50.7)     (345.5)
Reclassifications...................       --         5.7         --        (29.3)           (3.0)           (2.7)      (29.3)
Reduction of estimates of fiscal
  2001 acquisition liabilities......   (1,383)      (37.6)      (242)       (40.2)          (35.3)          (17.8)     (130.9)
                                       ------     -------       ----       ------          ------         -------    --------
Ending balance at September 30,
  2002..............................    2,196     $ 129.7        100       $207.5          $ 28.7         $  29.1    $  395.0
                                       ======     =======       ====       ======          ======         =======    ========


    Purchase accounting liabilities recorded during fiscal 2001 consist of
$366.1 million for severance and related costs; $282.9 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; $179.9 million for distributor and supplier contractual
cancellation fees; and $192.4 million for transaction and other costs. These purchase accounting liabilities relaterelating to fiscal 2001 acquisitions by $162.8 million primarily because actual costs were less than originally estimated since the Company severed 897 fewer employees and closed 25 fewer facilities than originally anticipated due to revisions to integration plans. Goodwill and related deferred tax assets in the acquisitions of
Mallinckrodt Inc. in October 2000, LPS, Simplex Time Recorder Co. in January
2001 and the electronic security systems businesses of Cambridge Protection
Industries, LLC in July 2001 ("SecurityLink.")aggregate were reduced by an equivalent amount.
        During fiscal 2001, the Company made payments totaling $20.0 million to Mr. Frank Walsh, a director of Tyco at the time of the CIT acquisition, and to a charitable organization specified by such director. The payments were direct and incremental costs incurred in connection with the acquisition of CIT and, accordingly, were included as part of the purchase price for CITCIT. The payments were refunded to the Company in fiscal 2003 (see Note 17)18).

    In connection with the fiscal 2001 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 349 facilities. The costs of
employee termination benefits relate to the elimination of 6,297 positions in
the United States, 1,559 positions in Europe, 1,354 positions in the
Asia-Pacific region and 706 positions in Canada and Latin America, consisting
primarily of manufacturing and distribution, administrative, technical, and
sales and marketing personnel. Facilities designated for closure include 226
facilities in the United States, 54 facilities in Europe, 48 facilities in the
Asia-Pacific region and 21 facilities in Canada and Latin America, consisting
primarily of manufacturing plants, distribution facilities, sales offices,
corporate administrative facilities and research and development facilities. At
September 30, 2002, 14,907 employees had been terminated and 500 facilities had
been closed or consolidated.

    During fiscal 2002, we recorded additions to purchase accounting liabilities
as we continued to formulate the integration plans of fiscal 2001 acquisitions,
such as LPS, Microser S.L. (integrated within

                                       60

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.  ACQUISITIONS AND DIVESTITURES (CONTINUED)
the Electronics segment), DAAG, Edison and SecurityLink, among others.
Finalization of components of integration plans associated with acquisitions
resulted in additional purchase accounting liabilities of $339.4 million and a
corresponding increase to goodwill and deferred tax assets. These additions
reflect the elimination of an additional 8,570 employees, the closure of an
additional 493 facilities, additional distributor and supplier cancellation fees
and other acquisition related costs consisting primarily of professional fees
and other costs.

    During fiscal 2002, the Company reduced its estimate of purchase accounting
liabilities relating to fiscal 2001 acquisitions by $130.9 million primarily
because actual costs were less than originally estimated since the Company
severed 1,383 fewer employees and closed 242 fewer facilities than originally
anticipated due to revisions to integration plans. Goodwill and related deferred
tax assets were reduced by an equivalent amount.

    Also during the year ended September 30, 2002, we reclassified certain fair
value adjustments related to the write-down of assets for fiscal 2001
acquisitions out of purchase accounting accruals and into the appropriate asset
or liability account. In addition, we reclassified certain amounts in the
preceding table related to fiscal 2001 acquisitions to separately classify
distributor and supplier cancellation fees and to correct the categorization of
other accruals. These reclassifications had no effect on the amount of goodwill
that was recorded.
        In connection with the purchase acquisitions consummated during fiscal 2001, liabilities for approximately $129.7$13.8 million for severance and related costs, $207.5$98.0 million for the shutdown and consolidation of acquired facilities, $28.7$3.6 million for distributor and supplier contractual cancellation fees and $29.1$2.1 million in transaction and other direct costs remained on the Consolidated Balance Sheet at September 30, 2002. The Company expects that the termination2003. Termination of employees and consolidation of facilities related to all such acquisitions will
beare substantially complete, within one year of plan finalization, except for long-term non-cancellablenon-cancelable lease obligations and certain long-term severance arrangements.
61

        In fiscal 2001, the Company sold its ADT Automotive business to Manheim Auctions, Inc., a wholly-owned subsidiary of Cox Enterprises, Inc., for approximately $1.0 billion in cash. The Company recorded a net gain on the sale of businesses of $410.4 million principally related to the sale of ADT Automotive, which is recorded as other income in the Consolidated Statement of Operations.
        The following unaudited pro forma data summarize the results of operations for the periods indicated as if the fiscal 2001 and 2000 acquisitions and divestitures had been completed as of the beginning of the periodsperiod presented. The pro forma data give effect to actual operating results prior to the acquisitions and divestitures and adjustments to interest expense, goodwill amortization and income taxes. No effect has been given to cost reductions or operating synergies in this presentation, and amounts have been revised to reflect the disposition of CIT as discontinued operations (see Note 11). These pro forma amounts do not purport to be indicative of the results that would have actually been 61

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.  ACQUISITIONS AND DIVESTITURES (CONTINUED)
obtainedachieved if the acquisitions and divestitures had occurred as of the beginning of the periods presented or that may be obtained in the future.

                                                    FOR YEAR ENDED SEPTEMBER 30,
                                               ---------------------------------------
                                                    2001(1)              2000(2)
                                               ------------------   ------------------
                                               ($ IN MILLIONS, EXCEPT PER SHARE DATA)

Net revenues.................................       $37,169.8            $38,933.5
Income from continuing operations............         4,297.4              4,182.1
Net income...................................         3,606.0              4,143.5
Basic income per common share:
  Income from continuing operations..........            2.26                 2.20
  Net income.................................            1.89                 2.18
Diluted income per common share:
  Income from continuing operations..........            2.23                 2.17
  Net income.................................            1.87                 2.15


- ------------------------------

($ in millions, except per share data)

 
For Year Ended
September 30, 2001(1)
Net revenues
 
$
37,135.3
Income from continuing operations
 
 
3,790.5
Net income
 
 
3,099.1
Basic earnings per common share:
 
 
 
 
Income from continuing operations
 
$
1.99
 
Net income
 
 
1.63
Diluted earnings per common share:
 
 
 
 
Income from continuing operations
 
$
1.97
 
Net income
 
 
1.61
(1)
Includes a net gain on sale of businesses of $410.4 million related primarily to the sale of ADT Automotive; a loss of $133.8 million related to the write-down of an investment; a net gain of $64.1$24.5 million on the sale of shares of a subsidiary; charges for the impairment of long-lived assets of $120.1 million; net restructuring and other unusual charges totaling $418.5$585.3 million; loss on the early extinguishment of debt of $26.3 million; income from discontinued operations of $252.5 million, net of tax; and cumulative effect of accounting changes of $683.4 million, net of tax. Excludes a charge of $184.3 million for the write-off of purchased in-process research and development associated with the acquisition of Mallinckrodt discussed in Note 7.

(2) Includes an unusual gain of $1,760.0 million on the sale by a subsidiary of
    its common shares. Income also includes net restructuring and other unusual
    charges of $176.3 million; charges for the impairment of long-lived assets
    of $99.0 million; and a loss on the early extinguishment of debt of
    $0.3 million.

FISCAL 2000

    During fiscal 2000, the Company purchased approximately 200 companies and
business lines for an aggregate cost of $4,917.9 million, consisting of
$4,246.5 million in cash, net of $243.1 million of cash acquired, and the
issuance of approximately 15.6 million common shares valued at $671.4 million.
Of this $4,246.5 million, Tyco paid $500.1 million for approximately 550,000
customer contracts for electronic security services through its dealer program.
In addition, $544.2 million of cash was paid during fiscal 2000 for purchase
accounting liabilities related to 2000 and prior years' acquisitions. Fiscal
2000 acquisitions include, among others, the acquisition of General Surgical
Innovations, Inc., AFC Cable Systems, Inc., Siemens Electromechanical Components
GmbH & Co. KG, Praegitzer Industries, Inc., Critchley Group PLC and the
Electronic OEM business of Thomas & Betts. 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. Fair value of debt of
acquired companies aggregated $244.1 million. Each of these acquisitions was
accounted for as a purchase, and the results of operations of the acquired
companies have been included in the consolidated results of the Company from
their respective acquisition dates. As a result of 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 intangible assets.

                                       62

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.  ACQUISITIONS AND DIVESTITURES (CONTINUED)
    The following table summarizes the purchase accounting liabilities recorded
in connection with the fiscal 2000 purchase acquisitions ($ in millions):


                                               SEVERANCE          FACILITIES-RELATED
                                          --------------------   ---------------------
                                                                   NUMBER                  DISTRIBUTOR &
                                          NUMBER OF                  OF                      SUPPLIER
                                          EMPLOYEES    AMOUNT    FACILITIES    AMOUNT    CANCELLATION FEES    OTHER      TOTAL
                                          ---------   --------   ----------   --------   -----------------   --------   --------

Original liabilities established........    7,215      $273.9        102       $62.7           $32.3          $57.3      $426.2
Fiscal 2000 utilization.................   (4,023)     (155.6)       (53)      (30.0)          (21.3)         (20.9)     (227.8)
                                           ------      ------        ---       -----           -----          -----      ------
Ending balance at September 30, 2000....    3,192       118.3         49        32.7            11.0           36.4       198.4
Fiscal 2001 utilization.................   (4,962)      (98.2)       (65)      (31.1)          (10.8)         (26.1)     (166.2)
Additions to fiscal 2000 acquisition
  liabilities...........................    3,842        35.6         86        36.5             6.5           25.4       104.0
Reclassifications.......................       --         1.0         --        (1.4)             --            0.1        (0.3)
Reduction of estimates of fiscal 2000
  acquisition liabilities...............     (515)      (15.7)        (9)       (9.8)           (1.4)          (6.4)      (33.3)
                                           ------      ------        ---       -----           -----          -----      ------
Ending balance at September 30, 2001....    1,557        41.0         61        26.9             5.3           29.4       102.6
Fiscal 2002 utilization.................     (997)      (15.8)       (32)       (7.1)           (0.4)          (4.1)      (27.4)
Reclassifications.......................       --          --         --        (0.3)            3.0           (6.0)       (3.3)
Reduction of estimates of fiscal 2000
  acquisition liabilities...............     (483)      (16.3)       (10)      (15.9)           (5.1)         (12.5)      (49.8)
                                           ------      ------        ---       -----           -----          -----      ------
Ending balance at September 30, 2002....       77      $  8.9         19       $ 3.6           $ 2.8          $ 6.8      $ 22.1
                                           ======      ======        ===       =====           =====          =====      ======


    Purchase accounting liabilities recorded during fiscal 2000 consist of
$273.9 million for severance and related costs, $62.7 million for costs
associated with the shut down and consolidation of certain acquired facilities,
$32.3 million for distributor and supplier contractual cancellation fees and
$57.3 million for transaction and other direct costs. The $273.9 million of
severance and related costs covers employee termination benefits for
approximately 7,215 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. As we continued to
formulate the integration plans of fiscal 2000 acquisitions, we recorded
additions to purchase accounting liabilities during fiscal 2001 of
$35.6 million for severence and related costs, reflecting the elimination of an
additional 3,842 employees. At September 30, 2002, all but 77 employees had been
terminated and $8.9 million in severance and related costs remained on the
3.    Consolidated Balance Sheet. The Company expects that the remaining employee
terminations will be completed in fiscal 2003.

    The $62.7 million of exit costs are associated with the closure and
consolidation of 102 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 certain of these facilities. During fiscal 2001, we recorded additional
liabilities of $36.5 million for the closure of an additional 86 facilities. All
but 19 facilities had been closed or consolidated at September 30, 2002. The
remaining facilities are primarily small sales and administrative offices, which
are expected to be shut down in Fiscal 2003.

    During fiscal 2002, the Company reduced its estimate of purchase accounting
liabilities relating to fiscal 2000 acquisitions by $49.8 million and,
accordingly, goodwill and related deferred tax assets were reduced by an
equivalent amount. These reductions resulted primarily from costs being less
than originally anticipated.

                                       63

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.  ACQUISITIONS AND DIVESTITURES (CONTINUED)

    Also during fiscal 2002, we reclassified certain fair value adjustments
related to the write-down of assets for fiscal 2000 acquisitions out of purchase
accounting accruals and into the appropriate asset or liability account. In
addition, we reclassified certain amounts in the preceding table related to
fiscal 2000 acquisitions to separately classify distributor and supplier
cancellation fees. These reclassifications had no effect on the amount of
goodwill that was recorded.

    At September 30, 2002, there remained on the Consolidated Balance Sheet
purchase accounting liabilities of $22.1 million for employee severance
(principally for payments to employees already terminated with severance paid
out over time), facility related costs (principally for rents under
non-cancelable leases for vacated premises) and other costs.

    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 and adjustments to interest expense, goodwill amortization and
income taxes. No effect has been given to cost reductions or operating synergies
in this presentation. These pro forma amounts do not purport to be indicative of
the results that would have actually been obtained if the acquisitions and
divestitures had occurred as of the beginning of the periods presented or that
may be obtained in the future.


                                                           FOR THE YEAR ENDED
                                                         SEPTEMBER 30, 2000(1)
                                                 --------------------------------------
                                                 ($ IN MILLIONS, EXCEPT PER SHARE DATA)

Net revenues...................................                $30,448.0
Income from continuing operations..............                  4,479.8
Net income.....................................                  4,479.8
Basic income per common share:
  Income from continuing operations............                     2.65
  Net income...................................                     2.65
Diluted income per common share:
  Income from continuing operations............                     2.61
  Net income...................................                     2.61


- ------------------------------

(1) Includes an unusual gain of $1,760.0 million on the sale by a subsidiary of
    its common shares. Income also includes net restructuring and other unusual
    charges of $176.3 million; charges for the impairment of long-lived assets
    of $99.0 million; and a loss on the early extinguishment of debt of
    $0.3 million.

3.  CONSOLIDATED SEGMENT DATASegment Data
      The Company's reportable segments are strategic business units that operate in different industries and are managed separately. The format of the segment
data presented below is consistent with how business activities were reported
internally to management through the period covered by this report. Certain corporate expenses were allocated to each operating segment's operating income, based generally on net revenues. For additional information, including a description of the products and services included in each segment, see Note 1.
62
        During fiscal 2002, the Company changed its internal reporting structure
(due to the amalgamation with TyCom which eliminated the publicly held minority
interest) such that the operations of the former Telecommunications segment are
now reported as part of the Electronics segment. In addition, during fiscal
2002,2003, a change was made to the Company's internal reporting structure such that the operations of Tyco's flow controlplastics and adhesives businesses and the environmental
engineering business (previously

                                       64

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3.  CONSOLIDATED SEGMENT DATA (CONTINUED)
reported within the Fire and Security Services segment) and Tyco's electrical
and metal products business (previously reported within the ElectronicsHealthcare and Specialty Products segment) now comprise the Company's new Engineered ProductsPlastics and ServicesAdhesives reportable segment. Also inThe Company has conformed its segment reporting accordingly and has reclassified comparative prior period information to reflect this change.
        In fiscal 2002, Tyco sold its financial services business (Tyco Capital) through an IPO.initial public offering ("IPO"). The historical results of our financial services business are presented as "Discontinued Operations." See Note 11 for more information regarding the discontinued operations of Tyco Capital. The Company has conformed its segment reporting accordingly and has reclassified comparative prior period information to reflect these changes.
        Selected information by industry segment is presented in the following tables ($ in millions). Amounts excludeinclude restructuring and other unusual(credits) charges,
(credits), charges for the impairment of long-lived assets, charges for the impairment of goodwill, write-off of purchased in-process research and development (IPR&D)("IPR&D"), and charges related to prior years, as described in
Notes 1, 5, 6, 7, and 16.


                                                                     FOR THE YEAR ENDED
                                                                        SEPTEMBER 30,
                                                              ---------------------------------
                                                                2002        2001        2000
                                                              ---------   ---------   ---------

NET REVENUES:
    Fire and Security Services..............................  $10,637.6   $ 7,471.7   $ 6,076.6
    Electronics.............................................   10,528.0    13,572.8    12,449.5
    Healthcare and Specialty Products.......................    9,777.4     8,812.7     6,467.9
    Engineered Products and Services........................    4,700.7     4,179.4     3,937.9
                                                              ---------   ---------   ---------
      Net revenues from external customers..................  $35,643.7   $34,036.6   $28,931.9
                                                              =========   =========   =========

                                                               FOR THE YEAR ENDED SEPTEMBER 30,
                                                            ---------------------------------------
                                                              2002           2001           2000
                                                            ---------      ---------      ---------

OPERATING INCOME (LOSS):
    Fire and Security Services............................  $ 1,407.3(1)   $ 1,289.2(6)   $ 1,029.3(11)
    Electronics...........................................    1,475.3(2)     3,477.8(7)     2,977.4(12)
    Healthcare and Specialty Products.....................    2,111.5(3)     2,060.8(8)     1,527.9(13)
    Engineered Products and Services......................      650.4(4)       816.5(9)       746.9
                                                            ---------      ---------      ---------
                                                              5,644.5        7,644.3        6,281.5
  Less: Corporate expenses................................     (196.2)(5)     (197.2)(10)    (187.4)(14)
      Goodwill amortization expense.......................         --         (537.4)        (344.4)
                                                            ---------      ---------      ---------
  Operating income (loss) before charges (credits)........  $ 5,448.3        6,909.7        5,749.7
  Less: Net restructuring, impairment and other unusual
    charges...............................................   (7,027.3)        (722.9)        (275.3)
                                                            ---------      ---------      ---------
  Operating (loss) income.................................  $(1,579.0)     $ 6,186.8      $ 5,474.4
                                                            =========      =========      =========


- ------------------------------

 (1) Excludes an impairment charge of $217.0 million primarily related to the
     write-down of intangible assets resulting from the curtailment, and in
     certain end markets, the termination of the authorized dealer program and
     the write-off of a software development project. Also excludes a net
     restructuring and other unusual charge of $94.9 million, of which charges
     of $19.4 million are included in cost of sales. The $94.9 million net
     charge consists of charges of $113.5 million primarily related to severance
     and facility-related charges associated with streamlining the business and
     an accrual for anticipated resolution and disposition of various labor and
     employment matters, offset by restructuring credits of $18.6 million due to
     costs being less than anticipated. Also excludes a charge of $17.8 million
     for the write-off of purchased IPR&D.

 (2) Excludes impairment charges of $3,113.7 million primarily related to the
     write-down of the TGN and other property, plant and equipment associated
     with the closure of certain facilities, net restructuring and other unusual
     charges of $1,559.5 million, of which $608.2 million is included in cost of
     sales and $115.0 million is included in selling, general and administrative
     expenses. The $1,559.5 million net charge consists of charges of
     $1,585.8 million primarily related to the

                                         (FOOTNOTES CONTINUED ON FOLLOWING PAGE)

                                       65

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3.  CONSOLIDATED SEGMENT DATA (CONTINUED)

(FOOTNOTES CONTINUED FROM PRECEDING PAGE)

    write-down of inventory and facility closures, slightly offset by
     restructuring credits of $26.3 million due to costs being less than
     anticipated. Also excludes a charge for the impairment of goodwill, of
     $1,024.5 million.

 (3) Excludes an impairment charge of $130.4 million primarily for the write-off
     of intangible assets related to a business line sold in July 2002, and net
     restructuring and other unusual charges of $54.9 million, of which
     $1.6 million is included in cost of sales. The $54.9 million net charge
     consists of charges of $58.8 million primarily related to severance
     associated with the consolidation of operations and facility-related costs
     due to exiting certain business lines, and the write-off of legal fees and
     other deal costs associated with acquisitions that were not completed,
     somewhat offset by restructuring credits of $3.9 million.

 (4) Excludes a charge for the impairment of goodwill of $319.2 million,
     restructuring and other unusual charges of $50.8 million, of which
     $6.2 million is included in cost of sales, related to severance and
     facility-related costs associated with streamlining the business, and
     impairment charges of $9.5 million related to property, plant and equipment
     due to the closure of facilities that had become redundant due to
     acquisitions.

 (5) Excludes charges related to prior yearschanges in estimate recorded during the quarter ended March 31, 2003, as described in Notes 5, 6, 7, 17 and 31, respectively.
 
 
For the Year Ended September 30,
 
 
2003
 
2002
 
2001
Net Revenues:
 
 
 
 
 
 
 
 
 
Fire and Security
 
$
11,292.8
 
$
10,639.0
 
$
7,473.0
Electronics(1)
 
 
10,355.0
 
 
10,464.1
 
 
13,545.6
Healthcare
 
 
8,571.9
 
 
7,899.1
 
 
7,065.3
Engineered Products and Services
 
 
4,684.4
 
 
4,709.3
 
 
4,170.8
Plastics and Adhesives
 
 
1,897.2
 
 
1,878.3
 
 
1,747.4
 
 
 
 
 
Net revenues from external customers
 
$
36,801.3
 
$
35,589.8
 
$
34,002.1
 
 
 
 
(1)
Includes net revenues for the TGN business of $261.6$14.4 million, (see Note 1),
     restructuring and other unusual charges of $194.2 million primarily related
     to the write-off of investment banking fees and other deal costs associated
     with the terminated breakup plan and certain acquisitions that were not
     completed, and to a lesser extent, severance associated with corporate
     employees and impairment charges of $18.9 million related to property,
     plant and equipment.

 (6) Excludes a net restructuring and other unusual charge of $84.1 million, of
     which $5.4 million is included in cost of sales. The $84.1 million net
     charge consists of charges of $85.7 million primarily associated with the
     closure of existing facilities that had become redundant due to
     acquisitions, slightly offset by restructuring credits of $1.6 million due
     to costs being less than anticipated. Also excludes a charge of
     $2.8 million related primarily to the impairment of property, plant and
     equipment associated with the closure of these facilities.

 (7) Excludes restructuring and other unusual charges of $383.8 million, of
     which charges of $125.8 million are included in cost of sales, primarily
     related to the closure of facilities within the computer and consumer
     electronics and communications industries. Also excludes a charge of
     $98.5 million related to the impairment of property, plant and equipment
     associated with the closure of these facilities.

 (8) Excludes the write-off of purchased in-process research and development of
     $184.3$8.0 million and net restructuring$1.7 million in fiscal 2003, fiscal 2002 and other unusual charges of
     $56.7 million, of which $44.0 million is included in cost of sales. The
     $56.7 million net charge consists of charges of $72.3 million, primarily
     related to inventory which had been written-up under purchase accounting
     and the closure of several manufacturing plants, offset by restructuring
     credits of $15.6 million. Also excludes a charge of $15.4 million related
     primarily to the impairment of property, plant and equipment associated
     with the closure of these plants.

 (9) Excludes a restructuring and other unusual charge of $57.3 million, of
     which $9.7 million is included in cost of sales, related primarily to a
     restructuring of the valves and controls business. Also excludes a charge
     of $3.4 million related primarily to the impairment of property, plant and
     equipment associated with the closure of facilities.

(10) Excludes an unusual credit of $166.8 million related to the settlement of
     litigation and an unusual charge of $3.4 million related to severance.

(11) Excludes a merger, restructuring and other unusual credit of $11.2 million
     representing a revision in estimates related to the Company's 1997
     restructuring accruals.

(12) Excludes 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, representing primarily a
     revision of estimates of merger, restructuring and other unusual accruals
     related to the merger with AMP and AMP's profit improvement plan. Also
     excludes an unusual charge of $13.1 million incurred in connection with the
     TyCom IPO.

(13) Excludes chargesfiscal 2001, respectively.

 
 
For the Year Ended September 30,
 
 
 
2003
 
2002
 
2001
 
Operating income (loss):
 
 
 
 
 
 
 
 
 
 
Fire and Security
 
$
360.2
 
$
904.7
 
$
883.2
 
Electronics(1)
 
 
457.7
 
 
(4,245.9
)
 
3,005.1
 
Healthcare
 
 
2,127.1
 
 
1,846.8
 
 
1,509.3
 
Engineered Products and Services
 
 
355.2
 
 
252.5
 
 
704.8
 
Plastics and Adhesives
 
 
167.4
 
 
209.2
 
 
300.9
 
 
 
 
 
 
 
 
 
3,467.6
 
 
(1,032.7
)
 
6,403.3
 
Less: Corporate expenses
 
 
(400.6
)
 
(419.7
)
 
(243.9
)
 
Goodwill amortization expense
 
 
—
 
 
—
 
 
(543.0
)
 
 
 
 
 
Operating income (loss)
 
$
3,067.0
 
$
(1,452.4
)
$
5,616.4
 
 
 
 
 
 
(1)
Includes operating loss for the impairmentTGN business of long-lived assets of $99.0$799.8 million, $3,125.7 million and restructuring$58.0 million in fiscal 2003, fiscal 2002 and other unusual charges of $7.9 million, of which
     $6.4 million is included in cost of sales, related to exiting U.S.
     Surgical's interventional cardiology business. Excludes restructuring and
     other unusual charges of $11.1 million related to U.S. Surgical's suture
     business. Also excludes a credit of $29.9 million representing a revision
     in estimates of merger, restructuring and other unusual accruals consisting
     of $19.7 million related primarily to the merger with U.S. Surgical and
     $10.2 million related to the Company's 1997 restructuring accruals.

(14) Excludes an unusual charge of $275.0 million for certain claims relating to
     a merged company in the Healthcare business and other unusual charges of
     $1.2 million.

                                       66

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3.  CONSOLIDATED SEGMENT DATA (CONTINUED)fiscal 2001, respectively.
63
        Revenue by groups of products aggregated based upon business units within Tyco's segments are as follows:

                                                                FOR THE YEAR ENDED SEPTEMBER 30,
                                                            -----------------------------------------
                                                              2002            2001            2000
                                                            ---------       ---------       ---------

REVENUE BY GROUPS OF PRODUCTS:
Security Services....................................       $ 5,990.5       $ 3,695.1       $ 3,331.1
Fire Protection......................................         4,647.1         3,776.6         2,745.5
Electronics Components...............................         9,778.3        11,709.6         9,909.8
Telecommunications...................................           749.7         1,863.2         2,539.7
Healthcare...........................................         7,899.1         7,065.3         4,377.5
Plastics and Adhesives...............................         1,878.3         1,737.5         1,583.9
ADT Automotive.......................................              --             9.9           506.5
Flow Control.........................................         2,789.0         2,252.9         2,023.5
Electrical and Metal Products........................         1,434.4         1,397.9         1,507.9
Tyco Infrastructure Services.........................           477.3           528.6           406.5
                                                            ---------       ---------       ---------
NET REVENUES FROM EXTERNAL CUSTOMERS.................       $35,643.7       $34,036.6       $28,931.9
                                                            =========       =========       =========
 
 
For the Year Ended September 30,
 
 
2003
 
2002
 
2001
Revenue by Groups of Products:
 
 
 
 
 
 
 
 
 
Electronic Security Services
 
$
6,361.6
 
$
5,991.9
 
$
3,696.4
Fire Protection Contracting and Services
 
 
4,931.2
 
 
4,647.1
 
 
3,776.6
Electronic Components
 
 
8,093.0
 
 
7,581.1
 
 
8,919.5
Wireless
 
 
771.5
 
 
811.7
 
 
673.1
Electrical Contracting Services
 
 
369.6
 
 
346.3
 
 
335.7
Power Systems
 
 
567.7
 
 
623.0
 
 
918.3
Printed Circuit Group
 
 
402.8
 
 
416.2
 
 
863.0
Submarine Telecommunications(1)
 
 
150.4
 
 
685.8
 
 
1,836.0
Medical Devices & Supplies
 
 
6,694.9
 
 
6,252.8
 
 
5,983.2
Retail
 
 
903.8
 
 
762.9
 
 
318.3
Pharmaceuticals
 
 
973.2
 
 
883.4
 
 
763.8
Flow Control and Fire Products
 
 
2,717.1
 
 
2,789.0
 
 
2,252.9
Electrical and Metal Products
 
 
1,349.5
 
 
1,434.4
 
 
1,397.9
Infrastructure Services
 
 
617.8
 
 
485.9
 
 
520.0
Plastics
 
 
999.8
 
 
950.4
 
 
835.5
A&E Products
 
 
296.2
 
 
321.6
 
 
343.3
Adhesives
 
 
343.3
 
 
348.0
 
 
331.9
Ludlow Coated Products
 
 
257.9
 
 
258.3
 
 
226.8
ADT Automotive
 
 
—
 
 
—
 
 
9.9
 
 
 
 
Net revenues from external customers
 
$
36,801.3
 
$
35,589.8
 
$
34,002.1
 
 
 
 
(1)
Includes net revenues for the TGN business of $14.4 million, $8.0 million and $1.7 million in fiscal 2003, fiscal 2002 and fiscal 2001, respectively.
        Total assets, depreciation and amortization, and capital expenditures by segment are as follows:

                                                                        AT SEPTEMBER 30,
                                                            -----------------------------------------
                                                              2002            2001            2000
                                                            ---------       ---------       ---------

TOTAL ASSETS:
  Fire and Security Services.........................       $20,557.9       $15,575.7       $ 9,298.5
  Electronics........................................        18,179.1        21,604.0        14,278.0
  Healthcare and Specialty Products..................        15,086.9        15,238.8         8,925.6
  Engineered Products and Services...................         6,742.3         6,414.9         5,748.4
  Corporate..........................................         5,848.2         1,591.2         2,153.8
                                                            ---------       ---------       ---------
                                                             66,414.4        60,424.6        40,404.3
  Net Assets of Discontinued Operations..............              --        10,598.0              --
                                                            ---------       ---------       ---------
                                                            $66,414.4       $71,022.6       $40,404.3
                                                            =========       =========       =========


                                       67

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3.  CONSOLIDATED SEGMENT DATA (CONTINUED)


                                                                FOR THE YEAR ENDED SEPTEMBER 30,
                                                            -----------------------------------------
                                                              2002            2001            2000
                                                            ---------       ---------       ---------

DEPRECIATION AND AMORTIZATION:
  Fire and Security Services.........................       $   984.0       $   718.1       $   531.6
  Electronics........................................           546.5           721.0           630.4
  Healthcare and Specialty Products..................           362.8           518.0           330.1
  Engineered Products and Services...................           127.3           172.4           144.7
  Corporate..........................................            12.3            11.1             7.6
                                                            ---------       ---------       ---------
                                                            $ 2,032.9       $ 2,140.6       $ 1,644.4
                                                            =========       =========       =========
CAPITAL EXPENDITURES, NET(1):
  Fire and Security Services.........................       $   850.3       $   890.2       $   764.3
  Electronics........................................         1,597.9(2)      2,922.7(4)        609.8(6)
  Healthcare and Specialty Products..................           304.8           159.6           251.1
  Engineered Products and Services...................            78.7            32.7           142.1
  Corporate..........................................            23.0            40.0            47.6
                                                            ---------       ---------       ---------
                                                            $ 2,854.7(3)    $ 4,045.2(5)    $ 1,814.9(7)
                                                            =========       =========       =========


- ------------------------------

 
 
At September 30,
 
 
2003
 
2002
 
2001
Total assets:
 
 
 
 
 
 
 
 
 
 
Fire and Security
 
$
19,423.0
 
$
19,728.8
 
$
15,008.7
 
Electronics(1)
 
 
17,392.4
 
 
18,187.1
 
 
21,605.6
 
Healthcare
 
 
13,177.0
 
 
13,274.7
 
 
13,583.0
 
Engineered Products and Services
 
 
7,097.3
 
 
6,632.7
 
 
6,305.2
 
Plastics and Adhesives
 
 
1,735.3
 
 
1,800.6
 
 
1,720.3
 
Corporate
 
 
4,720.0
 
 
5,875.9
 
 
1,592.4
 
 
 
 
 
 
 
63,545.0
 
 
65,499.8
 
 
59,815.2
 
Net Assets of Discontinued Operations
 
 
—
 
 
—
 
 
10,598.0
 
 
 
 
 
 
$
63,545.0
 
$
65,499.8
 
$
70,413.2
 
 
 
 
(1) Capital
Includes total assets (excluding cash which is not held for sale) for the TGN business of $47.5 million, $642.2 million and $2,657.3 million at September 30, 2003, 2002 and 2001, respectively.
64
 
 
For the Year Ended September 30,
 
 
2003
 
2002
 
2001
Depreciation and amortization:
 
 
 
 
 
 
 
 
 
 
Fire and Security
 
$
1,201.6
 
$
1,047.0
 
$
767.8
 
Electronics(1)
 
 
517.8
 
 
546.5
 
 
721.0
 
Healthcare
 
 
313.0
 
 
310.6
 
 
459.8
 
Engineered Products and Services
 
 
108.2
 
 
126.9
 
 
172.4
 
Plastics and Adhesives
 
 
47.4
 
 
41.7
 
 
52.9
 
Corporate
 
 
8.9
 
 
12.3
 
 
11.1
 
 
 
 
 
 
$
2,196.9
 
$
2,085.0
 
$
2,185.0
 
 
 
 
(1)
Includes depreciation and amortization for the TGN business totaling $37.1 million, $28.9 million and $15.8 million for fiscal 2003, fiscal 2002 and fiscal 2001, respectively.

 
 
For the Year Ended September 30,
 
 
 
2003
 
2002
 
2001
 
Capital expenditures, net:
 
 
 
 
 
 
 
 
 
 
 
Fire and Security
 
$
509.8
 
$
820.4
 
$
866.1
 
 
Electronics(1)
 
 
515.7
 
 
1,597.9
 
 
2,922.7
 
 
Healthcare
 
 
192.4
 
 
273.1
 
 
248.8
 
 
Engineered Products and Services
 
 
50.1
 
 
78.7
 
 
32.7
 
 
Plastics and Adhesives
 
 
22.0
 
 
31.7
 
 
(89.2
)
 
Corporate
 
 
(7.7
)
 
23.0
 
 
40.0
 
 
 
 
 
 
 
 
$
1,282.3
 
$
2,824.8
 
$
4,021.1
 
 
 
 
 
 
(1)
Includes capital expenditures, presented in this table represent purchasesnet for the TGN business of property, plant and equipment net of proceeds received in sale-leaseback
    transactions and in sale/disposition of property, plant and equipment.

(2) Includes$120.7 million, $1,146.0 million in spendingand $2,219.4 million for construction of the TGN.

(3) Net of $29.5 million received in sale-leaseback transactionsfiscal 2003, fiscal 2002 and $166.2 million of proceeds received on sale of property, plant and
    equipment.

(4) Includes $2,247.7 million in spending for construction of the TGN.

(5) Net of $427.7 million received in sale-leaseback transactions and
    $62.0 million of proceeds received on sale of property, plant and equipment.

(6) Includes $111.1 million in spending for construction of the TGN.

(7) Net of $172.0 million received in sale-leaseback transactions and
    $61.6 million of proceeds received on sale of property, plant and equipment.

fiscal 2001, respectively.
4.    CONSOLIDATED GEOGRAPHIC DATAConsolidated Geographic Data
       Selected information by geographic area is presented below ($ in millions).

                                                             AS AT AND FOR THE YEAR ENDED SEPTEMBER 30,
                                                            --------------------------------------------
                                                               2002             2001             2000
                                                            ----------       ----------       ----------

TOTAL REVENUES:
United States........................................       $20,284.6        $19,733.5        $17,308.2
Other Americas (excluding United States).............         2,071.1          2,206.9          1,149.3
Europe...............................................         8,373.5          7,591.1          6,610.1
Asia--Pacific........................................         4,914.5          4,505.1          3,864.3
                                                            ---------        ---------        ---------
  Net revenues from external customers(1)............       $35,643.7        $34,036.6        $28,931.9
                                                            =========        =========        =========


- ------------------------------

 
 
For the Year Ended September 30,
 
 
2003
 
2002
 
2001
Total revenues:
 
 
 
 
 
 
 
 
 
United States
 
$
19,838.7
 
$
20,308.2
 
$
19,728.0
Other Americas (excluding United States)
 
 
1,844.3
 
 
2,007.2
 
 
2,176.6
Europe
 
 
9,719.0
 
 
8,358.2
 
 
7,591.0
Asia—Pacific
 
 
5,399.3
 
 
4,916.2
 
 
4,506.5
 
 
 
 
 
Net revenues from external customers(1)
 
$
36,801.3
 
$
35,589.8
 
$
34,002.1
 
 
 
 
(1)
Revenues from external customers are attributed to individual countries based on the reporting entity that records the transaction.

                                       68

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4.  CONSOLIDATED GEOGRAPHIC DATA (CONTINUED)


                                                             AS AT AND FOR THE YEAR ENDED SEPTEMBER 30,
                                                             -------------------------------------------
                                                                2002             2001            2000
                                                             ----------       ----------       ---------

LONG-LIVED ASSETS:
United States.........................................       $ 7,201.2        $ 5,767.6        $5,258.5
Other Americas (excluding United States)..............           433.2          1,655.5           521.3
Europe................................................         2,766.8          4,450.2         2,035.9
Asia--Pacific.........................................           925.9          1,078.7           751.5
Corporate.............................................           466.9            620.1           395.5
                                                             ---------        ---------        --------
                                                             $11,794.0        $13,572.1        $8,962.7
                                                             =========        =========        ========

 
 
At September 30,
 
 
2003
 
2002
 
2001
Long-lived assets(1):
 
 
 
 
 
 
 
 
 
United States
 
$
7,059.3
 
$
7,196.5
 
$
5,754.7
Other Americas (excluding United States)
 
 
715.7
 
 
425.7
 
 
1,659.4
Europe
 
 
2,450.2
 
 
2,606.3
 
 
4,325.2
Asia—Pacific
 
 
904.1
 
 
905.6
 
 
1,069.2
Corporate
 
 
286.7
 
 
455.2
 
 
620.1
 
 
 
 
 
 
$
11,416.0
 
$
11,589.3
 
$
13,428.6
 
 
 
 
(1)
Long-lived assets are comprised primarily of property, plant and equipment and exclude goodwill and other intangible assets.
65
5.    RESTRUCTURING AND OTHER UNUSUAL CHARGES (CREDITS), NETRestructuring and Other (Credits) Charges, Net
        Restructuring and other unusual(credits) charges, (credits), net, are as follows ($ in millions):

                                                                FOR THE YEAR ENDED SEPTEMBER 30,
                                                            -----------------------------------------
                                                              2002            2001            2000
                                                            ---------       ---------       ---------

Fire and Security Services...........................       $    94.9       $    84.1       $   (11.2)
Electronics..........................................         1,559.5           383.8           (77.8)
Healthcare and Specialty Products....................            54.9            56.7           (10.9)
Engineered Products and Services.....................            50.8            57.3              --
Corporate............................................           194.2          (163.4)          276.2
                                                            ---------       ---------       ---------
                                                              1,954.3           418.5           176.3
Less: Inventory related amounts charged to cost of
  sales..............................................          (635.4)         (184.9)           (1.0)
    Bad debt provision charged to selling, general
    and administrative expenses......................          (115.0)             --              --
                                                            ---------       ---------       ---------
Restructuring and other unusual charges (credits),
  net................................................       $ 1,203.9       $   233.6       $   175.3
                                                            =========       =========       =========


2002 CHARGES AND CREDITS
 
 
 
 
For the Year Ended September 30,
 
 
 
 
 
2003
 
2002
 
2001
 
Fire and Security
 
$
9.7
 
$
94.9
 
$
84.1
 
Electronics
 
 
(90.5
)
 
1,504.5
 
 
383.8
 
Healthcare
 
 
(9.2
)
 
44.8
 
 
48.4
 
Engineered Products and Services
 
 
7.8
 
 
50.8
 
 
57.3
 
Plastics and Adhesives
 
 
(1.0
)
 
10.1
 
 
8.3
 
Corporate
 
 
(1.6
)
 
169.6
 
 
3.4
 
 
 
 
 
 
 
 
 
 
 
 
 
(84.8
)
 
1,874.7
 
 
585.3
 
Less:
 
Inventory related amounts credited (charged) to cost of sales
 
 
10.5
 
 
(635.4
)
 
(184.9
)
 
 
Bad debt provision charged to selling, general and administrative
expenses
 
 
—
 
 
(115.0
)
 
—
 
 
 
 
 
 
 
 
Restructuring and other (credits) charges, net
 
$
(74.3
)
$
1,124.3
 
$
400.4
 
 
 
 
 
 
 
 
2003 Charges and Credits
        The Company has engaged in a series of restructuring programs in which we have attempted to make our operations more efficient through exiting certain non-core businesses or business lines, or stream-lining general operations.
        The Fire and Security segment recorded net restructuring and other charges of $9.7 million, of which charges of $3.5 million are included in cost of sales and $2.8 million relates to other non-cash charges. The remaining $3.4 million net charge consists of charges of $19.4 million associated with streamlining the business, partially offset by a credit of $16.0 million related to changes in estimates of charges recorded in prior periods. The $19.4 million charge is primarily comprised of $16.0 million for employee severance in connection with the elimination of 1,367 positions primarily relating to general and administrative, manufacturing, technical, and sales and marketing personnel in the United States, Canada, Asia, Europe and Australia. During fiscal 2003, the Company incurred costs of $5.4 million related to this restructuring program, consisting primarily of $5.0 million in severance for the termination of 553 employees.
        The Electronics segment recorded restructuring and other credits of $90.5 million, of which credits of $19.9 million are included in cost of sales. These restructuring credits primarily related to severance costs being less than originally anticipated due to employee attrition and redeployment and termination fees being less than anticipated due to negotiated settlements.
        The Healthcare segment recorded restructuring and other credits of $9.2 million, of which credits of $0.2 million are included in cost of sales.
        The Engineered Products and Services segment recorded net restructuring and other unusual charges of $94.9 million.$7.8 million (excluding impairments of long-lived assets which are discussed in Note 6), of which charges of $6.1 million are included in cost of sales. The remaining $1.7 million net $94.9 million charge consists of charges of $113.5$12.1 million associated with streamlining the business, partially offset by a credit of $10.4 million primarily related to changes in estimates of charges recorded in prior periods. The $12.1 million includes $9.5 million for severance associated with the elimination of 113 positions primarily manufacturing and sales personnel in the United States and Europe; $2.0 million related to
66
the shutdown of 2 manufacturing facilities located in the United States and Europe; and other costs of $0.6 million. At September 30, 2003, all employees had been terminated and both facilities had been shut down. In addition, these restructuring accruals were fully utilized by September 30, 2003.
        During fiscal 2003, Corporate recorded net restructuring and other credits of $1.6 million consisting of charges of $17.1 million, of which $7.9 million relates to non-cash charges (excluding impairments of long-lived assets which are discussed in Note 6), offset by credits of $18.7 million related to changes in estimates of charges recorded in prior periods. The remaining charges of $9.2 million includes $5.8 million for the elimination of 33 administrative positions primarily in the United States and $3.4 million for the shutdown of 1 administrative office in the United States. At September 30, 2003, 32 employees had been terminated and the facility had been closed; and, there remained $4.4 million and $3.3 million of severance and facility-related restructuring accruals, respectively, on the Consolidated Balance Sheet.
2002 Charges and Credits
        The Fire and Security segment recorded net restructuring and other charges of $94.9 million, of which charges of $19.4 million are included in cost of sales,sales. Additionally, the net charge includes charges totaling $94.1 million related primarily to severance and facility closures associated with streamlining the business, partially offset by a credit of $18.6 million related to current and prior years' restructuring charges. The following table provides information about the restructuring and other unusual charges (excluding impairments of long-lived assets which are discussed in Note 6) related to the Fire and Security Services segment recorded in fiscal 2002 ($ in millions):

                                       SEVERANCE          FACILITIES-RELATED
                                  --------------------   ---------------------
                                  NUMBER OF              NUMBER OF
                                  EMPLOYEES    AMOUNT    FACILITIES    AMOUNT    INVENTORY    OTHER      TOTAL
                                  ---------   --------   ----------   --------   ---------   --------   --------

Fiscal 2002 charges.............    3,100      $ 43.5       109        $15.7      $ 19.4      $34.9      $113.5
Fiscal 2002 reversals...........       --        (0.3)       --         (3.0)         --       (0.8)       (4.1)
Fiscal 2002 utilization.........   (1,754)      (23.8)       (6)        (0.1)      (19.4)      (2.7)      (46.0)
                                   ------      ------       ---        -----      ------      -----      ------
Ending balance at September 30,
  2002..........................    1,346      $ 19.4       103        $12.6      $   --      $31.4      $ 63.4
                                   ======      ======       ===        =====      ======      =====      ======


                                       69

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5.  RESTRUCTURING AND OTHER UNUSUAL CHARGES (CREDITS), NET (CONTINUED)
    The cost of announced workforce
 
 
Severance
 
Facilities-Related
 
 
 
 
 
 
 
 
 
Number of
Employees
 
Amount
 
Number of
Facilities
 
Amount
 
Supplier
Contract
Fee
 
Other
 
Total
 
Fiscal 2002 charges
 
3,100
 
$
43.5
 
109
 
$
15.2
 
$
0.5
 
$
34.9
 
$
94.1
 
Fiscal 2002 reversals
 
—
 
 
(0.3
)
—
 
 
(3.0
)
 
—
 
 
(0.8
)
 
(4.1
)
Fiscal 2002 utilization
 
(1,754
)
 
(23.8
)
(6
)
 
(0.1
)
 
—
 
 
(2.7
)
 
(26.6
)
 
 
 
 
 
 
 
 
 
Ending balance at September 30, 2002
 
1,346
 
 
19.4
 
103
 
 
12.1
 
 
0.5
 
 
31.4
 
 
63.4
 
Transfers/reclassifications
 
—
 
 
0.2
 
—
 
 
(0.2
)
 
—
 
 
(25.6
)
 
(25.6
)
Fiscal 2003 reversals
 
(82
)
 
(3.4
)
(11
)
 
(1.8
)
 
—
 
 
(0.7
)
 
(5.9
)
Fiscal 2003 utilization
 
(1,249
)
 
(16.0
)
(88
)
 
(3.9
)
 
(0.5
)
 
(5.8
)
 
(26.2
)
Foreign currency translation adjustments
 
—
 
 
1.4
 
—
 
 
1.1
 
 
—
 
 
0.7
 
 
3.2
 
 
 
 
 
 
 
 
 
 
Ending balance at September 30, 2003
 
15
 
$
1.6
 
4
 
$
7.3
 
$
—
 
$
—
 
$
8.9
 
 
 
 
 
 
 
 
 
 
        Workforce reductions of $43.5 million includes the elimination of 3,100 positions primarily in the United States, Latin America,
Europe and Australia consisting primarily of manufacturing, general and administrative, technical, and sales and marketing personnel. The cost of
facility closures of $15.7 million consists of the shutdown of 109 facilitiespersonnel primarily in Australiathe United States, Latin America, Europe and Europe consistingAustralia. Facility closures primarily relate to the shutdown of sales offices and manufacturing plants. At September 30, 2002, 1,754 employees had been terminatedplants in Australia and 6 facilities had been shut down.Europe. The other charges of $34.9 million consist primarily of an accrual for anticipated resolution and disposition of various labor and employment matters. At September 30, 2003 $6.6 million of the remaining balance is included in accrued expenses and other current liabilities and the remaining $2.3 million is included in other long-term liabilities on the Consolidated Balance Sheet. These amounts are primarily for payments on non-cancelable lease obligations.
The Electronics segment recorded net restructuring and other unusual charges of $1,559.5 million. The $1,559.5$1,504.5 million, net charge consists of charges
totaling $1,585.8 million (of which charges of $608.2 million areis included in cost of sales. The initial charge included $166.1 million associated with a write-down of existing inventory to market value, which was lower than cost at the time of the charge.
67

The remaining charge of $442.1 million was comprised of inventory that was considered excess and was intended to be scrapped. As of September 30, 2003, this remaining inventory had been scrapped, with the exception of $19.9 million (originally included in the inventory written down in fiscal 2002) that was recorded as a restructuring credit to cost of sales andin fiscal 2003. Additionally, the net charge includes charges totaling $922.6 million (of which a bad debt provision of $115.0 million is included in selling, general and administrative expenses) primarily related to facility closures
inventory reserves and purchase commitment cancellations due to the significant downturn in the telecommunications business and certain electronics end markets. These charges were partially offset by restructuring credits of $26.3 million primarily related to a revision of estimates of current and prior years' severance and facility charges. The following table provides information about the restructuring and other unusual charges (excluding impairments of long-lived assets which are discussed in Note 6) related to the Electronics segment recorded in fiscal 2002 ($ in millions):

                                     SEVERANCE          FACILITIES-RELATED
                                --------------------   ---------------------
                                NUMBER OF              NUMBER OF
                                EMPLOYEES    AMOUNT    FACILITIES    AMOUNT    INVENTORY    OTHER      TOTAL
                                ---------   --------   ----------   --------   ---------   --------   --------

Fiscal 2002 charges...........    8,996      $198.1        31        $250.2     $ 943.6     $193.9    $1,585.8
Fiscal 2002 reversals.........     (356)       (2.5)       (1)         (8.1)         --         --       (10.6)
Fiscal 2002 utilization.......   (4,336)      (79.6)      (13)        (77.7)     (164.7)     (71.4)     (393.4)
                                 ------      ------       ---        ------     -------     ------    --------
Ending balance at
  September 30, 2002..........    4,304      $116.0        17        $164.4     $ 778.9     $122.5    $1,181.8
                                 ======      ======       ===        ======     =======     ======    ========


    The cost of announced workforce
 
 
Severance
 
Facilities-Related
 
 
 
 
 
 
 
 
 
Number of
Employees
 
Amount
 
Number of
Facilities
 
Amount
 
Supplier
Contract
Fee
 
Other
 
Total
 
Fiscal 2002 charges
 
8,996
 
$
198.1
 
31
 
$
240.1
 
$
345.5
 
$
138.9
 
$
922.6
 
Fiscal 2002 reversals
 
(356
)
 
(2.5
)
(1
)
 
(8.1
)
 
—
 
 
—
 
 
(10.6
)
Fiscal 2002 utilization
 
(4,336
)
 
(79.6
)
(13
)
 
(77.7
)
 
(19.7
)
 
(1.7
)
 
(178.7
)
 
 
 
 
 
 
 
 
 
Ending balance at September 30, 2002
 
4,304
 
 
116.0
 
17
 
 
154.3
 
 
325.8
 
 
137.2
 
 
733.3
 
Transfers/reclassifications
 
—
 
 
—
 
—
 
 
(3.3
)
 
3.3
 
 
(115.0
)
 
(115.0
)
Fiscal 2003 reversals, net
 
(1,303
)
 
(11.6
)
(6
)
 
13.8
 
 
(35.0
)
 
(11.7
)
 
(44.5
)
Fiscal 2003 utilization
 
(2,223
)
 
(77.5
)
(11
)
 
(46.0
)
 
(212.9
)
 
(6.9
)
 
(343.3
)
Foreign currency translation adjustments
 
—
 
 
—
 
—
 
 
0.4
 
 
(3.1
)
 
0.5
 
 
(2.2
)
 
 
 
 
 
 
 
 
 
Ending balance at September 30, 2003
 
778
 
$
26.9
 
—
 
$
119.2
 
$
78.1
 
$
4.1
 
$
228.3
 
 
 
 
 
 
 
 
 
 
        Workforce reductions of $198.1 million includesprimarily relate to the elimination of 8,996 positionsmanufacturing personnel across all regions consisting primarily of
manufacturing personnel.regions. Facilities-related costs of $250.2 million include building lease termination fees and other contract cancellation costs primarily for the shutdown of 31 facilities, primarily manufacturing plants in the United States. At September 30, 2002, 4,336 employees had been terminated and 13 facilities had
been shut down.

    The $943.6 million inventory charges include $608.2 million of inventory
write-downs and $335.4 million of supplier contract termination fees. The
inventory write-downs and the supplier contract termination fees are primarily the result of the sudden and significant decrease in demand for our products and services, primarily in the telecommunications end markets. As a result, the
Company determined that its current and committed inventory levels are in excess
of forecasted needs. There were no significant sales of previously written-down
or written-off inventory during the year ended September 30, 2002. Of the
$608.2 million, $143.1 million of inventory has been scrapped as of
September 30, 2002. We expect the remaining written-off inventory to be scrapped
over the next three to six months. Also, as a result of the uncertainty related to the continued financial viability of a certain customer in the telecommunications industry, a bad debt provision of $115.0 million was recorded to selling, general and administrative expenses, which is included in the "Other" column above. In 70

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5.  RESTRUCTURING AND OTHER UNUSUAL CHARGES (CREDITS), NET (CONTINUED)
addition to the $115.0 million bad debt provision, the remaining other charges also include a write-off of an uncollectible receivable of $60.7$5.7 million as a result of the downturn in the telecommunications industry. To the extent that any of the bad debt provisions are not utilized, the excess amounts will be reversed as a credit to the selling, general and administrative expenses line in the Consolidated Statement of Operations and will be described as an unusuala credit in Tyco's Consolidated Financial Statements and Managements' Discussion
and Analysis. To the extent that anyStatements. At September 30, 2003 $106.7 million of the inventoryremaining balance is subsequently sold,included in accrued expenses and other current liabilities and the related amount of income, if any will be disclosed separately as an unusual
creditremaining $121.6 million is included in Tyco'sother long-term liabilities on the Consolidated Financial Statements and Managements' Discussion
and Analysis.Balance Sheet. These amounts are primarily for payments on non-cancelable lease obligations.
68
        The Healthcare and Specialty Products segment recorded a net restructuring and other unusual charge of $54.9 million. The $54.9 million net charge consists
of charges of $58.8$44.8 million, of which charges of $1.6$0.5 million areis included in cost of sales, related primarily to severancesales. Additionally, the net charge includes charges of $48.2 million associated with the consolidation of operations and facility-related costs due tothe exiting of certain business lines.
These charges werelines, partially offset by a credit of $3.9 million representing a revision in estimates of current and prior years' restructuring charges. The following table provides information about the restructuring and other unusual
charges (excluding impairments of long-lived assets which are discussed in Note 6) related to the Healthcare and Specialty Products segment recorded in fiscal 2002 ($ in millions):

                                     SEVERANCE          FACILITIES-RELATED
                                --------------------   ---------------------
                                NUMBER OF              NUMBER OF
                                EMPLOYEES    AMOUNT    FACILITIES    AMOUNT    INVENTORY    OTHER      TOTAL
                                ---------   --------   ----------   --------   ---------   --------   --------

Fiscal 2002 charges...........     697       $28.2             9     $17.1       $ 1.6      $11.9      $ 58.8
Fiscal 2002 reversals.........      (6)       (0.8)           --        --          --       (2.4)       (3.2)
Fiscal 2002 utilization.......    (143)       (9.6)           (1)     (2.2)       (1.6)      (9.5)      (22.9)
                                  ----       -----     ---------     -----       -----      -----      ------
Ending balance at
  September 30, 2002..........     548       $17.8             8     $14.9       $  --      $  --      $ 32.7
                                  ====       =====     =========     =====       =====      =====      ======


    The cost of announced workforce
 
 
Severance
 
Facilities-Related
 
 
 
 
 
 
 
Number of
Employees
 
Amount
 
Number of
Facilities
 
Amount
 
Other
 
Total
 
Fiscal 2002 charges
 
380
 
$
24.0
 
4
 
$
14.1
 
$
10.1
 
$
48.2
 
Fiscal 2002 reversals
 
(6
)
 
(0.8
)
—
 
 
—
 
 
(2.4
)
 
(3.2
)
Fiscal 2002 utilization
 
(100
)
 
(9.4
)
—
 
 
(2.1
)
 
(7.7
)
 
(19.2
)
 
 
 
 
 
 
 
 
Ending balance at September 30, 2002
 
274
 
 
13.8
 
4
 
 
12.0
 
 
—
 
 
25.8
 
Fiscal 2003 reversals
 
(42
)
 
(1.9
)
—
 
 
(4.9
)
 
—
 
 
(6.8
)
Fiscal 2003 utilization
 
(231
)
 
(11.6
)
(4
)
 
(6.4
)
 
—
 
 
(18.0
)
Foreign currency translation adjustments
 
—
 
 
0.2
 
—
 
 
0.1
 
 
—
 
 
0.3
 
 
 
 
 
 
 
 
 
Ending balance at September 30, 2003
 
1
 
$
0.5
 
—
 
$
0.8
 
$
—
 
$
1.3
 
 
 
 
 
 
 
 
 
        Workforce reductions of $28.2 million includesprimarily relate to the elimination of 697 positions primarily in the United States consisting primarily of manufacturing and sales personnel. The cost of facility closures of
$17.1 million consists ofpersonnel associated with the shutdown of 94 manufacturing and administrative facilities primarily in the United States. At September 30, 2002, 143 employees
had been terminated and 1 facility had been shut down.

    The other charges of $11.9$10.1 million consist primarily of legal fees and other deal costs associated with acquisitions that were not completed. The total remaining balance at September 30, 2003 is primarily for payments on non-cancelable lease obligations and severance and is included in accrued expenses and other current liabilities.
        The Engineered Products and Services segment recorded restructuring and other unusual charges of $50.8 million, of which $6.2 million are included in cost of sales,sales. Additionally, the charge includes charges of $44.6 million related primarily related to severance and facility-related costs
associated with streamlining the business. The following table provides information about the restructuring and other unusual charges (excluding impairments of long-lived assets which are

                                       71

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5.  RESTRUCTURING AND OTHER UNUSUAL CHARGES (CREDITS), NET (CONTINUED) discussed in Note 6) related to the Engineered Products and Services segment recorded in fiscal 2002 ($ in millions):

                                     SEVERANCE          FACILITIES-RELATED
                                --------------------   ---------------------
                                NUMBER OF              NUMBER OF
                                EMPLOYEES    AMOUNT    FACILITIES    AMOUNT    INVENTORY    OTHER      TOTAL
                                ---------   --------   ----------   --------   ---------   --------   --------

Fiscal 2002 charges...........    1,217      $ 35.7        48        $ 4.1       $ 6.2      $ 4.8      $ 50.8
Fiscal 2002 utilization.......     (712)      (27.7)      (27)        (1.5)       (6.2)      (4.0)      (39.4)
                                  -----      ------       ---        -----       -----      -----      ------
Ending balance at
  September 30, 2002..........      505      $  8.0        21        $ 2.6       $  --      $ 0.8      $ 11.4
                                  =====      ======       ===        =====       =====      =====      ======


    The cost of announced workforce
 
 
Severance
 
Facilities-Related
 
 
 
 
 
 
 
Number of
Employees
 
Amount
 
Number of
Facilities
 
Amount
 
Other
 
Total
 
Fiscal 2002 charges
 
1,217
 
$
35.7
 
48
 
$
4.1
 
$
4.8
 
$
44.6
 
Fiscal 2002 utilization
 
(712
)
 
(27.7
)
(27
)
 
(1.5
)
 
(4.0
)
 
(33.2
)
 
 
 
 
 
 
 
 
Ending balance at September 30, 2002
 
505
 
 
8.0
 
21
 
 
2.6
 
 
0.8
 
 
11.4
 
Fiscal 2003 reversals
 
(312
)
 
(0.5
)
(7
)
 
(0.4
)
 
(0.3
)
 
(1.2
)
Fiscal 2003 utilization
 
(193
)
 
(7.3
)
(14
)
 
(1.4
)
 
(0.6
)
 
(9.3
)
Foreign currency translation adjustments
 
—
 
 
(0.2
)
—
 
 
—
 
 
0.1
 
 
(0.1
)
 
 
 
 
 
 
 
 
Ending balance at September 30, 2003
 
—
 
$
—
 
—
 
$
0.8
 
$
—
 
$
0.8
 
 
 
 
 
 
 
 
 
        Workforce reductions of $35.7 million includesprimarily relate to the elimination of 1,217 positions primarilymanufacturing and sales personnel associated with the closure of sales offices and manufacturing facilities in the United States and Europe
consisting
69

Europe. At September 30, 2003 $0.4 million of the remaining balance is included in accrued expenses and other current liabilities and $0.4 million is included in other long-term liabilities on the Consolidated Balance Sheet. These amounts primarily relate to non-cancelable lease payments.
        The Plastics and Adhesives segment recorded restructuring and other charges of $10.1 million, of which charges of $1.1 million are included in cost of sales. Additionally, the charge includes charges of $9.0 million associated with the consolidation of operations and the exiting of certain business lines. The following table provides information about the restructuring and other charges (excluding impairments of long-lived assets which are discussed in Note 6) related to the Plastics and Adhesives segment recorded in fiscal 2002 ($ in millions):
 
 
Severance
 
Facilities-Related
 
 
 
 
 
 
 
Number of
Employees
 
Amount
 
Number of
Facilities
 
Amount
 
Other
 
Total
 
Fiscal 2002 charges
 
317
 
$
4.2
 
5
 
$
3.0
 
$
1.8
 
$
9.0
 
Fiscal 2002 utilization
 
(43
)
 
(0.2
)
(1
)
 
(0.1
)
 
(1.8
)
 
(2.1
)
 
 
 
 
 
 
 
 
Ending balance at September 30, 2002
 
274
 
 
4.0
 
4
 
 
2.9
 
 
—
 
 
6.9
 
Fiscal 2003 reversals
 
(33
)
 
(0.5
)
—
 
 
(0.6
)
 
—
 
 
(1.1
)
Fiscal 2003 utilization
 
(222
)
 
(2.8
)
(1
)
 
(1.1
)
 
—
 
 
(3.9
)
Foreign currency translation adjustments
 
—
 
 
0.3
 
—
 
 
0.2
 
 
—
 
 
0.5
 
 
 
 
 
 
 
 
 
Ending balance at September 30, 2003
 
19
 
$
1.0
 
3
 
$
1.4
 
$
—
 
$
2.4
 
 
 
 
 
 
 
 
 
        Workforce reductions primarily relate to the elimination of manufacturing and sales personnel. Facilities-related
costs of $4.1 million includepersonnel associated with the shutdown of 48manufacturing and administrative facilities primarily in the United States and Europe consisting primarily of sales offices and manufacturing
facilities.States. At September 30, 2002, 712 employees had been terminated2003 $1.7 million of the remaining balance is included in accrued expenses and 27
facilities had been shut down.other current liabilities and the remaining $0.7 million is included in other long-term liabilities on the Consolidated Balance Sheet. These amounts primarily relate to non-cancelable lease obligations and severance.
        In addition to segment charges, the Company recorded net charges of $194.2$169.6 million consisting of $78.6 million for severance and $39.6$15.0 million for contract terminations, legal fees and other items associated with the downsizing of the corporate headquarters and $76.0 million for the write-off of investment banking fees and other deal costs associated with the terminated break-up plan and certain acquisitions that were not completed. At September 30, 2002,
$49.02003, $5.6 million remained in accrued expenses and other current liabilities on the Consolidated Balance Sheet.
2001 CHARGES AND CREDITSCharges and Credits
        In fiscal 2001, the Fire and Security Services segment recorded a net restructuring and other unusual charge of $84.1 million. The $84.1 million net
charge consists of charges of $85.7 million, of which charges of $5.4 million are included in cost of sales,sales. The $84.1 million net charge consists of charges of $80.3 million related primarily to the restructuring of the existing U.S. security business and U.S. fire protection business in connection with the acquisitions of SecurityLink and Simplex, partially offset by a credit of $1.6 million representing a revision of estimates of prior years' merger,
restructuring and other unusual charges. The following table provides information about the restructuring
70

and other unusual charges (excluding impairments of long-lived

                                       72

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5.  RESTRUCTURING AND OTHER UNUSUAL CHARGES (CREDITS), NET (CONTINUED) assets, which are discussed in Note 6) related to the Fire and Security Services
segment recorded in fiscal 2001 ($ in millions):

                                     SEVERANCE          FACILITIES-RELATED
                                --------------------   ---------------------
                                NUMBER OF              NUMBER OF
                                EMPLOYEES    AMOUNT    FACILITIES    AMOUNT    INVENTORY    OTHER      TOTAL
                                ---------   --------   ----------   --------   ---------   --------   --------

Fiscal 2001 charges...........     972       $13.0         176       $ 47.6      $ 5.4      $19.7      $ 85.7
Fiscal 2001 utilization.......    (411)       (4.8)        (53)        (1.2)      (5.4)      (3.3)      (14.7)
                                  ----       -----        ----       ------      -----      -----      ------
Ending balance at
  September 30, 2001..........     561         8.2         123         46.4         --       16.4        71.0
Fiscal 2002 reversals.........    (118)       (0.3)         --        (13.9)        --         --       (14.2)
Fiscal 2002 utilization.......    (232)       (5.6)       (100)        (8.1)        --       (8.0)      (21.7)
                                  ----       -----        ----       ------      -----      -----      ------
Ending balance at
  September 30, 2002..........     211       $ 2.3          23       $ 24.4      $  --      $ 8.4      $ 35.1
                                  ====       =====        ====       ======      =====      =====      ======


    The cost of announced workforce
 
 
Severance
 
Facilities-Related
 
 
 
 
 
 
 
 
 
Number of
Employees
 
Amount
 
Number of
Facilities
 
Amount
 
Supplier
Contract
Fee
 
Other
 
Total
 
Fiscal 2001 charges
 
972
 
$
13.0
 
176
 
$
47.6
 
$
—
 
$
19.7
 
$
80.3
 
Fiscal 2001 utilization
 
(411
)
 
(4.8
)
(53
)
 
(1.2
)
 
—
 
 
(3.3
)
 
(9.3
)
 
 
 
 
 
 
 
 
 
Ending balance at September 30, 2001
 
561
 
 
8.2
 
123
 
 
46.4
 
 
—
 
 
16.4
 
 
71.0
 
Fiscal 2002 reversals
 
(118
)
 
(0.3
)
—
 
 
(13.9
)
 
—
 
 
—
 
 
(14.2
)
Fiscal 2002 utilization
 
(232
)
 
(5.6
)
(100
)
 
(8.1
)
 
—
 
 
(8.0
)
 
(21.7
)
Transfers/reclassifications
 
—
 
 
—
 
—
 
 
(0.2
)
 
0.2
 
 
—
 
 
—
 
 
 
 
 
 
 
 
 
 
Ending balance at September 30, 2002
 
211
 
 
2.3
 
23
 
 
24.2
 
 
0.2
 
 
8.4
 
 
35.1
 
Transfers/reclassifications
 
—
 
 
—
 
—
 
 
—
 
 
—
 
 
(7.2
)
 
(7.2
)
Fiscal 2003 reversals
 
—
 
 
(2.0
)
—
 
 
(7.4
)
 
(0.2
)
 
(0.5
)
 
(10.1
)
Fiscal 2003 utilization
 
(211
)
 
(0.5
)
(23
)
 
(5.8
)
 
—
 
 
(0.8
)
 
(7.1
)
Foreign currency translation adjustments
 
—
 
 
0.2
 
—
 
 
0.1
 
 
—
 
 
0.1
 
 
0.4
 
 
 
 
 
 
 
 
 
 
Ending balance at September 30, 2003
 
—
 
$
—
 
—
 
$
11.1
 
$
—
 
$
—
 
$
11.1
 
 
 
 
 
 
 
 
 
 
        Workforce reductions of $13.0 million includesprimarily relate to the elimination of 972 positions primarily in the United States and Europe
consisting primarily of manufacturing, general and administrative, and sales and marketing personnel. The cost of facilitypersonnel in the United States and Europe. Facility closures of $47.6 million consists ofprimarily relate to the shutdown of 176 facilitiessales offices and manufacturing plants in the United States, Europe and Canada
consisting primarily of sales offices and manufacturing plants. At
September 30, 2002, 643 employees had been terminated and 153 facilities had
been shut down.Canada. The other charges of $19.7 million consist primarily of contract cancellation costs and charges relating to an environmental remediation project. The totalAt September 30, 2003 $5.6 million of the remaining balance at September 30, 2002 of $35.1 million, of which
$20.1 million is included in accrued expenses and other current liabilities and $15.0the remaining $5.5 million is included in other long-term liabilities on the Consolidated Balance Sheet, isSheet. These amounts are primarily for payments on non-cancelable lease obligations.
        In fiscal 2001, the Electronics segment recorded restructuring and other unusual charges of $383.8 million, of which charges of $125.8 million areis included in cost of sales,sales. The $383.8 million charge includes charges of $258.0 million related primarily to facility closures and related employee terminations within the computer and consumer electronics and communication industries. The following table provides information about the restructuring and other unusual charges (excluding impairments of long-lived assets,
71
which are discussed in Note 6) related to the Electronics segment recorded in fiscal 2001 ($ in millions):

                                    SEVERANCE          FACILITIES-RELATED
                               --------------------   ---------------------
                               NUMBER OF              NUMBER OF
                               EMPLOYEES    AMOUNT    FACILITIES    AMOUNT    INVENTORY    OTHER      TOTAL
                               ---------   --------   ----------   --------   ---------   --------   --------

Fiscal 2001 charges..........   10,375      $177.1        38        $ 44.4     $ 125.8     $ 36.5    $ 383.8
Fiscal 2001 utilization......   (6,020)      (70.5)      (12)        (10.2)     (125.8)     (17.5)    (224.0)
                                ------      ------       ---        ------     -------     ------    -------
Ending balance at
  September 30, 2001.........    4,355       106.6        26          34.2          --       19.0      159.8
Fiscal 2002 reversals........     (573)      (14.1)       (2)         (0.5)         --       (0.8)     (15.4)
Fiscal 2002 utilization......   (3,524)      (82.9)      (22)        (18.2)         --      (11.1)    (112.2)
                                ------      ------       ---        ------     -------     ------    -------
Ending balance at
  September 30, 2002.........      258      $  9.6         2        $ 15.5     $    --     $  7.1    $  32.2
                                ======      ======       ===        ======     =======     ======    =======


                                       73

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5.  RESTRUCTURING AND OTHER UNUSUAL CHARGES (CREDITS), NET (CONTINUED)
    Included in the $383.8 million restructuring and other unusual charges are
the cost of announced workforce
 
 
Severance
 
Facilities-Related
 
 
 
 
 
 
 
Number of
Employees
 
Amount
 
Number of
Facilities
 
Amount
 
Other
 
Total
 
Fiscal 2001 charges
 
10,375
 
$
177.1
 
38
 
$
44.4
 
$
36.5
 
$
258.0
 
Fiscal 2001 utilization
 
(6,020
)
 
(70.5
)
(12
)
 
(10.2
)
 
(17.5
)
 
(98.2
)
 
 
 
 
 
 
 
 
Ending balance at September 30, 2001
 
4,355
 
 
106.6
 
26
 
 
34.2
 
 
19.0
 
 
159.8
 
Fiscal 2002 reversals
 
(573
)
 
(14.1
)
(2
)
 
(0.5
)
 
(0.8
)
 
(15.4
)
Fiscal 2002 utilization
 
(3,524
)
 
(82.9
)
(22
)
 
(18.2
)
 
(11.1
)
 
(112.2
)
 
 
 
 
 
 
 
 
Ending balance at September 30, 2002
 
258
 
 
9.6
 
2
 
 
15.5
 
 
7.1
 
 
32.2
 
Transfers/reclassifications
 
—
 
 
—
 
—
 
 
0.6
 
 
—
 
 
0.6
 
Fiscal 2003 reversals, net
 
(166
)
 
(1.9
)
(2
)
 
(1.4
)
 
—
 
 
(3.3
)
Fiscal 2003 utilization
 
(91
)
 
(6.7
)
—
 
 
(9.8
)
 
(4.8
)
 
(21.3
)
Foreign currency translation adjustments
 
—
 
 
0.3
 
—
 
 
0.1
 
 
0.1
 
 
0.5
 
 
 
 
 
 
 
 
 
Ending balance at September 30, 2003
 
1
 
$
1.3
 
—
 
$
5.0
 
$
2.4
 
$
8.7
 
 
 
 
 
 
 
 
 
        Workforce reductions of $177.1 million forprimarily relate to the elimination of 10,375 positions primarilymanufacturing personnel in the United States and Latin America consisting
primarily of manufacturing personnel; the cost of facilityAmerica. Facility closures of
$44.4 million include building lease termination fees and other contract cancellation costs for the shutdown of 38 facilities; and othercosts. Other charges of
$36.5 million consistingconsist of purchase commitment cancellations and payments on non-cancelable machinery and equipment leases. The inventory charges of
$125.8 million include $74.1 million related to inventory write-downs associated
with exiting locations and scrapping amounts in excess of forecasted demand and
an unusual charge of $51.7 million related to the sale of inventory, which had
been written up under purchase accounting. The remaining balance atAt September 30, 2002 of $32.22003 $7.9 million of which $27.7 millionthe remaining balance is included in accrued expenses and other current liabilities and $4.5the remaining $0.8 million is included in other long-term liabilities on the Consolidated Balance Sheet, isSheet. These amounts are primarily for severance and payments on non-cancelable lease obligations.
        In fiscal 2001, the Healthcare and Specialty Products segment recorded a net restructuring and other unusual charge of $56.7 million.$64.0 million, of which $40.0 million is included in cost of sales. The $56.7remaining $24.0 million net charge consists of charges of $72.3$39.6 million of which charges of $44.0 million
are included in cost of sales, related primarilyrelating to the sale of inventory, which
had been written up under purchase accounting, and the closure of manufacturing plants, partially offset by a credit of $15.6 million representing a revision in estimates of prior years' merger, restructuring and other unusual charges related primarily to the merger with U.S. Surgical. The following table provides information
72

about the restructuring and other unusual charges (excluding impairments of long-lived assets, which are discussed in Note 6) related to the Healthcare and Specialty Products segment recorded in fiscal 2001 ($ in millions):

                                     SEVERANCE          FACILITIES-RELATED
                                --------------------   ---------------------
                                NUMBER OF              NUMBER OF
                                EMPLOYEES    AMOUNT    FACILITIES    AMOUNT    INVENTORY    OTHER      TOTAL
                                ---------   --------   ----------   --------   ---------   --------   --------

Fiscal 2001 charges...........    1,100      $19.2             5     $ 1.5      $ 44.0      $ 7.6      $ 72.3
Fiscal 2001 utilization.......     (444)      (9.2)           (2)     (0.6)      (44.0)      (1.2)      (55.0)
                                  -----      -----     ---------     -----      ------      -----      ------
Ending balance at
  September 30, 2001..........      656       10.0             3       0.9          --        6.4        17.3
Fiscal 2002 reversals.........      (23)      (0.5)           --      (0.1)         --       (0.1)       (0.7)
Fiscal 2002 utilization.......     (633)      (9.0)           (3)     (0.6)         --       (6.3)      (15.9)
                                  -----      -----     ---------     -----      ------      -----      ------
Ending balance at
  September 30, 2002..........       --      $ 0.5            --     $ 0.2      $   --      $  --      $  0.7
                                  =====      =====     =========     =====      ======      =====      ======


    The cost of announced workforce
 
 
Severance
 
Facilities-Related
 
 
 
 
 
 
 
Number of
Employees
 
Amount
 
Number of
Facilities
 
Amount
 
Other
 
Total
 
Fiscal 2001 charges
 
778
 
$
16.6
 
2
 
$
1.3
 
$
6.1
 
$
24.0
 
Fiscal 2001 utilization
 
(444
)
 
(9.2
)
(2
)
 
(0.6
)
 
(1.2
)
 
(11.0
)
 
 
 
 
 
 
 
 
Ending balance at September 30, 2001
 
334
 
 
7.4
 
—
 
 
0.7
 
 
4.9
 
 
13.0
 
Fiscal 2002 reversals
 
(23
)
 
(0.5
)
—
 
 
(0.1
)
 
(0.1
)
 
(0.7
)
Fiscal 2002 utilization
 
(311
)
 
(6.4
)
—
 
 
(0.4
)
 
(4.8
)
 
(11.6
)
 
 
 
 
 
 
 
 
Ending balance at September 30, 2002
 
—
 
 
0.5
 
—
 
 
0.2
 
 
—
 
 
0.7
 
Fiscal 2003 reversals
 
—
 
 
—
 
—
 
 
(1.0
)
 
—
 
 
(1.0
)
Fiscal 2003 utilization
 
—
 
 
(0.5
)
—
 
 
(0.2
)
 
—
 
 
(0.7
)
Foreign currency translation adjustments
 
—
 
 
—
 
—
 
 
1.1
 
 
—
 
 
1.1
 
 
 
 
 
 
 
 
 
Ending balance at September 30, 2003
 
—
 
$
—
 
—
 
$
0.1
 
$
—
 
$
0.1
 
 
 
 
 
 
 
 
 
        Workforce reductions of $19.2 million includesprimarily relate to the elimination of 1,100 positions primarily in the United States consisting
primarily of manufacturing and sales personnel. The cost of facilitypersonnel in the United States. Facility closures of
$1.5 million consists of the shutdown of 5a manufacturing and an administrative facilitiesfacility, both in the United States. At September 30, 2002, all employees had been
terminated and all facilities had been shut down.

    The inventory charges of $44.0 million include a charge of $35.0 million
related to the sale of inventory, which had been written-up under purchase
accounting. The other charges of $7.6 million consist primarily of the cost for lease buyouts and distributor termination fees.

                                       74

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5.  RESTRUCTURING AND OTHER UNUSUAL CHARGES (CREDITS), NET (CONTINUED)
        In fiscal 2001, the Engineered Products and Services segment recorded restructuring and other unusual charges of $57.3 million, of which $9.7 million areis included in cost of sales, primarily related to a restructuring of the
valves and controls business.sales. The following table provides information about the restructuring and other unusual charges (excluding impairments of long-lived assets which are discussed in Note 6) related to the Engineered Products and Services segment recorded in fiscal 2001 ($ in millions):

                                     SEVERANCE          FACILITIES-RELATED
                                --------------------   ---------------------
                                NUMBER OF              NUMBER OF
                                EMPLOYEES    AMOUNT    FACILITIES    AMOUNT    INVENTORY    OTHER      TOTAL
                                ---------   --------   ----------   --------   ---------   --------   --------

Fiscal 2001 charges...........     970       $14.1         24        $ 3.3       $ 9.7      $30.2      $ 57.3
Fiscal 2001 utilization.......    (527)       (5.4)       (18)        (2.5)       (9.7)      (2.4)      (20.0)
                                  ----       -----        ---        -----       -----      -----      ------
Ending balance at
  September 30, 2001..........     443         8.7          6          0.8          --       27.8        37.3
Fiscal 2002 utilization.......    (430)       (8.3)        (6)        (0.7)         --       (8.7)      (17.7)
                                  ----       -----        ---        -----       -----      -----      ------
Ending balance at
  September 30, 2002..........      13       $ 0.4         --        $ 0.1       $  --      $19.1      $ 19.6
                                  ====       =====        ===        =====       =====      =====      ======
 
 
Severance
 
Facilities-Related
 
 
 
 
 
 
 
Number of
Employees
 
Amount
 
Number of
Facilities
 
Amount
 
Other
 
Total
 
Fiscal 2001 charges
 
970
 
$
14.1
 
24
 
$
3.3
 
$
30.2
 
$
47.6
 
Fiscal 2001 utilization
 
(527
)
 
(5.4
)
(18
)
 
(2.5
)
 
(2.4
)
 
(10.3
)
 
 
 
 
 
 
 
 
Ending balance at September 30, 2001
 
443
 
 
8.7
 
6
 
 
0.8
 
 
27.8
 
 
37.3
 
Fiscal 2002 utilization
 
(430
)
 
(8.3
)
(6
)
 
(0.7
)
 
(8.7
)
 
(17.7
)
 
 
 
 
 
 
 
 
Ending balance at September 30, 2002
 
13
 
 
0.4
 
—
 
 
0.1
 
 
19.1
 
 
19.6
 
Fiscal 2003 reversals
 
(11
)
 
(0.4
)
—
 
 
—
 
 
(0.8
)
 
(1.2
)
Fiscal 2003 utilization
 
(2
)
 
—
 
—
 
 
(0.1
)
 
(3.3
)
 
(3.4
)
Transfers/reclassifications
 
—
 
 
—
 
—
 
 
—
 
 
(15.0
)
 
(15.0
)
 
 
 
 
 
 
 
 
Ending balance at September 30, 2003
 
—
 
$
—
 
—
 
$
—
 
$
—
 
$
—
 
 
 
 
 
 
 
 
 
        Workforce reductions primarily relate to the elimination of manufacturing personnel in the United States. Facilities closures primarily relate to the shutdown of manufacturing and distribution facilities in the United States. The other charges consist primarily of charges relating to acquisition-related product replacement.
        In fiscal 2001, the Plastics and Adhesives segment recorded restructuring and other charges of $8.3 million, of which $4.0 million is included in cost of sales (excluding impairments of long-lived
73

assets, which are discussed in Note 6). The remaining $4.3 million consists of $2.6 million for the cost of announced workforce reductions of $14.1 million includesfor the elimination of 970322 positions primarily in the United States consisting primarily of manufacturing personnel. Facilities-related costsand sales personnel; the cost of $3.3facility closures of $0.2 million includefor the shutdown of 243 manufacturing and administrative facilities primarily in the United States consistingStates; and other charges of $1.5 million primarily of
manufacturingfor lease buyouts and distribution facilities.distributor termination fees. At September 30, 2002, 957all employees had been terminated and all facilities had been shut down. The other charges of $30.2 million consist primarily of charges relating to
acquisition-related product replacement.In addition, these restructuring accruals were fully utilized by September 30, 2002.
        In addition to segment charges, the Company recorded a net credit of
$163.4 million, consisting of an unusual credit of $166.8 million related to the
settlement of litigation and a charge of $3.4 million related to severance.severance, all of which has been utilized by September 30, 2003.
6.    Charges for the Impairment of Long-Lived Assets
        The Company recorded charges of $275.0 million in fiscal 2000 for certain claims
relating to a merged company in the Healthcare business, including
$190.0 million relating to the Surgical Dynamics, Inc. business of U.S.
Surgical. The $275.0 million accrual comprises patent infringement related cases
and a breach of contract claim. All cases relate to the Company's acquisition of
U.S. Surgical on October 1, 1998. In fiscal 2001, the Company paid
$239.5 million primarily for the settlement of the breach of contract claim and
one of the patent infringement cases. As part of the patent infringement
settlement, the Company was provided with rights to an ongoing OEM arrangement
or manufacturing rights valued at $166.8 million which was allocated to
intangible assets to be amortized over a 10-year period. The corresponding
amount initially established as an accrual for patent infringement was reversed
on the restructuring and other unusual charges line in the Consolidated
Statement of Operations during fiscal 2001. During the fourth quarter of fiscal
2002, the Company sold the business to which the intangible asset relates. At
September 30, 2002, $35.5 million of the $275.0 million litigation accrual
established in fiscal 2000 remains in other long-term liabilities on the
Consolidated Balance Sheet relating to patent infringements, which have not yet
been settled. In addition, $0.7 million relating to the $3.4 million severance
charge remains in accrued expenses and other current liabilities on the
Consolidated Balance Sheet at September 30, 2002.

                                       75

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5.  RESTRUCTURING AND OTHER UNUSUAL CHARGES (CREDITS), NET (CONTINUED)
2000 CHARGES AND CREDITS

    In fiscal 2000, the Fire and Security Services segment recorded
restructuring and other unusual credits of $11.2 million related to revisions 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 completed.

    In fiscal 2000, the Electronics segment recorded a net merger, restructuring
and other unusual credit of $77.8 million, which consists of credits of
$107.8 million and charges of $30.0 million. The merger, restructuring and other
unusual credit of $107.8 million, of which a credit of $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 liabilities of $55.2 million, facility liabilities of
$7.8 million and other liabilities of $44.8 million primarily as a result of
certain facilities remaining open due to changes in market conditions. The
restructuring and other unusual charges of $30.0 million, of which $0.9 million
is included in cost of sales includes $16.9 million related to restructuring
activities in AMP's Brazilian operations and wireless communications business
and an unusual charge of $13.1 million incurred in connection with the TyCom
IPO.

    Included in the $16.9 million AMP restructuring and other unusual charges
are the cost of announced workforce reductions of $4.9 million for the
elimination of 941 positions primarily in Brazil; the cost of facility closures
of $4.8 million for the shut-down and consolidation of 3 facilities; and other
charges of $7.2 million consisting of the write-off of non-facility assets and
other direct costs. At September 30, 2002, substantially all of these
restructuring activities were completed. The remaining balance at September 30,
2002 of $3.0 million, of which $0.6 million is included in accrued expenses and
other current liabilities and $2.4 million is included in other long-term
liabilities on the Consolidated Balance Sheet, is primarily for payments on
non-cancelable lease obligations.

    In fiscal 2000, the Healthcare and Specialty Products segment recorded a net
merger, restructuring and other unusual credit of $10.9 million. The
$10.9 million net credit consists of charges of $11.1 million related to U.S.
Surgical's suture business and charges of $7.9 million, of which charges of
$6.4 million are included in cost of sales, related to exiting U.S. Surgical's
interventional cardiology business. All of these restructuring activities have
been completed. Also recorded was a credit of $29.9 million representing a
revision in estimates of prior years' merger, restructuring and other unusual
accruals, of which $19.7 million related primarily to the merger with U.S.
Surgical 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
liabilities of $4.2 million, facility liabilities of $4.5 million and other
liabilities of $11.0 million.

    In addition to segment charges (credits), the Company recorded unusual
charges of $275.0 million in fiscal 2000 for certain claims relating to a merged
company in the Healthcare business and $1.2 million for other unusual charges.
See "2001 Charges and Credits" above for further discussion regarding the
$275.0 million charge.

6.  CHARGES 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 intangible assets, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be fully recoverable. The Company

                                       76

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6.  CHARGES FOR THE IMPAIRMENT OF LONG-LIVED ASSETS (CONTINUED) evaluates the recoverability of long-lived assets 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 recognized whenever anticipated future cash flows (undiscounted) from an asset are estimated to be less than its 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 an asset is adjusted to fair value if its expected future undiscounted cash flows is less than book value. Fair values are based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates, reflecting varying degrees of perceived risk.
2003 Charges
        During fiscal 2003, the Company recorded total charges for the impairment of long-lived assets of $824.9 million.
        The Fire and Security segment recorded charges for the impairment of intangible assets of $100.7 million resulting from a further deterioration of future estimated cash flows anticipated from customers primarily in Mexico and certain Latin American countries following the curtailment, and in some instances, the termination of the ADT dealer program in these countries. In addition, $11.2 million of impairment charges were recorded related to the discontinuance of two brand names. The Fire and Security segment also recorded charges for the impairment of property, plant and equipment of $20.9 million related primarily to subscriber systems and other fixed assets, and $10.2 million associated with the termination of a software development project.
        The Electronics segment recorded charges of $665.1 million, of which $664.3 million relates to the impairment of the TGN. This impairment was recorded to write-off the entire TGN as a result of our intention to divest this business. The amount of the impairment was based upon estimates of its fair value, less costs to dispose.
        The Company recorded charges for the impairment of property, plant and equipment of $14.6 million at Corporate, primarily related to the closure and relocation of corporate offices from New York to New Jersey and other impairment charges of $2.2 million within the Engineered Products and Services segment.
2002 CHARGESCharges
        During fiscal 2002, the Company recorded total charges for the impairment of long-lived assets in continuing operations of $3,489.5$3,309.5 million.

    During fiscal 2002, the
74

        The Fire and Security Services segment recorded a charge of $110.0$5.6 million related to the impairment of intangible assets resulting from the curtailment, and in certain markets, the termination of the authorizedADT dealer program. In addition, the Fire and Security Services segment recorded a charge of $107.0$109.1 million primarily related to the impairment of property, plant and equipment associated with the termination of a software development project. The software development project related to a strategy to develop a new comprehensive integrated customer database and associated applications for this segment and its acquired companies. During fiscal 2002, management, with the assistance of a third-party consultant, performed a full evaluation to determine the information technology needs of the Fire and Security business relative to where it stood then and expectations for it over the near future. As a result of this review, the Company decided to abandon the project, which was still in the development and testing stage, resulting in the write-off of capitalized costs of $107.0$109.1 million.

    During fiscal 2002, the
        The Electronics segment recorded a charge of $3,113.7$3,150.7 million, of which $2,544.7$2,581.7 million related to the impairment of the TGN, $541.0 million primarily related to property, plant and equipment associated with the closure of facilities as discussed in Note 5 and $28.0 million related to the impairment of intangible assets associated with undersea systems technology and know-how acquired through acquisitions. The
fiberoptic
        During fiscal 2002, the fiber optic capacity available in the market continues to significantly exceedexceeded overall market demand, creatingwhich created sharply declining prices and reduced anticipated future cash flows. TheAs a result, the Company has assessed the carrying value of the TGN assuming a held and used model using an analysis that employsemployed estimates as to current and future market pricing, demand and network completion costs. This analysis iswas highly sensitive to changes in those estimates noted above. Based upon management'sthese estimates, the Company concluded that the value of its fiberopticfiber optic network was partially impaired and consequently recorded an impairment charge during the quarter ended March 31, 2002. The amount of the impairment was based upon the difference between the carrying value of each asset group and the estimated fair value of those assets groups as of March 31, 2002. The estimated fair value of each asset group was determined using an income (discounted cash flow) approach. The cash flowsflow forecasts were prepared using the fifteen year15-year estimated weighted averageweighted-average useful life of each of the TGN asset groups. Probability factors were applied to various scenarios weighting the likelihood of each possible outcome. Then, each cash flow forecast was discounted using a weighted averageweighted-average cost of capital of 15% similar to that used for 77

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6.  CHARGES FOR THE IMPAIRMENT OF LONG-LIVED ASSETS (CONTINUED)
SFAS No. 142 purposes, which was prepared by an independent appraiser as part of services rendered in evaluating the Company's enterprise value. Based upon these analyses, the sum of the expected future discounted cash flows was subtracted from the carrying values of the asset groups resulting in an impairment loss for the TGN. The entire TGN placed in service as of March 31, 2002 was written-off at that time, as well as a portion of TGN construction in progress of the TGN.progress. We reconsidered the factors noted above, such as projected operating results, business plans and an estimate of discounted future cash flows, in order to retest the carrying value of the TGN for a further impairment at June 30, 2002 and September 30, 2002. We determined that no impairment charge was necessary at June 30, 2002. However, as the telecommunications industry further declined, an additional impairment charge was necessary and therefore recorded that amount as of September 30, 2002. Changes to these forecasts and assumptions could lead to
further impairment of the TGN in the future.
75
        The amount of Tyco Global Network
on the Consolidated Balance Sheet at September 30, 2002 is $581.6 million as
compared to $2,342.4 million at September 30, 2001.

    During fiscal 2002, the Healthcare and Specialty Products segment recorded a charge of $125.3 million related to the impairment of intangible assets
associated with Healthcare's Surgical Dynamics, Inc. business sold in
July 2002. In addition, the Healthcare and Specialty Products segment recorded a
charge of $5.1$2.5 million related to the impairment of property, plant and equipment associated with the closure of facilities discussed in Note 5.

    During fiscal 2002, the
        The Engineered Products and Services segment recorded a charge of $9.5 million related to the impairment of property, plant and equipment associated with the closure of facilities discussed in Note 5.

    During fiscal 2002,
        The Plastics and Adhesives segment recorded a charge of $2.6 million related to the impairment of property, plant and equipment associated with the closure of facilities discussed in Note 5.
        The Company recorded a charge of $18.9$29.5 million related to the impairment of certain corporate properties associated with the downsizing of corporate headquarters discussed in Note 5.
2001 CHARGESCharges
        The Electronics, Healthcare, Plastics and Specialty Products,Adhesives, Engineered Products and Services and Fire and Security Services segments recorded charges of $98.5 million, $15.4$14.2 million, $1.2 million, $3.4 million and $2.8 million, respectively, related primarily to the impairment of property, plant and equipment associated with the closure of facilities discussed in Note 5.

2000 CHARGES

    The Healthcare
7. Write-Off of Purchased In-Process Research and Specialty Products segment recorded a charge of
$99.0 million in Fiscal 2000 primarily related to an impairment in goodwill and
other intangible assets associated with the Company exiting the interventional
cardiology business of U.S. Surgical discussed in Note 5.

7.  WRITE-OFF OF PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENTDevelopment
        During fiscal 2002, in connection with Tyco's acquisition of Sensormatic and DSC Group, the Company wrote-off the fair value of purchased in-process research and development ("IPR&D") of various projects for the development of new products and technologies in the amount of $17.8 million. Management determined the value of the IPR&D using, among other factors, appraisals.

                                       78

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7.  WRITE-OFF OF PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT (CONTINUED)
        In connection with Tyco's acquisition of Mallinckrodt Inc. during fiscal 2001, the Company wrote-off the fair value of purchased IPR&D of various projects for the development of new products and technologies in the amount of $184.3 million. ManagementThe Company determined the valuation of the IPR&D using, among other factors, appraisals. The value was based primarily on the discounted cash flow method. This valuation included consideration of (i) the stage of completion of each of the projects, (ii) the technological feasibility of each of the projects, (iii) whether the projects had an alternative future use, and (iv) the estimated future residual cash flows that could be generated from the various projects and technologies over their respective projected economic lives.
        As of the Mallinckrodt acquisition date, there were several projects under development at different stages of completion. The primary basis for determining the technological feasibility of these projects was obtaining Food and Drug Administration ("FDA") approval. As of the acquisition date, none of the IPR&D projects had received FDA approval. In assessing the technological feasibility of a project, consideration was also given to the level of complexity and future technological hurdles that each project had to overcome prior to being submitted to the FDA for approval. As of the acquisition date, none of the IPR&D projects waswere considered to be technologically feasible or to have any alternative future use.
        Future residual cash flows that could be generated from each of the projects were determined based upon management'san estimate of future revenue and expected profitability of the various products and technologies involved. These projected cash flows were then discounted to their present values taking into account management'sthe estimate of future expenses that would be necessary to bring the projects to
76

completion. The discount rates include a rate of return, which accounts for the time value of money, as well as risk factors that reflect the economic risk that the cash flows projected may not be realized. The cash flows were discounted at discount rates ranging from 14% to 25% per annum, depending on the project's stage of completion and the type of FDA approval needed. This discounted cash flow methodology for the various projects included in the purchased IPR&D resulted in a total valuation of $184.3 million. Although work on the projects related to the IPR&D continued after the acquisition, the amount of purchase price allocated to IPR&D was written off because the projects underlying the IPR&D that was being developed were not considered technologically feasible as of the acquisition date. As of September 30, 2002,2003, approximately 44%53% of the IPR&D projects have been successfully completed and approximately 30%25% of the projects have been discontinued or are currently inactive. The remainder are in various stages of completion. There are currently no expected material variations between projected results from the projects versus those at the time of the acquisition.
8. OTHER (EXPENSE) INCOMEOther (Expense) Income, Net
        Other (expense) income, net is as follows ($ in millions):

                                                                 YEAR ENDED SEPTEMBER 30,
                                                              ------------------------------
                                                                2002       2001       2000
                                                              --------   --------   --------

Income (loss) from early retirement of debt.................  $  30.6    $ (26.3)    $(0.3)
Loss on investments.........................................   (270.8)    (133.8)       --
Net gain on sale of businesses..............................      7.2      410.4        --
                                                              -------    -------     -----
                                                              $(233.0)   $ 250.3     $(0.3)
                                                              =======    =======     =====


                                       79

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8.  OTHER (EXPENSE) INCOME (CONTINUED)
 
 
Year Ended September 30,
 
 
 
2003
 
2002
 
2001
 
Income (loss) from early retirement of debt
 
$
24.1
 
$
30.6
 
$
(26.3
)
Loss on retirement of debt
 
 
(151.8
)
 
—
 
 
—
 
Loss on investments
 
 
(87.1
)
 
(270.8
)
 
(133.8
)
Equity investee guarantee
 
 
(8.6
)
 
—
 
 
—
 
Net gain on sale of businesses
 
 
—
 
 
23.6
 
 
410.4
 
 
 
 
 
 
 
 
$
(223.4
)
$
(216.6
)
$
250.3
 
 
 
 
 
 
        Tyco has repurchased some debt prior to scheduled maturities. In fiscal 2002,2003, the Company recorded other income from the early retirement of debt totaling $30.6$24.1 million, as compared to losses$30.6 million in fiscal 2002, and a loss from the early retirement of debt totaling $26.3 million and $0.3 million for fiscal 20012001.
        During fiscal 2003, the Company repurchased all of its 6.25% Dealer Remarketable Securities ("Drs.") due 2013. The total Dollar Price paid was $902 million based upon the $750 million par value of the Drs. The portion in excess of par of $151.8 million was recorded as a loss on retirement of debt.
        During fiscal 2003, the Company recognized a charge of $87.1 million relating to the write-down of various investments accounted for under both the cost and 2000, respectively.equity methods, of which $81.3 million was recorded, when it became evident that the declines in the fair value of the investments were other than temporary, primarily due to the continuing depressed economic conditions specifically within the telecommunications industry. Included within the $81.3 million is $75.6 million recorded during the quarter ended March 31, 2003 (see Note 31). The remaining $5.8 million charge adjusted a portion of the remaining portfolio to its fair value based upon estimates received in conjunction with our decision to sell such investments. During fiscal 2002, the Company recognized a $270.8 million loss on equityvarious investments, primarily related to its investments in FLAG Telecom Holdings Ltd. ("FLAG") when it became evident that the declines in the fair value of FLAG and other investments were other than temporary. During fiscal 2001, the Company recognized a $133.8 million loss on equityvarious investments
77

primarily related to its investment in 360Networks when it became evident that the declines in the fair value of the investments were other than temporary.
        During fiscal 2003, the Company recognized other expense of $8.6 million in connection with a bank guarantee on behalf of an equity investee.
        During fiscal 2002, the Company sold certain of its businesses for net proceeds of approximately $138.7 million in cash that consist primarily of certain businesses within the Healthcare and Specialty Products and Fire and Security Services segments. In connection with these dispositions, the Company recorded a net gain of $7.2 million (excluding a previous charge of
$125.3 million for impairment associated with these assets which were held for
sale).$23.6 million. In fiscal 2001, the Company sold its ADT Automotive business to Manheim Auctions, Inc., a wholly-owned subsidiary of Cox Enterprises, Inc., for approximately $1.0 billion in cash. The Company recorded a net gain on the sale of businesses of $410.4 million after deducting commissions and other direct costs, principally related to the sale of ADT Automotive. This gain is net of direct and incremental costs of the transaction, as well as $60.7 million of special non-recurring bonuses paid to key employees.
9.  TYCOM LTD.

    During fiscal 2000, TyCom Ltd., a majority-owned 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,
2001 the Company's ownership in TyCom's outstanding common shares was
approximately 89%. As a result of the TyCom IPO, the Company recognized a net
pre-tax gain on its investment in TyCom of approximately $1.76 billion
($1.01 billion, after-tax), which has been included in net gain on sale of
common shares of subsidiary in the fiscal 2000 Consolidated Statement of
Operations. This gain is net of direct and incremental costs of the transaction,
as well as $85.1 million of special, non-recurring bonuses paid to key
employees. In addition, in connection with the TyCom IPO, the Company paid
special, non-recurring bonuses of $13.1 million to certain employees, which was
included on the restructuring and other unusual charges (credits), net line in
the Consolidated Statement of Operations.
        During fiscal 2001, the Company recorded a $64.1$24.5 million net gain on the sale of approximately 5.6 million common shares of TyCom. This gain is net of direct and incremental costs of the transaction, as well as $15.0 million of special non-recurring bonuses paid to key employees. During fiscal 2002, the
Company recorded a $39.6 million adjustment to this gain (see Note 1).
        On December 18, 2001, the Company completed its amalgamation with TyCom and each of the approximately 56 million TyCom common shares not owned by Tyco were converted into the right to receive 0.3133 of a Tyco common share. Upon completion of the amalgamation, TyCom became a

                                       80

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9.  TYCOM LTD. (CONTINUED) wholly-owned subsidiary of Tyco, and each outstanding option to purchase TyCom common shares is exercisable for Tyco common shares, with the number of Tyco shares equal to the number of TyCom common shares issuable upon exercise immediately prior to the consummation multiplied by the exchange ratio of 0.3133. The per share exercise price for the Tyco common shares issuable upon the exercise of TyCom options equals the exercise price per TyCom common share, at the price such options were exercisable prior to the amalgamation, divided by the exchange ratio. In addition, each outstanding TyCom restricted share was converted into a restricted Tyco common share based on the exchange ratio. The options and restricted shares are subject to the same terms and conditions that were applicable immediately prior to the amalgamation.
78

10. INCOME TAXESIncome 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,
                                                              -------------------------------
                                                                2002        2001       2000
                                                              ---------   --------   --------

Notional U.S. federal income tax (benefit) expense at the
  statutory rate............................................  $  (984.0)  $2,003.6   $2,262.6
Adjustments to reconcile to the Company's income tax
  provision:
  U.S. state income tax provision, net......................       27.2       75.7       46.7
  Asset impairments in low-rate jurisdictions...............      861.5        1.2        6.4
  Non-U.S. net earnings.....................................     (174.1)    (923.9)    (495.6)
  Nondeductible charges.....................................      541.2      170.4      140.8
  Other.....................................................      (14.1)     (51.3)     (35.0)
                                                              ---------   --------   --------
  Provision for income taxes................................      257.7    1,275.7    1,925.9
  Deferred (benefit) provision..............................     (127.8)     558.8      721.2
                                                              ---------   --------   --------
  Current provision.........................................  $   385.5   $  716.9   $1,204.7
                                                              =========   ========   ========
 
 
Year Ended September 30,
 
 
 
2003
 
2002
 
2001
 
Notional U.S. federal income tax expense (benefit) at the statutory rate
 
$
631.0
 
$
(920.0
)
$
1,790.1
 
Adjustments to reconcile to the Company's income tax provision:
 
 
 
 
 
 
 
 
 
 
 
U.S. state income tax (benefit) provision, net
 
 
(97.4
)
 
26.1
 
 
74.6
 
 
Asset impairments
 
 
120.4
 
 
785.3
 
 
47.5
 
 
Non-U.S. net earnings(1)
 
 
(242.1
)
 
(210.5
)
 
(859.0
)
 
Nondeductible charges
 
 
383.0
 
 
541.2
 
 
170.4
 
 
Other
 
 
(30.4
)
 
(14.0
)
 
(51.3
)
 
 
 
 
 
 
Provision for income taxes
 
 
764.5
 
 
208.1
 
 
1,172.3
 
 
Deferred provision (benefit)
 
 
18.6
 
 
123.1
 
 
455.4
 
 
 
 
 
 
 
Current provision
 
$
745.9
 
$
85.0
 
$
716.9
 
 
 
 
 
 
(1)
Excludes asset impairments, nondeductible charges, and other items which are broken out separately in the table.
        The provisions for fiscal 2003, fiscal 2002, and fiscal 2001 and fiscal 2000 include $503.1$805.9 million, $629.2$487.6 million, and $648.6$514.8 million, respectively, for non-U.S. income taxes. The non-U.S. component of income/income (loss) from continuing operations before income taxes was $(739.9)$2,835.1 million, $4,398.8$(646.3) million and $3,343.6$4,005.8 million for fiscal 2003, fiscal 2002, and fiscal 2001, and fiscal 2000, respectively.

                                       81

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10.  INCOME TAXES (CONTINUED)
79

        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,
                                                         ---------------------
                                                           2002        2001
                                                         ---------   ---------

Deferred tax assets:
Accrued liabilities and reserves.......................  $ 1,802.7   $ 1,522.6
Tax loss and credit carryforwards......................    1,679.7       762.0
Capitalized research and development and interest......      148.5       139.6
Other..................................................      413.4       135.8
                                                         ---------   ---------
                                                           4,044.3     2,560.0
                                                         ---------   ---------
Deferred tax liabilities:
Property, plant and equipment..........................     (512.6)     (439.1)
Intangibles............................................     (770.6)     (564.0)
Undistributed earnings of subsidiaries.................      (80.1)     (126.1)
Other..................................................     (335.0)     (614.1)
                                                         ---------   ---------
                                                          (1,698.3)   (1,743.3)
                                                         ---------   ---------
Net deferred income tax asset before valuation
  allowance............................................    2,346.0       816.7
Valuation allowance....................................     (493.5)     (122.4)
                                                         ---------   ---------
Net deferred income tax asset..........................  $ 1,852.5   $   694.3
                                                         =========   =========
 
 
September 30,
 
 
 
2003
 
2002
 
Deferred tax assets:
 
 
 
 
 
 
 
Accrued liabilities and reserves
 
$
2,318.4
 
$
2,009.2
 
Tax loss and credit carryforwards
 
 
1,297.8
 
 
1,679.7
 
Capitalized research and development
 
 
280.0
 
 
63.0
 
Other
 
 
822.5
 
 
639.3
 
 
 
 
 
 
 
 
4,718.7
 
 
4,391.2
 
 
 
 
 

Deferred tax liabilities:

 

 

 

 

 

 

 
Property, plant and equipment
 
 
(487.3
)
 
(256.6
)
Intangibles
 
 
(1,000.3
)
 
(770.6
)
Undistributed earnings of subsidiaries
 
 
(80.1
)
 
(80.1
)
Other
 
 
(868.5
)
 
(527.4
)
 
 
 
 
 
 
 
(2,436.2
)
 
(1,634.7
)
 
 
 
 
Net deferred income tax asset before valuation allowance
 
 
2,282.5
 
 
2,756.5
 
Valuation allowance
 
 
(852.9
)
 
(603.9
)
 
 
 
 
Net deferred income tax asset
 
$
1,429.6
 
$
2,152.6
 
 
 
 
 
        At September 30, 2002,2003, the Company had approximately $1,275.0$1,826.5 million of net operating loss carryforwards in certain non-U.S. jurisdictions. Of these, $647.0$804.1 million have no expiration, and the remaining $628.0$1,022.4 million will expire in future years through 2012.2013. In the U.S., there were approximately $1,256.7 million of federal and $4,376.4 million of state net operating loss carryforwards at September 30, 2002 were approximately $2,501.0 million and2003, which will expire in future years through 2022. Of these U.S. losses, approximately $455.0 million are
limited in their use by "change of ownership" rules as defined in the Internal
Revenue Code of 1986. There are other limitations imposed on the utilization of
net operating losses that could further restrict the recognition of such2023.
        The deferred tax benefits. Aasset valuation allowance has been provided primarily for operating loss
carryforwards that are not expected to be utilized. The valuation allowance has
increased substantially over the prior year. The increase in valuation allowance
is primarilyby approximately $249 million due to the uncertainty of the utilization of certain non-U.S. deferred tax assets. The Company believes that it will generate sufficient future taxable income to realize the tax benefits related to the remaining net operating losses.deferred tax assets on the balance sheet. The valuation allowance was calculated in accordance with the provisions of SFAS No. 109 which requires a valuation allowance be established or maintained when it is "more likely than not" that all or a portion of deferred tax assets will not be realized. At September 30, 2002,2003, approximately $119.0$119 million of the valuation allowance will ultimately reduce goodwill if the net operating losses are utilized.
        The Company and its subsidiaries' income tax returns are routinelyperiodically examined by various regulatory tax authorities. In connection with such examinations, tax authorities, including the Internal Revenue Service, have raised issues and proposed tax deficiencies. The Company is reviewing the issues raised by the tax authorities and is contesting suchcertain proposed tax deficiencies. Amounts related to these tax deficiencies and other tax contingencies that management has assessed as probable and estimable have been accrued through the income tax provision. Further, management has reviewed with tax counsel the issues raised by these taxing authorities and the adequacy of these tax accrued amounts.
80

Management believes but cannot assure you that the ultimate resolution of these tax deficiencies and

                                       82

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10.  INCOME TAXES (CONTINUED) contingencies will not have a material adverse effect on the Company's financial condition, annual results of operations financial position or cash flows.
        Except for earnings that are currently distributed, no additional provision has been made for U.S. or non-U.S. income taxes on the undistributed earnings of subsidiaries or for unrecognized deferred tax liabilities for temporary differences related to investments in subsidiaries, as such earnings are expected to be permanently reinvested, or the investments are essentially permanent in duration. A liability could arise if amounts were distributed by their subsidiaries or if their subsidiaries were disposed. It is not practicable to estimate the additional taxes related to the permanently reinvested earnings or the basis differences related to investments in subsidiaries.
11. DISCONTINUED OPERATIONS OF TYCO CAPITALDiscontinued Operations of Tyco Capital (CIT GROUP INC.Group Inc.)
        On April 25,July 8, 2002, the Company announced its plan to divestdivested of Tyco Capital potentially through an IPO of all of CIT's outstanding shares. In June 2002,
management and the Company's Board of Directors approved the sale of 100% of CIT's common shares of CIT in an IPO establishing a measurement date for discontinued
operations.IPO. Accordingly, the results of Tyco Capital are presented as discontinued operations for all periods. Prior year amounts include Tyco Capital's operating results after June 1, 2001, the date of acquisition of CIT by Tyco. The sale of 100% of CIT's common shares through an IPO was completed on
July 8, 2002.

    The following table presents summary balance sheet information for the
discontinued operations of Tyco Capital at September 30, 2001 ($ in millions):


                                                              SEPTEMBER 30,
                                                                   2001
                                                              --------------

Cash........................................................     $   808.0
Finance receivables, net....................................      31,386.5
Property, plant and equipment (including equipment leased to
  others), net..............................................       6,503.6
Goodwill, net...............................................       6,547.5
Other assets................................................       5,844.5
                                                                 ---------
  Total assets..............................................     $51,090.1
                                                                 =========
Loans payable and current maturities of long-term debt......     $17,050.6
Accrued expenses and other liabilities......................       4,534.4
Long-term debt..............................................      18,647.1
                                                                 ---------
  Total liabilities.........................................      40,232.1
Mandatorily redeemable preferred securities.................         260.0
  Total shareholder's equity................................      10,598.0
                                                                 ---------
  Total liabilities and shareholder's equity................     $51,090.1
                                                                 =========


                                       83

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11.  DISCONTINUED OPERATIONS OF TYCO CAPITAL (CIT GROUP INC.) (CONTINUED)
        Operating results from the discontinued operations of Tyco Capital through July 8, 2002 were as follows ($ in millions):

                                                                    FOR THE PERIOD
                                                                        JUNE 2
                                                 FOR THE PERIOD        (DATE OF
                                                   OCTOBER 1,        ACQUISITION)
                                                  2001 THROUGH          THROUGH
                                                  JULY 8, 2002    SEPTEMBER 30, 2001
                                                 --------------   -------------------

Finance income.................................    $ 3,327.6           $1,676.5
Interest expense...............................      1,091.5              597.1
                                                   ---------           --------
Net finance income.............................      2,236.1            1,079.4
Depreciation on operating lease equipment......        944.4              448.6
                                                   ---------           --------
Net finance margin.............................      1,291.7              630.8
Provision for credit losses....................        665.6              116.1
                                                   ---------           --------
Net finance margin, after provision for credit
  losses.......................................        626.1              514.7
Other income...................................        741.1              335.1
                                                   ---------           --------
Operating margin...............................      1,367.2              849.8
                                                   ---------           --------
Selling, general, administrative and other
  costs and expenses...........................        687.8              398.7
Goodwill impairment............................      6,638.1                 --
                                                   ---------           --------
Operating expenses.............................      7,325.9              398.7
                                                   ---------           --------
(Loss) income before income taxes and minority
  interest.....................................     (5,958.7)             451.1
Income taxes...................................       (316.1)            (195.0)
Minority interest..............................         (7.7)              (3.6)
                                                   ---------           --------
(Loss) income from discontinued operations.....    $(6,282.5)          $  252.5
                                                   =========           ========
 
 
For the Period
October 1, 2001
through July 8, 2002
 
For the Period
June 2
(date of acquisition)
through
September 30, 2001
 
Finance income
 
$
3,327.6
 
$
1,676.5
 
Interest expense
 
 
1,091.5
 
 
597.1
 
 
 
 
 
Net finance income
 
 
2,236.1
 
 
1,079.4
 
Depreciation on operating lease equipment
 
 
944.4
 
 
448.6
 
 
 
 
 
Net finance margin
 
 
1,291.7
 
 
630.8
 
Provision for credit losses
 
 
665.6
 
 
116.1
 
 
 
 
 
Net finance margin, after provision for credit losses
 
 
626.1
 
 
514.7
 
Other income
 
 
741.1
 
 
335.1
 
 
 
 
 
Operating margin
 
 
1,367.2
 
 
849.8
 
 
 
 
 
Selling, general, administrative and other costs and expenses
 
 
687.8
 
 
398.7
 
Goodwill impairment
 
 
6,638.1
 
 
—
 
 
 
 
 
Operating expenses
 
 
7,325.9
 
 
398.7
 
 
 
 
 
(Loss) income before income taxes and minority interest
 
 
(5,958.7
)
 
451.1
 
Income taxes
 
 
(316.1
)
 
(195.0
)
Minority interest
 
 
(7.7
)
 
(3.6
)
 
 
 
 
(Loss) income from discontinued operations
 
$
(6,282.5
)
$
252.5
 
 
 
 
 
81
        During the quarter ended March 31, 2002, Tyco experienced disruptions to its business surrounding its announced break-up plan, a downgrade in its credit ratings, and a significant decline in its market capitalization. During this same time period, CIT also experienced credit downgrades and a disruption to its historical funding base. Further, market-based information used in connection with the Company's preliminary consideration of the proposed IPO of CIT indicated that CIT's book value exceeded its estimated fair value as of March 31, 2002. As a result, the Company performed a SFAS No. 142 first step impairment analysis as of March 31, 2002 and concluded that an impairment charge was warranted at that time.
        Management's objective in performing the SFAS No. 142 first step analysis was to obtain relevant market-based data to calculate the estimated fair value of CIT as of March 31, 2002 based on its projected earnings and market factors expected to be used by market participants in ascribing value to CIT in the planned separation of CIT from Tyco. Management obtained relevant market data from financial advisors regarding the range of price to earnings multiples and market condition discounts applicable to CIT as of March 31, 2002 and applied these market data to CIT's projected annual earnings as of March 31, 2002 to calculate an estimated fair value and any resulting goodwill 84

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11.  DISCONTINUED OPERATIONS OF TYCO CAPITAL (CIT GROUP INC.) (CONTINUED)
impairment. The estimated fair value was compared to the corresponding carrying value of CIT at March 31, 2002. As a result, wethe Company recorded a $4,512.7 million impairment charge as of March 31, 2002, which is included in discontinued operations.
        SFAS No. 142 requires a second step analysis whenever a reporting unit's book value exceeds estimated fair value. This analysis requires the Company to estimate the fair value of the reporting unit's individual assets and liabilities to complete the analysis of goodwill as of March 31, 2002. The Company completed this second step analysis for CIT during the quarter ended June 30, 2002 and, as a result, recorded an additional goodwill impairment charge of $132.0 million. During the June 30, 2002 quarter, CIT experienced further credit downgrades and the business environment and other factors continued to negatively impact the likely proceeds of the IPO. As a result, we performed another first step and second step analysis as of June 30, 2002 in a manner consistent with the March 2002 process described above. Each of these analyses was based upon updated market data at June 30, 2002 and through the period immediately following the IPO, including the IPO proceeds. These analyses resulted in a goodwill impairment of $1,867.0 million, which is also included in discontinued operations as of June 30, 2002.operations. Tyco also recorded an additional impairment charge of $126.4 million in order to write-down its investment in CIT to fair value for a total CIT goodwill impairment of $2,125.4 million for the
quarter ended June 30, 2002.million. This write-down was based upon net IPO proceeds of approximately $4.4 billion, after deducting estimated out of pocket expenses, and is included in the $6,282.5 million loss from discontinued operations. During the fourth quarter of fiscal 2002, Tyco recorded a loss on the sale of Tyco Capital of $58.8 million.

ACCOUNTING POLICIES OF DISCONTINUED OPERATIONS

    FINANCING AND LEASING ASSETS--Tyco
        During fiscal 2003, Tyco recorded income from discontinued operations of $20.0 million. The $20.0 million represented a restitution payment made by Frank E. Walsh Jr. (see Note 18).
Accounting Policies of Discontinued Operations
Financing and Leasing Assets—Tyco Capital providesprovided funding for a variety of financing arrangements, including term loans, lease financing and operating leases. The amounts outstanding on loans and leases arewere referred to as finance receivables. Financing and leasing assets consistconsisted of finance receivables, finance receivables held for sale, net book value of operating lease equipment and certain investments.
82

        At the time of designation for sale, securitization or syndication, assets arewere classified as finance receivables held for sale, which are included in Net
Assets of Discontinued Operations on the Consolidated Balance Sheet.sale. These assets arewere carried at the lower of aggregate cost or market value.

    LEASE FINANCING--Direct
Lease Financing—Direct financing leases arewere recorded at the aggregate future minimum lease payments plus estimated residual values less unearned finance income. Operating lease equipment iswas carried at cost less accumulated depreciation and iswas depreciated to estimated residual value using the straight-line method over the lease term or projected economic life of the asset. Equipment acquired in satisfaction of loans and subsequently placed on operating lease iswas recorded at the lower of carrying value or estimated fair value when acquired. Lease receivables includeincluded leveraged leases, for which a major portion of the funding iswas provided by third-party lenders on a nonrecourse basis, with Tyco Capital providing the balance and acquiring title to the property. Leveraged leases arewere recorded at the aggregate value of future minimum lease payments plus estimated residual value, less nonrecourse third-party debt and unearned finance income. Management performsperformed periodic reviews of the estimated residual values with impairment, other than temporary, recognized in the currentappropriate period.

    RESERVE FOR CREDIT LOSSES ON FINANCE RECEIVABLES--The
Reserve for Credit Losses on Finance Receivables—The reserve for credit losses iswas periodically reviewed for adequacy considering economic conditions, collateral values and credit quality indicators,

                                       85

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11.  DISCONTINUED OPERATIONS OF TYCO CAPITAL (CIT GROUP INC.) (CONTINUED) including historical and expected charge-off experience and levels of past due loans and non-performing assets. Changes in economic conditions or other events affecting specific obligors or industries may necessitatehave necessitated additions or deductions to the reserve for credit losses.

    CHARGE-OFF OF FINANCE RECEIVABLES--Finance
Charge-off of Finance Receivables—Finance receivables arewere reviewed periodically to determine the probability of loss. Charge-offs arewere taken after considering such factors as the borrower's financial condition and the value of underlying collateral and guarantees (including recourse to dealers and manufacturers). Such charge-offs arewere deducted from the carrying value of the related finance receivables. To the extent that an unrecovered balance remainsremained due, a final charge-off iswas taken at the time collection efforts arewere no longer deemed useful. Charge-offs arewere recorded on consumer and certain small ticket commercial finance receivables beginning at 180 days of contractual delinquency based upon historical loss severity.

    IMPAIRED LOANS--Impaired
Impaired Loans—Impaired loans includeincluded primarily large loans that arewere placed on non-accrual status or any troubled debt restructuring. Loan impairment iswas defined as any shortfall between the estimated value and the recorded investment in the loan, with the estimated value determined using the fair value of the collateral, if the loan iswas collateral dependent, or the present value of expected future cash flows discounted at the loan's effective interest rate.

    SECURITIZATIONS--Pools
Securitizations—Pools of assets arewere originated and sold to independent trusts which, in turn, issueissued securities to investors backed by the asset pools. Tyco Capital retainsretained the servicing rights and participatesparticipated in certain cash flows from the pools. The present value of expected net cash flows that exceedsexceeded the estimated cost of servicing iswas recorded at the time of sale as a "retained interest." Tyco Capital's retained interests in securitized assets are included
in other assets. Subsequent to the recording of retained interests, Tyco Capital reviewsreviewed such values on an asset by asset basis at least as often as quarterly. Fair values of retained interests arewere calculated utilizing current and anticipated credit losses, prepayment speeds and discount rates and arewere then compared to the respective carrying values. Losses, representing the excess of carrying value over estimated current fair market value, arewere recorded as impairments and arewere recognized as a charge to operations. Unrealized gains arewere not credited to current earnings but arewere reflected in shareholders' equity as part of other comprehensive income.

    FINANCE INCOME--Includes
83

Finance income—Includes interest on loans, the accretion of income on direct financing leases, and rents on operating leases. Related origination and other nonrefundable fees and direct origination costs arewere deferred and amortized as an adjustment of finance income over the contractual life of the transactions. Income on finance receivables other than leveraged leases iswas recognized on an accrual basis commencing in the month of origination using methods that generally approximateapproximated the interest method. Leveraged lease income iswas recognized on a basis calculated to achieve a constant after-tax rate of return for periods in which Tyco Capital hashad a positive investment in the transaction, net of related deferred tax liabilities. Rental income on operating leases iswas recognized on an accrual basis.
        The accrual of finance income on commercial and consumer finance receivables iswas generally suspended and an account iswas placed on non-accrual status when payment of principal or interest iswas contractually delinquent for 90 days or more, or earlier when, in the opinion of management, full collection of all principal and interest due iswas doubtful.

    FINANCIAL INSTRUMENTS--See
Financial Instruments—See the Company's discussion of significant accounting policies included in Note 1 for information related to financial instruments. Additionally, Tyco Capital hashad derivatives, which 86

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11.  DISCONTINUED OPERATIONS OF TYCO CAPITAL (CIT GROUP INC.) (CONTINUED)
arewere designated as a cash flow hedge. If a derivative iswas designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative arewere recorded in other comprehensive (loss) income and arewere recognized in the Consolidated Statement of Operations when the hedged item affectsaffected earnings. Ineffective portions of changes in the fair value of cash flow hedges arewere recognized as a charge or credit to earnings.
12. CUMULATIVE EFFECT OF ACCOUNTING CHANGESCumulative Effect of Accounting Changes
        As discussed in Note 30, the Company has three synthetic lease programs utilized, to some extent, by all of the Company's segments to finance capital expenditures for manufacturing machinery and equipment and for ships used by Tyco Submarine Telecommunications. During fiscal 2003, the Company adopted FIN 46 and, accordingly, restructured one of the synthetic leases to meet the requirements of FIN 46 for operating lease accounting. The Company has reclassified the remaining two leases as capital leases and consequently, recorded a cumulative effect adjustment, a $75.1 million loss after-tax ($115.5 million pre-tax) in fiscal 2003 in accordance with the provisions of FIN 46. In addition, four joint ventures within Tyco Infrastructure Services met the consolidation criteria set forth in FIN 46. As a result of both the synthetic lease reclassifications and the joint venture consolidations, the Company has increased property, plant and equipment, net, by $433.8 million and total debt by $562.2 million (effective July 1, 2003).
        In December 1999, the SEC issued SAB 101, in which the SEC Staff expressed its views regarding the appropriate recognition of revenue with respect to a variety of circumstances, some of which are relevant to the Company. As required under SAB 101, the Company modified its revenue recognition policies with respect to the installation of electronic security systems (see "REVENUE
RECOGNITION""Revenue Recognition" within Note 1). In addition, in response to SAB 101, the Company undertook a review of its revenue recognition practices and identified certain provisions included in a limited number of sales arrangements that delayed the recognition of revenue under SAB 101. During the fourth quarter of fiscal 2001, the Company changed its method of accounting for these items retroactive to the beginning of the fiscal year to conform to the requirements of SAB 101. This was reported as a $653.7 million after-tax ($1,005.6 million pre-tax) charge for the cumulative effect of change in accounting principle in the fiscal 2001 Consolidated Statement of Operations.
84

        During fiscal 2003 and 2002, the Company recognized $249.4 million and $294.2 million, respectively, of revenue that had previously been included in the SAB 101 cumulative effect adjustment recorded as of October 1, 2000. The impact of SAB 101 on net revenues in fiscal 2001 was a net decrease of $241.1 million, reflecting the deferral of $520.5 million of fiscal 2001 revenues, partially offset by the recognition of $279.4 million of revenue that is included in the cumulative effect adjustment as of the beginning of the fiscal year.2001.
        The Company recorded a cumulative effect adjustment, a $29.7 million loss, net of zero tax, in fiscal 2001 in accordance with the transition provisions of SFAS No. 133.

133, "Accounting for Derivative Instruments and Hedging Activities."
13. (LOSS) EARNINGS PER COMMON SHAREEarnings (Loss) Per Common Share
        The reconciliations between basic and diluted earnings (loss) earnings per common share are as follows ($ in millions, except per share data):

                                    FOR THE YEAR ENDED                FOR THE YEAR ENDED                FOR THE YEAR ENDED
                                    SEPTEMBER 30, 2002                SEPTEMBER 30, 2001                SEPTEMBER 30, 2000
                             --------------------------------   -------------------------------   -------------------------------
                                                    PER SHARE                         PER SHARE                         PER SHARE
                               LOSS       SHARES     AMOUNT      INCOME     SHARES     AMOUNT      INCOME     SHARES     AMOUNT
                             ---------   --------   ---------   --------   --------   ---------   --------   --------   ---------

BASIC (LOSS) EARNINGS PER
  COMMON SHARE:
(Loss) income from
  continuing operations....  $(3,070.4)  1,988.5     $(1.54)    $4,401.5   1,806.9      $2.44     $4,519.9   1,688.0      $2.68
Stock options and
  warrants.................         --        --                      --      21.4                      --      21.2
Exchange of convertible
  debt due 2010............         --        --                     1.1       3.3                     1.5       4.0
                             ---------   -------                --------   -------                --------   -------
DILUTED (LOSS) EARNINGS PER
  COMMON SHARE:
(Loss) income from
  continuing operations,
  giving effect to dilutive
  adjustments..............  $(3,070.4)  1,988.5     $(1.54)    $4,402.6   1,831.6      $2.40     $4,521.4   1,713.2      $2.64
                             =========   =======                ========   =======                ========   =======
 
 
For the Year Ended
September 30, 2003
 
For the Year Ended
September 30, 2002
 
For the Year Ended
September 30, 2001
 
 
Income
 
Shares
 
Per Share
Amount
 
Loss
 
Shares
 
Per Share
Amount
 
Income
 
Shares
 
Per Share
Amount
Basic earnings (loss) per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
1,034.7
 
1,995.0
 
$
0.52
 
$
(2,838.2
)
1,988.5
 
$
(1.43
)
$
3,894.9
 
1,806.9
 
$
2.16
Stock options, restricted shares and deferred stock units
 
 
—
 
5.3
 
 
 
 
 
—
 
—
 
 
 
 
 
—
 
21.4
 
 
 
Exchange of convertible debt due 2010
 
 
0.9
 
2.4
 
 
 
 
 
—
 
—
 
 
 
 
 
1.1
 
3.3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings (loss) per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations, giving effect to dilutive adjustments
 
$
1,035.6
 
2,002.7
 
$
0.52
 
$
(2,838.2
)
1,988.5
 
$
(1.43
)
$
3,896.0
 
1,831.6
 
$
2.13
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
        The computation of diluted earnings per common share in fiscal 2003 excludes the effect of the potential exercise of options to purchase approximately 110.1 million shares because the effect would be anti-dilutive. Diluted earnings per common share for fiscal 2003 excludes 33.0 million shares related to the Company's zero coupon convertible debentures due 2020 because conversion conditions have not been met. Diluted earnings per common share for fiscal 2003 also excludes 94.2 million shares and 49.3 million shares related to the Company's convertible senior debentures due 2018 and 2023, respectively, because the effect would be anti-dilutive.
        The computation of diluted loss per common share in fiscal 2002 excludes the effect of the potential exercise of options to purchase approximately 10.0 million shares and the potential exchange 87

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13.  (LOSS) EARNINGS PER COMMON SHARE (CONTINUED)
of convertible debt due 2010 for 2.9 million shares, because the effect would be anti-dilutive. The computation of diluted earnings per common share in fiscal
2001 and fiscal 2000 excludes the effect of the assumed exercise of
approximately 12.2 million and 7.3 million stock options, respectively, that
were outstanding as of September 30, 2001 and 2000, respectively, because the
effect would be anti-dilutive. Dilutive (loss) earningsDiluted loss per common share for fiscal 2002 also excludes 47.5 million and 22.4 million shares related to the Company's zero-coupon convertible debentures due 2020 and 2021, respectively, because conversion conditions have not been met.
        The computation of diluted earnings per common share in fiscal 2001 excludes the effect of the potential exercise of options to purchase approximately 12.2 million shares because the effect would be anti-dilutive. Diluted earnings per common share for fiscal 2001 also excludes 48.0 million and 26.4 million shares related to the Company's zero coupon convertible debentures due 2020 and 2021, respectively, because conversion conditions have not been met. Dilutive earnings
per common share for fiscal 2001 also excludes 48.0 million and 26.4 million
shares respectively, related to the Company's zero coupon convertible debentures
due 2020 and 2021, respectively, because conversion conditions have not been
met.

85
14. SALE OF ACCOUNTS RECEIVABLESale of Accounts Receivable
        Tyco has several programs under which it sells participating interests in accounts receivable to investors who, in turn, purchase and receive ownership and security interests in those receivables. As collections reduce accounts receivable included in the pool, the Company sells new receivables. The Company has the risk of credit loss on the receivables and, accordingly, the full amount of the allowance for doubtful accounts has been retained on the Consolidated Balance Sheets. At September 30, 2002,2003, the availability under these programs is $1,025 million. At September 30, 2003 and 2002, and 2001, $933$803 million and $695$933 million, respectively, was utilized under the programs. The proceeds from the sales were used to repay short-term and long-term borrowings and for working capital and other corporate purposes and are reported as operating cash flows in the Consolidated Statements of Cash Flows. The sale proceeds of sale are less than the face amount of accounts receivable sold by an amount that approximates the cost that would be incurred if commercial paper were issued 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 $29.0 million, $17.0 million, and $25.3 million, and $25.7 million, or 3.5%, 2.7%, 5.3% and 6.6%5.3% of the weighted-average balance of the receivables outstanding, during fiscal 2003, 2002 2001 and 2000,2001, respectively. The Company retains collection and administrative responsibilities for the participating interests in the defined pool. Also, some of our international businesses sell accounts receivable as a short-term financing mechanism. These transactions qualify as true sales. The aggregate amount outstanding under these arrangements was $157$202 million and $153$157 million at September 30, 2003 and 2002, and 2001, respectively.
        As a result of the rating agencies' downgrade of Tyco's debt to below
investment grade status in June 2002, investors of twoone of our accounts receivable programs hadhave the option to discontinue reinvestment in new receivables and terminate the programs. Theprogram. However, the investors have not exercised this option and one program was subsequently amended to continue reinvestment.option. The amount outstanding under the otherthis program was $103.2 million and $132.4 million at September 30, 2002.

    In addition, during fiscal2003 and 2002, Tyco sold certain receivables from time to
time to Tyco Capital prior to its disposition. The average amount sold during
such period was $332.5 million, which is net of discounts equal to
$15.4 million. These sales were eliminated as an intercompany transaction in the
Consolidated Financial Statements.

                                       88

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14.  SALE OF ACCOUNTS RECEIVABLE (CONTINUED)
    Also on September 27, 2001, Tyco sold certain accounts receivable to Tyco
Capital for net proceeds of approximately $297.8 million, which is net of a
discount of $4.3 million. This sale was eliminated as an intercompany
transaction in Tyco's Consolidated Financial Statements.

respectively.
15. INVESTMENTSAvailable-for-Sale Investments
        At September 30, 20022003 and 2001,2002, Tyco had available-for-sale equity investments with a fair market value of $24.6$23.2 million and $84.4$24.6 million and a cost basis of $25.5 million and $32.4 million, respectively. As of September 30, 2003, there were gross unrealized losses of $5.7 million and $205.6the gross unrealized gains of $3.5 million respectively. Theassociated with these investments. As of September 30, 2002, there were gross unrealized losses of $8.2 million and $149.6 million andthe gross unrealized gains of $0.4 million and $28.4 million at September 30, 2002 and 2001 have been
recorded net of deferred taxes asset of $2.5 million in both years.associated with these investments. These amounts have been included as a separate component of shareholders' equity. See Note 8 for discussion of realized losses on equity investments. At
16. Assets Held for Sale
        During the fourth quarter of fiscal 2003, the Company initiated a divestiture program through which it plans to dispose of some non-core businesses. As part of this divestiture program, Tyco intends to sell the TGN. The Company plans to exit the TGN business because it has decided not to invest further in this industry which it believes is in need of consolidation. The Company plans to retain ownership of the construction and maintenance portion of Tyco Submarine Telecommunications. In connection with the decision to sell the TGN, the Company has written down the carrying value for the network to net realizable value and accordingly, has recorded a loss on impairment of $664.3 million, which is further discussed in Note 6. Fiscal 2003 revenues and operating loss for the TGN business were $14.4 million and $799.8 million, respectively. The $799.8 million includes the $664.3 million
86

impairment described above and restructuring charges of $20.1 million. The following table presents balance sheet information for the TGN business held for sale at September 30, 2002, Tyco also had held-to-maturity investments2003 ($ in other current assets of
$93.5 million. Amortized costs approximated fair value.

16.  GOODWILL AND OTHER INTANGIBLE ASSETS

    Effective October 1, 2001, the beginning of Tyco's fiscal year 2002, the
Company adopted SFAS No. 142, "Goodwillmillions):
Accounts receivable
 
$
9.2
Other current assets
 
 
26.4
Other assets
 
 
11.9
 
 
 
Total assets
 
$
47.5
 
 

Accounts payable

 

$

32.7
Accrued expenses and other current liabilities
 
 
120.8
Deferred revenue
 
 
63.4
Other long-term liabilities
 
 
4.5
 
 
 
Total liabilities
 
$
221.4
 
 
17. Goodwill and Other Intangible Assets" under
which goodwill is no longer amortized but instead is assessed for impairment at
least annually.
        Goodwill net was $26,093.2$25,938.7 million and $23,264.0$26,020.5 million at September 30, 2003 and 2002, and 2001, respectively. Accumulated amortization amounted to
$1,556.5 million at September 30, 2001. The changes in the carrying amount of goodwill for fiscal 2002 including a reclassification from other intangibles to
goodwill upon the adoption of SFAS 142,and 2003 are as follows ($ in millions):

                                        FIRE AND                  HEALTHCARE      ENGINEERED
                                        SECURITY                 AND SPECIALTY   PRODUCTS AND
                                        SERVICES   ELECTRONICS     PRODUCTS        SERVICES     TOTAL TYCO
                                        --------   -----------   -------------   ------------   ----------

Balance at September 30, 2001.........  $5,957.8    $ 7,749.5      $6,584.0        $2,930.0     $23,221.3
Reclassification of intangible
  assets..............................        --           --          42.7              --          42.7
                                        --------    ---------      --------        --------     ---------
Balance at September 30, 2001 after
  reclassification....................   5,957.8      7,749.5       6,626.7         2,930.0      23,264.0
Goodwill related to acquisitions......   2,003.5      1,098.0         716.7           253.2       4,071.4
Goodwill written-off related to
  divestitures........................      (0.3)          --         (55.4)             --         (55.7)
Goodwill impairment...................        --     (1,024.5)           --          (319.2)     (1,343.7)
Adjustments for prior years'
  activity............................      (4.3)        (9.9)         (7.7)           (5.4)        (27.3)
Currency translation adjustments......      87.5         35.4           6.0            55.6         184.5
                                        --------    ---------      --------        --------     ---------
Balance at September 30, 2002.........  $8,044.2    $ 7,848.5      $7,286.3        $2,914.2     $26,093.2
                                        ========    =========      ========        ========     =========
 
 
Fire and
Security
Services
 
Electronics
 
Healthcare
 
Engineered
Products and
Services
 
Plastics and
Adhesives
 
Total Tyco
 
Balance at September 30, 2001
 
$
5,914.3
 
$
7,739.6
 
$
6,131.0
 
$
2,924.5
 
$
699.1
 
$
23,408.5
 
Goodwill related to acquisitions
 
 
2,002.2
 
 
1,090.4
 
 
471.0
 
 
253.2
 
 
10.1
 
 
3,826.9
 
Goodwill written-off related to divestitures
 
 
(0.3
)
 
—
 
 
(55.4
)
 
—
 
 
—
 
 
(55.7
)
Goodwill impairment
 
 
—
 
 
(1,024.5
)
 
—
 
 
(319.2
)
 
—
 
 
(1,343.7
)
Currency translation adjustments
 
 
87.5
 
 
35.4
 
 
2.5
 
 
55.6
 
 
3.5
 
 
184.5
 
 
 
 
 
 
 
 
 
Balance at September 30, 2002
 
 
8,003.7
 
 
7,840.9
 
 
6,549.1
 
 
2,914.1
 
 
712.7
 
 
26,020.5
 
Reversal of purchase accounting liabilities and fair value adjustments
 
 
(232.4
)
 
(74.1
)
 
(131.2
)
 
(40.0
)
 
(2.8
)
 
(480.5
)
Goodwill related to acquisitions
 
 
4.2
 
 
2.6
 
 
0.8
 
 
10.5
 
 
—
 
 
18.1
 
Goodwill written-off related to divestitures
 
 
(0.1
)
 
—
 
 
(3.6
)
 
—
 
 
—
 
 
(3.7
)
Goodwill impairment
 
 
—
 
 
(278.4
)
 
—
 
 
—
 
 
—
 
 
(278.4
)
Currency translation adjustments
 
 
351.5
 
 
96.3
 
 
16.4
 
 
191.2
 
 
7.3
 
 
662.7
 
 
 
 
 
 
 
 
 
Balance at September 30, 2003
 
$
8,126.9
 
$
7,587.3
 
$
6,431.5
 
$
3,075.8
 
$
717.2
 
$
25,938.7
 
 
 
 
 
 
 
 
 
Fiscal 2003
        As discussed in Note 3, during fiscal 2003, a change was made to the Company's internal reporting structure such that the operations of Tyco's plastics and adhesives businesses (previously reported within the Healthcare and Specialty Products segment) now comprise the Company's new Plastics and Adhesives reportable segment. As a result, the goodwill within the previous Healthcare and Specialty
87

Products segment was reassigned based on the relative fair value of the new reporting units within each new segment. No impairments resulted from this reevaluation.
        The Company performed its annual impairment assessments for all reporting units as of July 1, 2003. This assessment also resulted in no goodwill impairment.
        In the fourth quarter of fiscal 2003, the Company reorganized its reporting structure (see Note 1). As part of that reorganization, the Company finalized a plan in September 2003, to sell TGN, the major operating asset of the Tyco Submarine Telecommunications business previously included in the Electronics segment. The Company plans to exit the TGN business because it has decided not to invest further in this industry. The reorganization resulted in a change in the composition of its reporting units. As a result, goodwill was reassigned to the new reporting units using a relative fair value allocation approach, resulting in the recognition of impairment charges of $278.4 million in Power Systems, Electrical Contracting Services and the Printed Circuit Group. This charge was based on a valuation performed by a third party using an income approach based on the present value of estimated future cash flows of each of the reporting units. After the impairment write-off, there is no goodwill remaining at the Power Systems and Printed Circuit Group reporting units.
Fiscal 2002
        Under the transition provisions of SFAS No. 142, our transitional benchmark analysis concluded that there was no goodwill impairment at October 1, 2001. However, during the quarter ended March 31, 2002, the Electronics segment recorded a charge of $2,181.4$2,218.4 million related to the impairment of the TGN, (fixed asset), as a result of the fiberopticfiber optic capacity available in the market place continuing to significantly exceedexceeding overall market demand, thereby creating sharply declining prices and reduced cash flows. For additional information on the TGN impairment charge, see Note 6. An updated 89

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16.  GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
goodwill valuation was completed as of March 31, 2002 for Tyco Submarine Telecommunications. The valuation was completed using an income approach based upon the present value of future cash flows of the reporting unit as of March 31, 2002. However, this first step analysis resulted in no impairment of the Submarine Telecommunications reporting unit's goodwill at that date.
        During the quarter ended June 30, 2002, additional circumstances developed that indicated a potential impairment of the value of goodwill with respect to the Company's reporting units. Tyco experienced disruptions to its business surrounding the termination of its previously announced break-up plan, the resignation of its chief executive officer, further downgrades in its credit ratings and an additional decline in its market capitalization. Updated valuations were completed for all reporting units as of June 30, 2002 using an income approach based on the present value of future cash flows of each reporting unit. An additional discount factor was then applied to reflect a decrease in reporting unit valuations for recent disruptions at the Company's corporate offices and negative publicity about Tyco, as evidenced by the decline in the Company's total market capitalization. This resulted in an estimated goodwill impairment of $844.4 million, $607.7 million relating to Submarine Tyco Telecommunications and $236.7 million relating to Tyco Infrastructure Services, a reporting unit within the Engineered Products and Services segment.
        During the quarter ended September 30, 2002, step two analyses, as prescribed by SFAS142SFAS No. 142 were completed for the Tyco Submarine Telecommunications and Tyco Infrastructure Services reporting units. This resulted in an incremental goodwill impairment on continuing operations of $162.0 million ($
88

($79.5 million relating Tyco Submarine Telecommunications and $82.5 million relating to Tyco Infrastructure)Infrastructure Services).
        During the quarter ended September 30, 2002, circumstances associated with the restructuring charges related to the Submarine Telecommunications reporting unit indicated potential further impairment of the value of goodwill of this reporting unit. An updated valuation using an income approach based on the present value of future cash flows was completed as of September 30, 2002. The valuation resulted in an additional estimated goodwill impairment on continuing operations of $337.3 million. Following the impairments recorded during fiscal 2002 totaling $1,343.7 million, there is no goodwill remaining at the Tyco Submarine Telecommunications and Tyco Infrastructure Services reporting units.
        During fiscal 2002 we curtailed, and in certain markets terminated, the ADT
authorized dealer program. Due to a decrease in projected purchases of customer contracts through the authorizedADT dealer program, an updated valuation using an income approach based on the present value of future cash flows as of September 30, 2002 was performed for the Security Services reporting unit. The valuation results indicated that the fair value of the reporting unit exceeded the book value of the reporting unit resulting in no impairment of the Security Services reporting unit's goodwill at that date.

    Further disruptions to Tyco's business such as end market conditions and
protracted economic weakness, unexpected significant declines in operating
results of reporting units, continued downgrades in Tyco's credit ratings, and
additional market capitalization declines may result in the Company having to
perform another SFAS 142 first step valuation analysis for all of its reporting
units prior to the required annual assessment. These types of events and the
resulting analysis could result in additional charges to goodwill and other
asset impairments in the future. We have elected to make July 1 the annual
assessment date for all reporting units.
        See Note 11, "Discontinued Operations of Tyco Capital (CIT Group Inc.)," for information regarding the impairment of goodwill relating to Tyco Capital.

                                       90

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16.  GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
        Following is a reconciliation of previously reported financial information to adjusted amounts excluding goodwill amortization for fiscal 2001 and 2000 ($ in millions, except per share data):

                                        FISCAL 2001                        FISCAL 2000
                              --------------------------------   --------------------------------
                                           BASIC      DILUTED                 BASIC      DILUTED
                                         EARNINGS    EARNINGS               EARNINGS    EARNINGS
                              EARNINGS   PER SHARE   PER SHARE   EARNINGS   PER SHARE   PER SHARE
                              --------   ---------   ---------   --------   ---------   ---------

Income from continuing
  operations................  $4,401.5     $2.44       $2.40     $4,519.9     $2.68       $2.64
Goodwill amortization
  expense, net of tax.......     496.3      0.27        0.27        325.1      0.19        0.19
                              --------                           --------
ADJUSTED INCOME FROM
  CONTINUING OPERATIONS.....  $4,897.8     $2.71       $2.67     $4,845.0     $2.87       $2.83
                              ========                           ========
Income before extraordinary
  items and cumulative
  effect of accounting
  changes...................  $4,654.0     $2.58       $2.54     $4,519.9     $2.68       $2.64
Goodwill amortization
  expense, net of tax.......     556.1      0.31        0.30        325.1      0.19        0.19
                              --------                           --------
ADJUSTED INCOME BEFORE
  EXTRAORDINARY ITEMS AND
  CUMULATIVE EFFECT OF
  ACCOUNTING CHANGES........  $5,210.1     $2.88       $2.85     $4,845.0     $2.87       $2.83
                              ========                           ========
Net income..................  $3,970.6     $2.20       $2.17     $4,519.9     $2.68       $2.64
Goodwill amortization
  expense, net of tax.......     556.1      0.31        0.30        325.1      0.19        0.19
                              --------                           --------
ADJUSTED NET INCOME.........  $4,526.7     $2.51       $2.47     $4,845.0     $2.87       $2.83
                              ========                           ========


    Other intangible
 
 
Fiscal 2001
 
 
Earnings
 
Basic
Earnings
Per Share
 
Diluted
Earnings
Per Share
Income from continuing operations
 
$
3,894.9
 
$
2.16
 
$
2.13
Goodwill amortization expense, net of tax
 
 
501.9
 
 
0.28
 
 
0.27
 
 
 
 
 
 
 
 
Adjusted income from continuing operations
 
$
4,396.8
 
$
2.43
 
$
2.40
 
 
 
 
 
 
 
 
Income before cumulative effect of accounting changes
 
$
4,147.4
 
$
2.30
 
$
2.26
Goodwill amortization expense, net of tax
 
 
561.7
 
 
0.31
 
 
0.31
 
 
 
 
 
 
 
 
Adjusted income before extraordinary items and cumulative effect of accounting changes
 
$
4,709.1
 
$
2.61
 
$
2.57
 
 
 
 
 
 
 
 

Net income

 

$

3,464.0

 

$

1.92

 

$

1.89
Goodwill amortization expense, net of tax
 
 
561.7
 
 
0.31
 
 
0.31
 
 
 
 
 
 
 
 
Adjusted net income
 
$
4,025.7
 
$
2.23
 
$
2.20
 
 
 
 
 
 
 
 
        Intangible assets, net were $6,562.6$5,790.0 million and $5,476.9$5,805.8 million at September 30, 20022003 and 2001,2002, respectively. Accumulated amortization amounted to $1,472.9$2,492.9 million and $864.6$1,655.1 million at
89

September 30, 20022003 and 2001,2002, respectively. The following table sets forth the gross carrying amount and accumulated amortization of the Company's intangible assets ($ in millions):

                                     AT SEPTEMBER 30, 2002                    AT SEPTEMBER 30, 2001
                             --------------------------------------   --------------------------------------
                                                         WEIGHTED                                 WEIGHTED
                              GROSS                      AVERAGE       GROSS                      AVERAGE
                             CARRYING   ACCUMULATED    AMORTIZATION   CARRYING   ACCUMULATED    AMORTIZATION
                              AMOUNT    AMORTIZATION    PERIOD(1)      AMOUNT    AMORTIZATION    PERIOD(1)
                             --------   ------------   ------------   --------   ------------   ------------

Contracts and related
  customer relationships...  $4,354.0     $  994.6       10 years     $2,978.8      $514.6        10 years
Intellectual property......   3,446.3        433.4       22 years      2,991.6       297.9        23 years
Other......................     235.2         44.9       28 years        371.1        52.1        19 years
                             --------     --------                    --------      ------
  Total....................  $8,035.5     $1,472.9       16 years     $6,341.5      $864.6        17 years
                             ========     ========                    ========      ======


- ------------------------------

 
 
At September 30, 2003
 
At September 30, 2002
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Weighted
Average
Amortization
Period(1)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Weighted
Average
Amortization
Period(1)
Contracts and related customer relationships
 
$
4,413.7
 
$
1,737.9
 
12 years
 
$
3,780.0
 
$
1,191.3
 
12 years
Intellectual property
 
 
3,608.6
 
 
692.7
 
23 years
 
 
3,470.8
 
 
443.0
 
21 years
Other
 
 
260.6
 
 
62.3
 
27 years
 
 
210.1
 
 
20.8
 
28 years
 
 
 
 
 
 
 
 
Total
 
$
8,282.9
 
$
2,492.9
 
18 years
 
$
7,460.9
 
$
1,655.1
 
17 years
 
 
 
 
 
 
 
(1)
Intangible assets not subject to amortization are excluded from the calculation of the weighted average amortization period.

                                       91

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16.  GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
        As of September 30, 2003 and 2002, the Company had $130.4 million and $140.1 million, respectively, of intellectual property, not subject to amortization. These balances consist primarily of trademarks acquired from Sensormatic. As of September 30, 2002, the Company had $140.1 million of intellectual
property, consisting primarily of trademarks acquired from Sensormatic, and $0.2 million customer relationships that are not subject to amortization. Asamortization and as of September 30, 20022003 and 2001,2002, the Company had $26.2$28.3 million and $3.9$26.2 million, respectively, of other intangible assets that are not subject to amortization.
        Intangible asset amortization expense for Fiscalfiscal 2003, fiscal 2002 and fiscal 2001 and 2000 was $567.4$725.0 million, $360.1$620.9 million and $205.0$399.3 million, respectively. AmortizationThe estimated aggregate amortization expense on intangible assets currently owned by the Company is expected to be approximately $700 million for fiscal 2004, $600 million for eachfiscal 2005, $550 million for fiscal 2006, $500 million for fiscal 2007, and $450 million for fiscal 2008.
        See Note 6 for information regarding the impairment of the next five fiscal years.

17.  RELATED PARTY TRANSACTIONSintangible assets.
18.    Related Party Transactions
        The Company has amounts due related to loans and advances issued to employees in prior years under the Company's Key Employee Loan Program, relocation programs and other advances made to executives. Loans arewere provided to employees under the Company's Key Employee Loan Program, which is now discontinued except for outstanding loans, for the payment of taxes upon the vesting of shares granted under our Restricted Share Ownership Plans. The loans are unsecurednot collateralized and bear interest, payable annually, at a rate based on the six month LIBOR, rate, calculated annually as the average of the 12 rates in effect on the first day of the month. Loans are generally repayable in ten years, except that earlier payments are required under certain circumstances.circumstances, such as when an employee is terminated. In addition, the Company issued mortgages to certain employees under employee relocation programs. These mortgages are generally payable in 15 years and are securedcollateralized by the underlying property. During fiscal 2003 and fiscal 2002, the maximum amount outstanding under these programs was $82.4 million and $117.5 million.million, respectively. Loans receivable under these programs, as well as other unsecured advances outstanding, were $88.1$78.5 and $93.4$88.1 million at September 30, 20022003 and 2001,2002, respectively. Certain of the above loans totaling $30.3$23.9 million and $33.7$30.3 million at September 30,
90

2003 and 2002, and 2001, respectively, are non-interest bearing. Interest income on interest bearing loans totaled $0.5 million, $5.5 million, $1.3 million, and $3.7$1.3 million in fiscal 2003, fiscal 2002 and fiscal 2001, respectively.
        During fiscal 2003, the Company engaged in commercial transactions in the normal course of business with companies where our Directors were employed and served as officers, including Marsh & McLennan Companies, Inc., Brunswick Corporation, VF Corporation, Verizon Communications, Inc., Imperial Chemical Industries PLC and MicroWarehouse, Inc. Sandra S. Wijnberg, a member of Tyco's Board of Directors, is an executive officer of Marsh & McClennan Companies, Inc. George W. Buckley, a Director, is an executive officer of Brunswick Corporation. Mackey J. McDonald, a Director, is an executive officer of VF Corporation. Bruce S. Gordon, a Director, is an officer of Verizon Communications, Inc. Brendan R. O'Neill and Jerome B. York, both Directors, were executive officers of Imperial Chemical Industries PLC and MicroWarehouse, Inc., respectively, at the time of these commercial transactions. Purchases from Marsh & McLennan Companies, Inc. and Imperial Chemical Industries PLC during fiscal 2000,2003 were approximately $18 million and $16 million, respectively. Purchases from other companies noted above during fiscal 2003 aggregated less than $15 million.
        During fiscal 2002, L. Dennis Kozlowski, our former Chairman and Chief Executive Officer (until June 2002), had outstanding loans from Tyco. The rate of interest charged on such loans was 1.91%. The maximum amount outstanding under these loans, during
fiscal 2002 was $51.0 million plus accrued interest, of $3.2was $48.0 million and the
amount outstanding$47.0 million at September 30, 2003 and 2002, was $47.0 million.respectively.
        During fiscal 2002, Mark H. Swartz, a former director and our former Chief Financial Officer, had outstanding loans from Tyco. The rate of interest charged on such loans was 2.11%. The maximum amount outstanding under these loans during fiscal 2002 was $25.0 million plus accrued interest of $1.6 million and such loans were repaid in full prior to September 30, 2002.

    During
        Tyco authorized compensation arrangements to Messrs. Kozlowski and Swartz in fiscal 2001. In connection with such arrangements, Tyco purchased executive split dollar life insurance policies for Messrs. Kozlowski and Swartz and entered into a shared ownership agreement with each of them whereby the Company agreed to pay premiums for these insurance policies for an 11 year period beginning in fiscal 2001. In 2001, amended policies were executed providing for additional Company paid premiums. The Company is a co-beneficiary of the policies, less amounts owed to Messrs Kozlowski and Swartz. Messrs. Kozlowski and Swartz are the beneficiaries of the cash surrender values of the policies plus the amount of any unpaid premiums. The Company's obligations under these arrangements were entered into in recognition of services rendered by these officers and were not contingent upon continuing employment. In fiscal 2001, the Company deposited $30.8 million into a consolidated rabbi trust to fund premiums on the policies. The Consolidated Financial Statements include charges of $26.7 million related to the initial awards for Mr. Kozlowski and $13.6 million for Mr. Swartz in fiscal 2001 and charges of $4.9 million for Mr. Kozlowski and $2.1 million for Mr. Swartz in fiscal 2002 under the policy, as amended. The Consolidated Financial Statements include charges of $6.4 million for Mr. Kozlowski in fiscal 2003. In the event the investment options within the policies do not earn specified interest amounts, Tyco has guaranteed a supplemental premium payment amounting to ensure a 10% annual return on the cash surrender value, and any unpaid premiums. This liability is accreted by a charge to earnings throughout the period of the arrangements to make the specified supplemental premium payments, if any. In conjunction with Mr. Swartz's termination of employment, a lump sum payment of $24.6 million, which represented the present value of the annual premium
91

amounts at his termination date for the remainder of the contractual period, was made to Mr. Swartz and in return Mr. Swartz waived Tyco's obligation to continue making the premium payments. The Company has accrued $53.1 million and $46.6 million on our Consolidated Balance Sheets as of September 30, 2003 and 2002, respectively, in connection with these arrangements, of which $23.4 million is held in the rabbi trust as of September 30, 2003. Tyco's ability to withdraw monies for purposes other than premium payments from the rabbi trust requires Mr. Kozlowski's approval. Tyco discontinued making premium payments for Mr. Kozlowski's insurance policy as of October 1, 2002. We have filed affirmative actions against Messrs. Kozlowski and Swartz, seeking disgorgement of all benefits under these executive life insurance policies. Pending resolution of such action against Mr. Kozlowski, premium obligations since October 2002 have been drawn down from the cash surrender value of such policy to avoid termination of such policy's death benefit.
        Mark A. Belnick, our former Executive Vice President and Chief Corporate Counsel, had outstanding loans from Tyco. The maximum amount outstanding under these loans during fiscal 2003 and fiscal 2002 was $14.8 million and $16.5 million, and therespectively. The amount outstanding at both September 30, 2003 and 2002 was $14.8 million. Of the $14.8 million, $14.5 million is a non interestnon-interest bearing mortgage loan collateralized by real estate and $0.3 million is in the form of an interest bearing promissory note. The interest rate on the promissory note was 2.78% for both fiscal 2003 and fiscal 2002.
        Richard J. Meelia, the President of Tyco Healthcare had an outstanding loan under the Key Employee Loan Program. The rate of interest charged on such loan was 2.23% and 2.06% for fiscal 2003 and fiscal 2002, respectively. The maximum amount outstanding under this loan during fiscal 2003 and fiscal 2002 was $18.2 thousand and $1.7 million, respectively. The amount outstanding at September 30, 2002 was $18.2 thousand and such loan was repaid in full prior to September 30, 2003.
        During fiscal 2002, Robert P. Mead, the President of Tyco Engineered Products and Services, had an outstanding loan under the Key Employee Loan Program. The rate of interest charged on such loan 92

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

17.  RELATED PARTY TRANSACTIONS (CONTINUED)
was 2.03%. The maximum amount outstanding under this loan during fiscal 2002 was $0.9 million and such loan was repaid in full prior to September 30, 2002.

    During fiscal 2002, Richard J. Meelia, the President of Tyco Healthcare and
Specialty Products, had an outstanding loan under the Key Employee Loan Program.
The rate of interest charged on such loan was 2.06%. The maximum amount
outstanding under this loan during fiscal 2002 was $1.7 million and the amount
outstanding at September 30, 2002 was $18.2 thousand.
        During fiscal 2002, Jerry R. Boggess, the former President of Tyco Fire and Security, Services, had an outstanding loan under the Key Employee Loan Program. The rate of interest charged on such loan was 2.03%. The maximum amount outstanding under this loan during fiscal 2002 was $0.4 million and such loan was repaid in full prior to September 30, 2002.
        During the fourth quarter of fiscal 2002, the Board of Directors and new senior management adopted a policy under which no new loans are allowed to be granted to any officers of the Company and existing loans are not allowed to be extended or modified.
        Certain former Tyco directors and executive officers owned TyCom Ltd. shares or options, which were converted to Tyco shares and Tyco options upon the amalgamation of a subsidiary of Tyco with TyCom Ltd. on December 18, 2001 at the exchange ratio applicable to all holders of TyCom Ltd. shares and options.
        Stephen W. Foss iswas a director of Tyco.Tyco until March 6, 2003. Mr. Foss is the owner of a corporate aircraft which we leased from him starting in May 2001 after seeking competitive bids of which
92

Mr. Foss's bid was considered the most competitive given anticipated usage. Tyco paid Mr. Foss, and a company of which he is president, an aggregate of $587,000 in lease payments for our use of the aircraft and its pilots in fiscal 2002. These leasing arrangements were terminated as of September 30, 2002.
        Joshua M. Berman was a director of Tyco until December 5, 2002. From March 1, 2000 through July 31, 2002, we also engaged Mr. Berman to render legal and other services. During this period, we compensated Mr. Berman at an annual rate of $360,000 and provided Mr. Berman with health benefits, secretarial assistance, a cell phone and electronic security services for his homes. We also reimbursed Mr. Berman for legal fees and expenses incurred by him in connection with matters relating to Tyco pursuant to indemnification provisions applicable to all directors of Tyco. Mr. Berman is a retired counsel to the law firm Kramer Levin Naftalis & Frankel LLP, which provided legal services to us in fiscal 2002.

    As previously reported in our Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002,
        Tyco and certain of our current and former directors are defendants in four pending actions purporting to bring suit derivatively on behalf of Tyco against certain former officers and certain
current and former directors of Tyco and against Tyco as a nominal defendant in connection with alleged improper conduct of former officers of Tyco relating to the use of our funds, our Key Employee Loan Program and assets. The ultimate resolution of these actions is not yet determinable.

    As previously reported in our Current Reports on Form 8-K filed on
September 17, 2002 and October 8, 2002, we have
        We filed civil complaints against L. Dennis Kozlowski, our former Chairman and Chief Executive Officer, and
Mark A. Belnick, our former Executive Vice President and Chief Corporate Counsel, and an arbitration claim against Mark H. Swartz, our former Chief Financial Officer, for breach of fiduciary duty and other wrongful conduct relating to alleged abuses of our Key Employee Loan Program and relocation program, unauthorized bonuses, unauthorized payments, self-dealing transactions or other improper conduct.

                                       93

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

17.  RELATED PARTY TRANSACTIONS (CONTINUED)

    As previously reported in our Current Report on Form 8-K filed on
September 17, 2002, on
        In June 17, 2002, we filed a civil complaint against Frank E. Walsh, Jr. for breach of fiduciary duty, inducing breaches of fiduciary duty and related wrongful conduct involving a $20 million payment by Tyco, $10 million of which went to Mr. Walsh with the balance going to a charity of which Mr. Walsh is trustee. The payment was purportedly made for Mr. Walsh's assistance in arranging our acquisition of The CIT Group, Inc. On December 17, 2002, Mr. Walsh pleaded guilty to a felony violation of New York law in the Supreme Court of the State of New York, (New York County) and settled a civil action for violation of federal securities laws brought by the Securities and Exchange Commission in United States District Court for the Southern District of New York. Both the felony charge and the civil action were brought against Mr. Walsh based on such payment. The felony charge accused Mr. Walsh of intentionally concealing information concerning the payment from Tyco's directors and shareholders while engaged in the sale of Tyco securities in the State of New York. The SEC action alleged that Mr. Walsh knew that the registration statement covering the sale of Tyco securities as part of the CIT acquisition contained a material misrepresentation concerning fees payable in connection with the acquisition. Pursuant to the plea and settlement, Mr. Walsh paid $20 million in restitution to Tyco on December 17, 2002. Our claims against Mr. Walsh are still pending.

                                       94

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

18.  DEBT
93
19. Debt
        Debt is as follows(1)follows(1) ($ in millions):

                                                                  SEPTEMBER 30,
                                                              ---------------------
                                                                2002        2001
                                                              ---------   ---------

Commercial paper program(2).................................  $      --   $ 3,909.5
Euro commercial paper program(2)............................         --        80.7
Notes payable to Tyco Capital...............................         --       200.0
6.5% public notes due 2001(3)...............................         --       300.0
6.875% private placement notes due 2002(4)..................         --     1,037.2
Variable-rate unsecured bank credit facilities due
  2003(2)(11)...............................................    3,855.0          --
Zero coupon convertible debentures with 2003 put
  options(5)(11)............................................    1,944.6     2,272.4
6.25% public Dealer Remarketable Securities with 2003 put
  options(6)(11)............................................      751.9       754.6
Floating rate private placement notes due 2003(11)..........      493.8       498.4
4.95% notes due 2003(11)....................................      565.1       598.0
6.0% notes due 2003.........................................       72.7        72.7
Zero coupon convertible senior debentures with 2003 put
  options(7)................................................    3,519.1     3,499.4
5.875% public notes due 2004................................      399.1       398.6
4.375% Euro denominated notes due 2004(8)...................      486.5          --
6.375% public notes due 2005................................      747.0       745.9
6.75% notes due 2005........................................       76.7        76.6
6.375% public notes due 2006................................      993.7       991.9
Variable rate unsecured revolving credit facility due
  2006(2)...................................................    2,000.0          --
5.8% public notes due 2006..................................      695.7       694.5
6.125% Euro denominated public notes due 2007...............      582.4       550.1
6.5% notes due 2007.........................................       99.3        99.2
6.125% public notes due 2008................................      396.6       396.0
8.2% notes due 2008(10).....................................      388.4       393.4
5.50% Euro denominated notes due 2008(8)....................      664.4          --
6.125% public notes due 2009................................      393.1       386.5
Zero coupon convertible subordinated debentures due 2010....       26.3        30.8
6.75% public notes due 2011.................................      992.8       991.9
6.375% public notes due 2011(9).............................    1,490.7          --
6.50% British pound denominated public notes due 2011(8)....      285.3          --
7.0% debentures due 2013....................................       86.2        86.1
7.0% public notes due 2028..................................      493.2       492.9
6.875% public notes due 2029................................      782.5       781.8
3.5% Yen denominated private placement notes due 2030(10)...         --       252.1
6.50% British pound denominated public notes due 2031(8)....      438.9          --
Other(11)...................................................      484.8     1,027.8
                                                              ---------   ---------
Total debt..................................................   24,205.8    21,619.0
Less current portion........................................    7,719.0     2,023.0
                                                              ---------   ---------
Long-term debt..............................................  $16,486.8   $19,596.0
                                                              =========   =========


- ------------------------------

 
 
September 30,
2003
 
September 30,
2002
Bank credit agreement(2)
 
$
—
 
$
—
Variable-rate unsecured term loan from banks due 2003(3)
 
 
—
 
 
3,855.0
6.25% public Dealer Remarketable Securities with a 2003 put option(4)
 
 
—
 
 
751.9
Floating rate private placement notes due 2003
 
 
—
 
 
493.8
4.95% notes due 2003
 
 
—
 
 
565.1
6.0% notes due 2003(8)
 
 
72.8
 
 
72.7
Zero coupon convertible senior debentures with a November 2003
put option(5)(8)
 
 
2,476.5
 
 
3,519.1
5.875% public notes due 2004
 
 
400.0
 
 
399.9
4.375% Euro denominated notes due 2004
 
 
573.4
 
 
487.4
6.375% public notes due 2005
 
 
749.3
 
 
748.8
6.75% notes due 2005
 
 
76.7
 
 
76.7
6.375% public notes due 2006
 
 
998.5
 
 
997.8
Variable rate unsecured revolving credit facility due 2006
 
 
2,000.0
 
 
2,000.0
5.8% public notes due 2006
 
 
696.8
 
 
695.7
6.125% Euro denominated public notes due 2007
 
 
686.7
 
 
583.9
6.5% notes due 2007
 
 
99.5
 
 
99.3
2.75% convertible senior debentures with a 2008 put option(6)
 
 
3,000.0
 
 
—
6.125% public notes due 2008
 
 
398.5
 
 
398.2
8.2% notes due 2008
 
 
388.8
 
 
388.4
5.50% Euro denominated notes due 2008
 
 
784.1
 
 
666.6
6.125% public notes due 2009
 
 
391.8
 
 
394.7
Zero coupon convertible subordinated debentures due 2010
 
 
27.0
 
 
26.3
6.75% public notes due 2011
 
 
998.4
 
 
998.2
6.375% public notes due 2011
 
 
1,499.6
 
 
1,499.6
6.50% British pound denominated public notes due 2011
 
 
338.9
 
 
286.5
7.0% debentures due 2013
 
 
86.3
 
 
86.2
3.125% convertible senior debentures with a 2015 put option(6)
 
 
1,500.0
 
 
—
Zero coupon convertible senior debentures due 2021(7)
 
 
0.7
 
 
1,944.6
7.0% public notes due 2028
 
 
497.0
 
 
496.9
6.875% public notes due 2029
 
 
789.1
 
 
788.6
6.50% British pound denominated public notes due 2031
 
 
470.4
 
 
441.4
Other(8)(9)
 
 
968.3
 
 
484.8
 
 
 
Total debt
 
 
20,969.1
 
 
24,248.1
Less current portion
 
 
2,718.4
 
 
7,719.0
 
 
 
Long-term debt
 
$
18,250.7
 
$
16,529.1
 
 
 
(1)
Debt maturity dates are presented on a calendar basis, consistent with the respective offering documents.

(2)
In February 2002,January 2003, Tyco International Group S.A. ("TIG") borrowed, a wholly-owned subsidiary of the available $2.0Company, entered into a $1.5 billion of capacity under its 5-year364-day unsecured revolving credit facility which had been maintained as liquidity supportalso provides for its
    commercial paper program.issuance of unsecured letters of credit. The facility, which expires in February 2006, is fully and unconditionally guaranteed by Tyco and certain of its subsidiaries and is guaranteed in part by various subsidiaries of TIG, has a variable LIBO-basedinterest rate whichbased on LIBOR. The margin over LIBOR payable by TIG can vary depending upon changes in its credit rating and in the market price of one of its outstanding debt securities. TIG also pays a commitment fee of 0.50% annually on any unused portion of the line of credit. The facility was 4.94% as of September 30, 2002.

                                         (FOOTNOTES CONTINUED ON FOLLOWING PAGE)

                                       95

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

18.  DEBT (CONTINUED)
(FOOTNOTES CONTINUED FROM PRECEDING PAGE)

     Also,not utilized in February 2002,fiscal 2003.

(3)
In January 2003, TIG borrowedrepaid its $3.855 billion under its 364-day
     unsecured revolving credit facility and exercised its option to convert
     this facility into a term loan expiringfrom banks scheduled to expire on February 6, 2003. The loan,
     which is fully and unconditionally guaranteed by Tyco, has a variable
     LIBO-based rate, which was 4.99% as of September 30, 2002.

     Proceeds from the bridge loan and credit facilities were used to pay off
     maturing commercial paper at the scheduled maturities and to provide
     additional available capital for Tyco.

(3) During the first quarter of fiscal 2002, Tyco repaid upon maturity its
    $300.0 million 6.5% public notes due 2001.

94
(4) During the fourth quarter of fiscal 2002
In June 2003, TIG paid off its $1.037 billion
    6.875% private placement notes due 2002.

(5) These debentures are due in February 2021. However, TIG is required to
    repurchase these debentures based on certain contractual put provisions at
    the option of the holders at the accreted value of approximately
    $1.9 billion in February 2003. TIG may repurchase themrepurchased for cash or Tyco
    common shares or some combination thereof. If the holders of the debentures
    exercise their put option, the number of common shares needed to satisfy the
    put option in lieu of cash is the fair value of Tyco's stock, based on the
    price for a defined period of time around the settlement date. Based on
    Tyco's stock prices as of a recent date (December 20, 2002), we would need
    to issue approximately 110 million common shares if all of the debentures
    were put back to TIG and we elected to use common shares to satisfy all of
    the debentures. Any shares issuable under the debentures were registered at
    the time of the offering. At the option of the holders Tyco may be required
    to repurchase the remaining debentures for cash at the then accreted value
    in February 2005, 2007, 2009 and 2016. During fiscal 2002 TIG repurchased
    $475.7 million (principal amount at maturity) of these debentures.

(6) In June 1998, TIG issued $750.0 millionits 6.25% Dealer Remarketable Securities ("Drs.") due 2013. UnderThe total Dollar Price paid was $902 million, based upon the terms$750 million par value of the Drs., plus the Remarketing Dealer has
    an option to remarket the Drs. in June 2003. If this option is exercised it
    would subject the Drs. to mandatory tender to the Remarketing Dealerdifference between a Base Rate of 5.55% 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. If these debentures are
    tendered, TIG would be required to repurchase them for cash.

(7) These debentures are due in November 2020. However, the Company is required
    to repurchase the remaining debentures based on certain contractual put
    provisions at the option of the holders at the then accretedcurrent ten-year United States Treasury yield-to-maturity.

(5)
In November 2000, Tyco issued $4,657.5 million principal amount at maturity of zero coupon convertible debentures due 2020 for aggregate net proceeds of approximately $3,374.0 million. The debentures accrete interest at a rate of 1.5% per annum. During fiscal 2003, Tyco purchased $1,085.7 million (par value in
    November 2003. Tyco may be required to repurchase these$1,415.2 million) of the debentures for cash of approximately $1,062.8 million. On November 17, 2003, holders of principal amount at maturity of $3,196.7 million notified Tyco that they had exercised their option to require Tyco to repurchase their notes at a price of $775.66 per $1,000 principal at maturity representing the optionaccreted value of the holders at the then accreted value innotes on that date. On November 2005,
    200718, 2003, Tyco purchased these notes for cash of $2,479.6 million.

(6)
In January 2003, TIG issued $3.0 billion of 2.75% Series A convertible senior debentures due January 2018 and 2014.

(8) In November 2001, TIG sold E500.0 million 4.375% notes$1.5 billion of 3.125% Series B convertible senior debentures due 2004,
    E685.0 million 5.5% notes due 2008, L200.0 million 6.5% notes due 2011 and
    L285.0 million 6.5% notes due 2031, utilizing capacity available under TIG's
    Euro Medium Term Note Programme established in September 2001. The notesJanuary 2023. These debentures are fully and unconditionally guaranteed by Tyco. The net proceedsTyco, and at any time prior to the stated maturity, holders may convert each of their debentures into Tyco common shares at a rate of $22.7832 and $21.7476 respectively, per share. Additionally, holders of the Series A debentures may require the Company to purchase all four
    tranches wereor a portion of their debentures on January 15, 2008 and January 15, 2013, and holders of the equivalentSeries B debentures may require the Company to purchase all or a portion of $1,726.6 milliontheir debentures on January 15, 2015. If the option is exercised at any one of the aforementioned dates, TIG must repurchase the debentures at par plus accrued but unpaid interest, and were usedmay elect to repay
    borrowings under TIG's commercial paper program.

(9) In October 2001,repurchase the securities for cash, Tyco common shares, or some combination thereof. TIG sold $1,500.0 million 6.375% notes due 2011 under its
    $6.0 billion shelf registration statement in a public offering. The notes
    are fullymay redeem for cash some or all of the Series A debentures and unconditionally guaranteed by Tyco. The netSeries B debentures at any time on or after January 20, 2006 and January 20, 2008, respectively. Net proceeds of approximately $1,487.8$4,387.5 million, before out-of-pocket expenses, from these debentures were used primarily to repay borrowingsdebt.

(7)
At February 12, 2003, the accreted value of TIG's zero coupon convertible debentures with a February 2003 put option was $1,850.8 million. On February 13, 2003, TIG purchased $1,850.1 million accreted value of these debentures for cash. This purchase resulted from the exercise of investors' option under TIG's
    commercial paper program.

(10) As a result of the rating agencies' downgrade of Tyco's debtindenture to below
    investment grade status in June 2002,require TIG was required to pay
    $256.7 million to repurchase its Y30 billion 3.5% notes due 2030 in
    July 2002. In addition, the rating of below investment grade status caused
    the interest rate on our $400 million 7.2% notes due 2008 to increase to
    8.2%, until such time that the rating becomes investment gradepurchase at accreted value debentures validly surrendered by both S&P
    and Moody's.

(11) February 12, 2003.

(8)
These debentures,instruments, plus $108.6$169.1 million of the amount shown as other, comprise the current portion of long-term debt as of September 30, 2002.

    In January 2002, TIG entered into a $1.5 billion bridge loan, which was
fully and unconditionally guaranteed by Tyco, which had a weighted-average
interest rate2003.

(9)
Includes $562.2 million of 3.66%. TIG repaid $645.0 milliondebt recorded in April 2002 andconnection with the remainder in June 2002.

    Someadoption of our debt agreements, including ourFIN 46 (see Note 30).
        Our bank credit agreements contain a number of financial covenants, such as interest coverage and leverage ratios, and restrictive covenants that would resultlimit the amount of debt we can incur and restrict our ability to pay dividends or make other payments in connection with our capital stock, to make acquisitions or investments, to pledge assets and to prepay debt that matures after December 31, 2004. Specifically, TIG is the borrower under a default if our total debt5-year, $2.0 billion revolving credit facility that contains a financial covenant based on the Company's leverage ratio. The maximum allowable leverage ratio as a percentage of
total capitalization (total debt and shareholders'

                                       96

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

18.  DEBT (CONTINUED)
equity) exceedsdefined under this agreement is 52.5%. Total debt as a percentage of total capitalization was
49.4%At September 30, 2003, this ratio declined to 46.3% from 51.3% at September 30, 2002. We also have several synthetic lease facilities with similar covenants. Our zero coupon convertible debentures due 2020outstanding indentures contain customary covenants including a negative pledge, limit on subsidiary debt and zero coupon convertible
debentures due 2021 may be converted into Tyco common shares at the optionlimit on sale/leasebacks. None of the holders if any one of the following conditions is satisfied for the relevant
debentures:

    - if the closing sale price of Tyco common shares for at least 20 trading
      days in the 30 trading day period ending on the trading day priorthese covenants are presently considered restrictive to the
      date of surrender is more than 110% of the accreted conversion price per
      common share of the relevant debentures on that preceding trading day;

    - if the Company has called the relevant debentures for redemption after a
      certain date; and

    - upon the occurrence of specified corporate transactions, such as if Tyco
      makes a significant distribution to its shareholders or if it is a party
      to specific consolidations, mergers or binding share exchanges.

    The conversion feature of the zero coupon convertible debentures due 2020
and 2021 was not available to the debt holders at September 30, 2002 as shown in
the following table:


                                                      ZERO COUPON   ZERO COUPON
                                                      CONVERTIBLE   CONVERTIBLE
                                                      DEBENTURES    DEBENTURES
                                                       DUE 2020      DUE 2021
                                                      -----------   -----------

Stock price at September 30, 2002...................    $14.10        $14.10
Accreted conversion price per common share at
  September 30, 2002(1).............................    $73.63        $86.94


- ------------------------------

(1) Accreted conversion price per common share is equal to the accreted value of
    the respective debentures at September 30, 2001 divided by their respective
    conversion rates. The conversion price increases as interest on the notes
    accretes.our operations.
        The fair value of debt was approximately $21,656.0 million (book value of $20,969.1 million) and $21,934.6 million (book value of $24,205.8 million) and $21,895.0 million (book value of $21,619.0$24,248.1 million) at September 30, 20022003 and 2001,2002, respectively, based on discounted cash flow analyses using current market interest rates.
        The aggregate amounts of total debt maturing during the next five years are as follows (in millions): $7,719.0 in fiscal 2003, $3,680.6$2,718.4 in fiscal 2004, $1,755.9$2,258.6 in fiscal 2005, $3,744.2$3,949.2 in fiscal 2006, and $602.3$704.0 in fiscal 2007.2007, and $122.6 in fiscal 2008.
        The weighted-average rate of interest on all debt was 4.69%4.89% and 4.27%4.69% at September 30, 20022003 and 2001,2002, respectively. The weighted-average rate of interest on all variable debt was 4.71%5.93% and 3.50%4.71% at September 30, 20022003 and 2001,2002, respectively. The impact of Tyco's interest rate swap activities on its weighted-average borrowing rate was not material in any year. The impact on Tyco's reported interest expense was a reduction of zero, $116.1 million $9.7 million and $6.6$9.7 million for fiscal 2003, fiscal 2002 and fiscal 2001, respectively.
95
20.    Guarantees
        The Company may, from time to time, enter into sales contracts whereby it will buy back (at a discount) a transaction from a customer's third-party financier in the event of a customer's default. For such transactions that include "shared risk," the Company accrues a liability based on historical loss data. As of September 30, 2003, $3.2 million was accrued related to these contracts. In the event the Company must pay for this shared risk, the Company's recourse is as follows: place the lease with a financially viable third-party financier; repossess the purchased products or equipment; seek payment through a personal guarantee issued by the customer; or, alternatively, sue the customer.
        The Company's Fire and Security business has guaranteed the performance of a third-party contractor. The performance guarantee arose from contract negotiations, because the contractor could provide cost-effective service on a telecommunications contract. In the event the contractor does not perform its contractual obligations, Tyco Fire and Security would perform the service itself. Therefore, the Company's exposure would be the cost of any services performed, which would not have a material effect to the Company's financial position or annual results of operations. Because it is not probable that the Company will have to make any payments or perform any services pursuant to the guarantee, it has not recorded any obligation related to the guarantee. The contract was entered into in July 2002 and expires at the end of the warranty period, July 2004. If the third-party sub-contractor does not perform its obligations, Tyco may consider withholding any future payment for work performed by the contractor.
        The Company, in disposing of assets or businesses, often provides representations, warranties and/or indemnities to cover various risks including, for example, unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at hazardous waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal fees related to periods prior to disposition. The Company does not have the ability to estimate the potential liability from such indemnities because they relate to unknown conditions. However, we have no reason to believe that these uncertainties would have a material adverse effect on the Company's financial position, annual results of operations or cash flows.
        The Company has recorded liabilities for known indemnifications included as part of environmental liabilities. See Note 22 for a discussion of these liabilities.
        The Company has guaranteed the fair value of certain vessels not to exceed $235 million and has accrued $10.4 million and $4.4 million as of September 30, 2003 and 2002, respectively, based on its estimate of fair value of the vessels (see Note 22).
        Due to the Company's downsizing of certain operations as part of restructuring plans, acquisitions, or otherwise, the Company has leased properties which it has vacated but has sub-let to third parties. In the event third parties vacate the premises, the Company would be legally obligated under master lease arrangements. The Company believes that the financial risk of default by sub-lessors is individually and in the aggregate not material to the Company's financial position, annual results of operations or cash flows.
        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, annual results of operations or cash flows.
96

        The Company generally accrues estimated product warranty costs at the time of sale. In other instances, additional amounts are recorded when such costs are probable and can be reasonably estimated. For further information on estimated product warranty, see Note 1.
        Following is a roll forward of the Company's warranty accrual for the year ended September 30, 2003 ($ in millions).
 
 
 
 
Balance at September 30, 2002
 
$
493.6
 
Accruals for warranties issued during the year
 
 
40.7
 
Changes in estimates related to pre-existing warranties
 
 
11.4
 
Settlements made
 
 
(166.0
)
Additions due to acquisitions
 
 
0.6
 
 
 
 
Balance at September 30, 2003
 
$
380.3
 
 
 
 
        Settlements made include spending of $103.5 million by the Engineered Products and Services segment in connection with a Voluntary Replacement Program ("VRP") associated with the acquisition of Central Sprinkler. The VRP was initiated in fiscal 2001 and fiscal 2000,
respectively.

19.  FINANCIAL INSTRUMENTSrelates to the recall of certain Model GB fire sprinkler heads which were originally manufactured by Central Sprinkler. Identification and investigation of problems with the sprinkler heads commenced prior to Tyco's acquisition. All affected sprinkler heads are replaced over a 5-7 year period free of charge to property owners.
21. 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 fair value of cash and cash equivalents, accounts receivables,receivable, long-term investments and accounts payable

                                       97

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

19.  FINANCIAL INSTRUMENTS (CONTINUED) approximated book value at September 30, 20022003 and 2001.2002. See Note 1819 for the fair value estimates of debt.
        In accordance with SFAS No. 133, as amended, all derivative financial instruments are reported on the Consolidated Balance Sheet at fair value, and changes in a derivative's fair value are recognized currently in earnings unless specific hedge criteria are met. While it is not the Company's intention to terminate its derivative financial instruments, based on their estimated fair values, the termination at September 30, 2003 would have resulted in proceeds of $44.2 million for forward and option foreign currency exchange contracts, no proceeds for forward commodity contracts, and proceeds of $20.9 million for interest rate swapsswaps. The termination at September 30, 2002 would have resulted in aproceeds of $34.0 million gain, afor forward and option foreign currency exchange contracts, payments of $1.2 million loss,for forward commodity contracts, and aproceeds of $2.5 million gain, respectively,
and at September 30, 2001 would have resulted in a $8.6 million gain, a
$6.8 million loss and a $139.6 million gain, respectively.for interest rate swaps. At September 30, 20022003 and 2001,2002, the book values of derivative financial instruments recorded on the Consolidated Balance Sheets approximate fair values.

INTEREST RATE EXPOSURES
Interest Rate Exposures
        The Company uses interest rate swaps to hedge its exposure to interest rate risk by exchanging fixed rate interest on certain of its debt for variable rate amounts. These interest rate swaps are designated as fair value hedges. Certain of the Company's interest rate swaps entered into during fiscal 2002,2003, as assessed using the short-cut method under SFAS No. 133, were highly effective. The ineffective
97

element of the gains and losses on certain other interest rate swaps during fiscal 2002, and fiscal 2001, totaling a net gain of $116.1 million, and a net gain of $19.7 million, respectively, havehas been recognized in interest expense, net, along with the effective element of the changes in fair value of the interest rate swaps and the related hedged debt.

NET INVESTMENTS

    In fiscal 2001, Tyco used cross currency swaps and designated portions of
foreign-currency denominated debt to hedge the foreign-currency exposure of
certain net investments in foreign operations. A net unrealized loss of
$39.4 million was included in the cumulative translation adjustment during
fiscal 2001 in connection with these hedges. In fiscal 2002, the Company had no
such swaps.

OTHER
Other
        Tyco uses various options, swaps and forwards not designated as hedging instruments under SFAS No. 133 to hedge the impact of the variability in the price of raw materials, such as copper and other commodities, and the impact of the variability in foreign exchange rates on accounts and notes receivable, accounts payable, intercompany loan balances and subsidiary earningsforecast transactions denominated in certain foreign currencies.

20.  COMMITMENTS AND CONTINGENCIES
22.    Commitments and Contingencies
        The Company occupies certain facilities underhas facility, vehicle and equipment leases that expire at various dates through the year 2027.2050. Rental expense under these leases and leases for equipment was $861.8 million, $848.9 million $634.7 million and $442.7$634.7 million for fiscal 2003, fiscal 2002 and fiscal 2001, and fiscal 2000, respectively. At September 30, 2002,2003, the minimum lease payment obligations under non-cancelable operating leases were as follows (amounts include payments due on sale-leaseback transactions): $808.4 million in
fiscal 2003, $685.1$714.2 million in fiscal 2004, $511.5$563.2 million in fiscal 2005, $397.9$421.4 million in fiscal 2006, $258.1$303.1 million in fiscal 2007, and $227.8 million in fiscal 2008 and an aggregate of $1,087.5$1,030.1 million in fiscal years 20082009 through 2027. In addition,2050. These payments include obligations under an off-balance sheet leasing arrangement for five cable laying sea vessels. Upon expiration of this lease in fiscal 2007, a subsidiary of the Company has the option to buy these vessels for approximately $280 million, or return the equipmentvessels to the lessor and, under sale-leaseback upon expirationa guarantee, pay any shortfall in sales proceeds from a third party in an amount not to exceed $235 million.
        At September 30, 2003, the Company had a contingent liability of $80 million related to the lease term. These payments

                                       98

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

20.  COMMITMENTS AND CONTINGENCIES (CONTINUED)
would approximate $200fiscal 2001 acquisition of Com-Net by the Electronics segment. The $80 million is the maximum amount payable to the former shareholders of Com-Net only after the construction and installation of a communications system for the State of Florida is finished and the State has approved the system based on the guidelines set forth in the contract. The $80 million is not accrued at September 30, 2003, as the outcome of this contingency cannot be reasonably determined.
        TIG entered into a $1.5 billion 364-day unsecured revolving credit facility which also provides for issuance of unsecured letters of credit. The facility was not utilized in fiscal 2005, $300 million in fiscal 2006 and
$340 million in fiscal 2007.

    In January 2002, the Company issued a $200 million guarantee that can be
exercised by a customer if certain specifications relating to the recently
completed Pacific component of the TGN are not completed by March 2003. The
Company does not anticipate any problems with meeting this deadline.
        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 annual results of operations.
        As a result of actions taken by our former senior corporate management, Tyco, and
certainsome members of our former senior corporate management, former members of our Board of Directors and our current Chief Executive Officer are named defendants in a number of purported class actions alleging violations of the disclosure provisions of the federal securities laws, as well as in a number of derivative actionsactions. In the consolidated derivative action, the plaintiffs have filed a motion which seeks to add certain members of our current Board of Directors and management as defendants. Tyco, certain of our current and former employees, some members of our former senior corporate management and some former members of our Board of Directors also are named as defendants in several ERISA
claims,Employee
98

Retirement Income Security Act ("ERISA") actions. In addition, Tyco and some members of our former senior corporate management are subject to an SEC inquiry, and investigationssome members of our former senior corporate management are named as defendants in criminal cases being prosecuted by the District Attorney of New York CountyCounty. The findings and outcomes of the prosecutions and the U.S. Attorney forSEC civil action may affect the District of New
Hampshire. We recently signed a consent agreement with the State of New
Hampshire Bureau of Securities Regulation that resolved the Bureau's
investigation into the conduct of Tyco's previous management, pursuant to which
we agreed to pay a total of $5 million as an administrative settlement to the
State of New Hampshire and paid $100,000 to cover the costcourse of the Bureau's
investigation.purported class actions, derivative actions and ERISA claims pending against Tyco. In May and July 2003, complaints were filed against Tyco and our current Chairman and Chief Executive Officer purporting to represent a class of purchasers of Tyco securities alleging violations of the disclosure provisions of the federal securities laws. We may beare generally obliged to indemnify our directors and officers and our former directors and officers who are also are named as defendants in some or all of these matters.matters to the extent permitted by Bermuda law. In addition, our insurance carriercarriers may decline coverage, or suchour coverage may be insufficient to cover our expenses and liability, if any, in some or all of these matters. We believe that we have meritorious defenses and
we are vigorously defending these matters. However, we are currently unable at this time to estimate what our ultimate liability if any, in these matters may be, and it is possible that we will be required to pay judgments or settlements and incur expenses in aggregate amounts that are material.would have a material adverse effect on our financial condition, results of operations or cash flows. It is not possible to estimate the amount of loss or probable losses, if any, that might result from an adverse settlement of these matters.
        We and others have received various subpoenas and requests from the SEC,SEC's Division of Enforcement, the District Attorney of New York County, the U.S. Attorney for the District of New Hampshire, the Equal Opportunity Employment Commission and others seeking the production of voluminous documents in connection with various investigations into our governance, management, operations, accounting and related controls. The Department of Labor is investigating Tyco and the administrators of certain of our benefit plans. In addition, while we believe we have adequately responded to a Governmental Services Administration ("GSA") action questioning whether Tyco lacked the present responsibility to be a government contractor due to concerns the GSA has expressed as a result of the alleged serious criminal misconduct of our former Chief Executive Officer, Chief Financial Officer and General Counsel, the GSA has reserved the right to take appropriate actions if additional information warrants it. We cannot predict when these investigations will be completed, nor can we predict what the results of these investigations may be. It is possible that we will be required to pay material fines, consent to injunctions on future conduct, lose the ability to conduct business with government instrumentalities (which in turn could negatively impact our business with non-governmental customers) or suffer other penalties, each of which could have a material adverse effect on our business. We cannot assure youIt is not possible to estimate the amount of loss, or range of possible loss, if any, that the effects andmight result from an adverse settlement of these matters.
        Tyco and our subsidiaries' income tax returns are periodically examined by various investigations will not be materialregulatory tax authorities. In connection with such examinations, tax authorities, including the Internal Revenue Service, have raised issues and adverseproposed tax deficiencies. We are reviewing the issues raised by the tax authorities and are contesting certain of the proposed tax deficiencies. Amounts related to our business, financial conditionthese tax deficiencies and liquidity.other tax contingencies that management has assessed as probable and estimable have been accrued through the income tax provision.
        The Company is a defendant in a number of other pending legal proceedings incidental to present and former operations, acquisitions and dispositions (see
Note 17).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, annual results of operations or liquidity.cash flows.
99

        Tyco 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 Tyco's experience with
environmental remediation matters,As of September 30, 2003, Tyco has concluded that it iswas probable that we willit would incur remedial costs in the range of approximately $160$142 million to $460$451 million. As of September 30, 2002,2003, Tyco concluded that the best probable estimate within this range is approximately $248$270 million, of which $221$32 million is included in accrued expenses and other current liabilities and $27$238 million is included in other long-term liabilities 99

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

20.  COMMITMENTS AND CONTINGENCIES (CONTINUED)
on the Consolidated Balance Sheet. Included within the $248 million is
$193 million related to the acquisition of Mallinckrodt. In view of the Company's financial position and reserves for environmental matters of $248$270 million, the Company has concluded that any potential payment of such estimated amounts will not have a material adverse effect on its financial position, annual results of operations or liquidity.cash flows.
        Like many other companies, Tyco and some of our subsidiaries are named as defendants in personal injury lawsuits based on alleged exposure to asbestos-containing materials. Consistent with the national trend of increased asbestos-related litigation, we have observed an increase in the number of these lawsuits in the past several years. The majority of these cases have been filed against subsidiaries in our Healthcare division and our Engineered Products and Services division. A limited number of the cases allege premises liability, based on claims that individuals were exposed to asbestos while on a subsidiary's property. Some of the cases involve product liability claims, based principally on allegations of past distribution of heat-resistant industrial products incorporating asbestos or the past distribution of industrial valves that incorporated asbestos-containing gaskets or packing. Each case typically names between dozens to hundreds of corporate defendants.
        Tyco's involvement in asbestos cases has been limited because our subsidiaries did not mine or produce asbestos. Furthermore, in our experience, a large percentage of these claims were never substantiated and have been dismissed by the courts. Our vigorous defense of these lawsuits has resulted in judgments in our favor in all cases tried to verdict. We have not suffered an adverse verdict in a trial court proceeding related to asbestos claims.
        When appropriate, we settle claims. However, the total amount paid to date to settle and defend all asbestos claims has been immaterial. As of September 30, 2003, there were approximately 14,000 asbestos liability cases pending against us and our subsidiaries.
        We believe that we and our subsidiaries have substantial indemnification protection and insurance coverage, subject to applicable deductibles, with respect to asbestos claims. These indemnitors and the relevant carriers typically have been honoring their duty to defend and indemnify. We believe that we have valid defenses to these claims and intend to continue to defend them vigorously. Additionally, based on our historical experience in asbestos litigation and an analysis of our current cases, we believe that we have adequate amounts accrued for potential settlements and adverse judgments in asbestos-related litigation. While it is not possible at this time to determine with certainty the ultimate outcome of these asbestos-related proceedings, we believe that the final outcome of all known and anticipated future claims, after taking into account our substantial indemnification rights and insurance coverage, will not have a material adverse effect on our financial position, annual results of operations financial position or cash flows.

21.  RETIREMENT PLANS

    DEFINED BENEFIT PENSION PLANS--The
100

23.    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. Net periodic pension benefit cost (income) is based on periodic actuarial valuations which use the projected unit credit method of calculation and is charged to the Consolidated Statements of Operations on a systematic basis over the expected average remaining service lives of current employees. Contribution amounts are determined in accordance withbased on the advice of professionally qualified actuaries in the countries concerned or is based on
subsequent formal reviews.concerned. The Company's funding policy is to make contributions in accordance with the laws and customs of the various countries in which it operates.operates as well as to make discretionary voluntary contributions. The benefits under the defined benefit plans are based on various factors, such as years of service and compensation. The following tables exclude amounts related to the discontinued operations of CIT for all periods presented.
        The net periodic pensionbenefit cost (income) for all U.S. and non-U.S. defined benefit pension plans includes the following components ($ in millions):

                                                                        U.S. PLANS
                                                              ------------------------------
                                                                2002       2001       2000
                                                              --------   --------   --------

Service cost................................................  $  19.2    $  28.2    $  12.1
Interest cost...............................................    134.2      127.7       84.6
Expected return on plan assets..............................   (123.4)    (170.6)    (112.8)
Recognition of initial net obligation.......................     (1.0)      (1.0)      (1.0)
Recognition of prior service cost...........................      0.8        0.6        0.7
Recognition of net actuarial loss (gain)....................      8.8      (11.3)      (6.4)
Curtailment/settlement loss (gain)..........................      1.4      (56.8)      (4.6)
Cost of special termination benefits........................      1.6        0.6        1.9
                                                              -------    -------    -------
Net periodic benefit cost (income)..........................  $  41.6    $ (82.6)   $ (25.5)
                                                              =======    =======    =======


                                      100

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

21.  RETIREMENT PLANS (CONTINUED)


                                                                      NON-U.S. PLANS
                                                              ------------------------------
                                                                2002       2001       2000
                                                              --------   --------   --------

Service cost................................................  $  69.0    $  65.4    $  60.9
Interest cost...............................................     88.1       79.2       75.1
Expected return on plan assets..............................    (81.8)     (96.8)     (85.3)
Recognition of initial net asset............................      0.1        0.2        0.2
Recognition of prior service cost...........................      0.9        1.7        0.8
Recognition of net actuarial loss...........................     15.1        0.5        2.3
Curtailment/settlement (gain) loss..........................     (2.3)       3.0       (2.7)
Cost of special termination benefits........................      2.4       16.2        3.0
                                                              -------    -------    -------
Net periodic benefit cost...................................  $  91.5    $  69.4    $  54.3
                                                              =======    =======    =======
 
 
U.S. Plans
 
 
 
2003
 
2002
 
2001
 
Service cost
 
$
25.5
 
$
19.2
 
$
28.2
 
Interest cost
 
 
131.0
 
 
134.2
 
 
127.7
 
Expected return on plan assets
 
 
(99.2
)
 
(123.4
)
 
(170.6
)
Recognition of initial net asset
 
 
(1.0
)
 
(1.0
)
 
(1.0
)
Recognition of prior service cost
 
 
2.8
 
 
0.8
 
 
0.6
 
Recognition of net actuarial loss (gain)
 
 
39.0
 
 
8.8
 
 
(11.3
)
Curtailment/settlement loss (gain)
 
 
9.7
 
 
1.4
 
 
(56.8
)
Cost of special termination benefits
 
 
0.2
 
 
1.6
 
 
0.6
 
 
 
 
 
 
Net periodic benefit cost (income)
 
$
108.0
 
$
41.6
 
$
(82.6
)
 
 
 
 
 
 
 
Non-U.S. Plans
 
 
 
2003
 
2002
 
2001
 
Service cost
 
$
85.0
 
$
69.0
 
$
65.4
 
Interest cost
 
 
101.3
 
 
88.1
 
 
79.2
 
Expected return on plan assets
 
 
(74.7
)
 
(81.8
)
 
(96.8
)
Recognition of initial net obligation
 
 
0.5
 
 
0.1
 
 
0.2
 
Recognition of prior service cost
 
 
1.0
 
 
0.9
 
 
1.7
 
Recognition of net actuarial loss
 
 
43.1
 
 
15.1
 
 
0.5
 
Curtailment/settlement loss (gain)
 
 
8.7
 
 
(2.3
)
 
3.0
 
Cost of special termination benefits
 
 
1.2
 
 
2.4
 
 
16.2
 
 
 
 
 
 
Net periodic benefit cost
 
$
166.1
 
$
91.5
 
$
69.4
 
 
 
 
 
 
        The curtailment/settlement gains in fiscal 2001 in the U.S. relate primarily to the freezing of certain pension plans. These curtailment/settlement gains have been recorded in selling, general and administrative expenses in the Consolidated Statements of Operations.
101

        The net pension amount recognized on the Consolidated Balance Sheet at September 30, 20022003 and 20012002 for all U.S. and non-U.S. defined benefit plans is as follows ($ in millions):

                                                            U.S. PLANS          NON-U.S. PLANS
                                                        -------------------   -------------------
                                                          2002       2001       2002       2001
                                                        --------   --------   --------   --------

CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year...............  $1,832.5   $1,085.8   $1,571.9   $1,367.6
Service cost..........................................      19.2       28.2       69.0       65.4
Interest cost.........................................     134.2      127.7       88.1       79.2
Employee contributions................................        --         --        9.9        9.5
Plan amendments.......................................      24.6        2.8        1.1        2.8
Actuarial loss........................................     203.2       90.2      210.9       36.0
Benefits and administrative expenses paid.............    (155.9)    (100.9)     (74.8)     (43.5)
Acquisitions..........................................      15.6      782.8       12.9      100.4
Plan curtailments.....................................     (20.7)     (54.6)      (4.9)     (11.4)
Plan settlements......................................      (6.2)    (130.1)     (20.0)     (43.2)
Special termination benefits..........................       1.6        0.6        2.4       16.2
Currency translation adjustment.......................        --         --       71.8       (7.1)
                                                        --------   --------   --------   --------
Benefit obligation at end of year.....................  $2,048.1   $1,832.5   $1,938.3   $1,571.9
                                                        ========   ========   ========   ========


                                      101

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

21.  RETIREMENT PLANS (CONTINUED)


                                                            U.S. PLANS          NON-U.S. PLANS
                                                        -------------------   -------------------
                                                          2002       2001       2002       2001
                                                        --------   --------   --------   --------

CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year........  $1,452.3   $1,304.2   $1,111.4   $1,253.1
Actual return on plan assets..........................     (56.0)    (316.6)    (114.4)    (203.5)
Employer contributions................................      19.5       43.4       86.8       88.7
Employee contributions................................        --         --        9.9        9.5
Acquisitions..........................................        --      652.3        2.4       59.9
Plan settlements......................................      (6.2)    (130.1)     (20.0)     (43.2)
Benefits paid.........................................    (144.5)     (95.9)     (71.3)     (41.0)
Administrative expenses paid..........................     (11.4)      (5.0)      (3.5)      (2.5)
Currency translation adjustment.......................        --         --       38.5       (9.6)
                                                        --------   --------   --------   --------
Fair value of plan assets at end of year..............  $1,253.7   $1,452.3   $1,039.8   $1,111.4
                                                        ========   ========   ========   ========
Funded status.........................................  $ (794.4)  $ (380.2)  $ (898.5)  $ (460.5)
Unrecognized net actuarial loss.......................     658.1      306.3      737.3      318.3
Unrecognized prior service cost.......................      30.2        6.4        5.8        6.1
Unrecognized transition asset.........................      (2.0)      (3.0)      (4.8)      (4.3)
                                                        --------   --------   --------   --------
Net amount recognized.................................  $ (108.1)  $  (70.5)  $ (160.2)  $ (140.4)
                                                        ========   ========   ========   ========
 
 
U.S. Plans
 
Non-U.S. Plans
 
 
 
2003
 
2002
 
2003
 
2002
 
Change in benefit obligation
 
 
 
 
 
 
 
 
 
 
 
 
 
Benefit obligation at beginning of year
 
$
2,048.1
 
$
1,832.5
 
$
1,938.3
 
$
1,571.9
 
Service cost
 
 
25.5
 
 
19.2
 
 
85.0
 
 
69.0
 
Interest cost
 
 
131.0
 
 
134.2
 
 
101.3
 
 
88.1
 
Employee contributions
 
 
—
 
 
—
 
 
10.7
 
 
9.9
 
Plan amendments
 
 
1.2
 
 
24.6
 
 
1.3
 
 
1.1
 
Actuarial loss
 
 
221.3
 
 
203.2
 
 
159.6
 
 
210.9
 
Benefits and administrative expenses paid
 
 
(153.2
)
 
(155.9
)
 
(70.7
)
 
(74.8
)
Acquisitions
 
 
—
 
 
15.6
 
 
17.9
 
 
12.9
 
Plan curtailments
 
 
(1.6
)
 
(20.7
)
 
2.0
 
 
(4.9
)
Plan settlements
 
 
(28.7
)
 
(6.2
)
 
(32.0
)
 
(20.0
)
Special termination benefits
 
 
0.2
 
 
1.6
 
 
1.2
 
 
2.4
 
Currency translation adjustment
 
 
—
 
 
—
 
 
199.3
 
 
71.8
 
 
 
 
 
 
 
Benefit obligation at end of year
 
$
2,243.8
 
$
2,048.1
 
$
2,413.9
 
$
1,938.3
 
 
 
 
 
 
 
 
 
U.S. Plans
 
Non-U.S. Plans
 
 
 
2003
 
2002
 
2003
 
2002
 
Change in plan assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value of plan assets at beginning of year
 
$
1,253.7
 
$
1,452.3
 
$
1,039.8
 
$
1,111.4
 
Actual return on plan assets
 
 
183.5
 
 
(56.0
)
 
118.6
 
 
(114.4
)
Employer contributions
 
 
248.8
 
 
19.5
 
 
92.6
 
 
86.8
 
Employee contributions
 
 
—
 
 
—
 
 
10.7
 
 
9.9
 
Acquisitions
 
 
—
 
 
—
 
 
5.0
 
 
2.4
 
Plan settlements
 
 
(28.7
)
 
(6.2
)
 
(32.0
)
 
(20.0
)
Benefits paid
 
 
(142.5
)
 
(144.5
)
 
(66.2
)
 
(71.3
)
Administrative expenses paid
 
 
(10.7
)
 
(11.4
)
 
(4.5
)
 
(3.5
)
Currency translation adjustment
 
 
—
 
 
—
 
 
98.7
 
 
38.5
 
 
 
 
 
 
 
Fair value of plan assets at end of year
 
$
1,504.1
 
$
1,253.7
 
$
1,262.7
 
$
1,039.8
 
 
 
 
 
 
 
Funded status
 
$
(739.7
)
$
(794.4
)
$
(1,151.2
)
$
(898.5
)
Unrecognized net actuarial loss
 
 
751.1
 
 
650.5
 
 
858.6
 
 
737.3
 
Unrecognized prior service cost
 
 
28.5
 
 
30.2
 
 
5.5
 
 
5.8
 
Unrecognized transition asset
 
 
(1.0
)
 
(2.0
)
 
(5.5
)
 
(4.8
)
 
 
 
 
 
 
Net amount recognized
 
$
38.9
 
$
(115.7
)
$
(292.6
)
$
(160.2
)
 
 
 
 
 
 
102
        The net pension amounts recognized on the Consolidated Balance Sheet at September 30, 20022003 and 20012002 for all U.S. and non-U.S. defined benefit plans is as follows ($ in millions).

                                                               U.S. PLANS          NON-U.S. PLANS
                                                           -------------------   -------------------
                                                             2002       2001       2002       2001
                                                           --------   --------   --------   --------

AMOUNTS RECOGNIZED ON THE CONSOLIDATED BALANCE SHEETS
Prepaid benefit cost.....................................  $   5.1    $   5.2    $ 148.2    $  93.4
Accrued benefit liability................................   (745.5)    (354.0)    (746.4)    (399.5)
Intangible asset.........................................     19.6        6.5        6.2        5.4
Accumulated other comprehensive income...................    612.7      271.8      431.8      160.3
                                                           -------    -------    -------    -------
Net amount recognized....................................  $(108.1)   $ (70.5)   $(160.2)   $(140.4)
                                                           =======    =======    =======    =======
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate............................................     6.75%      7.50%      5.09%      5.71%
Expected return on plan assets...........................     8.74%     10.00%      7.37%      7.80%
Rate of compensation increase............................     4.27%      4.60%      3.49%      3.74%
 
 
U.S. Plans
 
Non-U.S. Plans
 
 
 
2003
 
2002
 
2003
 
2002
 
Amounts recognized on the Consolidated Balance Sheets
 
 
 
 
 
 
 
 
 
 
 
 
 
Prepaid benefit cost
 
$
3.7
 
$
5.1
 
$
26.8
 
$
148.2
 
Accrued benefit liability
 
 
(711.5
)
 
(753.1
)
 
(851.6
)
 
(746.4
)
Intangible asset
 
 
21.1
 
 
19.6
 
 
7.2
 
 
6.2
 
Accumulated other comprehensive income
 
 
725.6
 
 
612.7
 
 
525.0
 
 
431.8
 
 
 
 
 
 
 
Net amount recognized
 
$
38.9
 
$
(115.7
)
$
(292.6
)
$
(160.2
)
 
 
 
 
 
 
Weighted-average assumptions
 
 
 
 
 
 
 
 
 
 
 
 
 
Discount rate
 
 
6.00
%
 
6.75
%
 
4.85
%
 
5.09
%
Expected return on plan assets
 
 
8.49
%
 
8.74
%
 
6.89
%
 
7.37
%
Rate of compensation increase
 
 
4.30
%
 
4.27
%
 
3.42
%
 
3.49
%
        The amounts in the tables above include defined benefit arrangements for certain current key executive officers.
        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 $2,236.7 million, $2,200.5 million and $1,496.4 million, respectively, at September 30, 2003 and $2,038.0 million, $1,980.9 million and $1,242.5 million, respectively, at September 30, 2002 and $1,811.6 million,
$1,781.4 million and $1,430.2 million, respectively, at September 30, 2001.2002.
        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 $2,277.3 million, $1,936.4 million and $1,133.5 million, respectively, at September 30, 2003 and $1,702.6 million, $1,423.3 million and $831.7 million, respectively, at September 30, 2002 and $1,069.1 million,
$929.4 million and $598.0 million, respectively, at September 30, 2001.

                                      102

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

21.  RETIREMENT PLANS (CONTINUED)2002.

        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 $22.8 million, $17.1 million $6.4 million and $8.2$6.4 million for fiscal 2003, fiscal 2002 and fiscal 2001, and fiscal 2000, respectively.

    EXECUTIVE RETIREMENT ARRANGEMENTS--Messrs.
Executive Retirement Arrangements—Messrs. Kozlowski and Swartz participated in individual Executive Retirement Arrangements maintained by Tyco (the "ERA"). Under the ERA, Messrs. Kozlowski and Swartz would have fixed lifetime benefits commencing at their normal retirement age of 65. The Company's accrued benefit obligations for Messrs. Kozlowski and Swartz as of September 30, 2003 were $54.1 million and $27.7 million, respectively. The Company's accrued benefit obligations for Messrs. Kozlowski and Swartz as of September 30, 2002 were $50.6 million and $25.9 million, respectively. Retirement benefits are available at earlier ages and alternative forms of benefits can be elected. Any such variations would be actuarially equivalent to the fixed lifetime benefit starting at age 65. Amounts owed to Messrs. Kozlowski and Swartz under the ERA are in dispute by the Company. DEFINED CONTRIBUTION RETIREMENT PLANS--TheFor further information, see Note 18.
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 $184.0 million, $179.9 million $152.8 million and $132.7$152.8 million for fiscal 2003, fiscal 2002 and fiscal 2001, and fiscal 2000, 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 $4.0 million, $16.1 million $9.3 million
and $10.8$9.3 million in fiscal 2003, fiscal 2002 and fiscal 2001, respectively.
Deferred Compensation Plans—The Company has nonqualified deferred compensation plans, which permit eligible employees to defer a portion of their compensation. A record keeping account is set up for each participant and the participant chooses from a variety of measurement funds for the deemed investment of their accounts. The measurement funds correspond to a number of funds in the Company's 401(k) plans and the account balance fluctuates with the investment returns on those funds. Deferred compensation expense was $17.4 million, $15.9 million and $10.3 million for fiscal 2003, fiscal 2002 and fiscal 2000,2001, respectively. POSTRETIREMENT BENEFIT PLANS--TheTotal deferred compensation liabilities were $189.0 million, $182.3 million and $292.3 million for fiscal 2003, fiscal 2002 and fiscal 2001. The Company has established a Rabbi Trust that is currently funded through corporate-owned life insurance policies. The Rabbi Trust assets, which are consolidated, are available to pay plan benefits and are subject to the claims of the Company's creditors in the event of the Company's insolvency. The cash surrender value of these policies, net of outstanding loans, included in other noncurrent assets on the Consolidated Balance Sheet were $231.7 million, $316.0 million and $328.6 million in fiscal 2003, fiscal 2002 and fiscal 2001, respectively. The employees are general creditors of the Company with respect to these benefits.
Postretirement Benefit Plans—The Company generally does not provide postretirement benefits other than pensions for its employees. Certain of the
Company'sHowever, certain acquired operations provide these benefits to employees who were eligible at the date of acquisition.acquisition, and a small number of U.S. and Canadian operations provide on-going eligibility for such benefits. The following tables exclude amounts related to the discontinued operations of CIT for all periods presented.
104

        Net periodic postretirement benefit cost reflects the following components ($ in millions):

                                                                2002       2001       2000
                                                              --------   --------   --------

Service cost................................................   $ 1.8      $ 3.4      $ 1.1
Interest cost...............................................    22.5       22.7       12.7
Expected return on assets...................................    (0.4)      (0.3)        --
Recognition of prior service credit.........................    (3.5)      (2.5)      (1.9)
Recognition of net gain.....................................      --       (1.7)      (1.6)
Curtailment loss (gain).....................................      --        0.4       (3.2)
                                                               -----      -----      -----
Net periodic postretirement benefit cost....................   $20.4      $22.0      $ 7.1
                                                               =====      =====      =====
 
 
2003
 
2002
 
2001
 
Service cost
 
$
2.0
 
$
1.8
 
$
3.4
 
Interest cost
 
 
23.5
 
 
22.5
 
 
22.7
 
Expected return on assets
 
 
(0.3
)
 
(0.4
)
 
(0.3
)
Recognition of prior service credit
 
 
(3.3
)
 
(3.5
)
 
(2.5
)
Recognition of net actuarial loss (gain)
 
 
7.1
 
 
—
 
 
(1.7
)
Curtailment/Settlement (gain) loss
 
 
(2.3
)
 
—
 
 
0.4
 
 
 
 
 
 
Net periodic postretirement benefit cost
 
$
26.7
 
$
20.4
 
$
22.0
 
 
 
 
 
 
        The components of the accrued postretirement benefit obligation, substantially all of which are generally unfunded, are as follows ($ in millions):

                                                                 SEPTEMBER 30,
                                                              -------------------
                                                                2002       2001
                                                              --------   --------

CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year.....................  $ 332.6    $ 167.6
Service cost................................................      1.8        3.4
Interest cost...............................................     22.5       22.7


                                      103

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

21.  RETIREMENT PLANS (CONTINUED)


                                                                 SEPTEMBER 30,
                                                              -------------------
                                                                2002       2001
                                                              --------   --------

Amendments..................................................      0.7      (19.4)
Actuarial loss..............................................     32.5       42.2
Acquisition.................................................     (1.1)     145.6
Curtailment loss............................................       --        0.4
Expected net benefits paid..................................    (33.6)     (29.6)
Currency translation adjustment.............................       --       (0.3)
                                                              -------    -------
Benefit obligation at end of year...........................  $ 355.4    $ 332.6
                                                              =======    =======
CHANGE IN PLAN ASSETS
Fair value of assets at beginning of year...................  $   5.2    $    --
Employer contributions......................................     33.5         --
Payment of benefits from plan assets........................    (33.6)        --
Actual return on plan assets................................     (0.4)       0.3
Acquisition.................................................       --        4.9
                                                              -------    -------
Fair value of plan assets at end of year....................  $   4.7    $   5.2
                                                              =======    =======
Funded status...............................................  $(350.7)   $(327.4)
Unrecognized net loss.......................................     47.5       14.2
Unrecognized prior service cost.............................    (24.0)     (28.2)
                                                              -------    -------
Accrued postretirement benefit cost.........................  $(327.2)   $(341.4)
                                                              =======    =======
 
 
September 30,
 
 
 
2003
 
2002
 
Change in benefit obligation
 
 
 
 
 
 
 
Benefit obligation at beginning of year
 
$
355.4
 
$
332.6
 
Service cost
 
 
2.0
 
 
1.8
 
Interest cost
 
 
23.5
 
 
22.5
 
Amendments
 
 
(14.3
)
 
0.7
 
Actuarial loss
 
 
71.0
 
 
32.5
 
Acquisition
 
 
—
 
 
(1.1
)
Plan Curtailments
 
 
(4.6
)
 
—
 
Expected net benefits paid
 
 
(36.2
)
 
(33.6
)
Currency translation adjustment
 
 
1.1
 
 
—
 
 
 
 
 
Benefit obligation at end of year
 
$
397.9
 
$
355.4
 
 
 
 
 

Change in plan assets

 

 

 

 

 

 

 
Fair value of assets at beginning of year
 
$
4.7
 
$
5.2
 
Employer contributions
 
 
35.8
 
 
33.5
 
Payment of benefits from plan assets
 
 
(36.2
)
 
(33.6
)
Actual return on plan assets
 
 
0.4
 
 
(0.4
)
 
 
 
 
Fair value of plan assets at end of year
 
$
4.7
 
$
4.7
 
 
 
 
 

Funded status

 

$

(393.2

)

$

(350.7

)
Unrecognized net loss
 
 
110.6
 
 
47.5
 
Unrecognized prior service cost
 
 
(36.1
)
 
(24.0
)
 
 
 
 
Accrued postretirement benefit cost
 
$
(318.7
)
$
(327.2
)
 
 
 
 
        For measurement purposes, in fiscal 2002, a 7.05%2003, an 11.55% 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 20082011 and remain at that level thereafter. At year-end, the composite annual rate of increase in health care benefit costs was increased to 11.55%12.71%, decreasing to 5.00% by the year 2011.2013. A
105

one-percentage-point change in assumed healthcare cost trend rates would have the following effects on income ($ in millions):

                                                              1-PERCENTAGE-    1-PERCENTAGE-
                                                              POINT INCREASE   POINT DECREASE
                                                              --------------   --------------

Effect on total of service and interest cost components.....      $ 1.3             $ (1.1)
Effect on postretirement benefit obligation.................       18.0              (15.8)
 
 
1-Percentage- Point Increase
 
1-Percentage- Point Decrease
 
Effect on total of service and interest cost components
 
$
1.4
 
$
(1.2
)
Effect on accumulated postretirement benefit obligation
 
 
25.2
 
 
(22.1
)
        The combined weighted average discount rate used in determining the accumulated postretirement benefit obligation was 5.52% and 6.75% at September 30, 2003 and 2002, (7.50% at September 30, 2001).

22.  PREFERENCE SHARESrespectively.
24.    Preference Shares
        Tyco has authorized 125,000,000 preference shares, par value of $1 per share, at September 30, 20022003 and September 30, 2001,2002, of which one such share was issued and designated a special voting preference share in connection with the purchase of CIT in June 2001. This preference share provided a mechanism by which the holders of outstanding exchangeable shares exercise their voting, dividend and liquidation rights, which were equivalent to those of Tyco common shareholders, except that each exchangeable share was equivalent to 0.6907 of a Tyco common share. In connection with the IPO of CIT, the exchangeable shares were redeemed effective July 5, 2002 through the issuance of 3,243,322 104

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

22.  PREFERENCE SHARES (CONTINUED)
Tyco common shares. As a result, no one is entitled to exercise the rights attaching to the preference share.
        Rights as to dividends, return of capital, redemption, conversion, voting and otherwise with respect to the preference shares may be determined by Tyco's Board of Directors 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.

23.  SHAREHOLDERS' EQUITY
25.    Shareholders' Equity
        Shares owned by subsidiaries are treated as treasury shares and are recorded at cost.

    Included within Tyco's outstanding common shares at September 30, 2001 are
4,243,108 common shares representing the assumed exchange of 6,143,199
exchangeable shares (at 0.6907 of a Tyco common share per exchangeable share).
Exchangeable shares of CIT Exchangeco Inc., a wholly-owned subsidiary of Tyco
Capital Corporation, were issued by CIT prior to CIT's acquisition by Tyco. In
connection with the acquisition of CIT, each outstanding exchangeable share,
which was exchangeable prior to the merger for one share of CIT common stock,
became exchangeable for 0.6907 of a Tyco common share. The holders of these
exchangeable shares had dividend, liquidation and voting rights equivalent to
those of Tyco common shareholders, except that each exchangeable share is
equivalent to 0.6907 of a Tyco common share. In connection with the IPO of CIT,
the exchangeable shares were redeemed effective July 5, 2002 through the
issuance of 3,243,322 Tyco common shares.
        In fiscal 2001, Tyco sold 39 million common shares for approximately $2,198.0 million in an underwritten public offering. Net proceeds from the offering were $2,196.6 million and were used to repay debt incurred to finance a portion of the acquisition of CIT.

    Per share amounts and share data have been retroactively restated to give
effect to the two-for-one stock split on October 21, 1999, effected in the form
of a 100% stock dividend.
        The total compensation cost expensed for all stock-based compensation awards discussed below was $43.4 million, $89.9 million $116.8 million and $137.4$116.8 million for fiscal 2003, fiscal 2002 and fiscal 2001, and fiscal 2000, respectively.

    RESTRICTED SHARES--The
Restricted Shares—The Company maintains a restricted share 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, 2002,2003, there were 49,740,62359,831,883 shares authorized under the plan, of which 15,339,02116,223,413 shares had been granted. The number of shares available for issuance under the 1994 Restricted Stock Plan was reduced to 999,524 in October 2002. Common shares are awarded subject to certain restrictions with vesting varying over periods of up to ten years.
        For grants which vest based on certain specified performance criteria, the fair market value of the shares at the date of vesting is expensed over the period of performance, once achievement of criteria
106

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, 105

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23.  SHAREHOLDERS' EQUITY (CONTINUED)
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 PLANS--Substantially
Employee Stock Purchase Plans—Substantially all full-time employees of the Company's U.S. subsidiaries and employees of certain qualified non-U.S. subsidiaries are eligible to participate in an employee share 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.
        The Company also maintains two other employee stock purchase plans for the benefit of employees of certain qualified non-U.S. subsidiaries. Under one plan, eligible employees are granted options to purchase shares at the end of three years of service at 85% of the market price at the time of grant. As of September 30, 2002,2003, there were approximately 764,0003.0 million options outstanding and 9.27.0 million shares available for future issuance under this plan. All shares purchased under the other plan are purchased on the open market.

    SHARE OPTIONS--Tyco
Share Options—Tyco has granted employee share options which were issued under two fixed share option plans which reserve common shares for issuance to Tyco'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. Tyco has reserved 140.0 million common shares for issuance under the Incentive Plan. Awards which Tyco 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, 2002,2003, there were approximately 18.625.5 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. Tyco has reserved 100.0 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, 2002,2003, there were approximately 14.66.3 million shares available for future grant under the LTIP II.
        Options assumed as part of business combination transactions are administered under the Incentive Plan but retain all the rights, terms and conditions of the respective plans under which they were originally granted.

                                      106

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23.  SHAREHOLDERS' EQUITY (CONTINUED)
107

        Share option activity for all Tyco plans sincefrom September 30, 19992000 to September 30, 2003 is as follows:

                                                                            WEIGHTED-AVERAGE
                                                              OUTSTANDING    EXERCISE PRICE
                                                              -----------   ----------------

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
Assumed from acquisition....................................   19,094,534         33.27
Granted.....................................................   33,731,727         50.53
Exercised...................................................  (21,543,189)        25.32
Canceled....................................................   (6,051,186)        41.06
                                                              -----------
At September 30, 2001.......................................  120,247,037         39.44
Assumed from acquisition....................................   10,794,826         83.02
Granted.....................................................   60,012,080         29.79
Exercised...................................................   (8,159,841)        22.88
Canceled....................................................  (29,260,509)        45.81
                                                              -----------
At September 30, 2002.......................................  153,633,593         37.80
                                                              ===========
 
 
Outstanding
 
Weighted-Average
Exercise Price
At September 30, 2000
 
95,015,151
 
$
32.01
Assumed from acquisition
 
19,094,534
 
 
33.27
Granted
 
33,731,727
 
 
50.53
Exercised
 
(21,543,189
)
 
25.32
Canceled
 
(6,051,186
)
 
41.06
 
 
 
 
 
At September 30, 2001
 
120,247,037
 
 
39.44
Assumed from acquisition
 
10,794,826
 
 
83.02
Granted
 
60,012,080
 
 
29.79
Exercised
 
(8,159,841
)
 
22.88
Canceled
 
(29,260,509
)
 
45.81
 
 
 
 
 
At September 30, 2002
 
153,633,593
 
 
37.80
Granted
 
26,937,609
 
 
14.80
Exercised
 
(1,460,513
)
 
10.13
Canceled
 
(30,470,736
)
 
46.38
 
 
 
 
 
At September 30, 2003
 
148,639,953
 
 
32.28
 
 
 
 
 
        The following table summarizes information about outstanding and exercisable Tyco options at September 30, 2002:


                                             OPTIONS OUTSTANDING                           OPTIONS EXERCISABLE
                           --------------------------------------------------------   ------------------------------
                                                                   WEIGHTED-AVERAGE
                                                                      REMAINING
                                                WEIGHTED-AVERAGE     CONTRACTUAL        NUMBER      WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES   NUMBER OUTSTANDING    EXERCISE PRICE      LIFE--YEARS      EXERCISABLE    EXERCISE PRICE
- ------------------------   ------------------   ----------------   ----------------   -----------   ----------------

   $0.00 to $ 10.00            10,458,301            $ 9.14              7.6           3,108,301         $ 7.09
  10.01 to   20.00              9,080,633             16.62              6.1           6,359,300          17.24
  20.01 to   30.00             38,295,418             24.38              7.8          13,480,215          25.27
  30.01 to   40.00             19,938,469             35.65              6.3          12,317,496          35.10
  40.01 to   50.00             43,346,893             45.12              7.7          12,171,487          47.57
  50.01 to   60.00             26,814,560             53.17              7.2          13,383,807          54.57
  60.01 to  142.42              5,699,319             93.95              7.5           3,989,061          90.55
                              -----------                                             ----------
       Total                  153,633,593                                             64,809,667
                              ===========                                             ==========


    STOCK-BASED COMPENSATION--SFAS No. 123, "Accounting for Stock-Based
Compensation," allows companies to measure compensation cost in connection with
employee 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. Tyco continues to use the intrinsic value based method and
does 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

                                      107

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23.  SHAREHOLDERS' EQUITY (CONTINUED)
TyCom (for fiscal 2001 and 2000), the Company's pro forma net income and pro
forma net income per common share for fiscal 2002, fiscal 2001 and fiscal 2000
would have been as follows:


                                                   2002        2001       2000
                                                 ---------   --------   --------

Net (loss) income--pro forma (in millions).....  $(9,822.6)  $3,588.0   $4,136.7
Net (loss) income per common share--pro forma
  Basic........................................      (4.94)      1.99       2.45
  Diluted......................................      (4.94)      1.96       2.42


    On the dates of grant using the Black-Scholes option-pricing model and
assumptions set forth below, the estimated weighted-average fair value of Tyco
options granted during fiscal 2002 was $14.31; the estimated weighted-average
fair value of Tyco and TyCom options granted during fiscal 2001 was $19.72 and
$9.11, respectively; and the estimated weighted-average fair value of Tyco and
TyCom options granted during fiscal 2000 was $16.26 and $17.47, respectively.

    2003:
 
 
Options Outstanding
 
Options Exercisable
Range of Exercise Prices
 
Number
Outstanding
 
Weighted-Average
Exercise Price
 
Weighted-Average
Remaining
Contractual
Life—Years
 
Number
Exercisable
 
Weighted-Average
Exercise Price
$0.00 to $10.00
 
9,545,030
 
$
9.35
 
7.1
 
4,111,697
 
$
8.49
10.01 to 20.00
 
32,736,317
 
 
15.06
 
8.5
 
5,775,040
 
 
16.93
20.01 to 30.00
 
33,586,742
 
 
24.21
 
6.9
 
18,519,967
 
 
24.60
30.01 to 40.00
 
17,587,765
 
 
35.58
 
5.3
 
17,391,563
 
 
35.56
40.01 to 50.00
 
34,623,076
 
 
44.77
 
7.0
 
16,106,353
 
 
44.82
50.01 to 60.00
 
17,026,286
 
 
52.65
 
6.6
 
7,661,565
 
 
54.48
60.01 to 142.42
 
3,534,737
 
 
93.55
 
6.3
 
3,273,359
 
 
92.92
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
148,639,953
 
 
32.28
 
7.0
 
72,839,544
 
 
36.38
 
 
 
 
 
 
 
 
 
 
 
Deferred Stock Units—The following weighted-average assumptions were used for fiscal 2002:


                                                             TYCO
                                                         -------------

Expected stock price volatility........................             52%
Risk free interest rate................................           4.03%
Expected annual dividend yield per share...............          $0.05
Expected life of options...............................      5.0 years


    The following weighted-average assumptions were used for fiscal 2001:


                                                             TYCO           TYCOM
                                                         -------------   ------------

Expected stock price volatility........................             39%            80%
Risk free interest rate................................           5.18%          4.71%
Expected annual dividend yield per share...............  $        0.05             --
Expected life of options...............................     4.4 years      4.0 years


    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


    The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of what the effects may be in future years. SFAS No. 123 does not
apply to awards prior to 1995. Additional awards in future years are
anticipated.

    DEFERRED STOCK UNITS--During fiscal 2002, the Company granted 1.7 million deferred stock units ("DSU's") under the existing Incentive Plan described above during fiscal 2003 and fiscal 2002, all of which were outstanding at September 30, 2002.2003. DSU's are notional units that are tied to the value of Tyco common shares with distribution deferred until termination of employment. Distribution, when made, will be in the form of actual shares. Similar to restricted stock grants that vest through the passage of time, the fair market value of the DSU's at the time of the grant is amortized to expense over the period of vesting. The unamortized portion of deferred compensation expense is recorded as a reduction of shareholders' 108

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

23.  SHAREHOLDERS' EQUITY (CONTINUED)
equity. Recipients of DSU's do not have the right to vote such shares and do not have the right to
108

receive cash dividends. However, they have the right to receive dividends in the form of additional DSU's.

    DIVIDENDS--Tyco
Dividends—Tyco has paid a quarterly cash dividend of $0.0125 per common share since July 1997.

24.  COMPREHENSIVE (LOSS) INCOME
26.    Comprehensive Income (Loss)
        The purpose of reporting comprehensive income (loss) income is to report a measure of all changes in equity, other than transactions with shareholders. Total comprehensive income (loss) income is included in the Consolidated Statements of Shareholders' Equity. The components of accumulated other comprehensive income (loss)
income are as follows ($ in millions):

                                                UNREALIZED
                                   CURRENCY       (LOSS)     UNREALIZED LOSS    MINIMUM    ACCUMULATED OTHER
                                  TRANSLATION    GAIN ON      ON DERIVATIVE     PENSION      COMPREHENSIVE
                                     ITEMS      SECURITIES     INSTRUMENTS     LIABILITY     (LOSS) INCOME
                                  -----------   ----------   ---------------   ---------   -----------------

Balance at September 30, 1999...   $  (432.1)   $     7.8        $    --        $ (25.8)       $  (450.1)
  Pre-tax current period
    change......................      (384.0)     1,094.8(1)          --           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
  Pre-tax current period
    change......................      (186.4)    (1,227.0)(1)        (2.3)       (401.6)        (1,817.3)
  Income tax benefit............          --         24.8             --          140.6            165.4
  Activity of discontinued
    operations net of tax.......       (13.3)          --          (63.4)            --            (76.7)
                                   ---------    ---------        -------        -------        ---------
Balance at September 30, 2001...    (1,015.8)      (118.7)         (65.7)        (279.3)        (1,479.5)
  Pre-tax current period
    change......................       101.4        116.6(2)         1.6         (611.7)          (392.1)
  Income tax (expense)
    benefit.....................          --         (3.2)            --          205.9            202.7
  Activity of discontinued
    operations net of tax.......        13.3           --           63.4             --             76.7
                                   ---------    ---------        -------        -------        ---------
Balance at September 30, 2002...   $  (901.1)   $    (5.3)       $  (0.7)       $(685.1)       $(1,592.2)
                                   =========    =========        =======        =======        =========


- ------------------------------

 
 
Currency
Translation
Items
 
Unrealized
(Loss)
Gain on
Securities
 
Unrealized
(Loss) Gain
on Derivative
Instruments
 
Minimum
Pension
Liability
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Balance at September 30, 2000
 
$
(798.1
)
$
1,083.5
 
$
—
 
$
(18.3
)
$
267.1
 
 
Pre-tax current period change
 
 
(191.6
)
 
(1,187.4
)(1)
 
(2.3
)
 
(401.6
)
 
(1,782.9
)
 
Income tax benefit
 
 
—
 
 
24.8
 
 
—
 
 
140.6
 
 
165.4
 
 
Activity of discontinued operations net of tax
 
 
(13.3
)
 
—
 
 
(63.4
)
 
—
 
 
(76.7
)
 
 
 
 
 
 
 
Balance at September 30, 2001
 
 
(1,003.0
)
 
(79.1
)
 
(65.7
)
 
(279.3
)
 
(1,427.1
)
 
Pre-tax current period change
 
 
92.2
 
 
77.0
  (2)
 
1.6
 
 
(611.7
)
 
(440.9
)
 
Income tax (expense) benefit
 
 
—
 
 
(3.2
)
 
—
 
 
205.9
 
 
202.7
 
 
Activity of discontinued operations net of tax
 
 
13.3
 
 
—
 
 
63.4
 
 
—
 
 
76.7
 
 
 
 
 
 
 
 
Balance at September 30, 2002
 
 
(897.5
)
 
(5.3
)
 
(0.7
)
 
(685.1
)
 
(1,588.6
)
 
Pre-tax current period change
 
 
1,445.4
 
 
3.9
 
 
2.7
 
 
(206.1
)
 
1,245.9
 
 
Income tax (expense) benefit
 
 
—
 
 
(1.9
)
 
—
 
 
71.3
 
 
69.4
 
 
 
 
 
 
 
 
Balance at September 30, 2003
 
$
547.9
 
$
(3.3
)
$
2.0
 
$
(819.9
)
$
(273.3
)
 
 
 
 
 
 
 
(1)
Primarily related to Tyco's investment in 360networks, Inc.

(2)
Includes $112.8 million pre-tax ($100.6 million after-tax) reclassification of unrealized losses related to the other than temporary impairment of investments.

25.  SUPPLEMENTARY INCOME STATEMENT INFORMATION
109
27. Supplementary Income Statement Information
        Selected supplementary income statement information is presented below ($ in millions).

                                                                    FOR THE YEAR ENDED
                                                                      SEPTEMBER 30,
                                                              ------------------------------
                                                                2002       2001       2000
                                                              --------   --------   --------

Company-sponsored research and development..................   $633.4     $572.0     $527.5
Advertising.................................................   $180.7     $152.3     $149.3


                                      109

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

26.  SUPPLEMENTARY BALANCE SHEET INFORMATION
 
 
For the Year Ended September 30,
 
 
2003
 
2002
 
2001
Company-sponsored research and development
 
$
670.6
 
$
633.4
 
$
572.0
Advertising
 
$
186.6
 
$
180.7
 
$
152.3
28.    Supplementary Balance Sheet Information
        Selected supplementary balance sheet information is presented below ($ in millions).

                                                                 SEPTEMBER 30,
                                                              --------------------
                                                                2002        2001
                                                              ---------   --------

Purchased materials and manufactured parts..................  $ 1,235.0   $1,552.0
Work in process.............................................      976.0    1,110.2
Finished goods..............................................    2,505.0    2,439.1
                                                              ---------   --------
  Inventories...............................................  $ 4,716.0   $5,101.3
                                                              =========   ========

Contracts in process........................................  $   409.6   $  580.1
Prepaid expenses and other..................................    1,069.3      952.2
                                                              ---------   --------
  Other current assets......................................  $ 1,478.9   $1,532.3
                                                              =========   ========

Land........................................................  $   548.0   $  534.1
Buildings...................................................    2,708.8    2,557.7
Subscriber systems..........................................    4,711.6    3,998.5
Machinery and equipment.....................................    8,479.5    8,226.6
Leasehold improvements......................................      363.9      325.0
Construction in progress....................................      775.2      920.4
Accumulated depreciation....................................   (7,617.5)  (6,592.0)
                                                              ---------   --------
  Property, plant and equipment, net........................  $ 9,969.5   $9,970.3
                                                              =========   ========

Construction in progress--TGN...............................  $   372.9   $1,643.8
TGN--placed in service......................................      214.3      714.6
Accumulated depreciation TGN--placed in service.............       (5.6)     (16.0)
                                                              ---------   --------
  Tyco Global Network.......................................  $   581.6   $2,342.4
                                                              =========   ========

Long-term investments.......................................  $   283.0   $  597.9
Non-current portion of deferred income taxes................    1,611.3    1,440.4
Other.......................................................    1,548.6    1,486.5
                                                              ---------   --------
  Other assets..............................................  $ 3,442.9   $3,524.8
                                                              =========   ========

Accrued payroll and payroll related costs (including
  bonuses)..................................................  $   954.4   $  957.6
Current portion of deferred income taxes....................       18.1       71.3
Accrued expenses and other..................................    4,298.3    4,152.9
                                                              ---------   --------
  Accrued expenses and other current liabilities............  $ 5,270.8   $5,181.8
                                                              =========   ========

Deferred revenue--non-current portion.......................  $ 1,195.8   $1,115.0
Deferred income taxes.......................................    1,078.7    1,655.0
Other.......................................................    3,187.6    1,966.9
                                                              ---------   --------
  Other long-term liabilities...............................  $ 5,462.1   $4,736.9
                                                              =========   ========
 
 
September 30,
 
 
 
2003
 
2002
 
Purchased materials and manufactured parts
 
$
1,095.3
 
$
1,234.6
 
Work in process
 
 
942.7
 
 
975.4
 
Finished goods
 
 
2,254.2
 
 
2,397.9
 
 
 
 
 
 
Inventories
 
$
4,292.2
 
$
4,607.9
 
 
 
 
 

Short-term investments

 

$

51.4

 

$

—

 
Short-term investments (restricted)
 
 
424.9
 
 
93.5
 
Contracts in process
 
 
387.2
 
 
408.5
 
Prepaid expenses and other
 
 
1,185.3
 
 
959.7
 
 
 
 
 
 
Other current assets
 
$
2,048.8
 
$
1,461.7
 
 
 
 
 

Land

 

$

563.7

 

$

548.0

 
Buildings
 
 
2,810.1
 
 
2,708.8
 
Subscriber systems
 
 
4,930.5
 
 
4,614.6
 
Machinery and equipment
 
 
10,146.5
 
 
8,467.9
 
Leasehold improvements
 
 
362.7
 
 
363.9
 
Construction in progress
 
 
550.0
 
 
773.0
 
Accumulated depreciation
 
 
(9,063.7
)
 
(7,615.2
)
 
 
 
 
 
 
 
10,299.8
 
 
9,861.0
 
Construction in progress—TGN
 
 
—
 
 
372.9
 
TGN—placed in service
 
 
—
 
 
214.3
 
Accumulated depreciation TGN—placed in service
 
 
—
 
 
(5.6
)
 
 
 
 
 
Property, plant and equipment, net
 
$
10,299.8
 
$
10,442.6
 
 
 
 
 

Non-current restricted cash

 

$

303.0

 

$

—

 
Long-term investments
 
 
162.1
 
 
297.8
 
Long-term investments (restricted)
 
 
45.3
 
 
—
 
Non-current portion of deferred income taxes
 
 
2,157.0
 
 
1,800.3
 
Other
 
 
1,609.6
 
 
1,493.4
 
 
 
 
 
 
Other assets
 
$
4,277.0
 
$
3,591.5
 
 
 
 
 
 
 
 
 
 
 
 
 
110
                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

27.  SUPPLEMENTARY CASH FLOW INFORMATION

Accrued payroll and payroll related costs (including bonuses)

 

$

861.8

 

$

963.7

 
Current portion of deferred income taxes
 
 
27.9
 
 
18.1
 
Accrued expenses and other
 
 
3,109.4
 
 
4,366.9
 
 
 
 
 
 
Accrued expenses and other current liabilities
 
$
3,999.1
 
$
5,348.7
 
 
 
 
 

Deferred revenue—non-current portion

 

$

1,192.2

 

$

1,195.8

 
Deferred income taxes
 
 
1,554.7
 
 
985.6
 
Income taxes
 
 
2,027.7
 
 
2,166.9
 
Other
 
 
3,465.1
 
 
2,940.6
 
 
 
 
 
 
Other long-term liabilities
 
$
8,239.7
 
$
7,288.9
 
 
 
 
 
29.    Supplementary Cash Flow Information
        Selected supplementary cash flow information is presented below ($ in millions).
 
 
For the Year Ended September 30,
 
 
2003
 
2002
 
2001

Interest paid

 

$

1,143.0

 

$

943.8

 

$

896.5
Income taxes paid
 
 
608.0
 
 
668.3
 
 
798.9
        Net (repayments of) proceeds from debt consist of the following:


                                                               FOR THE YEAR ENDED SEPTEMBER 30,
                                                              -----------------------------------
                                                                 2002         2001        2000
                                                              ----------   ----------   ---------

Net proceeds (repayments of) from short-term debt...........  $ 2,065.2    $(1,947.7)   $ (736.0)
Proceeds from issuance of long-term debt....................    5,417.0     11,794.7     1,793.2
Repayment of long-term debt, including debt tenders.........   (5,530.9)    (1,311.4)     (376.8)
                                                              ---------    ---------    --------
                                                              $ 1,951.3    $ 8,535.6    $  680.4
                                                              =========    =========    ========


28.  SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)following ($ in millions):
 
 
For the Year Ended September 30,
 
 
 
2003
 
2002
 
2001
 
Net (repayments of) proceeds from short-term debt
 
$
(7,908.6
)
$
2,065.2
 
$
(1,947.7
)
Proceeds from issuance of long-term debt
 
 
4,387.5
 
 
5,417.0
 
 
11,794.7
 
Repayment of long-term debt, including debt tenders
 
 
(1,097.5
)
 
(5,530.9
)
 
(1,311.4
)
 
 
 
 
 
 
 
$
(4,618.6
)
$
1,951.3
 
$
8,535.6
 
 
 
 
 
 
30.    Variable Interest Entities
        During fiscal 2003, the Company adopted FIN 46, which requires identification of the Company's participation in VIE's, which are entities with a level of invested equity that is not sufficient to fund future activities to permit them to operate on a stand alone basis, or whose equity holders lack certain characteristics of a controlling financial interest. For entities identified as VIE's, FIN 46 sets forth a model to evaluate potential consolidation based on an assessment of which party to VIE's, if any, bears a majority of the risk to its expected losses, or stands to gain from a majority of its expected returns.
        The Company has programs under which it sells machinery and equipment to investors who, in turn, purchase and receive ownership and security interests in those assets. As describedsuch, the Company may have certain investments in those affiliated companies whereby it provides varying degrees of financial support and where the investors are entitled to a share in the results of those entities but do not
111

consolidate these entities. While these entities may be substantive operating companies, they have been evaluated for potential consolidation under FIN 46.
        As discussed in Note 1 to these Consolidated Financial Statements, during
the fourth quarter of fiscal 2002,12, the Company identified various adjustments
relatinghas three synthetic lease programs utilized, to prior year financial statements,some extent, by all of the effectsCompany's segments to finance capital expenditures for manufacturing machinery and equipment and for ships used by Tyco Submarine Telecommunications. During fiscal 2003, the Company restructured one of the synthetic leases to meet the requirements of FIN 46 for operating lease accounting and reclassified the remaining two leases as capital leases. In addition, the Company evaluated other investments and concluded that four joint ventures that were previously accounted for under the equity method of accounting within Tyco Infrastructure Services, in which we own a minority interest, meet the consolidation criteria set forth in FIN 46. Accordingly, these ventures have been consolidated onto the Company's balance sheet. The following table presents balance sheet information for the VIE's that were included within the Company's Consolidated Balance Sheet under the transitional accounting prescribed by FIN 46 effective July 1, 2003 ($ in millions):
Restricted cash
 
$
21.7
 
Accounts receivable
 
 
7.5
 
Property, plant and equipment
 
 
433.8
 
Other assets(1)
 
 
28.2
 
 
 
 
 
Total assets
 
$
491.2
 
 
 
 

Loans payable and current maturities of long-term debt

 

$

10.6

 
Accounts payable
 
 
2.1
 
Accrued expenses and other current liabilities(2)
 
 
(31.6
)
Long-term debt
 
 
551.6
 
Other long-term liabilities(3)
 
 
(12.8
)
Minority interest
 
 
46.4
 
 
 
 
 
Total liabilities
 
 
566.3
 
 
 
 
 
Cumulative effect of accounting change, net of tax
 
$
(75.1
)
 
 
 
(1)
Includes the elimination of $16.2 million of equity investments related to joint ventures previously recorded under the equity method which are not
material individually or innow consolidated under FIN 46.

(2)
Includes the aggregate to any prior year or quarter, and
therefore prior year financial statements have not been restated. Instead, these
adjustments that aggregate $261.6elimination of $32.7 million on a pre-tax basis have beenof accrued expenses associated with synthetic leases previously recorded inas operating leases which are now recorded as capital leases under FIN 46.

(3)
Includes the first quarterelimination of fiscal 2002. Also during the fourth quarter$14.7 million of fiscal
2002, the Company identified certain matters requiring adjustment to thelong-term liabilities associated with synthetic leases previously reported quarterly results for the first three quarters of fiscal
2002. The nature and amounts of these adjustmentsrecorded as operating leases which are described in Notes
(1) through (3) of the quarterly table below for fiscal 2002.now recorded as capital leases under FIN 46.
112
31.    Summarized Quarterly Financial Data (Unaudited)
        Summarized quarterly financial data for the yearyears ended September 30, 2002 on
an as previously reported basis (as adjusted to reflect the reclassification of
Tyco Capital as discontinued operations)

                                      111

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

28.  SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)2003 and restated for the adjustments referred to above are included in the table
below2002 ($ in millions, except per share data).

                                                             FOR THE YEAR ENDED SEPTEMBER 30, 2002
                                                     -----------------------------------------------------
                                                     1ST QTR.(1)   2ND QTR.(2)   3RD QTR.(3)   4TH QTR.(4)
                                                     -----------   -----------   -----------   -----------

Net revenues as previously reported................   $8,629.6      $ 8,661.5     $ 9,123.7     $ 9,349.9
Adjustments........................................      (50.9)         (50.1)        (20.0)           --
                                                      --------      ---------     ---------     ---------
Restated
 
 
For the Year Ended September 30, 2003
 
 
 
1st Qtr.(1)
 
2nd Qtr.(2)
 
3rd Qtr.(3)
 
4th Qtr.(4)
 
Net revenues
 
$
8,927.4
 
$
8,988.5
 
$
9,412.6
 
$
9,472.8
 
Gross profit
 
 
3,195.4
 
 
3,133.0
 
 
3,398.9
 
 
3,182.1
 
Income (loss) from continuing operations
 
 
565.9
 
 
124.3
 
 
566.5
 
 
(222.0
)
Net income (loss)
 
 
585.9
 
 
124.3
 
 
566.5
 
 
(297.1
)

Basic income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 
 
Income (loss) from continuing operations
 
 
0.28
 
 
0.06
 
 
0.28
 
 
(0.11
)
 
Income (loss) per common share
 
 
0.29
 
 
0.06
 
 
0.28
 
 
(0.15
)
Diluted income (loss) per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
 
0.28
 
 
0.06
 
 
0.27
 
 
(0.11
)
 
Income (loss) per common share
 
 
0.29
 
 
0.06
 
 
0.27
 
 
(0.15
)
(1)
Includes net restructuring credits of $3.7 million, of which credits of $0.2 million are included in cost of sales, and charges of $55.1 million which are included in selling, general and administrative expenses. Also includes other income of $1.4 million from the early retirement of debt. Net income also includes income from discontinued operations of $20.0 million, net of tax.

(2)
Includes charges recorded for changes in estimates of $388.7 million which arose from the Company's intensified internal audits and detailed controls and operating reviews (see Changes in Estimates Recorded During the Quarter Ended March 31, 2003 below) and a charge for the impairment of intangible assets of $77.0 million. In addition, includes a charge of $91.5 million for a retroactive, incremental premium on prior period directors and officers insurance, which is included in selling, general and administrative expenses. In addition, includes other income of $22.7 million from the early retirement of debt.

(3)
Includes net restructuring credits of $16.5 million, of which credits of $7.0 million are included in cost of sales, a net charge for the impairment of long-lived assets of $0.1 million, and net charges of $43.7 million, of which charges of $20.0 million are included in cost of sales and net charges of $23.7 million are included in selling, general and administrative expenses. In addition, includes a $151.8 million loss from the retirement of debt and $18.7 million of interest income.

(4)
Includes net revenues..............................   $8,578.7      $ 8,611.4     $ 9,103.7     $ 9,349.9
                                                      ========      =========     =========     =========
Gross profit as previously reported................   $3,384.0      $ 2,997.4     $ 3,301.6     $ 2,939.3
Adjustments........................................      (39.7)         (16.0)         (3.9)           --
                                                      --------      ---------     ---------     ---------
Restated gross profit..............................   $3,344.3      $ 2,981.4     $ 3,297.7     $ 2,939.3
                                                      ========      =========     =========     =========
Income (loss) from continuing operations as
  previously reported..............................   $1,186.3      $(2,095.1)    $   (84.1)    $(1,496.0)
Adjustments........................................     (251.6)          40.1        (370.0)           --
                                                      --------      ---------     ---------     ---------
Restated income (loss) from continuing
  operations.......................................   $  934.7      $(2,055.0)    $  (454.1)    $(1,496.0)
                                                      ========      =========     =========     =========
Net income (loss) as previously reported...........   $1,451.0      $(6,418.1)    $(2,319.4)    $(1,543.7)
Adjustments........................................     (251.6)          40.1        (370.0)           --
                                                      --------      ---------     ---------     ---------
Restated net income (loss).........................   $1,199.4      $(6,378.0)    $(2,689.4)    $(1,543.7)
                                                      ========      =========     =========     =========

BASIC INCOME (LOSS) PER COMMON SHARE:
  Income (loss) from continuing operations as
    previously reported............................       0.60          (1.05)        (0.04)        (0.75)
  Adjustments......................................      (0.13)          0.02         (0.19)           --
  Restated.........................................       0.47          (1.03)        (0.23)        (0.75)
  Net income (loss) per common share as previous
    reported.......................................       0.73          (3.22)        (1.16)        (0.77)
  Adjustments......................................      (0.13)          0.02         (0.19)           --
  Restated.........................................       0.61          (3.20)        (1.35)        (0.77)

DILUTED INCOME (LOSS) PER COMMON SHARE:
  Income (loss) from continuing operations as
    previously reported............................       0.59          (1.05)        (0.04)        (0.75)
  Adjustments......................................      (0.13)          0.02         (0.19)           --
  Restated.........................................       0.47          (1.03)        (0.23)        (0.75)

  Net income (loss) per common share...............       0.73          (3.22)        (1.16)        (0.77)
  Adjustments......................................      (0.13)          0.02         (0.19)           --
  Restated.........................................       0.60          (3.20)        (1.35)        (0.77)


- ------------------------------

(1) Includes restructuring and other unusual charges of $25.7$7.9 million, of which charges of $9.6 million are included in cost of sales, charges for the impairment of long-lived assets of $737.6 million, charges for the impairment of goodwill of $278.4 million, and other charges totaling $49.8 million, of which $14.0 million is included in cost of sales related to the dismantlement of customers' ADT security systems, and $35.8 million is included in selling, general and administrative expenses primarily related to uncollectible receivables and severance of corporate employees. Also includes charges of $11.5 million for the write-down of investments, an other charge of $0.1 million and a charge of $2.4 million, which is included in interest expense. Net income also includes an after-tax loss of $75.1 million for the cumulative effect of an accounting change.
Changes in Estimates Recorded During the Quarter Ended March 31, 2003—During the quarter ended March 31, 2003, the Company intensified a process whereby internal audits and detailed controls and operating reviews were conducted. As a result of this process, the Company recorded $388.7 million of pre-tax charges relating to new information and changes in facts and circumstances occurring during the quarter. The process included assessing the continued recoverability of assets, including accounts receivable, inventory and installed security systems and equity investments, and the estimated costs of settling legal, environmental and insurance obligations. The assessments were based on an analysis of the impact of circumstances that occurred during the quarter and on our assessment of the recoverability of certain assets and costs to settle certain liabilities. The assessments include changes in judgments relative to the adequacy of reserves and contingent liabilities. Concurrent with
113

this review process and resulting assessments by management during the quarter, we decided to discontinue existing product lines and terminate an information technology systems implementation project. As a result of these decisions, inventory and other asset balances were written down to their net realizable value.
        The impact of the $388.7 million of net charges recorded in the second quarter and included in the Consolidated Statement of Operations for fiscal 2003, is as follows:
Cost of sales
 
$
(110.5
)
Selling, general and administrative expense
 
 
(243.1
)
Restructuring and other credits (charges), net
 
 
59.6
 
Charges for the impairment of long-lived assets
 
 
(10.2
)
 
 
 
Operating income
 
 
(304.2
)
Other expense, net
 
 
(84.5
)
 
 
 
Income from continuing operations before taxes and minority interest
 
$
(388.7
)
 
 
 
        The net charges of $388.7 million include $139.6 million related to asset reserve valuations, $95.4 million of increased cost estimates for insurance accruals ($49.3 million for workers' compensation accruals and $46.1 million for product and general liability insurance accruals), $84.1 million related to an other than temporary decline in the value of investments, $62.3 million for other accounting estimate changes described below, environmental accruals of $18.0 million, legal accruals of $20.0 million, other various accruals of $15.2 million, $16.4 million for account write-offs included primarily in selling, general and administrative expenses, where we concluded that the recoverability of various asset balances had become doubtful and $10.2 million write-off representing capitalized external costs of a European financial computer system based on the Company's decision in the second quarter to discontinue the new system under development and continue to use the existing system. The above charges are partially offset by credits of $72.5 million, of which $12.9 million is included in cost of sales, related to restructuring charge reversals (see Note 5) that arose during the second quarter of fiscal 2003.
        The $139.6 million of adjustments for asset valuations includes a $76.4 million write-down of inventories, $51.9 million increase for allowance for doubtful accounts and $11.3 million write-off of subscriber systems. The inventory charge of $76.4 million was primarily due to the finalization of plans regarding the disposition of inventory in connection with curtailed programs and product lines and the Company's decision during the second quarter to exit certain product lines in our fire and security business. The increase in the allowance for doubtful accounts of $51.9 million and the write-off of subscriber systems of $11.3 million was primarily due to the further deterioration in the accounts receivable aging and increased customer cancellations in certain non-strategic European security businesses during the second quarter. The inventory charge and subscriber systems adjustments are included in cost of sales and the allowance for doubtful accounts is included in selling, general and administrative expenses. We do not expect these changes to have an adverse impact on future operations.
        The workers' compensation and product and general liability changes in estimate are based on third-party actuarial reviews of insurance liabilities. The charge of $95.4 million is included in selling, general and administrative expenses ($65.2 million), and cost of product sales ($30.2 million). This
114

adjustment relates to changes in facts and circumstances occurring during the quarter ended March 31, 2003 which necessitate a change in assumptions and estimates. In particular, the Company identified trend data which required the Company to revise its assumptions as a result of an unanticipated increase in the number and changes in the nature of claims incurred and the rate of increase of medical costs, as well as the emergence of previously unanticipated new claims. In addition, the Company experienced an increase in workers' compensation expense, particularly in California, as a result of adverse legal developments toward employers.
        The $84.1 million investment write-down, included in other (expense) income, net, primarily consists of a $75.6 million loss on various equity investments. It became evident in the quarter ended March 31, 2003 that the declines in the fair values of the investments were other than temporary, primarily due to depressed economic conditions. Factors that management considered in making their assessment included investees' inability to raise funds during the quarter, bankruptcy, continued losses by the investees, lack of sufficient future expected cash flows, and lower entity valuations based on recent private financing activity. During the quarter ended March 31, 2003, the Company also recognized other expense of $8.5 million in connection with a bank guarantee on behalf of an equity investee (see Note 20). It is possible that the Company may have additional write-downs on other investments if market conditions continue recent negative trends.
        The $62.3 million for other accounting estimates includes a charge to selling, general and administrative expenses of $17.3 million resulting from the Company's revision in the second quarter of deferred commissions related to long-term contracts, $12.1 million to write-down company-owned properties based on real estate assessments and purchase offers received in the second quarter for assets held for sale, $11.5 million of additional severance related to terminated executives, and $21.4 million of other accounting estimate changes, none of which are individually significant, that were included primarily in selling, general and administrative expenses.
        An increase of $18.0 million due to increased environmental accruals resulting from the finalization of the Company's plan to remediate one of its manufacturing sites in the second quarter, $20.0 million to establish an accrual related to the estimated settlement amount for contractual disputes and other legal matters based on our determination that such amounts became both probable and
115

estimable in the second quarter, and $15.2 million of other miscellaneous increased accrual estimates are primarily included in selling, general and administrative expenses.
 
 
For the Year Ended September 30, 2002
 
 
 
1st Qtr.(1)
 
2nd Qtr.(2)
 
3rd Qtr.(3)
 
4th Qtr.(4)
 
Net revenues
 
$
8,510.5
 
$
8,607.1
 
$
9,099.4
 
$
9,372.8
 
Gross profit
 
 
3,306.1
 
 
2,974.8
 
 
3,285.6
 
 
2,958.0
 
Income (loss) from continuing operations
 
 
1,038.7
 
 
(2,085.9
)
 
(395.9
)
 
(1,395.1
)
Net income (loss)
 
 
1,303.4
 
 
(6,408.9
)
 
(2,631.2
)
 
(1,442.8
)

Basic income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 
 
Income (loss) from continuing operations
 
 
0.53
 
 
(1.05
)
 
(0.20
)
 
(0.70
)
 
Income (loss) per common share
 
 
0.66
 
 
(3.22
)
 
(1.32
)
 
(0.72
)
Diluted income (loss) per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
 
0.52
 
 
(1.05
)
 
(0.20
)
 
(0.70
)
 
Income (loss) per common share
 
 
0.65
 
 
(3.22
)
 
(1.32
)
 
(0.72
)
(1)
Includes charges totaling $30.5 million, which includes restructuring and other charges and impairment charges of $26.2 million, of which $5.8 million is included in cost of sales, primarily related to the termination of employees and the write-down of inventory associated with the closure of facilities and the exiting of a product line. Also includes charges related to prior years of $261.6 million (see Note 1) and a loss of $4.3 million related to the early retirement of debt.
    Adjustments related to the first quarter of fiscal 2002 include:
    $199.7 million decrease to net income ($261.6 million pre-tax) as described
    in Note 1; $28.3 million decrease to net income related to recording as a
    deferred credit the amount by which the dealer reimbursements exceed the
    actual costs under the Company's ADT authorized dealer program;
    $23.6 million decrease to net income to reflect the reversal of
    inter-company sales ($50.9 million) and the associated margin
    ($29.0 million) between the Company's Engineered Products and Services and
    Electronics' segment.

                                         (FOOTNOTES CONTINUED ON FOLLOWING PAGE)

                                      112

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

28.  SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)

(FOOTNOTES CONTINUED FROM PRECEDING PAGE)



(2) "As previously reported" information reflects the Company's previous
    restatement of the Form 10-Q to record impairment of goodwill related to the
    Tyco Capital reporting unit. 
Includes charges totaling $3,147.8$3,132.7 million. The charges consist of impairment charges of $2,351.7$2,389.2 million primarily related to the write-down of the TGN; restructuring and other unusual charges of $655.1$600.1 million, of which $251.3 million is included in cost of sales, primarily related to the write-down of inventory and facility closures within the Electronics segment; a loss on the write-off of investments of $180.6 million,$141.0 million; and a charge related to prior years of activity
    $39.6 million (see Note 1). Also includes a loss of $2.4 million relating to the early retirement of debt.
    Adjustments related to the second quarter of fiscal 2002 include:
    $26.9 million decrease to net income related to recording as a deferred
    credit the amount by which the dealer reimbursements exceed the actual costs
    under the Company's ADT authorized dealer program; $27.4 million increase to
    net income to reflect the elimination of inter-company sales
    ($50.1 million) and the associated margin ($16.0 million) between the
    Company's Engineered Products and Services and Electronics' segment; and a
    $39.6 million increase to net income to reflect the reduction of an
    impairment charge related to an other than temporary impairment associated
    with an available for sale security.



(3)
Includes charges totaling $1,286.6$1,172.4 million. The charges consist of goodwill impairment charges of $844.4 million relating to continuing operations; impairment charges of $239.4$125.2 million related primarily to the impairment of
    intangible assets associated with a Healthcare business line sold and the impairment of property, plant and equipment associated with the termination of a software development project within the Fire and Security Services
    segment; net restructuring and other unusual charges of $182.9 million, of which $2.5 million is included in cost of sales, related primarily to the write-off of investment banking fees and other deal costs associated with the terminated break-up plan and certain acquisitions that were not completed, and to a less extent, to severance associated with consolidating and streamlining operations and an accrual for anticipated resolution and disposition of various labor and employment matters within the Fire and Security Services segment; a write-off of purchased in-process research and development related to the acquisition of Sensormatic of $13.4 million; and a loss on the write-down of investments of $6.5 million.
    Adjustments related to the third quarter

(4)
Includes charges totaling $2,426.7 million consisting of fiscal 2002 include:
    $25.5 million decrease to net income related to recording as a deferred
    credit the amount by which the dealer reimbursements exceed the actual costs
    under the Company's ADT authorized dealer program; $2.7 million decrease to
    net income to reflect the reversal of inter-company sales ($20.0 million)
    and the associated margin ($3.9 million) between the Company's Engineered
    Products and Services and Electronics' segment; $10.4 million decrease to
    net income to reflect an increase in interest expense to adjust the amount
    of capitalized interest; $331.4 million to decrease net income to reflect a
    revision to the amount of previously reported goodwill impairment regarding
    the Company's Infrastructure and Telecommunications reporting units.

(4) Includes goodwill impairment charges of $499.3 million relating to continuing operations; net restructuring and other unusual charges of $1,090.6$1,066.0 million, of which $375.8 million is included in cost of sales and $115.0 million relates to a bad debt provision which is included in selling, general and administrative expenses, primarily related to the decision to significantly scale back our Telecommunications business; impairment of long-lived assets of $898.4$794.6 million primarily related to the write-down of property, plant and equipment within our Telecommunications business and, to
    a much lesser extent, the write-down of intangible assets associated with
    our dealer program within the Fire and Security Services segment;business; the write-off of in-process research and development of $4.4 million within our Fire and Security business; loss on the write-down of investments of $123.3 million; anda gain on sale of businesses of $7.2 million. Also
    includes$23.6 million; and $37.3 million of income related to the early retirement of debt.

                                      113

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

28.  SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)


                                                           FOR THE YEAR ENDED SEPTEMBER 30, 2001(1)
                                                     -----------------------------------------------------
                                                     1ST QTR.(2)   2ND QTR.(3)   3RD QTR.(4)   4TH QTR.(5)
                                                     -----------   -----------   -----------   -----------

Net revenues.......................................   $8,029.0      $ 8,809.8     $ 8,680.4     $ 8,517.4
Gross profit.......................................    3,054.6        3,295.3       3,292.2       3,444.2
Income from continuing operations..................    1,000.8        1,100.1       1,105.8       1,194.8
Net income(6)......................................      317.4        1,100.1       1,177.0       1,376.1

BASIC EARNINGS PER COMMON SHARE:
  Income from continuing operations................       0.58           0.63          0.61          0.62
  Net income.......................................       0.18           0.63          0.65          0.71
DILUTED EARNINGS PER COMMON SHARE:
  Income from continuing operations................       0.57           0.62          0.60          0.61
  Net income.......................................       0.18           0.62          0.64          0.70


- ------------------------------

(1) As described in Note 1, $125.4 million of pre-tax charges relating to fiscal
    2001 were reported in fiscal 2002. The $125.4 million relate to the fiscal
    2001 quarters as follows: 1st Qtr.--$21.2 million;
    2nd Qtr.--$22.9 million; 3rd Qtr.--$67.4 million; and
    4th Qtr.--$13.9 million.

(2) Includes a net restructuring and other unusual credit of $175.6 million, of
    which a charge of $25.0 million is included in cost of sales. The net credit
    consists of a net gain on the sale of businesses of $410.4 million
    principally related to the sale of ADT Automotive; a write-off of purchased
    in-process research and development of $184.3 million; an unusual charge of
    $25.0 million related to the sale of inventory, which had been written-up
    under purchase accounting; restructuring and other unusual charges of
    $18.1 million primarily related to an environmental remediation project and
    the closure of a manufacturing plant; and a charge of $7.4 million primarily
    related to the impairment of property, plant and equipment associated with
    the closure of a manufacturing plant.

(3) Includes a net restructuring and other unusual charge of $15.2 million, of
    which a charge of $46.4 million is included in cost of sales. The net charge
    consists of an unusual credit of $166.8 million related to the settlement of
    litigation, an unusual charge of $46.4 million, which is included in cost of
    sales, primarily related to the sale of inventory, which had been written-up
    under purchase accounting; an unusual charge of $114.0 million primarily
    related to the closure of facilities; charges of $17.7 million related to
    the impairment of property, plant and equipment associated with the closure
    of these facilities; and a net loss on the sale of businesses and
    investments of $3.9 million primarily related to the sale of ADT Automotive.
    Also includes $15.8 million related to the early retirement of debt.

(4) Includes a net restructuring and other unusual charge of $118.8 million, of
    which charges of $7.4 million are included in cost of sales. The net charge
    consists of a net loss on sale of investments of $129.9 million and
    restructuring and other unusual charges of $50.2 million and impairment
    charges of $2.8 million related to certain Fire and Security Services
    businesses, partially offset by a $64.1 million net gain on the sale of
    shares of a subsidiary. Also includes $5.2 million related to the early
    retirement of debt.

(5) Includes a restructuring and other unusual charge of $423.8 million, of
    which charges of $106.1 million are included in cost of sales. The charge
    consists of restructuring and other unusual charges of $283.9 million, of
    which charges of $58.4 million are included in cost of sales, primarily
    related to the closure of manufacturing facilities within the Electronics
    and Fire and Security Services segments; charges of $92.2 million related to
    the impairment of property, plant and equipment associated with the
    facilities closures; and an unusual charge of $47.7 million, which is
    included in cost of sales, related to the sale of inventory, which had been
    written-up under purchase accounting. Also includes $5.3 million related to
    the early retirement of debt.

(6) Cumulative effect of accounting changes in fiscal 2001 relate to the
    adoption of SAB 101 and SFAS No. 133.

                                      114

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

29.  TYCO INTERNATIONAL GROUP
116
32.  Tyco International Group S.A.
        Tyco International Group S.A. ("TIG"), a wholly-owned subsidiary of the Company, has public debt securities outstanding (see Note 18)19), which are fully and unconditionally guaranteed by Tyco. The following tables present condensed consolidating financial information for Tyco, TIG and all other subsidiaries. Condensed financial information for Tyco and TIG on a stand-alone basis are presented using the equity method of accounting for subsidiaries in which they own or control twenty percent or more of the voting shares.

CONSOLIDATING STATEMENT OF OPERATIONS
                     FOR THE YEAR ENDED SEPTEMBER
For the Year Ended September 30, 2002
                                ($ IN MILLIONS)


                                         TYCO            TYCO
                                     INTERNATIONAL   INTERNATIONAL      OTHER       CONSOLIDATING
                                         LTD.         GROUP S.A.     SUBSIDIARIES    ADJUSTMENTS      TOTAL
                                     -------------   -------------   ------------   -------------   ---------

Net revenues.......................   $       --       $     --       $35,643.7       $     --      $35,643.7
Cost of product sales..............           --             --        19,510.8             --       19,510.8
Cost of services...................           --             --         3,570.2             --        3,570.2
Selling, general and administrative
  expenses.........................         26.6           (0.5)        8,060.7             --        8,086.8
Restructuring and other unusual
  charges, net.....................         25.3            0.4         1,178.2             --        1,203.9
Charges for the impairment of long-
  lived assets.....................           --             --         3,489.5             --        3,489.5
Goodwill impairment................           --             --         1,343.7             --        1,343.7
Write-off of purchased in-process
  research and development.........           --             --            17.8             --           17.8
                                      ----------       --------       ---------       --------      ---------
OPERATING (LOSS) INCOME............        (51.9)           0.1        (1,527.2)            --       (1,579.0)
Interest (expense) income, net.....       (116.7)        (894.0)           51.0             --         (959.7)
Other income (expense), net........          2.6           33.1          (268.7)            --         (233.0)
Net loss on sale of common shares
  of a subsidiary..................           --             --           (39.6)            --          (39.6)
Equity in net (loss) income of
  subsidiaries.....................     (8,724.0)       1,806.7              --        6,917.3             --
Intercompany interest and fees.....       (521.7)         861.1          (339.4)            --             --
                                      ----------       --------       ---------       --------      ---------
(Loss) income from continuing
  operations before income taxes
  and minority interest............     (9,411.7)       1,807.0        (2,123.9)       6,917.3       (2,811.3)
Income taxes.......................           --           (0.2)         (257.5)            --         (257.7)
Minority interest..................           --             --            (1.4)            --           (1.4)
                                      ----------       --------       ---------       --------      ---------
(LOSS) INCOME FROM CONTINUING
  OPERATIONS.......................     (9,411.7)       1,806.8        (2,382.8)       6,917.3       (3,070.4)
Loss from discontinued operations
  of Tyco Capital, net of tax......           --             --        (6,282.5)            --       (6,282.5)
Loss on sale of Tyco Capital, net
  of tax...........................           --             --           (58.8)            --          (58.8)
                                      ----------       --------       ---------       --------      ---------
NET (LOSS) INCOME..................   $ (9,411.7)      $1,806.8       $(8,724.1)      $6,917.3      $(9,411.7)
                                      ==========       ========       =========       ========      =========


                                      115

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

29.  TYCO INTERNATIONAL GROUP S.A. (CONTINUED)

                     2003
($ in millions)
 
 
Tyco
International
Ltd.
 
Tyco
International
Group S.A.
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Total
 
Net revenues
 
$
—
 
$
—
 
$
36,801.3
 
$
—
 
$
36,801.3
 
Cost of product sales
 
 
—
 
 
—
 
 
19,740.2
 
 
—
 
 
19,740.2
 
Cost of services
 
 
—
 
 
—
 
 
4,151.7
 
 
—
 
 
4,151.7
 
Selling, general and administrative expenses
 
 
53.8
 
 
2.9
 
 
8,756.7
 
 
—
 
 
8,813.4
 
Restructuring and other credits, net
 
 
—
 
 
(0.1
)
 
(74.2
)
 
—
 
 
(74.3
)
Charges for the impairment of long-lived assets
 
 
—
 
 
—
 
 
824.9
 
 
—
 
 
824.9
 
Goodwill impairment
 
 
—
 
 
—
 
 
278.4
 
 
—
 
 
278.4
 
 
 
 
 
 
 
 
Operating (loss) income
 
 
(53.8
)
 
(2.8
)
 
3,123.6
 
 
—
 
 
3,067.0
 
Interest income
 
 
1.5
 
 
34.4
 
 
71.3
 
 
—
 
 
107.2
 
Interest expense
 
 
(43.1
)
 
(996.2
)
 
(108.7
)
 
—
 
 
(1,148.0
)
Other income (expense), net
 
 
22.9
 
 
(159.4
)
 
(86.9
)
 
—
 
 
(223.4
)
Equity in net income of subsidiaries
 
 
1,769.7
 
 
579.6
 
 
—
 
 
(2,349.3
)
 
—
 
Intercompany interest and fees
 
 
(717.6
)
 
953.8
 
 
(236.2
)
 
—
 
 
—
 
 
 
 
 
 
 
 
Income from continuing operations before income taxes and minority interest
 
 
979.6
 
 
409.4
 
 
2,763.1
 
 
(2,349.3
)
 
1,802.8
 
Income taxes
 
 
—
 
 
(0.1
)
 
(764.4
)
 
—
 
 
(764.5
)
Minority interest
 
 
—
 
 
—
 
 
(3.6
)
 
—
 
 
(3.6
)
 
 
 
 
 
 
 
Income from continuing operations
 
 
979.6
 
 
409.3
 
 
1,995.1
 
 
(2,349.3
)
 
1,034.7
 
Income from discontinued operations of Tyco Capital, net of tax
 
 
—
 
 
—
 
 
20.0
 
 
—
 
 
20.0
 
 
 
 
 
 
 
 
Income before cumulative effect of accounting change
 
 
979.6
 
 
409.3
 
 
2,015.1
 
 
(2,349.3
)
 
1,054.7
 
Cumulative effect of accounting change, net of tax
 
 
—
 
 
—
 
 
(75.1
)
 
—
 
 
(75.1
)
 
 
 
 
 
 
 
Net income
 
$
979.6
 
$
409.3
 
$
1,940.0
 
$
(2,349.3
)
$
979.6
 
 
 
 
 
 
 
 
117

CONSOLIDATING STATEMENT OF OPERATIONS
                     FOR THE YEAR ENDED SEPTEMBER
For the Year Ended September 30, 2001
                                ($ IN MILLIONS)


                                         TYCO            TYCO
                                     INTERNATIONAL   INTERNATIONAL      OTHER       CONSOLIDATING
                                         LTD.         GROUP S.A.     SUBSIDIARIES    ADJUSTMENTS      TOTAL
                                     -------------   -------------   ------------   -------------   ---------

Net revenues.......................    $     --        $     --       $34,036.6       $      --     $34,036.6
Cost of product sales..............          --              --        18,334.4              --      18,334.4
Cost of services...................          --              --         2,615.9              --       2,615.9
Selling, general and administrative
  expenses.........................        13.9            (4.4)        6,352.0              --       6,361.5
Restructuring and other unusual
  charges, net.....................          --              --           233.6              --         233.6
Charges for the impairment of long-
  lived assets.....................          --              --           120.1              --         120.1
Write-off of purchased in-process
  research and development.........          --              --           184.3              --         184.3
                                       --------        --------       ---------       ---------     ---------
OPERATING (LOSS) INCOME............       (13.9)            4.4         6,196.3              --       6,186.8
Interest expense, net..............       (51.4)         (724.2)           (0.9)             --        (776.5)
Other income, net..................          --              --           250.3              --         250.3
Net gain on sale of common shares
  of a subsidiary..................          --              --            64.1              --          64.1
Equity in net income of
  subsidiaries.....................     4,139.8         2,608.8              --        (6,748.6)           --
Intercompany interest and fees.....      (103.9)          749.9          (646.0)             --            --
                                       --------        --------       ---------       ---------     ---------
Income from continuing operations
  before income taxes and minority
  interest.........................     3,970.6         2,638.9         5,863.8        (6,748.6)      5,724.7
Income taxes.......................          --            (0.4)       (1,275.3)             --      (1,275.7)
Minority interest..................          --              --           (47.5)             --         (47.5)
                                       --------        --------       ---------       ---------     ---------
INCOME FROM CONTINUING
  OPERATIONS.......................     3,970.6         2,638.5         4,541.0        (6,748.6)      4,401.5
Income from discontinued operations
  of Tyco Capital, net of tax......          --              --           252.5              --         252.5
                                       --------        --------       ---------       ---------     ---------
Income before cumulative effect of
  accounting changes...............     3,970.6         2,638.5         4,793.5        (6,748.6)      4,654.0
Cumulative effect of accounting
  changes, net of tax..............          --           (29.7)         (653.7)             --        (683.4)
                                       --------        --------       ---------       ---------     ---------
NET INCOME.........................    $3,970.6        $2,608.8       $ 4,139.8       $(6,748.6)    $ 3,970.6
                                       ========        ========       =========       =========     =========


                                      116

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

29.  TYCO INTERNATIONAL GROUP S.A. (CONTINUED)

                     2002
($ in millions)
 
 
Tyco
International
Ltd.
 
Tyco
International
Group S.A.
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Total
 
Net revenues
 
$
—
 
$
—
 
$
35,589.8
 
$
—
 
$
35,589.8
 
Cost of product sales
 
 
—
 
 
—
 
 
19,495.1
 
 
—
 
 
19,495.1
 
Cost of services
 
 
—
 
 
—
 
 
3,570.2
 
 
—
 
 
3,570.2
 
Selling, general and administrative expenses
 
 
26.9
 
 
(0.5
)
 
8,155.2
 
 
—
 
 
8,181.6
 
Restructuring and other charges, net
 
 
0.7
 
 
0.4
 
 
1,123.2
 
 
—
 
 
1,124.3
 
Charges for the impairment of long-lived assets
 
 
—
 
 
—
 
 
3,309.5
 
 
—
 
 
3,309.5
 
Goodwill impairment
 
 
—
 
 
—
 
 
1,343.7
 
 
—
 
 
1,343.7
 
Write-off of purchased in-process research and development
 
 
—
 
 
—
 
 
17.8
 
 
—
 
 
17.8
 
 
 
 
 
 
 
 
Operating (loss) income
 
 
(27.6
)
 
0.1
 
 
(1,424.9
)
 
—
 
 
(1,452.4
)
Interest income
 
 
0.4
 
 
37.9
 
 
79.0
 
 
—
 
 
117.3
 
Interest expense
 
 
(117.1
)
 
(931.9
)
 
(28.0
)
 
—
 
 
(1,077.0
)
Other income (expense), net
 
 
2.6
 
 
33.1
 
 
(252.3
)
 
—
 
 
(216.6
)
Equity in net (loss) income of subsidiaries
 
 
(8,516.1
)
 
2,002.9
 
 
—
 
 
6,513.2
 
 
—
 
Intercompany interest and fees
 
 
(521.7
)
 
861.1
 
 
(339.4
)
 
—
 
 
—
 
 
 
 
 
 
 
 
(Loss) income from continuing operations before income taxes and minority interest
 
 
(9,179.5
)
 
2,003.2
 
 
(1,965.6
)
 
6,513.2
 
 
(2,628.7
)
Income taxes
 
 
—
 
 
(0.2
)
 
(207.9
)
 
—
 
 
(208.1
)
Minority interest
 
 
—
 
 
—
 
 
(1.4
)
 
—
 
 
(1.4
)
 
 
 
 
 
 
 
(Loss) income from continuing operations
 
 
(9,179.5
)
 
2,003.0
 
 
(2,174.9
)
 
6,513.2
 
 
(2,838.2
)
Loss from discontinued operations of Tyco Capital, net of tax
 
 
—
 
 
—
 
 
(6,282.5
)
 
—
 
 
(6,282.5
)
Loss on sale of Tyco Capital, net of tax
 
 
—
 
 
—
 
 
(58.8
)
 
—
 
 
(58.8
)
 
 
 
 
 
 
 
Net (loss) income
 
$
(9,179.5
)
$
2,003.0
 
$
(8,516.2
)
$
6,513.2
 
$
(9,179.5
)
 
 
 
 
 
 
 
118

CONSOLIDATING STATEMENT OF OPERATIONS
                     FOR THE YEAR ENDED SEPTEMBER
For the Year Ended September 30, 2000
                                ($ IN MILLIONS)


                                         TYCO            TYCO
                                     INTERNATIONAL   INTERNATIONAL      OTHER       CONSOLIDATING
                                         LTD.         GROUP S.A.     SUBSIDIARIES    ADJUSTMENTS      TOTAL
                                     -------------   -------------   ------------   -------------   ---------

Net revenues.......................    $     --        $     --       $28,931.9       $      --     $28,931.9
Cost of product sales..............          --              --        15,959.8              --      15,959.8
Cost of services...................          --              --         1,971.4              --       1,971.4
Selling, general and administrative
  expenses.........................        12.5             9.9         5,229.6              --       5,252.0
Restructuring and other unusual
  charges, net.....................          --              --           175.3              --         175.3
Charges for the impairment of long-
  lived assets.....................          --              --            99.0              --          99.0
                                       --------        --------       ---------       ---------     ---------
OPERATING (LOSS) INCOME............       (12.5)           (9.9)        5,496.8              --       5,474.4
Interest income (expense), net.....         3.5          (698.9)          (74.2)             --        (769.6)
Other expense......................          --              --            (0.3)             --          (0.3)
Net gain on sale of common shares
  of a subsidiary..................          --              --         1,760.0              --       1,760.0
Equity in net income of
  subsidiaries.....................     4,543.3         2,556.1              --        (7,099.4)           --
Intercompany interest and fees.....       (14.4)          709.0          (694.6)             --            --
                                       --------        --------       ---------       ---------     ---------
Income before income taxes and
  minority interest................     4,519.9         2,556.3         6,487.7        (7,099.4)      6,464.5
Income taxes.......................          --            (0.2)       (1,925.7)             --      (1,925.9)
Minority interest..................          --              --           (18.7)             --         (18.7)
                                       --------        --------       ---------       ---------     ---------
NET INCOME.........................    $4,519.9        $2,556.1       $ 4,543.3       $(7,099.4)    $ 4,519.9
                                       ========        ========       =========       =========     =========


                                      117

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

29.  TYCO INTERNATIONAL GROUP S.A. (CONTINUED)
                          2001
($ in millions)
 
 
Tyco
International
Ltd.
 
Tyco
International
Group S.A.
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Total
 
Net revenues
 
$
—
 
$
—
 
$
34,002.1
 
$
—
 
$
34,002.1
 
Cost of product sales
 
 
—
 
 
—
 
 
18,319.7
 
 
—
 
 
18,319.7
 
Cost of services
 
 
—
 
 
—
 
 
2,615.9
 
 
—
 
 
2,615.9
 
Selling, general and administrative expenses
 
 
54.0
 
 
(4.4
)
 
6,695.7
 
 
—
 
 
6,745.3
 
Restructuring and other charges, net
 
 
—
 
 
—
 
 
400.4
 
 
—
 
 
400.4
 
Charges for the impairment of long-lived assets
 
 
—
 
 
—
 
 
120.1
 
 
—
 
 
120.1
 
Write-off of purchased in-process research and development
 
 
—
 
 
—
 
 
184.3
 
 
—
 
 
184.3
 
 
 
 
 
 
 
 
Operating (loss) income
 
 
(54.0
)
 
4.4
 
 
5,666.0
 
 
—
 
 
5,616.4
 
Interest income
 
 
8.4
 
 
3.8
 
 
116.1
 
 
—
 
 
128.3
 
Interest expense
 
 
(59.8
)
 
(728.0
)
 
(117.0
)
 
—
 
 
(904.8
)
Other income, net
 
 
—
 
 
—
 
 
250.3
 
 
—
 
 
250.3
 
Net gain on sale of common shares of a subsidiary
 
 
—
 
 
—
 
 
24.5
 
 
—
 
 
24.5
 
Equity in net income of subsidiaries
 
 
3,673.3
 
 
2,201.7
 
 
—
 
 
(5,875.0
)
 
—
 
Intercompany interest and fees
 
 
(103.9
)
 
749.9
 
 
(646.0
)
 
—
 
 
—
 
 
 
 
 
 
 
 
Income from continuing operations before income taxes and minority interest
 
 
3,464.0
 
 
2,231.8
 
 
5,293.9
 
 
(5,875.0
)
 
5,114.7
 
Income taxes
 
 
—
 
 
(0.4
)
 
(1,171.9
)
 
—
 
 
(1,172.3
)
Minority interest
 
 
—
 
 
—
 
 
(47.5
)
 
—
 
 
(47.5
)
 
 
 
 
 
 
 
Income from continuing operations
 
 
3,464.0
 
 
2,231.4
 
 
4,074.5
 
 
(5,875.0
)
 
3,894.9
 
Income from discontinued operations of Tyco Capital, net of tax
 
 
—
 
 
—
 
 
252.5
 
 
—
 
 
252.5
 
 
 
 
 
 
 
 
Income before cumulative effect of accounting changes
 
 
3,464.0
 
 
2,231.4
 
 
4,327.0
 
 
(5,875.0
)
 
4,147.4
 
Cumulative effect of accounting changes, net of tax
 
 
—
 
 
(29.7
)
 
(653.7
)
 
—
 
 
(683.4
)
 
 
 
 
 
 
 
Net income
 
$
3,464.0
 
$
2,201.7
 
$
3,673.3
 
$
(5,875.0
)
$
3,464.0
 
 
 
 
 
 
 
 
119

CONSOLIDATING BALANCE SHEET
                               SEPTEMBER
September 30, 2002
                                ($ IN MILLIONS)


                                             TYCO            TYCO
                                         INTERNATIONAL   INTERNATIONAL      OTHER       CONSOLIDATING
                                             LTD.         GROUP S.A.     SUBSIDIARIES    ADJUSTMENTS      TOTAL
                                         -------------   -------------   ------------   -------------   ----------

ASSETS
Current Assets:
  Cash and cash equivalents............    $     37.6      $  2,970.7     $  3,178.5     $        --    $  6,186.8
  Accounts receivables, net............            --             0.1        5,848.5              --       5,848.6
  Inventories..........................            --              --        4,716.0              --       4,716.0
  Intercompany receivables.............         277.3           101.2        3,949.5        (4,328.0)           --
  Other current assets.................            --           275.3        2,737.9              --       3,013.2
                                           ----------      ----------     ----------     -----------    ----------
    Total current assets...............         314.9         3,347.3       20,430.4        (4,328.0)     19,764.6
Tyco Global Network....................            --              --          581.6              --         581.6
Property, Plant and Equipment, Net.....           5.2             0.2        9,964.1              --       9,969.5
Goodwill, Net..........................            --             0.7       26,092.5              --      26,093.2
Intangible Assets, Net.................            --              --        6,562.6              --       6,562.6
Investment In Subsidiaries.............      40,534.1        32,220.0             --       (72,754.1)           --
Intercompany Loans Receivable..........         218.3        21,000.6       13,334.8       (34,553.7)           --
Other Assets...........................          23.1            21.4        3,398.4              --       3,442.9
                                           ----------      ----------     ----------     -----------    ----------
      TOTAL ASSETS.....................    $ 41,095.6      $ 56,590.2     $ 80,364.4     $(111,635.8)   $ 66,414.4
                                           ==========      ==========     ==========     ===========    ==========

LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
  Loans payable and current maturities
    of long-term debt..................    $       --      $  7,610.4     $    108.6     $        --    $  7,719.0
  Accounts payable.....................           0.2             0.2        3,169.6              --       3,170.0
  Accrued expenses and other current
    liabilities........................          35.8           267.2        4,967.8              --       5,270.8
  Intercompany payables................       3,434.9           514.6          378.5        (4,328.0)           --
  Other................................            --             0.7        3,471.6              --       3,472.3
                                           ----------      ----------     ----------     -----------    ----------
    Total current liabilities..........       3,470.9         8,393.1       12,096.1        (4,328.0)     19,632.1
Long-Term Debt.........................       3,519.1        11,876.5        1,091.2              --      16,486.8
Intercompany Loans Payable.............       9,315.0         4,019.8       21,218.9       (34,553.7)           --
Other Long-Term Liabilities............            --            52.4        5,409.7              --       5,462.1
                                           ----------      ----------     ----------     -----------    ----------
      TOTAL LIABILITIES................      16,305.0        24,341.8       39,815.9       (38,881.7)     41,581.0
Minority Interest......................            --              --           42.8              --          42.8
Shareholders' Equity:
  Preference shares....................            --              --        4,680.0        (4,680.0)           --
  Common shares........................         403.6              --           (4.5)             --         399.1
  Other shareholders' equity...........      24,387.0        32,248.4       35,830.2       (68,074.1)     24,391.5
                                           ----------      ----------     ----------     -----------    ----------
      TOTAL SHAREHOLDERS' EQUITY.......      24,790.6        32,248.4       40,505.7       (72,754.1)     24,790.6
                                           ----------      ----------     ----------     -----------    ----------
      TOTAL LIABILITIES AND
        SHAREHOLDERS' EQUITY...........    $ 41,095.6      $ 56,590.2     $ 80,364.4     $(111,635.8)   $ 66,414.4
                                           ==========      ==========     ==========     ===========    ==========


                                      118

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

29.  TYCO INTERNATIONAL GROUP S.A. (CONTINUED)

                          2003
($ in millions)
 
 
Tyco
International
Ltd.
 
Tyco
International
Group S.A.
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
47.0
 
$
2,281.9
 
$
1,857.8
 
$
—
 
$
4,186.7
 
Restricted cash
 
 
—
 
 
65.0
 
 
76.8
 
 
—
 
 
141.8
 
Accounts receivable, net
 
 
—
 
 
—
 
 
5,714.8
 
 
—
 
 
5,714.8
 
Inventories
 
 
—
 
 
—
 
 
4,292.2
 
 
—
 
 
4,292.2
 
Intercompany receivables
 
 
111.0
 
 
442.7
 
 
6,091.8
 
 
(6,645.5
)
 
—
 
Other current assets
 
 
—
 
 
431.2
 
 
2,472.8
 
 
—
 
 
2,904.0
 
 
 
 
 
 
 
 
Total current assets
 
 
158.0
 
 
3,220.8
 
 
20,506.2
 
 
(6,645.5
)
 
17,239.5
Property, Plant and Equipment, Net
 
 
0.5
 
 
0.2
 
 
10,299.1
 
 
—
 
 
10,299.8
Goodwill
 
 
—
 
 
0.7
 
 
25,938.0
 
 
—
 
 
25,938.7
Intangible Assets, Net
 
 
—
 
 
—
 
 
5,790.0
 
 
—
 
 
5,790.0
Investment In Subsidiaries
 
 
52,327.9
 
 
42,726.9
 
 
—
 
 
(95,054.8
)
 
—
Intercompany Loans Receivable
 
 
218.3
 
 
19,704.8
 
 
24,168.2
 
 
(44,091.3
)
 
—
Other Assets
 
 
23.4
 
 
502.2
 
 
3,751.4
 
 
—
 
 
4,277.0
 
 
 
 
 
 
 
 
Total Assets
 
$
52,728.1
 
$
66,155.6
 
$
90,452.9
 
$
(145,791.6
)
$
63,545.0
 
 
 
 
 
 

Liabilities and Shareholder's Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Current Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans payable and current maturities of long-term debt
 
$
2,476.5
 
$
—
 
$
241.9
 
$
—
 
$
2,718.4
 
Accounts payable
 
 
1.3
 
 
0.4
 
 
2,715.0
 
 
—
 
 
2,716.7
 
Accrued expenses and other current liabilities
 
 
50.8
 
 
271.3
 
 
3,677.0
 
 
—
 
 
3,999.1
 
Intercompany payables
 
 
5,162.4
 
 
929.4
 
 
553.7
 
 
(6,645.5
)
 
—
 
Other
 
 
—
 
 
—
 
 
1,138.1
 
 
—
 
 
1,138.1
 
 
 
 
 
 
 
 
Total current liabilities
 
 
7,691.0
 
 
1,201.1
 
 
8,325.7
 
 
(6,645.5
)
 
10,572.3
Long-Term Debt
 
 
—
 
 
16,816.7
 
 
1,434.0
 
 
—
 
 
18,250.7
Intercompany Loans Payable
 
 
18,615.0
 
 
5,553.2
 
 
19,923.1
 
 
(44,091.3
)
 
—
Other Long-Term Liabilities
 
 
53.1
 
 
—
 
 
8,186.6
 
 
—
 
 
8,239.7
 
 
 
 
 
 
 
 
Total Liabilities
 
 
26,359.1
 
 
23,571.0
 
 
37,869.4
 
 
(50,736.8
)
 
37,062.7
Minority Interest
 
 
—
 
 
—
 
 
113.3
 
 
—
 
 
113.3
Shareholders' Equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preference shares
 
 
—
 
 
—
 
 
4,680.0
 
 
(4,680.0
)
 
—
 
Common shares
 
 
403.8
 
 
—
 
 
(4.2
)
 
—
 
 
399.6
 
Other shareholders' equity
 
 
25,965.2
 
 
42,584.6
 
 
47,794.4
 
 
(90,374.8
)
 
25,969.4
 
 
 
 
 
 
 
 
Total Shareholders' Equity
 
 
26,369.0
 
 
42,584.6
 
 
52,470.2
 
 
(95,054.8
)
 
26,369.0
 
 
 
 
 
 
 
 
Total Liabilities and Shareholders' Equity
 
$
52,728.1
 
$
66,155.6
 
$
90,452.9
 
$
(145,791.6
)
$
63,545.0
 
 
 
 
 
 
120
CONSOLIDATING BALANCE SHEET
                               SEPTEMBER
September 30, 2001
                                ($ IN MILLIONS)


                                             TYCO            TYCO
                                         INTERNATIONAL   INTERNATIONAL      OTHER       CONSOLIDATING
                                             LTD.         GROUP S.A.     SUBSIDIARIES    ADJUSTMENTS      TOTAL
                                         -------------   -------------   ------------   -------------   ----------

ASSETS
iCurrent Assets:
  Cash and cash equivalents............    $     1.4       $    37.0      $  1,740.8     $        --    $  1,779.2
  Accounts receivable, net.............          4.2              --         6,449.0              --       6,453.2
  Inventories..........................           --              --         5,101.3              --       5,101.3
  Intercompany receivables.............        520.5             8.3         5,035.3        (5,564.1)           --
  Other current assets.................           --             7.0         2,505.5              --       2,512.5
                                           ---------       ---------      ----------     -----------    ----------
    Total current assets...............        526.1            52.3        20,831.9        (5,564.1)     15,846.2
Net Assets of Discontinued
  Operations...........................           --              --        10,598.0              --      10,598.0
Tyco Global Network....................           --              --         2,342.4              --       2,342.4
Property, Plant and Equipment, Net.....          6.4             0.7         9,963.2              --       9,970.3
Goodwill, Net..........................           --             0.7        23,263.3              --      23,264.0
Intangible Assets, Net.................           --              --         5,476.9              --       5,476.9
Investment In Subsidiaries.............     48,324.8        31,608.4              --       (79,933.2)           --
Intercompany Loans Receivable..........        218.3        16,672.3         9,610.1       (26,500.7)           --
Other Assets...........................         97.6            73.8         3,353.4              --       3,524.8
                                           ---------       ---------      ----------     -----------    ----------
      TOTAL ASSETS.....................    $49,173.2       $48,408.2      $ 85,439.2     $(111,998.0)   $ 71,022.6
                                           =========       =========      ==========     ===========    ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
  Loans payable and current maturities
    of long-term debt..................    $      --       $ 1,106.5      $    916.5     $        --    $  2,023.0
  Accounts payable.....................           --             0.2         3,692.4              --       3,692.6
  Accrued expenses and other current
    liabilities........................         30.1           127.3         5,024.4              --       5,181.8
  Intercompany payables................      4,296.2           739.1           528.8        (5,564.1)           --
  Other................................           --             0.4         3,753.1              --       3,753.5
                                           ---------       ---------      ----------     -----------    ----------
    Total current liabilities..........      4,326.3         1,973.5        13,915.2        (5,564.1)     14,650.9
Long-Term Debt.........................      3,499.4        14,843.3         1,253.3              --      19,596.0
Intercompany Loans Payable.............      9,610.1              --        16,890.6       (26,500.7)           --
Other Long-Term Liabilities............           --             5.0         4,731.9              --       4,736.9
                                           ---------       ---------      ----------     -----------    ----------
      TOTAL LIABILITIES................     17,435.8        16,821.8        36,791.0       (32,064.8)     38,983.8
Minority Interest......................           --              --           301.4              --         301.4
Shareholders' Equity:
  Preference shares....................           --              --         1,710.0        (1,710.0)           --
  Common shares........................        390.5              --            (3.4)             --         387.1
  Other shareholders' equity...........     31,346.9        31,586.4        46,640.2       (78,223.2)     31,350.3
                                           ---------       ---------      ----------     -----------    ----------
      TOTAL SHAREHOLDERS' EQUITY.......     31,737.4        31,586.4        48,346.8       (79,933.2)     31,737.4
                                           ---------       ---------      ----------     -----------    ----------
      TOTAL LIABILITIES AND
        SHAREHOLDERS' EQUITY...........    $49,173.2       $48,408.2      $ 85,439.2     $(111,998.0)   $ 71,022.6
                                           =========       =========      ==========     ===========    ==========


                                      119

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

29.  TYCO INTERNATIONAL GROUP S.A. (CONTINUED)

                     2002
($ in millions)
 
 
Tyco
International
Ltd.
 
Tyco
International
Group S.A.
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
37.6
 
$
2,970.7
 
$
3,177.4
 
$
—
 
$
6,185.7
 
Restricted cash
 
 
—
 
 
181.4
 
 
14.8
 
 
—
 
 
196.2
 
Accounts receivable, net
 
 
—
 
 
0.1
 
 
5,831.8
 
 
—
 
 
5,831.9
 
Inventories
 
 
—
 
 
—
 
 
4,607.9
 
 
—
 
 
4,607.9
 
Intercompany receivables
 
 
277.3
 
 
101.2
 
 
3,949.5
 
 
(4,328.0
)
 
—
 
Other current assets
 
 
—
 
 
93.9
 
 
2,723.8
 
 
—
 
 
2,817.7
 
 
 
 
 
 
 
 
Total current assets
 
 
314.9
 
 
3,347.3
 
 
20,305.2
 
 
(4,328.0
)
 
19,639.4
Property, Plant and Equipment, Net
 
 
5.2
 
 
0.2
 
 
10,437.2
 
 
—
 
 
10,442.6
Goodwill
 
 
—
 
 
0.7
 
 
26,019.8
 
 
—
 
 
26,020.5
Intangible Assets, Net
 
 
—
 
 
—
 
 
5,805.8
 
 
—
 
 
5,805.8
Investment In Subsidiaries
 
 
39,871.4
 
 
32,005.4
 
 
—
 
 
(71,876.8
)
 
—
Intercompany Loans Receivable
 
 
218.3
 
 
21,000.6
 
 
13,334.8
 
 
(34,553.7
)
 
—
Other Assets
 
 
23.1
 
 
63.7
 
 
3,504.7
 
 
—
 
 
3,591.5
 
 
 
 
 
 
 
 
    Total Assets
 
$
40,432.9
 
$
56,417.9
 
$
79,407.5
 
$
(110,758.5
)
$
65,499.8
 
 
 
 
 
 

Liabilities and Shareholder's Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Current Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans payable and current maturities of long-term debt
 
$
—
 
$
7,610.4
 
$
108.6
 
$
—
 
$
7,719.0
 
Accounts payable
 
 
0.2
 
 
0.2
 
 
3,173.4
 
 
—
 
 
3,173.8
 
Accrued expenses and other current liabilities
 
 
35.8
 
 
267.9
 
 
5,045.0
 
 
—
 
 
5,348.7
 
Intercompany payables
 
 
3,434.9
 
 
514.6
 
 
378.5
 
 
(4,328.0
)
 
—
 
Other
 
 
—
 
 
—
 
 
1,282.1
 
 
—
 
 
1,282.1
 
 
 
 
 
 
 
 
Total current liabilities
 
 
3,470.9
 
 
8,393.1
 
 
9,987.6
 
 
(4,328.0
)
 
17,523.6
Long-Term Debt
 
 
3,519.1
 
 
11,918.8
 
 
1,091.2
 
 
—
 
 
16,529.1
Intercompany Loans Payable
 
 
9,315.0
 
 
4,019.8
 
 
21,218.9
 
 
(34,553.7
)
 
—
Other Long-Term Liabilities
 
 
46.6
 
 
52.4
 
 
7,189.9
 
 
—
 
 
7,288.9
 
 
 
 
 
 
 
 
    Total Liabilities
 
 
16,351.6
 
 
24,384.1
 
 
39,487.6
 
 
(38,881.7
)
 
41,341.6
Minority Interest
 
 
—
 
 
—
 
 
76.9
 
 
—
 
 
76.9
Shareholders' Equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preference shares
 
 
—
 
 
—
 
 
4,680.0
 
 
(4,680.0
)
 
—
 
Common shares
 
 
403.6
 
 
—
 
 
(4.5
)
 
—
 
 
399.1
 
Other shareholders' equity
 
 
23,677.7
 
 
32,033.8
 
 
35,167.5
 
 
(67,196.8
)
 
23,682.2
 
 
 
 
 
 
 
 
    Total Shareholders' Equity
 
 
24,081.3
 
 
32,033.8
 
 
39,843.0
 
 
(71,876.8
)
 
24,081.3
 
 
 
 
 
 
 
 
    Total Liabilities and Shareholders' Equity
 
$
40,432.9
 
$
56,417.9
 
$
79,407.5
 
$
(110,758.5
)
$
65,499.8
 
 
 
 
 
 
121
CONSOLIDATING STATEMENT OF CASH FLOWS
                     FOR THE YEAR ENDED SEPTEMBER
For the Year Ended September 30, 2002
                                ($ IN MILLIONS)


                                                     TYCO            TYCO
                                                 INTERNATIONAL   INTERNATIONAL      OTHER       CONSOLIDATING
                                                     LTD.         GROUP S.A.     SUBSIDIARIES    ADJUSTMENTS      TOTAL
                                                 -------------   -------------   ------------   -------------   ---------

CASH FLOWS FROM OPERATING ACTIVITIES:
  Net cash (used in) provided by operating
    activities from continuing operations......    $(1,128.0)      $   (91.1)      $ 6,914.6      $      --     $ 5,695.5
  Net cash provided by operating activities
    from discontinued operations...............           --              --         1,462.9             --       1,462.9
                                                   ---------       ---------       ---------      ---------     ---------
  Net cash (used in) provided by operating
    activities.................................     (1,128.0)          (91.1)        8,377.5             --       7,158.4

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment,
  net..........................................           --              --        (1,708.7)            --      (1,708.7)
Construction in progress--Tyco Global
  Network......................................           --              --        (1,146.0)            --      (1,146.0)
Acquisition of businesses, net of cash
  acquired.....................................           --              --        (3,084.8)            --      (3,084.8)
Cash paid for purchase accounting and holdback/
  earn-out liabilities.........................           --              --          (624.1)            --        (624.1)
Net proceeds from the sale of CIT..............           --              --         4,395.4             --       4,395.4
Disposal of other businesses, net of cash
  sold.........................................           --              --           138.7             --         138.7
Net proceeds from (purchases of) investments...          6.3           (93.5)           70.4             --         (16.8)
Increase in intercompany loans.................           --          (258.1)             --          258.1            --
Net decrease (increase) in investment in
  subsidiaries.................................      1,021.9              --           (71.8)        (950.1)           --
Restricted cash................................           --          (181.4)          (14.8)            --        (196.2)
Other..........................................           --              --           (83.2)            --         (83.2)
                                                   ---------       ---------       ---------      ---------     ---------
  Net cash provided by (used in) investing
    activities from continuing operations......      1,028.2          (533.0)       (2,128.9)        (692.0)     (2,325.7)
  Net cash provided by investing activities
    from discontinued operations...............           --              --         2,684.3             --       2,684.3
                                                   ---------       ---------       ---------      ---------     ---------
  Net cash provided by (used in) investing
    activities.................................      1,028.2          (533.0)          555.4         (692.0)        358.6

CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments of) proceeds from debt.........        (28.5)        3,557.8        (1,578.0)            --       1,951.3
Proceeds from sale of common shares for
  acquisitions.................................        501.6              --          (501.6)            --            --
Proceeds from exercise of options..............         58.3              --           127.4             --         185.7
Dividends paid.................................       (100.3)             --              --             --        (100.3)
Repurchase of Tyco common shares...............           --              --          (789.2)            --        (789.2)
Financing from parent..........................           --              --           258.1         (258.1)           --
Repayment of intercompany note payable.........       (295.1)             --           295.1             --            --
Net capital distributions to parent............           --              --          (950.1)         950.1            --
Capital contribution to Tyco Capital...........           --              --          (200.0)            --        (200.0)
Other..........................................           --              --            (9.7)            --          (9.7)
                                                   ---------       ---------       ---------      ---------     ---------
  Net cash provided by (used in) financing
    activities from continuing operations......        136.0         3,557.8        (3,348.0)         692.0       1,037.8
  Net cash used in financing activities from
    discontinued operations....................           --              --        (2,874.6)            --      (2,874.6)
                                                   ---------       ---------       ---------      ---------     ---------
  Net cash provided by (used in) financing
    activities.................................        136.0         3,557.8        (6,222.6)         692.0      (1,836.8)
NET INCREASE IN CASH AND CASH EQUIVALENTS......         36.2         2,933.7         2,710.3             --       5,680.2
TYCO CAPITAL'S CASH AND CASH EQUIVALENTS
  TRANSFERRED TO DISCONTINUED OPERATIONS.......           --              --        (1,272.6)            --      (1,272.6)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
  PERIOD.......................................          1.4            37.0         1,740.8             --       1,779.2
                                                   ---------       ---------       ---------      ---------     ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.....    $    37.6       $ 2,970.7       $ 3,178.5      $      --     $ 6,186.8
                                                   =========       =========       =========      =========     =========


                                      120

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

29.  TYCO INTERNATIONAL GROUP S.A. (CONTINUED)

                     2003
($ in millions)
 
 
Tyco
International
Ltd.
 
Tyco
International
Group S.A.
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Total
 
Cash Flows From Operating Activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities from continuing operations
 
$
1,171.4
 
$
623.5
 
$
3,551.2
 
$
—
 
$
5,346.1
 
 
Net cash provided by operating activities from discontinued operations
 
 
—
 
 
—
 
 
20.0
 
 
—
 
 
20.0
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
 
 
1,171.4
 
 
623.5
 
 
3,571.2
 
 
—
 
 
5,366.1
 
Cash Flows From Investing Activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sale (purchase) of property, plant and equipment, net
 
 
4.0
 
 
—
 
 
(1,173.6
)
 
—
 
 
(1,169.6
)
Construction of Tyco Global Network
 
 
—
 
 
—
 
 
(112.7
)
 
—
 
 
(112.7
)
Acquisition of businesses, net of cash acquired
 
 
—
 
 
—
 
 
(44.0
)
 
—
 
 
(44.0
)
Acquisition of customer accounts (ADT dealer program)
 
 
—
 
 
—
 
 
(596.8
)
 
—
 
 
(596.8
)
Cash paid for purchase accounting and holdback/earn-out liabilities
 
 
—
 
 
—
 
 
(271.8
)
 
—
 
 
(271.8
)
Disposal of businesses, net of cash sold
 
 
—
 
 
—
 
 
8.5
 
 
—
 
 
8.5
 
Cash invested in short-term investments
 
 
—
 
 
(331.4
)
 
(60.7
)
 
—
 
 
(392.1
)
Net sales (purchases) of long-term investments
 
 
0.1
 
 
(45.3
)
 
54.4
 
 
—
 
 
9.2
 
Net decrease in intercompany loans
 
 
—
 
 
2,657.6
 
 
—
 
 
(2,657.6
)
 
—
 
Net increase in investment in subsidiaries
 
 
(2.4
)
 
(0.5
)
 
—
 
 
2.9
 
 
—
 
Increase in current and non-current restricted cash
 
 
—
 
 
(134.4
)
 
(94.0
)
 
—
 
 
(228.4
)
Other
 
 
—
 
 
(8.6
)
 
66.3
 
 
—
 
 
57.7
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) investing activities
 
 
1.7
 
 
2,137.4
 
 
(2,224.4
)
 
(2,654.7
)
 
(2,740.0
)
Cash Flows From Financing Activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net repayments of debt
 
 
(1,062.8
)
 
(3,449.7
)
 
(106.1
)
 
—
 
 
(4,618.6
)
Proceeds from exercise of options
 
 
—
 
 
—
 
 
14.8
 
 
—
 
 
14.8
 
Dividends paid
 
 
(100.9
)
 
—
 
 
—
 
 
—
 
 
(100.9
)
Repurchase of Tyco common shares
 
 
—
 
 
—
 
 
(1.2
)
 
—
 
 
(1.2
)
Net financing repayments to parent
 
 
—
 
 
—
 
 
(2,657.6
)
 
2,657.6
 
 
—
 
Net capital contributions from parent
 
 
 
 
 
 
 
 
2.9
 
 
(2.9
)
 
—
 
Other
 
 
—
 
 
—
 
 
(8.0
)
 
—
 
 
(8.0
)
 
 
 
 
 
 
 
 
Net cash used in financing activities
 
 
(1,163.7
)
 
(3,449.7
)
 
(2,755.2
)
 
2,654.7
 
 
(4,713.9
)
Effect of currency translation on cash
 
 
—
 
 
—
 
 
88.8
 
 
—
 
 
88.8
 
Net increase (decrease) in cash and cash equivalents
 
 
9.4
 
 
(688.8
)
 
(1,319.6
)
 
—
 
 
(1,999.0
)
Cash and cash equivalents at beginning of year
 
 
37.6
 
 
2,970.7
 
 
3,177.4
 
 
—
 
 
6,185.7
 
 
 
 
 
 
 
 
Cash and cash equivalents at end of year
 
$
47.0
 
$
2,281.9
 
$
1,857.8
 
$
—
 
$
4,186.7
 
 
 
 
 
 
 
 
122
CONSOLIDATING STATEMENT OF CASH FLOWS
                     FOR THE YEAR ENDED SEPTEMBER
For the Year Ended September 30, 2001
                                ($ IN MILLIONS)


                                                    TYCO            TYCO
                                                INTERNATIONAL   INTERNATIONAL      OTHER       CONSOLIDATING
                                                    LTD.         GROUP S.A.     SUBSIDIARIES    ADJUSTMENTS      TOTAL
                                                -------------   -------------   ------------   -------------   ----------

CASH FLOWS FROM OPERATING ACTIVITIES:
  Net cash provided by (used in) operating
    activities from continuing operations.....    $  2,090.5      $  (291.1)     $  5,126.1      $      --     $  6,925.5
  Net cash used in operating activities from
    discontinued operations...................            --             --          (260.2)            --         (260.2)
                                                  ----------      ---------      ----------      ---------     ----------
  Net cash provided by (used in) operating
    activities................................       2,090.5         (291.1)        4,865.9             --        6,665.3
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment,
  net.........................................          (0.2)          (0.1)       (1,797.2)            --       (1,797.5)
Construction in progress--Tyco Global
  Network.....................................            --             --        (2,247.7)            --       (2,247.7)
Acquisition of businesses, net of cash
  acquired....................................            --             --       (10,956.6)            --      (10,956.6)
Cash paid for purchase accounting and
  holdback/ earn-out liabilities..............            --             --          (894.4)            --         (894.4)
Disposal of businesses, net of cash sold......            --             --           904.4             --          904.4
Net proceeds from (purchases of)
  investments.................................           5.9             --          (148.7)            --         (142.8)
Decrease (increase) in intercompany loans.....          54.8       (5,993.5)             --        5,938.7             --
(Increase) decrease in investment in
  subsidiaries................................     (10,621.3)          (2.8)        8,985.0        1,639.1             --
Other.........................................            --             --          (177.2)            --         (177.2)
                                                  ----------      ---------      ----------      ---------     ----------
  Net cash used in investing activities from
    continuing operations.....................     (10,560.8)      (5,996.4)       (6,332.4)       7,577.8      (15,311.8)
  CIT cash balance acquired...................            --             --         2,156.4             --        2,156.4
  Net cash provided by investing activities
    from discontinued operations..............            --             --         1,516.8             --        1,516.8
                                                  ----------      ---------      ----------      ---------     ----------
  Net cash used in investing activities.......     (10,560.8)      (5,996.4)       (2,659.2)       7,577.8      (11,638.6)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayments of) debt........       3,374.9        6,320.9        (1,160.2)            --        8,535.6
Proceeds from sale of common shares...........       2,196.6             --              --             --        2,196.6
Proceeds from sale of common shares for
  acquisitions................................       2,729.4             --        (2,729.4)            --             --
Proceeds from exercise of options and
  warrants....................................         226.6             --           318.4             --          545.0
Dividends paid................................         (90.0)            --              --             --          (90.0)
Repurchase of Tyco common shares..............            --             --        (1,326.1)            --       (1,326.1)
Financing from parent, net....................            --             --         5,938.7       (5,938.7)            --
Net capital contributions from parent.........            --             --         1,639.1       (1,639.1)            --
Repurchase of minority interest shares of
  subsidiary..................................            --             --          (270.0)            --         (270.0)
Capital contributions to Tyco Capital.........            --             --          (675.0)            --         (675.0)
Other.........................................            --             --           (15.4)            --          (15.4)
                                                  ----------      ---------      ----------      ---------     ----------
  Net cash provided by financing activities
    from continuing operations................       8,437.5        6,320.9         1,720.1       (7,577.8)       8,900.7
  Net cash used in financing activities from
    discontinued operations...................            --             --        (2,605.0)            --       (2,605.0)
                                                  ----------      ---------      ----------      ---------     ----------
  Net cash provided by (used in) financing
    activities................................       8,437.5        6,320.9          (884.9)      (7,577.8)       6,295.7
NET (DECREASE) INCREASE IN CASH AND CASH
  EQUIVALENTS.................................         (32.8)          33.4         1,321.8             --        1,322.4
TYCO CAPITAL'S CASH AND CASH EQUIVALENTS
  TRANSFERRED TO DISCONTINUED OPERATIONS......            --             --          (808.0)            --         (808.0)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
  PERIOD......................................          34.2            3.6         1,227.0             --        1,264.8
                                                  ----------      ---------      ----------      ---------     ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD....    $      1.4      $    37.0      $  1,740.8      $      --     $  1,779.2
                                                  ==========      =========      ==========      =========     ==========


                                      121

                            TYCO INTERNATIONAL LTD.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

29.  TYCO INTERNATIONAL GROUP S.A. (CONTINUED)

                     2002
($ in millions)
 
 
Tyco
International
Ltd.
 
Tyco
International
Group S.A.
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Total
 
Cash Flows From Operating Activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities from continuing operations
 
$
(1,128.0
)
$
(91.1
)
$
6,630.5
 
$
—
 
$
5,411.4
 
 
Net cash provided by operating activities from discontinued operations
 
 
—
 
 
—
 
 
1,462.9
 
 
—
 
 
1,462.9
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
 
 
(1,128.0
)
 
(91.1
)
 
8,093.4
 
 
—
 
 
6,874.3
 
Cash Flows From Investing Activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase of property, plant and equipment, net
 
 
—
 
 
—
 
 
(1,678.8
)
 
—
 
 
(1,678.8
)
Construction of Tyco Global Network
 
 
—
 
 
—
 
 
(1,146.0
)
 
—
 
 
(1,146.0
)
Acquisition of businesses, net of cash acquired
 
 
—
 
 
—
 
 
(1,683.8
)
 
—
 
 
(1,683.8
)
Acquisition of customer accounts (ADT dealer program)
 
 
—
 
 
—
 
 
(1,139.3
)
 
—
 
 
(1,139.3
)
Cash paid for purchase accounting and holdback/earn-out liabilities
 
 
—
 
 
—
 
 
(624.1
)
 
—
 
 
(624.1
)
Net proceeds from the sale of CIT
 
 
—
 
 
—
 
 
4,395.4
 
 
—
 
 
4,395.4
 
Disposal of other businesses, net of cash sold
 
 
—
 
 
—
 
 
138.7
 
 
—
 
 
138.7
 
Net sales (purchases) of long-term investments
 
 
6.3
 
 
(93.5
)
 
70.4
 
 
—
 
 
(16.8
)
Net increase in intercompany loans
 
 
—
 
 
(258.1
)
 
—
 
 
258.1
 
 
—
 
Net decrease (increase) in investment in subsidiaries
 
 
1,021.9
 
 
—
 
 
(71.8
)
 
(950.1
)
 
—
 
Increase in current restricted cash
 
 
—
 
 
(181.4
)
 
(14.8
)
 
—
 
 
(196.2
)
Other
 
 
—
 
 
—
 
 
(94.8
)
 
—
 
 
(94.8
)
 
 
 
 
 
 
 
 
Net cash provided by (used in) investing activities from continuing operations
 
 
1,028.2
 
 
(533.0
)
 
(1,848.9
)
 
(692.0
)
 
(2,045.7
)
 
Net cash provided by investing activities from discontinued operations
 
 
—
 
 
—
 
 
2,684.3
 
 
—
 
 
2,684.3
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) investing activities
 
 
1,028.2
 
 
(533.0
)
 
835.4
 
 
(692.0
)
 
638.6
 
Cash Flows From Financing Activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (repayments of) proceeds from debt
 
 
(28.5
)
 
3,557.8
 
 
(1,578.0
)
 
—
 
 
1,951.3
 
Proceeds from sale of common shares for acquisitions
 
 
501.6
 
 
—
 
 
(501.6
)
 
—
 
 
—
 
Proceeds from exercise of options
 
 
58.3
 
 
—
 
 
127.4
 
 
—
 
 
185.7
 
Dividends paid
 
 
(100.3
)
 
—
 
 
—
 
 
—
 
 
(100.3
)
Repurchase of Tyco common shares
 
 
—
 
 
—
 
 
(789.2
)
 
—
 
 
(789.2
)
Net financing from parent
 
 
—
 
 
—
 
 
258.1
 
 
(258.1
)
 
—
 
Repayment of intercompany note payable
 
 
(295.1
)
 
—
 
 
295.1
 
 
—
 
 
—
 
Net capital distributions to parent
 
 
—
 
 
—
 
 
(950.1
)
 
950.1
 
 
—
 
Capital contribution to Tyco Capital
 
 
—
 
 
—
 
 
(200.0
)
 
—
 
 
(200.0
)
Other
 
 
—
 
 
—
 
 
(9.7
)
 
—
 
 
(9.7
)
 
 
 
 
 
 
 
 
Net cash provided by (used in) financing activities from continuing operations
 
 
136.0
 
 
3,557.8
 
 
(3,348.0
)
 
692.0
 
 
1,037.8
 
 
Net cash used in financing activities from discontinued operations
 
 
—
 
 
—
 
 
(2,874.6
)
 
—
 
 
(2,874.6
)
 
 
 
 
 
 
 
 
Net cash provided by (used in) financing activities
 
 
136.0
 
 
3,557.8
 
 
(6,222.6
)
 
692.0
 
 
(1,836.8
)
Effect of currency translation on cash
 
 
—
 
 
—
 
 
2.1
 
 
—
 
 
2.1
 
Net increase in cash and cash equivalents
 
 
36.2
 
 
2,933.7
 
 
2,708.3
 
 
—
 
 
5,678.2
 
Tyco Capital's cash and cash equivalents transferred to discontinued operations
 
 
—
 
 
—
 
 
(1,272.6
)
 
—
 
 
(1,272.6
)
Cash and cash equivalents at beginning of year
 
 
1.4
 
 
37.0
 
 
1,741.7
 
 
—
 
 
1,780.1
 
 
 
 
 
 
 
 
Cash and cash equivalents at end of year
 
$
37.6
 
$
2,970.7
 
$
3,177.4
 
$
—
 
$
6,185.7
 
 
 
 
 
 
 
 
123

CONSOLIDATING STATEMENT OF CASH FLOWS
                     FOR THE YEAR ENDED SEPTEMBER
For the Year Ended September 30, 2000
                                ($ IN MILLIONS)


                                         TYCO            TYCO
                                     INTERNATIONAL   INTERNATIONAL      OTHER       CONSOLIDATING
                                         LTD.         GROUP S.A.     SUBSIDIARIES    ADJUSTMENTS      TOTAL
                                     -------------   -------------   ------------   -------------   ---------

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)              --       (1,697.4)             --      (1,703.8)
Construction in progress--Tyco
  Global Network...................          --               --         (111.1)             --        (111.1)
Acquisition of businesses, net of
  cash acquired....................          --               --       (4,246.5)             --      (4,246.5)
Cash paid for purchase accounting
  and holdback/earn-out
  liabilities......................          --               --         (544.2)             --        (544.2)
Disposal of businesses, net of cash
  sold.............................          --               --           74.4              --          74.4
Net proceeds from (purchases of)
  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 used in investing
    activities.....................      (890.7)        (2,422.5)      (6,946.8)        3,322.5      (6,937.5)

CASH FLOWS FROM FINANCING
  ACTIVITIES:
Net proceeds from (repayments of)
  debt.............................          --          1,209.4         (529.0)             --         680.4
Proceeds from exercise of
  options..........................        64.6               --          290.7              --         355.3
Net proceeds from sale 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)             --            --
Repurchase of Tyco common shares...          --               --       (1,885.1)             --      (1,885.1)
Financing from parent, net.........          --               --        2,421.8        (2,421.8)           --
Net capital contributions from
  parent...........................          --               --          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 PERIOD..............        22.8             15.4        1,723.8              --       1,762.0
                                        -------        ---------      ---------       ---------     ---------
CASH AND CASH EQUIVALENTS AT END OF
  PERIOD...........................     $  34.2        $     3.6      $ 1,227.0       $      --     $ 1,264.8
                                        =======        =========      =========       =========     =========


                                      122
2001
($ in millions)
 
 
Tyco
International
Ltd.
 
Tyco
International
Group S.A.
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Total
 
Cash Flows From Operating Activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities from continuing operations
 
$
2,090.5
 
$
(291.1
)
$
4,911.7
 
$
—
 
$
6,711.1
 
 
Net cash used in operating activities from discontinued operations
 
 
—
 
 
—
 
 
(260.2
)
 
—
 
 
(260.2
)
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
 
 
2,090.5
 
 
(291.1
)
 
4,651.5
 
 
—
 
 
6,450.9
 
Cash Flows From Investing Activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase of property, plant and equipment, net
 
 
(0.2
)
 
(0.1
)
 
(1,773.1
)
 
—
 
 
(1,773.4
)
Construction of Tyco Global Network
 
 
—
 
 
—
 
 
(2,247.7
)
 
—
 
 
(2,247.7
)
Acquisition of businesses, net of cash acquired
 
 
—
 
 
—
 
 
(9,962.0
)
 
—
 
 
(9,962.0
)
Acquisition of customer accounts (ADT dealer program)
 
 
—
 
 
—
 
 
(798.1
)
 
—
 
 
(798.1
)
Cash paid for purchase accounting and holdback/earn-out liabilities
 
 
—
 
 
—
 
 
(878.7
)
 
—
 
 
(878.7
)
Disposal of businesses, net of cash sold
 
 
—
 
 
—
 
 
904.4
 
 
—
 
 
904.4
 
Net sales (purchases) of long-term investments
 
 
5.9
 
 
—
 
 
(148.7
)
 
—
 
 
(142.8
)
Net decrease (increase) in intercompany loans
 
 
54.8
 
 
(5,993.5
)
 
—
 
 
5,938.7
 
 
—
 
Net (increase) decrease in investment in subsidiaries
 
 
(10,621.3
)
 
(2.8
)
 
8,985.0
 
 
1,639.1
 
 
—
 
Other
 
 
—
 
 
—
 
 
(177.2
)
 
—
 
 
(177.2
)
 
 
 
 
 
 
 
 
Net cash used in investing activities from continuing operations
 
 
(10,560.8
)
 
(5,996.4
)
 
(6,096.1
)
 
7,577.8
 
 
(15,075.5
)
 
CIT cash balance acquired
 
 
—
 
 
—
 
 
2,156.4
 
 
—
 
 
2,156.4
 
 
Net cash provided by investing activities from discontinued operations
 
 
—
 
 
—
 
 
1,516.8
 
 
—
 
 
1,516.8
 
 
 
 
 
 
 
 
 
Net cash used in investing activities
 
 
(10,560.8
)
 
(5,996.4
)
 
(2,422.9
)
 
7,577.8
 
 
(11,402.3
)
Cash Flows From Financing Activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net proceeds from (repayments of) debt
 
 
3,374.9
 
 
6,320.9
 
 
(1,160.2
)
 
—
 
 
8,535.6
 
Proceeds from sale of common shares
 
 
2,196.6
 
 
—
 
 
—
 
 
—
 
 
2,196.6
 
Proceeds from sale of common shares for acquisitions
 
 
2,729.4
 
 
—
 
 
(2,729.4
)
 
—
 
 
—
 
Proceeds from exercise of options
 
 
226.6
 
 
—
 
 
318.4
 
 
—
 
 
545.0
 
Dividends paid
 
 
(90.0
)
 
—
 
 
—
 
 
—
 
 
(90.0
)
Repurchase of Tyco common shares
 
 
—
 
 
—
 
 
(1,326.1
)
 
—
 
 
(1,326.1
)
Net financing from parent
 
 
—
 
 
—
 
 
5,938.7
 
 
(5,938.7
)
 
—
 
Net capital contributions from parent
 
 
—
 
 
—
 
 
1,639.1
 
 
(1,639.1
)
 
—
 
Repurchase of minority interest shares of subsidiary
 
 
—
 
 
—
 
 
(270.0
)
 
—
 
 
(270.0
)
Capital contributions to Tyco Capital
 
 
—
 
 
—
 
 
(675.0
)
 
—
 
 
(675.0
)
Other
 
 
—
 
 
—
 
 
(15.4
)
 
—
 
 
(15.4
)
 
 
 
 
 
 
 
 
Net cash provided by financing activities from continuing operations
 
 
8,437.5
 
 
6,320.9
 
 
1,720.1
 
 
(7,577.8
)
 
8,900.7
 
 
Net cash used in financing activities from discontinued operations
 
 
—
 
 
—
 
 
(2,605.0
)
 
—
 
 
(2,605.0
)
 
 
 
 
 
 
 
 
Net cash provided by (used in) financing activities
 
 
8,437.5
 
 
6,320.9
 
 
(884.9
)
 
(7,577.8
)
 
6,295.7
 
Effect of currency translation on cash
 
 
—
 
 
—
 
 
(21.0
)
 
—
 
 
(21.0
)
Net (decrease) increase in cash and cash equivalents
 
 
(32.8
)
 
33.4
 
 
1,322.7
 
 
—
 
 
1,323.3
 
Tyco Capital's cash and cash equivalents transferred to discontinued operations
 
 
—
 
 
—
 
 
(808.0
)
 
—
 
 
(808.0
)
Cash and cash equivalents at beginning of year
 
 
34.2
 
 
3.6
 
 
1,227.0
 
 
—
 
 
1,264.8
 
 
 
 
 
 
 
 
Cash and cash equivalents at end of year
 
$
1.4
 
$
37.0
 
$
1,741.7
 
$
—
 
$
1,780.1
 
 
 
 
 
 
 
 
124
33.  Subsequent Events
       On November 12, 2003, TIG issued $1.0 billion par value 6% Notes due 2013 in a private placement offering. The Notes are fully and unconditionally guaranteed by Tyco. In addition, subsequent to year end, TIG executed LIBOR-in-arrears interest rate swaps on notional value $875 million against these notes. Under these swaps Tyco will receive 6% and pay on average 6-month LIBOR plus 90.3 basis points.
        On November 17, 2003, holders of principal amount at maturity of $3,196.7 million of zero coupon convertible debentures due 2020 notified Tyco that they had exercised their option to require Tyco to repurchase their notes at a price of $775.66 per $1,000 principal at maturity representing the accreted value of the notes on that date. On November 18, 2003, Tyco purchased these notes for cash of $2,479.6 million.
125

TYCO INTERNATIONAL LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    As described in Note 11 to the

Results of Operations
Introduction
        The Consolidated Financial Statements CIT
Group Inc. ("CIT"), which comprisedinclude the operations of the Tyco Capital business
segment, was sold in an initial public offering ("IPO") in July 2002.
Consequently, the resultsconsolidated accounts of Tyco Capital are presented as discontinued
operations. References to Tyco refer toInternational Ltd., a company incorporated in Bermuda, and its continuing operations, withsubsidiaries (Tyco and all its subsidiaries, hereinafter "we," the exception of the discussions regarding discontinued operations below. The
continuing operations of Tyco represent what was referred to as Tyco Industrial
in prior filings.

                             RESULTS OF OPERATIONS

INTRODUCTION

    Our results for fiscal 2002 were adversely affected by: decreased demand, as
a result of the overall economic downturn, particularly in the
telecommunications"Company" or "Tyco") and electronics markets; the termination of our previously
announced plan to separate into four independent publicly traded companies;
rumors and negative publicity; the resignation of our chief executive officer
and chief financial officer; the replacement of other members of our senior
management; the indictment of former members of our senior management; concern
regarding our ability to maintain compliance with debt covenants and meet
upcoming debt maturities; and the announced investigation being conducted by the
Company's outside counsel. All of these factors affected employees, customers,
vendors and investors. These effects are continuing. In January 2002, our Board
of Directors became aware of the first of many unauthorized actions that
ultimately led to the resignations of our former chief executive officer and
chief financial officer and the termination of our chief legal officer as well
as the decision not to re-nominate one of our directors. In September 2002, our
former chief executive officer, chief financial officer and chief legal officer
were each charged with violating New York state criminal law as a result of
their actions. In December 2002, the former director was charged with, and
pleaded guilty to, violating New York state criminal law as a result of his
actions. During the fourth quarter of fiscal 2002, we announced the hiring of a
new chief executive officer, a new chief financial officer and a new chief legal
officer, as well as other key executives, and also announced the initiation of
external and internal investigations.

    INVESTIGATION--With the arrival of new senior management, the Company has
engaged in a number of internal reviews aimed at determining what, if any,
misconduct may have been committed by prior senior management. An initial review
of prior senior management's transactions with the Company was conducted by the
law firm of Boies, Schiller & Flexner LLP. The details of their findings were
made publicprepared in a Form 8-K filed on September 17, 2002. In July 2002, our new CEO
and our Board of Directors ordered a further review of corporate governance
practices and the accounting of selected acquisitions. This review has been
referred to as the "Phase 2 review."

    The Phase 2 review was conducted by the law firm of Boies, Schiller &
Flexner LLP and the Boies firm was in turn assisted by forensic accountants. The
review received the full cooperation of Tyco's auditors, PricewaterhouseCoopers
LLP, as well as Tyco's new senior management team. The review included an
examination of Tyco's reported revenues, profits, cash flow, internal auditing
and control procedures, accounting for major acquisitions and reserves, the use
of non-recurring charges, as well as corporate governance issues such as the
personal use of corporate assets and the use of corporate funds to pay personal
expenses, employee loan and loan forgiveness programs. Approximately 25 lawyers
and 100 accountants worked on the review from August into December 2002. In
total, at considerable cost, more than 15,000 lawyer hours and 50,000 accountant
hours were dedicated to this review. The review team examined documents and
interviewed Tyco personnel at more than 45 operating units in the United States dollars, and in 12 foreign countries.

    The results of the Phase 2 Review were reported by the Company in a
Form 8-K furnished to the SEC on December 30, 2002. Among other findings, the
report noted that "the Company's prior

                                      123

management engaged in a pattern of aggressive accounting which, even when in accordance with Generally Accepted Accounting Principles was intended to
increase reported earnings above what they wouldin the United States ("GAAP").
        The Company operates in the following business segments:
•
Fire and Security designs, manufactures, installs, monitors and services electronic security and fire protection systems.

•
Electronics designs, manufactures and distributes electrical and electronic components, and designs, manufactures, installs, operates and maintains undersea fiber optic cable communications systems.

•
Healthcare designs, manufactures and distributes medical devices and supplies, imaging agents, pharmaceuticals and adult incontinence and infant care products.

•
Engineered Products and Services designs, manufactures, distributes and services engineered products including industrial valves and controls and steel tubular goods and provides environmental and other industrial consulting services.

•
Plastics and Adhesives designs, manufactures and distributes plastic products, adhesives and films.
Overview
        Although acquisitions of complementary businesses have been if more conservative
accounting had been employed." While mostan important part of the matters identified by the
investigation as "aggressive accounting" were determined by the Company, in
consultation with its auditors, to be in accordance with generally accepted
accounting principles, there were certain adjustments identified as relating to
years preceding fiscal 2002. Such adjustments were recordedTyco's growth in the first quarter
of fiscal 2002, and are discussed further below. See also Item 14. "Controls and
Procedures".

    CHARGES RELATING TO PRIOR YEARS RECORDED IN FISCAL 2002--During the fourth
quarter of fiscal 2002, the Company identified various adjustments relating to
prior year financial statements. Management concluded the effects of these
adjustments, as well as any unrecorded proposed audit adjustments, were not
material individually or in the aggregate to the current year or any prior year.
Accordingly, prior year financial statements have not been restated. Instead,
these adjustments, which aggregate $261.6 million on a pre-tax income basis, or
$199.7 million on an after-tax income basis have been recorded effective
October 1, 2001. The nature and amounts of these adjustments are principally as
follows:

    - The Company determined the amounts reimbursed from dealers under ADT's
      authorized dealer program exceeded the costs actually incurred. The
      cumulative effect of reimbursements recorded in years prior to fiscal 2002
      in excess of costs incurred, net of the effect of the deferred credit,
      which would have been amortized as described in Note 1 to these
      Consolidated Financial Statements, is $185.9 million.

    - The Company determined that the gain of $64.1 million on the issuance of
      TyCom shares previously reported for fiscal 2001 should have been lower by
      $39.6 million.

    - The Company identified several adjustments both as a result of the
      Phase 2 review and the recording of previously unrecorded audit
      adjustments, which are more appropriately recorded as expenses, rather
      than as part of the Company's acquisition accounting. The cumulative
      effect of the adjustments necessary to revise the prior accounting is a
      pre-tax charge of $36.1 million.

    The fiscal years to which the charges relate are as follows ($ in millions):


                                                              PRIOR TO
                                                               FISCAL     FISCAL     FISCAL
TYPE OF ADJUSTMENT                                              2000       2000       2001      TOTAL
- ------------------------------------------------------------  --------   --------   --------   --------

ADT dealer reimbursements...................................   $33.6      $53.5      $ 98.8     $185.9
Gain on issuance of shares of TyCom.........................      --         --        39.6       39.6
Other adjustments...........................................    22.7       26.4       (13.0)      36.1
                                                               -----      -----      ------     ------
Totals......................................................   $56.3      $79.9      $125.4     $261.6
                                                               =====      =====      ======     ======


    These adjustments would have impacted income (loss) from continuing
operations and net income (loss). Income (loss) from continuing operations would
have been impacted as follows: fiscal 2000 $4,464 million compared with
$4,520 million; fiscal 2001 $4,297 million compared with $4,402 million; and
fiscal 2002 $(2,871) million compared with $(3,070) million. Net income (loss)
would have been impacted as follows: fiscal 2000 $4,464 million compared with
$4,520 million; fiscal 2001 $3,866 million compared with $3,971 million; and
fiscal 2002 $(9,212) million compared with $(9,412) million.

OVERVIEW

    Ourpast, our business strategy and near-term actions focusnow focuses on enhancing internal growth withinand operational efficiency for existing Tyco businesses. We plan to achieve this goal through new product innovation, increased market share, increasedincreasing the service and repair components of our existing businesses and continued geographic expansion. Acquisitions have been an important partWe are also implementing initiatives across our business segments to achieve best-in-class operating practices utilizing six sigma measurements. Additionally, we announced that we are evaluating the disposition of Tyco's growth in recent
years. While we may continuesome proposed non-core businesses to make selected complementary acquisitions, we
anticipate thatbe effected during the amount of acquisition activity will be significantly
reduced, and, therefore, expect that our growth rate in revenues and earnings
from acquisitions will also be reduced as compared to prior periods.

                                      124

    As evidenced by the restructuring charges recorded during fiscal 2002, we
will continue to implement cost-cutting initiatives in order to improve earnings
and margins.next year.
        Information for all periods presented below reflects the grouping of Tyco's businesses into fourfive segments, consisting of Fire and Security, Services,
Electronics, Healthcare, and Specialty Products, and Engineered Products and Services.Services, and Plastics and Adhesives. During fiscal 2002, we changed our internal reporting structure (due
to the amalgamation with TyCom Ltd. that eliminated the publicly held minority
interest) such that the operations of the former Telecommunications segment are
now reported as part of the Electronics segment. In addition, during fiscal
2002,2003, a change was made to ourthe Company's internal reporting structure such that the operations of Tyco's flow controlplastics and adhesives businesses and the environmental engineering
business (previously reported within the FireHealthcare and Security Services segment) and
Tyco's electrical and metal products business (previously reported within the
ElectronicsSpecialty Products segment) now comprise the Company's new Engineered ProductsPlastics and ServicesAdhesives reportable segment. The Company has conformed its segment reporting accordingly and has reclassified comparative prior period information to reflect this change. References to Tyco refer to the Company's continuing operations. Also in fiscal 2002, Tyco sold its financial services business (Tyco Capital) through an IPOinitial public offering ("IPO") of CIT Group Inc.CIT. The historical results of our financial services business are presented as "Discontinued Operations." See "Discontinued Operations of Tyco Capital (CIT Group Inc.)" below for more information regarding the discontinued operations of Tyco Capital. The Company has conformed its segment reporting accordingly and has reclassified comparative prior period information to reflect these changes.

    Segment
126

        Net revenues increased 3.4% during fiscal 2003 to $36,801.3 million from $35,589.8 million in fiscal 2002. Net revenues increased 4.7% during fiscal 2002 to $35,643.7 millionas compared to $34,036.6$34,002.1 million in fiscal 2001. Segment revenues increased 17.6%
during fiscal 2001 to $34,036.6 millionTyco had income from $28,931.9continuing operations of $1,034.7 million in fiscal 2000.
Tyco had2003, as compared to a loss from continuing operations of $(3,070.4)$2,838.2 million in fiscal 2002, as compared toand income from continuing operations of $4,401.5$3,894.9 million in fiscal 20012001.
        Income from continuing operations for fiscal 2003 included net charges totaling $1,832.6 million ($1,566.8 million after-tax) consisting of the following: (i) charges for the impairment of long-lived assets of $814.7 million; (ii) charges recorded for changes in estimates of $388.7 million which arose from the Company's intensified internal audits and $4,519.9detailed controls and operating reviews discussed below (includes net restructuring credits of $72.5 million, of which credits of $12.9 million are included in fiscal 2000.costs of sales, charges for the impairment of long-lived assets of $10.2 million, charges of $243.1 million included in selling, general and administrative expenses, charges of $123.4 million included in cost of sales, a charge of $75.6 million relating to the write-down of investments and other expense of $8.5 million, both of which are included in other (expenses) income, net, and a charge of $0.4 million included in interest expense); (iii) charges for the impairment of goodwill of $278.4 million; (iv) other loss of $151.8 million related to the retirement of debt; (v) other charges of $148.6 million, of which $34.0 million is included in cost of sales related primarily to product warranty accruals and the dismantlement of customers' ADT security systems, and $114.6 million is included in selling, general and administrative expenses related primarily to uncollectible accounts receivable, internal investigation fees, as well as severance and facility closures, slightly offset by a credit for changes in estimates of charges recorded in prior periods; (vi) a charge of $91.5 million for a retroactive, incremental premium on prior period directors and officers insurance included in selling, general and administrative expenses; (vii) a charge of $11.5 million relating to the write-down of investments; (viii) other interest expense of $2.4 million; (ix) other expense of $0.1 million; (x) income from the early retirement of debt of $24.1 million; (xi) other interest income of $18.7 million; and (xii) net restructuring credits of $12.3 million, of which charges of $2.4 million are included in cost of sales.
        Loss from continuing operations for fiscal 2002 included a net chargescharge totaling $7,299.9$6,762.3 million ($6,570.16,091.4 million after-tax), consisting of the following: (i) goodwill impairment charge of $1,343.7 million relating to continuing operations; (ii) charges for the impairment charges of $3,489.5long-lived assets of $3,309.5 million primarily related to the write-down of the TGN;Tyco Global Network ("TGN"); (iii) net restructuring and other unusual
charges of $1,954.3$1,874.7 million, of which $635.4 million is included in cost of sales and $115.0 million related to a bad debt provision is included in selling, general and administrative expenses, primarily related to the write-down of
inventory and facility closures within our Electronics segment;expenses; (iv) charges
related to prior years of $261.6 million; (v) a write-off of purchased in-process research and development related to the acquisitions of Sensormatic
and DSC Group of $17.8 million; (vi)(v) a loss on the write-off of investments of $270.8 million; (vii)(vi) a gain on the sale of businesses of $7.2 million
(excluding a charge of $125.3 million for impairment associated with these
assets held for sale);$23.6 million; and (viii)(vii) gain from the early extinguishment of debt of $30.6 million.
        Income from continuing operations for fiscal 2001 included a net charge of $408.5$614.9 million ($383.9546.3 million after-tax) consisting of the following: (i) net restructuring, impairment and other unusual charges and impairment charges totaling $705.4 million related primarily to the closure of facilities within the
Electronics and Fire and Security Services segments;million; (ii) $184.3 milliona write-off of purchased in-process research and development related to the
acquisition of Mallinckrodt Inc. ("Mallinckrodt");$184.3 million; (iii) an unusual credit of
$166.8 million related to the settlement of litigation; (iv) a net gain on sale of businesses of $410.4 million principally related to the sale of ADT
Automotive; (v)million; (iv) a loss of $133.8 million related to the write-down of an investment; (vi)(v) a $64.1$24.5 million net gain on the sale of common shares of a subsidiary; and (vii)(vi) a loss from the early extinguishment of debt of $26.3 million.

    Income from continuing operations for fiscal 2000 included a net credit of
$1,484.4 million ($793.9 million after-tax) consisting of the following: (i) a
gain of $1,760.0 million on the sale by a subsidiary of its common shares in
connection with TyCom's initial public offering; (ii) restructuring, unusual and
impairment charges of $424.2 million primarily for claims related to a merged
company and the exiting of U.S. Surgical's interventional cardiology business;
(iii) a credit of $148.9 million representing a revision of estimates of merger,
restructuring and other unusual accruals; and (iv) a loss from the early
extinguishment of debt of $0.3 million.

                                      125
        We are currently assessing the potential impact of various legislative proposals that would deny U.S. federal government contracts to U.S. companies that move their corporate location abroad. Tyco became a Bermuda-based company
as a result ofThe legislative proposals could cover the 1997 business combinationacquisition of Tyco International Ltd., a Massachusetts corporation, andby ADT Limited (a public company that had been located in Bermuda since the 1980's with origins dating back to the United Kingdom since the early 1900's). Currently, Tyco's revenues related, as a result of which ADT changed its name to U.S.
federal governmentTyco International Ltd. and became the parent to the Tyco group. During the fourth quarter of fiscal 2003, the State of California adopted legislation that purports to limit the eligibility of certain Bermuda and other foreign-chartered companies to participate in certain state contracts. Although the California law provides that waivers may be issued permitting such companies
127

to participate in state contracts account for less than 3% of net revenues for the
fiscal year ended September 30, 2002.under certain circumstances, it is unclear how that waiver authority will be exercised. In addition, various stateother states and other municipalities in the U.S. have proposed similar legislation. There also is also
other similarsimilarly proposed tax legislation, which could substantially increase our corporate income taxes and, consequently, decrease future net income and increase our future cash outlay for taxes.
        Tyco's revenues related to U.S. federal government and California state contracts account for less than 2% and 0.1%, respectively, of total net revenues for the fiscal year ended September 30, 2003. We are unable to predict, with any level of certainty, the likelihood or final form in which any proposed legislation might become law, or the nature of regulations that may be promulgated under any such future legislative enactments.enactments or the impact such enactments and increased regulatory scrutiny may have on our governmental business or on non-governmental customers' willingness to do business with us. As a result of these uncertainties, we are unable to assess the impact on us of any proposed legislation in this area and can provide no assurance that they will not be materially adverse.
        The following table details net revenues and earnings in fiscal 2003, fiscal 2002 and fiscal 2001 and fiscal 2000 ($
($ in millions):

                                                              FISCAL 2002   FISCAL 2001   FISCAL 2000
                                                              -----------   -----------   -----------

Revenue from product sales..................................   $28,794.8     $28,987.4     $24,958.4
Service revenue.............................................     6,848.9       5,049.2       3,973.5
                                                               ---------     ---------     ---------
NET REVENUES................................................   $35,643.7     $34,036.6     $28,931.9
                                                               =========     =========     =========
Restructuring
 
 
Fiscal 2003
 
Fiscal 2002
 
Fiscal 2001
 
Revenue from product sales
 
$
29,427.7
 
$
28,741.8
 
$
28,953.1
 
Service revenue
 
 
7,373.6
 
 
6,848.0
 
 
5,049.0
 
 
 
 
 
 
Net revenues
 
$
36,801.3
 
$
35,589.8
 
$
34,002.1
 
 
 
 
 
 
Operating income (loss)
 
$
3,067.0
 
$
(1,452.4
)
$
5,616.4
 
Interest income
 
 
107.2
 
 
117.3
 
 
128.3
 
Interest expense
 
 
(1,148.0
)
 
(1,077.0
)
 
(904.8
)
Other (expense) income, net
 
 
(223.4
)
 
(216.6
)
 
250.3
 
Net gain on sale of common shares of a subsidiary
 
 
—
 
 
—
 
 
24.5
 
 
 
 
 
 
Income (loss) from continuing operations before income taxes and minority interest
 
 
1,802.8
 
 
(2,628.7
)
 
5,114.7
 
Income taxes
 
 
(764.5
)
 
(208.1
)
 
(1,172.3
)
Minority interest
 
 
(3.6
)
 
(1.4
)
 
(47.5
)
 
 
 
 
 
Income (loss) from continuing operations
 
 
1,034.7
 
 
(2,838.2
)
 
3,894.9
 
Income (loss) from discontinued operations of Tyco Capital, net of tax
 
 
20.0
 
 
(6,282.5
)
 
252.5
 
Loss on sale of Tyco Capital, net of tax
 
 
—
 
 
(58.8
)
 
—
 
 
 
 
 
 
Income (loss) before cumulative effect of accounting changes
 
 
1,054.7
 
 
(9,179.5
)
 
4,147.4
 
Cumulative effect of accounting changes, net of tax
 
 
(75.1
)
 
—
 
 
(683.4
)
 
 
 
 
 
Net income (loss)
 
$
979.6
 
$
(9,179.5
)
$
3,464.0
 
 
 
 
 
 
        During the fourth quarter of fiscal 2003, we completed a comprehensive review of Tyco's core businesses, and as a result, have initiated a divestiture and other unusual charges, net(1).............   $(1,954.3)    $  (418.5)    $  (176.3)
Charges for the impairment of long-lived assets.............    (3,489.5)       (120.1)        (99.0)
Goodwill impairment.........................................    (1,343.7)           --            --
Charges related to prior year recorded in fiscal 2002.......      (222.0)           --            --
Write-off of purchased in-process research and
  development...............................................       (17.8)       (184.3)           --
                                                               ---------     ---------     ---------
Total charges included in operating income..................   $(7,027.3)    $  (722.9)    $  (275.3)
                                                               =========     =========     =========

OPERATING (LOSS) INCOME AFTER (CHARGES) CREDITS, NET........   $(1,579.0)    $ 6,724.2     $ 5,818.8
Amortization of goodwill....................................          --        (537.4)       (344.4)
                                                               ---------     ---------     ---------
Total operating (loss) income...............................    (1,579.0)      6,186.8       5,474.4
Net (loss) gain on sale of common shares of a subsidiary....       (39.6)         64.1       1,760.0
Net gain on sale of businesses..............................         7.2         410.4            --
Loss on investments.........................................      (270.8)       (133.8)           --
Interest expense, net.......................................      (959.7)       (776.5)       (769.6)
Other income (expense)......................................        30.6         (26.3)         (0.3)
                                                               ---------     ---------     ---------
(Loss) income from continuing operations before income taxes
  and minority interest.....................................    (2,811.3)      5,724.7       6,464.5
Income taxes................................................      (257.7)     (1,275.7)     (1,925.9)
Minority interest...........................................        (1.4)        (47.5)        (18.7)
                                                               ---------     ---------     ---------
(LOSS) INCOME FROM CONTINUING OPERATIONS....................    (3,070.4)      4,401.5       4,519.9
(Loss) income from discontinued operations of Tyco Capital,
  net of tax................................................    (6,282.5)        252.5            --
Loss on sale of Tyco Capital, net of tax....................       (58.8)           --            --
                                                               ---------     ---------     ---------
(Loss) income before cumulative effect of accounting
  changes...................................................    (9,411.7)      4,654.0       4,519.9
Cumulative effect of accounting changes, net of tax.........          --        (683.4)           --
                                                               ---------     ---------     ---------
NET (LOSS) INCOME...........................................   $(9,411.7)    $ 3,970.6     $ 4,519.9
                                                               =========     =========     =========


- ------------------------------

(1) This amount includes restructuring program. As part of this program, we plan to sell the TGN, our undersea fiber optic telecommunications system. The market for the TGN is challenged by significant overcapacity and other unusual charges relatedsevere pricing pressure and the industry is in need of consolidation. However, we plan to inventoryretain ownership of the construction and maintenance portion of Tyco Submarine Telecommunications. In addition to selling the TGN, we are also starting a broader divestiture program designed to increase the focus on our core operations by exiting certain operations that do not meet our criteria for strategic fit or financial returns. Combined fiscal 2003 revenues for businesses under consideration for potential divestiture within the Electronics, Fire and Security, Engineered Products and Services, and Healthcare segments totaled approximately $2 billion and operating income totaled approximately $55 million (excluding operating loss from the TGN of
128

$115 million). Overall, this entire potential divestiture program represents just below 6% of Tyco's fiscal 2003 revenue. We are estimating that the potential proceeds (excluding the proceeds from the sale of the TGN) could be at least $400 million once the program is completed. If we dispose of these businesses, we may not fully recover their recorded book values. At September 30, 2003, however, under the held and used model, the assets of these businesses were fully recoverable. The restructuring program announced in November 2003 is designed to improve our cost structure primarily in the amount of $635.4 million, $184.9 millionFire and $1.0 million
    for fiscal 2002, 2001 and 2000, respectively, which have been deducted as
    part of cost of salesSecurity, but also in the Consolidated Statements of Operations.
    Similarly, this amount includes an unusual charge related to a provision for
    bad debtsPlastics and Adhesives and in the amountEngineered Products and Services segments and is an important element of $115.0 million for fiscal 2002 which has been
    deducted as part of selling, general and administrative expenses in the
    Consolidated Statement of Operations.

                                      126
building a stronger operating foundation.
        During fiscal 2002, we recorded restructuring and other unusual charges and charges for the impairment of long-lived assets related primarily to the significant decrease in demand in certain end markets within our Electronics segment. Under our restructuring and integration programs, we terminate employees and close facilities made redundant. The reduction in manpower and facilities comes from the manufacturing, 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 have not historically tracked the impact on financial results of the restructuring and integration programs. However, we estimate that our overall cost structure has been reduced by approximately $910 million on an annualized basis, of which approximately $315 million relates to selling, general and administrative expenses, and approximately $595 million to cost of sales. The $910 million estimated overall annualized cost savings as a result of restructuring activities in fiscal 2002 was based on a summary of estimated cost savings. In determining the amount of cost savings, management looked at the salaries and benefits of the people that were terminated to derive the annual savings. As it relates to facility closures, the cost savings represents the rent, plant operating expenses and depreciation on the assets that will no longer be incurred.

    When
        Historically, when we makemade an acquisition, we typically beginbegan to integrate the acquired company with our existing operations immediately. As part of ourthis integration process, we often eliminate duplicate functions by closing corporate and administrative offices, and we attempt to make the combined companies more cost efficient by combining manufacturing facilities, product lines, sales offices and marketing efforts. As a result of our integration processes, most acquired companies are no longer separately identifiable. Consequently, we are generally unable to separately track the post-acquisition financial results of acquired companies. The discussions following the tables below include percentages for revenue growth or decline that exclude increased revenue attributable to specified acquisitions and that eliminate the effects of period to period currency fluctuations. Revenue growth or decline percentages excluding the specified acquisitions are pro forma estimates calculated by assuming the acquisitions were made at the beginning of the relevant fiscal periods by adding back pre-acquisition revenue of the specified acquired companies for both periods in the comparison. A majority of the companies that we acquire operate within the same industry as the segment into which the acquired company is integrated and, consequently, we assume that the companies that we acquire generally have a comparable growth percentage. We calculate pro forma segment growth using this methodology because we generally do not have the ability to capture post-acquisition revenues related to individual acquisitions since most companies are immediately integrated upon acquisition. The calculations of the pro forma growth analysis, excluding acquisitions discussed in the segment narratives below, include all acquisitions with a purchase price of $10 million or more in the pro forma calculation and do not include acquisitions with a purchase price of less than $10 million, due to the relative size of these smaller acquisitions compared to Tyco's operating results and the large number of acquisitions during certain of the periods presented. These smaller acquisitions represent approximately 6% of the total purchase price for all acquisitions during the years ended September 30, 20022003 and 2001.2002. Since these pro forma estimates are based on pre-acquisition revenues, they are not necessarily indicative of post-acquisition results. This calculation is similar to the method used in calculating the acquisition-related pro forma results of operations in Note 2 to the Consolidated Financial Statements, pursuant to Statement of Financial Accounting Standards ("SFAS") No. 141.
129

        In the discussions that follow, we describe the reasons for changes in results for each segment, although we do not quantify the impact of the various
factors.every factor. In order to quantify each factor contributing to a change in operating income and margins, we would need to exclude the results of acquisitions. As previously noted, since acquisitions are generally integrated within our existing operations immediately upon acquisition, we generally do not have the ability to exclude the effect of acquired businesses when quantifying increases and decreases in operating income and margins.

                                      127

SEGMENT REVENUE, OPERATING INCOME AND MARGINS

FIRE AND SECURITY SERVICES
Changes in Estimates
Changes in Estimates Recorded During the Quarter Ended March 31, 2003
        The preparation of consolidated financial statements in conformity with GAAP requires management to make extensive use of estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Significant estimates in the Company's Consolidated Financial Statements include restructuring and other charges and credits, purchase accounting liabilities, allowances for doubtful accounts receivable, estimates of future cash flows associated with asset impairments, useful lives for depreciation and amortization, loss contingencies, net realizable value of inventories, fair values of financial instruments, 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. Changes in estimates are recorded in the results of operations in the period that the events and circumstances giving rise to such changes occur.
        During the quarter ended March 31, 2003, the Company intensified a process whereby internal audits and detailed controls and operating reviews were conducted. As a result of this process, the Company recorded $388.7 million of pre-tax charges relating to new information and changes in facts and circumstances occurring during the quarter. The process included assessing the continued recoverability of assets, including accounts receivable, inventory and installed security systems and equity investments, and the estimated costs of settling legal, environmental and insurance obligations. The assessments were based on an analysis of the impact of circumstances that occurred during the quarter and on our assessment of the recoverability of certain assets and costs to settle certain liabilities. The assessments include changes in judgments relative to the adequacy of reserves and contingent liabilities. Concurrent with this review process and resulting assessments by management during the quarter, we decided to discontinue existing product lines and terminate an information technology systems implementation project. As a result of these decisions, inventory and other asset balances were written down to their net realizable value.
        The impact of the $388.7 million of net charges recorded in the second quarter and included in the Consolidated Statement of Operations for fiscal 2003, is as follows:
Cost of sales
 
$
(110.5
)
Selling, general and administrative expense
 
 
(243.1
)
Restructuring and other credits (charges), net
 
 
59.6
 
Charges for the impairment of long-lived assets
 
 
(10.2
)
 
 
 
Operating income
 
 
(304.2
)
Other expense, net
 
 
(84.5
)
 
 
 
Income from continuing operations before taxes and minority interest
 
$
(388.7
)
 
 
 
        The net charges of $388.7 million include $139.6 million related to asset reserve valuations, $95.4 million of increased cost estimates for insurance accruals ($49.3 million for workers' compensation accruals and $46.1 million for product and general liability insurance accruals), $84.1 million related to an other than temporary decline in the value of investments, $62.3 million for other accounting estimate changes described below, environmental accruals of $18.0 million, legal
130

accruals of $20.0 million, other various accruals of $15.2 million, $16.4 million for account write-offs included primarily in selling, general and administrative expenses, where we concluded that the recoverability of various asset balances had become doubtful and $10.2 million write-off representing capitalized external costs of a European financial computer system based on the Company's decision in the second quarter to discontinue the new system under development and continue to use the existing system. The above charges are partially offset by credits of $72.5 million, of which $12.9 million is included in cost of sales, related to restructuring charge reversals (see Note 5 to the Consolidated Financial Statements) that arose during the second quarter of fiscal 2003.
        The $139.6 million of adjustments for asset valuations includes a $76.4 million write-down of inventories, $51.9 million increase for allowance for doubtful accounts and $11.3 million write-off of subscriber systems. The inventory charge of $76.4 million was primarily due to the finalization of plans regarding the disposition of inventory in connection with curtailed programs and product lines and the Company's decision during the second quarter to exit certain product lines in our fire and security business. The increase in the allowance for doubtful accounts of $51.9 million and the write-off of subscriber systems of $11.3 million was primarily due to the further deterioration in the accounts receivable aging and increased customer cancellations in certain non-strategic European security businesses during the second quarter. The inventory charge and subscriber systems adjustments are included in cost of sales and the allowance for doubtful accounts is included in selling, general and administrative expenses. We do not expect these changes to have an adverse impact on future operations.
        The workers' compensation and product and general liability changes in estimate are based on third-party actuarial reviews of insurance liabilities. The charge of $95.4 million is included in selling, general and administrative expenses ($65.2 million), and cost of product sales ($30.2 million). This adjustment relates to changes in facts and circumstances occurring during the quarter ended March 31, 2003 which necessitate a change in assumptions and estimates. In particular, the Company identified trend data which required the Company to revise its assumptions as a result of an unanticipated increase in the number and changes in the nature of claims incurred and the rate of increase of medical costs, as well as the emergence of previously unanticipated new claims. In addition, the Company experienced an increase in workers' compensation expense, particularly in California, as a result of adverse legal developments toward employers.
        The $84.1 million investment write-down, included in other (expense) income, net, primarily consists of a $75.6 million loss on various equity investments. It became evident in the quarter ended March 31, 2003 that the declines in the fair values of the investments were other than temporary, primarily due to depressed economic conditions. Factors that management considered in making their assessment included investees' inability to raise funds during the quarter, bankruptcy, continued losses by the investees, lack of sufficient future expected cash flows, and lower entity valuations based on recent private financing activity. During the quarter ended March 31, 2003, the Company also recognized other expense of $8.5 million in connection with a bank guarantee on behalf of an equity investee (see Note 20 to the Consolidated Financial Statements). It is possible that the Company may have additional write-downs on other investments if market conditions continue recent negative trends.
131
         The $62.3 million for other accounting estimates includes a charge to selling, general and administrative expenses of $17.3 million resulting from the Company's revision in the second quarter of deferred commissions related to long-term contracts, $12.1 million to write-down company-owned properties based on real estate assessments and purchase offers received in the second quarter for assets held for sale, $11.5 million of additional severance related to terminated executives, and $21.4 million of other accounting estimate changes, none of which are individually significant, that were included primarily in selling, general and administrative expenses.
        An increase of $18.0 million due to increased environmental accruals resulting from the finalization of the Company's plan to remediate one of its manufacturing sites in the second quarter, $20.0 million to establish an accrual related to the estimated settlement amount for contractual disputes and other legal matters based on our determination that such amounts became both probable and estimable in the second quarter, and $15.2 million of other miscellaneous increased accrual estimates are primarily included in selling, general and administrative expenses.
Segment Revenue, Operating Income and Margins
Fire and Security
        The following table sets forth net revenues and operating income and margins for the Fire and Security Services segment ($ in millions):

                                                              FISCAL 2002   FISCAL 2001   FISCAL 2000
                                                              -----------   -----------   -----------

Revenue from product sales..................................   $ 4,954.1     $3,493.1      $2,740.8
Service revenue.............................................     5,683.5      3,978.6       3,335.8
                                                               ---------     --------      --------
  Net revenues..............................................   $10,637.6     $7,471.7      $6,076.6
                                                               =========     ========      ========
Operating income............................................   $ 1,077.6     $1,202.3      $1,040.5
Operating margins...........................................        10.1%        16.1%         17.1%

Restructuring and other unusual charges.....................   $    94.1     $   80.3      $     --
Restructuring credits.......................................       (18.6)        (1.6)        (11.2)
Inventory charges...........................................        19.4          5.4            --
Write-off of purchased in-process research and
  development...............................................        17.8           --            --
Impairment of long-lived assets.............................       217.0          2.8            --
                                                               ---------     --------      --------
  Total charges (credits) included in operating income......   $   329.7     $   86.9      $  (11.2)
                                                               =========     ========      ========
 
 
Fiscal 2003
 
Fiscal 2002
 
Fiscal 2001
 
Revenue from product sales
 
$
5,124.1
 
$
4,955.5
 
$
3,494.4
 
Service revenue
 
 
6,168.7
 
 
5,683.5
 
 
3,978.6
 
 
 
 
 
 
 
Net revenues
 
$
11,292.8
 
$
10,639.0
 
$
7,473.0
 
 
 
 
 
 
Operating income
 
$
360.2
 
$
904.7
 
$
883.2
 
Operating margins
 
 
3.2
%
 
8.5
%
 
11.8
%
        Net revenues in the Fire and Security Services segment increased 6.1% in fiscal 2003 over fiscal 2002, including a 3.4% increase in product revenue and an 8.5% increase in service revenue. The increase in net revenues was due to favorable changes in foreign currency exchange rates ($519.7 million) and fiscal 2002 acquisitions ($213.8 million calculated in the manner described above in "Overview"). Acquisitions included SBC/Smith Alarm Systems in October 2001, DSC Group and Sensormatic in November 2001, and all other acquisitions with a purchase price of $10 million or more. In addition, an increase in net revenues due to customer contracts purchased through the ADT dealer program ($371.2 million) and generated through our internal sales force offset a decline in revenue due to increased attrition rates in worldwide security. The overall increase was also partially offset by a decline in net revenues at worldwide fire protection due to continued softness in the commercial construction market.
        Operating income and margins decreased significantly in fiscal 2003 over fiscal 2002 due to charges totaling $512.4 million recorded during fiscal 2003. Included within the $512.4 million are charges of $266.7 million related to changes in estimates recorded during the quarter ended March 31, 2003 (includes charges of $127.6 million primarily related to adjustments to accrual balances such as workers compensation, professional fees, and environmental exposure, a charge of $98.1 million primarily due to adjusting reserves for doubtful accounts and slow and non-moving inventory, as well as a write-off of subscriber systems, charges of $34.5 million for other accounting adjustments primarily related to deferred commissions, and charges of $6.5 million related to reconciling items in the current period) in connection with the Company's intensified internal audits, detailed controls and operating reviews and as a result of applying management's judgments and estimates. Also included within the $512.4 million are impairment charges of $143.0 million primarily related to the impairment of intangible assets associated with the ADT dealer program mostly as a result of increased attrition rates (discussed below), and to the impairment of property, plant and equipment of subscriber systems and other fixed
132

assets; net restructuring and other charges of $9.7 million, of which charges of $3.5 million are included in cost of sales and $2.8 million is for the write-off of non-current assets, related to streamlining the business; and other charges of $93.0 million, of which $34.0 million is included in cost of sales and $59.0 million is included in selling, general and administrative expenses, primarily related to uncollectible receivables, product warranty and the dismantlement of customers' ADT security systems. Included within the $143.0 million impairment charge and the $9.7 million net restructuring charge is a charge of $10.2 million and a credit of $2.0 million, respectively, also related to changes in estimates recorded during the quarter ended March 31, 2003. The decrease in operating income and margins was also due to increased depreciation and amortization expense in the security business due to growth in the subscriber asset and dealer asset base as well as the impact of the acquisitions of Sensormatic Electronics Corporation ("Sensormatic") and DSC Group ("DSC") in fiscal 2002; decline in operating income in the continental European security business; and a weaker worldwide fire and contracting environment. The Fire and Security segment expects to incur additional restructuring charges in future periods related to the comprehensive cost reduction program announced on November 4, 2003.
        Attrition rates for customers in our global electronic security services business averaged 15.9% on a trailing twelve-month basis for fiscal 2003, as compared to 13.2% for fiscal 2002. This increase relates to attrition in customer accounts acquired through our worldwide dealer program, as well as internally generated commercial customer accounts in continental Europe and internally generated residential customer accounts in the United States (both of which were partly driven by increased management and control of delinquent accounts). For those account pools experiencing increased attrition, prior lifing studies were re-examined. The Company concluded that existing amortization methods and asset lives continue to be appropriate given the observed actual attrition data for these pools.
        Net revenues for the Fire and Security Services segment increased 42.4% in fiscal 2002 over fiscal 2001 including a 41.8% increase in product revenue and a 42.9% increase in service revenue, primarily as a result of higher sales volume and increased service revenue in the worldwide security business and, to a lesser extent, our worldwide fire protection business. The increase in net revenues was mostly due to acquisitions as well as a higher volume of recurring service revenues generated from our worldwide security business dealer program and, to a lesser extent, increased sales of fire safety and video surveillance products and access control systems. This net revenue growth iswas largely due to our focus in prior years on increasing revenues by growing the business through acquisitions (including the authorized dealer program), as compared to our current long-term strategy, which is to grow our existing business. We plan to do this by gaining
and maintaining high quality security monitoring accounts through our internal
sales force supplemented by the authorized dealer program in key geographic
areas. RevenuesNet revenues for fiscal 2002 also include the effect of the heightened level of security concerns that followed September 11th, which temporarily increased the demand for security-related products. Significant acquisitions included Simplex Time Recorder Co. ("Simplex") in January 2001, Scott Technologies, Inc. ("Scott") in May 2001, the electronic security systems businesses of Cambridge Protection Industries, L.L.C. ("SecurityLink") and Sentry S.A. in July 2001, Edison Select in August 2001, SBC/Smith Alarm Systems in October 2001, and DSC
Group and Sensormatic in November 2001. Excluding the $33.5 million increase from foreign currency fluctuations, our ADT dealer program, (the Company purchases
residential monitoring contracts from an external network of dealers who operate
under ADT's authorized "dealer program"), the acquisitions listed above, and all other acquisitions with a purchase price of $10 million or more, pro forma revenues (calculated in the manner described above in "Overview") for the segment were level with prior year. We expect revenues for the next fiscal year
to increase due to increased service revenue in our world-wide security
business, increased revenue in our fire protection business in Europe and Asia
and, to a lesser extent increases at Ansul. However, we expect the fiscal 2002
curtailment, and in certain end markets the termination, of the ADT dealer
program to partially offset revenue and operating income growth going forward.
        Operating income decreased 10.4%increased slightly in fiscal 2002, over fiscal 2001 primarily due to acquisitions. This increase was partially offset by net restructuring and other unusual charges, charges for the impairment of long-lived assets and a charge for the write-off of purchased in-process research and development. This decrease was partially offset by increases due to
acquisitions. Operating margins decreased primarily due to the charges mentioned

                                      128

above in addition to decreased margins at our security business, as a result of
lower margins at businesses acquired during the year, and also due to decreased
margins at our fire protection business in Europe, Australia and New Zealand. We
expect operating income and margins to increase in the next fiscal year due
primarily to the significant charges incurred in the current year related to
impairment of long-lived assets as well as the restructuring and other unusual
charges incurred, and related improvements resulting from such charges. We
expect these increases to be partially offset by increased costs associated with
enhancing our security business' internal sales force and softness in the
domestic contracting market, which is expected to generate lower margins as a
result of increased competition.
        Operating income and margins in fiscal 2002 include a net restructuring and other unusual charge of $94.9 million. The net $94.9 million charge consists ofincludes charges of $113.5 million, of which inventory write-downs of $0.7 million and a charge of $18.7 million related to the write-up of inventory under purchase accounting are included in cost of sales. These charges are primarily related to severance and facility-related charges associated with streamlining the business, slightly offset by a credit of $18.6
133

$18.6 million relating to current and prior years' restructuring charges. Also included within operating income for fiscal 2002 is a charge of $17.8 million for the write-off of purchased in-process research and development associated with the acquisitions of Sensormatic and DSC Group and a charge of $217.0$114.7 million for the impairment of property, plant and equipment resulting primarily from the termination of a software development project and, to a lesser extent, from the curtailment, and in certain markets, the termination of the authorizedADT dealer program in certain non-U.S. markets and the termination of a software development project.

    The following table provides information about the fiscal 2002 restructuring
and other unusual charges related to the Fire and Security Services segment:


                                                               FACILITIES-   INVENTORY-
                                                   SEVERANCE     RELATED      RELATED      OTHER      TOTAL
                                                   ---------   -----------   ----------   --------   --------

Fiscal 2002 charges..............................   $ 43.5        $15.7        $ 19.4      $34.9      $113.5
Fiscal 2002 reversals............................     (0.3)        (3.0)           --       (0.8)       (4.1)
Fiscal 2002 utilization..........................    (23.8)        (0.1)        (19.4)      (2.7)      (46.0)
                                                    ------        -----        ------      -----      ------
Balance at September 30, 2002....................   $ 19.4        $12.6        $   --      $31.4      $ 63.4
                                                    ======        =====        ======      =====      ======


    As a result of the charges recorded within the Fire and Security Services
segment during fiscal 2002, we estimate that our overall cost structure will be
reduced due to the impact of these charges by approximately $115 million
(approximately $105 million cash and $10 million non-cash) on an annualized
basis, $105 million of which relates to other selling, general and
administrative expenses and $10 million to amortization. However, since business
conditions do not remain constant, the actual reductions in cost may
significantly differ from these amounts.

    Revenue increased 23.0% in fiscal 2001 over fiscal 2000, including a 27.4%
increase in product revenue and a 19.3% increase in service revenue primarily
due to acquisitions and, to a lesser extent, higher sales volume and increased
recurring service revenue in fire protection in North America and Asia, and
increased recurring revenues in the worldwide electronic security services
business. These acquisitions include: Simplex in January 2001; Scott in
May 2001; and SecurityLink in July 2001. Excluding the $338.1 million decrease
from foreign currency exchange fluctuations, our dealer program, the
acquisitions listed above and all other acquisitions with a purchase price of
$10 million or more, pro forma revenue (calculated in the manner described above
in "Overview") increased an estimated 4.7%.

    Operating income increased 15.6% in fiscal 2001 over fiscal 2000 primarily
due to acquisitions and increased service volume in the fire protection business
in North America and Asia and worldwide security business, partially offset by
net restructuring and other unusual charges. The decrease in

                                      129

operating margins was primarily due to net restructuring and other unusual
charges partially offset by increased service revenues in fire protection.markets.
        Operating income and margins in fiscal 2001 include net restructuring and other unusual charges of $84.1 million. The $84.1 million net charge consists of charges of $85.7 million, of which inventory write-downs of $5.4 million are included in cost of sales, primarily related to the closure of facilities that became redundant due to the acquisitions of SecurityLink and Simplex, partially offset by a credit of $1.6 million relating to prior years' restructuring charges. Also included are charges of $2.8 million for the impairment of property, plant and equipment primarily associated with the facility closures.

    Operating income and margins in fiscal 2000 includes a restructuring and
other unusual credit of $11.2 million primarily related to a revision in
estimates of our prior charges. As required under SAB 101, we modified our
revenue recognition policies with respect to the installation of electronic
security systems as of the beginning of fiscal 2001. See CUMULATIVE EFFECT OF
ACCOUNTING CHANGES below.

ELECTRONICS
Electronics
        The following table sets forth net revenues and operating income (loss) and margins for the Electronics segment ($ in millions):

                                                         FISCAL 2002       FISCAL 2001       FISCAL 2000
                                                         -----------       -----------       -----------

Revenue from product sales.............................   $10,078.5         $13,142.7        $ 12,271.7
Service revenue........................................       449.5             430.1             177.8
                                                          ---------         ---------        ----------
  Net revenues.........................................   $10,528.0         $13,572.8        $ 12,449.5
                                                          =========         =========        ==========
Operating (loss) income................................   $(4,222.4)        $ 2,995.5        $  3,055.2
Operating margins......................................       (40.1)%            22.1%             24.5%

Restructuring and other unusual charges................   $   527.2         $   258.0        $     29.1
Restructuring credits..................................       (26.3)               --            (101.5)
Inventory charges......................................       943.6             125.8              (5.4)
Charges related to bad debt provision..................       115.0                --                --
Impairment of long-lived assets........................     3,113.7              98.5                --
Goodwill impairment....................................     1,024.5                --                --
                                                          ---------         ---------        ----------
  Total charges included in operating income (loss)....   $ 5,697.7         $   482.3        $    (77.8)
                                                          =========         =========        ==========
 
 
Fiscal 2003
 
Fiscal 2002
 
Fiscal 2001
 
Revenue from product sales
 
$
9,900.3
 
$
10,015.5
 
$
13,115.7
 
Service revenue
 
 
454.7
 
 
448.6
 
 
429.9
 
 
 
 
 
 
 
Net revenues
 
$
10,355.0
 
$
10,464.1
 
$
13,545.6
 
 
 
 
 
 
Operating income (loss)
 
$
457.7
 
$
(4,245.9
)
$
3,005.1
 
Operating margins
 
 
4.4
%
 
(40.6
)%
 
22.2
%
        Net revenues for the Electronics segment decreased 22.4%slightly in fiscal 2003 compared with fiscal 2002, including a 1.2% decrease in product revenue and a 1.4% increase in service revenue. Net revenues at the electronic components group increased $426.3 million, or 4.4% due to the favorable impact of foreign currency exchange rates. Net revenues at the segment's submarine telecommunications business declined $535.4 million, or 78.1%, due to completion of third-party undersea fiber optic system installations in fiscal 2002. Overall, the decrease in net revenues at our submarine telecommunications business more than offset the increase in the total segment revenues due to favorable changes in foreign currency exchange rates of $523.9 million, and $68.9 million (calculated in the manner described above in "Overview") due to the acquisitions of Transpower Technologies ("Transpower") in November 2001, Communications Instruments, Inc. ("CII") in January 2002, and all other acquisitions with a purchase price of $10 million or more.
        The increase in operating income and margins fiscal 2003 as compared to fiscal 2002 was due to operating losses in the prior year, primarily as a result of charges totaling $5,679.7 million (discussed below) that were recorded in fiscal 2002. Operating income and margins for fiscal 2003 include net charges totaling $881.8 million. The $881.8 million includes charges for the impairment of long-lived assets of $665.1 million primarily related to the Company's intended sale of the TGN which was entirely written off; charges for the impairment of goodwill of $278.4 million in Power Systems, Electrical Contracting Services and the Printed Circuit Group; and restructuring credits of $90.5 million, of which $19.9 million is included in cost of sales, related to changes in estimates of severance and facilities-related charges recorded in prior years. The net restructuring credit of $90.5 million includes $54.8 million of credits which were changes in estimates recorded during the quarter ended March 31, 2003. Also included within the $881.8 million are charges of $14.1 million related to adjusting asset reserves, $6.2 million related to the adjustments to accrual balances, $8.5 million of reconciliation and other accounting adjustments, which were also changes in estimates recorded during the quarter ended March 31, 2003.
134

        Net revenues for the Electronics segment decreased 22.7% in fiscal 2002 compared with fiscal 2001, including a 23.3%23.6% decrease in product revenue and a 4.5%4.3% increase in service revenue, as a result of a severe decline in demand for undersea telecommunications systems and surplus capacity available and a decline in demand for our electronicselectronic components group products in the communications, computer and consumer electronics industries across all geographic regions. The
Electronics segment is comprised ofNet revenues at the electronicselectronic components group as well as
Tyco Telecommunications, which share certain customers. Revenues at the
electronics components group(which consists of Electronic Components, Wireless, Electrical Contracting Services, Power Systems and Printed Circuit Group) decreased $1,931.3 million, or 16.5%, reflecting a significant decrease in demand in certain end markets. Sales were impacted mostly by the market decline in the telecommunications and computer industries and, to a lesser extent, the industrial/commercial industry. The market decreases were partially offset by growth in our product sales into the automotive industry. RevenuesNet revenues at Tyco Submarine Telecommunication's undersea cable
communications business declined $1,113.5$1,150.2 million, or 59.8%62.6%, due to lack of demand for new cable construction and very weak demand for capacity sales on the TGN. Excluding the $16.7 million decrease from foreign currency fluctuations and the acquisitions of CIGI Investment Group, Inc. ("CIGI") in October 2000, Lucent Technologies' Power Systems business ("LPS") in December 2000, Transpower, Technologies in November 2001, Communications Instruments, Inc. in
January 2002,CII, and all other acquisitions with a purchase price of $10 million or more, pro forma revenues (calculated in 130
the manner described above in "Overview") for the segment decreased an estimated 29.3%29.6%. We expect our Electronics segment to continue to experience a significant
decrease in demand for the next fiscal year as a result of our undersea fiber
optic installation business not anticipating any major third-party system
builds. Furthermore, an industry-wide surplus of telecommunication capacity
available for sales continues to exist. Although total segment revenue is
expected to decrease year over year, we anticipate that revenues for our core
electronics components group will slightly increase
        The operating loss in fiscal 2003 due to growth
due to new product development launches and increases in market share. As
evidenced by the current period's restructuring charges, management has
implemented plans within this segment to reduce the number of manufacturing
plants, along with the related employees, to a size appropriate for the current
business environment, while attempting to maintain the flexibility needed for a
potential upturn in these markets.

    The significant decrease in operating income and operating margins in fiscal
2002 compared to fiscal 2001 was primarily due to the impairment of long-lived assets and goodwill as well as the restructuring and other unusual charges in addition to the decrease in revenue. In the Electronics Componentselectronic components business, the significant decrease in demand related to the telecommunications, computer, consumer electronics, and the industrial machinery and commercial aerospace industriesindustries. The overall decrease in demand resulted in much lower manufacturing volumes which increased per unit costs. In the Submarine Telecommunications business, margins were impacted significantly by the lack of capacity sales on the TGN and a significant reduction in third party system builds. We expect operating income to increase in the next fiscal year due to
the significant charges incurred in the current year related to the impairment
of long-lived assets, as well as the restructuring and other unusual charges
incurred and related improvements resulting from such charges.
        Operating loss and margins for fiscal 2002 include net restructuring and other unusual charges of $1,559.5$1,504.5 million. The $1,559.5$1,504.5 million net charge consists ofincludes charges totaling $1,585.8$1,530.8 million, of which inventory reserves of $608.2 million are included in cost of sales and a bad debt provision of $115.0 million is included in selling, general and administrative expenses. These charges primarily relate to initiatives taken to reduce fixed costs, due to the significant downturn in the telecommunications business and certain electronics end markets, including facility closures, headcount reductions, inventory reserves and purchase commitment cancellations. These charges were slightly offset by a restructuring credit of $26.3 million primarily relating to a revision in estimates of current and prior years' severance and facilities charges. Total inventory charges of $943.6 million include $608.2 million of inventory write-downs and $335.4 million of supplier contract termination fees. There were no significantIn fiscal 2002, $19.9 million was originally included in the inventory written down and was recorded as a restructuring credit to cost of sales of previously written-down or written-off
inventory during thein fiscal year ended September 30, 2002. Of the
$608.2 million, $143.1 million of inventory has been scrapped as of
September 30, 2002. We expect the remaining written-off inventory to be scrapped
over the next three to six months.2003. To the extent that any of the bad debt provisions are not utilized the excess amounts will be reversed as a credit to the selling, general and administrative expenses line in the Consolidated Statements of Operations and will be separately disclosed as an unusual credit.
To the extent that any of the inventory is subsequently sold, the related amount
of income, if any, will be recognized as a credit to the cost of sales line and
will be disclosed as an unusual credit. Also included within operating loss and margins for fiscal 2002 are charges of $3,113.7$3,150.7 million for the impairment of property, plant and equipment, primarily related to the TGN, and goodwill impairment charges of $1,024.5 million related to Tyco Submarine Telecommunications. For additional information regarding our accounting for goodwill impairments, see "Accounting Policies--Goodwill"Policies—Goodwill" below.
        The significant restructuring charges recorded in fiscal 2002 were primarily related to the restructuring of the Submarine Telecommunications business to address the significant overcapacity in the market and resulting lack of demand for new system construction. In the fourth fiscal quarter of 2002, management decided to focus the business for the foreseeable future on maintenance revenues and capacity sales on the Tyco Global Network,TGN, to discontinue future additions to the TGN, and limit construction activities to small projects that arewere cash flow positive with at least breakeven earnings. As 131
a result of this new strategy, management devised a plan to significantly downsize the manufacturing footprint, decrease project management staffing, reduce the research and development function and minimize
135

staffing and expense in all other administrative areas of the business to decrease cash outflows and losses to the maximum extent possible. This plan was carefully crafted to ensure that both the technical and construction competencies of the business would be preserved for whenin the event industry conditions improve.

    The following table provides information about the fiscal 2002 restructuring
and other unusual charges related to the Electronics segment:


                                                            FACILITIES-   INVENTORY-
                                                SEVERANCE     RELATED      RELATED      OTHER      TOTAL
                                                ---------   -----------   ----------   --------   --------

Fiscal 2002 charges...........................   $198.1       $250.2        $ 943.6    $ 193.9    $1,585.8
Fiscal 2002 reversals.........................     (2.5)        (8.1)            --         --       (10.6)
Fiscal 2002 utilization.......................    (79.6)       (77.7)        (164.7)     (71.4)     (393.4)
                                                 ------       ------        -------    -------    --------
Balance at September 30, 2002.................   $116.0       $164.4        $ 778.9    $ 122.5    $1,181.8
                                                 ======       ======        =======    =======    ========


    As a result of the charges recorded within the Electronics segment during
fiscal 2002, we estimate that our overall cost structure will be reduced due to
the impact of these charges by approximately $710 million (approximately
$570 million cash and $140 million non-cash) on an annualized basis, of which
$550 million relates to cost of sales and $160 million to other selling, general
and administrative expenses. However, since business conditions do not remain
constant the actual reductions in cost may significantly differ from these
amounts.

    Net revenue increased 9.0% in fiscal 2001 over fiscal 2000, including a 7.1%
increase in product revenue and a $252.3 million increase in service revenue,
due to acquisitions by our electronic components group. These acquisitions
included: Siemens Electromechanical Components GmbH & Co. KG in November 1999;
Praegitzer Industries, Inc. in December 1999; Critchley Group PLC in
March 2000; the electronic OEM business of Thomas & Betts in July 2000; CIGI in
October 2000; and LPS in December 2000. Excluding the $436.8 million decrease
from foreign currency exchange fluctuations, the impact of the acquisitions
listed above and all other acquisitions with a purchase price of $10 million or
more, pro forma revenue (calculated in the manner described above in "Overview")
decreased an estimated 5.5%, which reflects an economic slowdown in the computer
and consumer electronics and communications industries.

    The slight decrease in operating income was primarily the result of net
restructuring and other unusual charges and impairments largely offset by
increased operating income due to higher revenues in the electronics components
business associated with acquisitions in fiscal 2001, as well as the full year
result of acquisitions in 2000. In addition, there were margin improvements on
26.6% lower revenues in Tyco Telecommunications business due to the completion
of several large third-party system contracts in fiscal 2001 with higher
margins, offset by approximately $36.5 million of incremental expenses related
to bad debt provisions and legal costs due to industry conditions.
        Operating income and margins in fiscal 2001 include restructuring and other
unusual charges of $383.8 million primarily related to the closure of facilities within the communications, computer and consumer electronics industries in response to the severe downturn experienced. Included within the $383.8 million are inventory write-downs of $74.1 million and charges of $51.7 million for the write-up of inventory under purchase accounting, both of which are included in cost of sales. Operating income and margins after charges (credits) for fiscal 2001 also includes charges of $98.5 million for the impairment of property, plant and equipment associated with the facility closures.

    Operating income and margins in fiscal 2000 include a net merger,
restructuring and other unusual credit of $77.8 million in fiscal 2000, of which
a net credit of $5.4 million related to inventory is

                                      132

included in cost of sales, primarily related to a revision of estimates of
merger, restructuring and other unusual accruals related to the merger with AMP
and AMP's profit improvement plan.

HEALTHCARE AND SPECIALTY PRODUCTS
Healthcare
        The following table sets forth net revenues and operating income and margins for the Healthcare and Specialty Products segment ($ in millions):

                                                              FISCAL 2002   FISCAL 2001   FISCAL 2000
                                                              -----------   -----------   -----------

Revenue from product sales..................................   $9,706.7      $8,748.5      $6,458.7
Service revenue.............................................       70.7          64.2           9.2
                                                               --------      --------      --------
  Net revenues..............................................   $9,777.4      $8,812.7      $6,467.9
                                                               ========      ========      ========
Operating income............................................   $1,926.2      $1,804.4      $1,439.8
Operating margins...........................................       19.7%         20.5%         22.3%

Restructuring and other unusual charges.....................   $   57.2      $   28.3      $   12.6
Restructuring credits.......................................       (3.9)        (15.6)        (29.9)
Inventory charges...........................................        1.6          44.0           6.4
Write-off of purchased in-process research and
  development...............................................         --         184.3            --
Impairment of long-lived assets.............................      130.4          15.4          99.0
                                                               --------      --------      --------
  Total charges included in operating income................   $  185.3      $  256.4      $   88.1
                                                               ========      ========      ========
 
 
Fiscal 2003
 
Fiscal 2002
 
Fiscal 2001
 
Revenue from product sales
 
$
8,496.0
 
$
7,828.4
 
$
7,001.1
 
Service revenue
 
 
75.9
 
 
70.7
 
 
64.2
 
 
 
 
 
 
 
Net revenues
 
$
8,571.9
 
$
7,899.1
 
$
7,065.3
 
 
 
 
 
 
Operating income
 
$
2,127.1
 
$
1,846.8
 
$
1,509.3
 
Operating margins
 
 
24.8
%
 
23.4
%
 
21.4
%
        Net revenues for the Healthcare and Specialty Products segment increased 10.9%8.5% in fiscal 2003 over fiscal 2002, including an 8.5% increase in product revenue and a 7.4% increase in service revenue. The increase in net revenues resulted primarily from organic growth and favorable foreign currency exchange rates and, to a lesser extent, acquisitions, net of divestitures. Organic growth was due to the following: increases in the surgical sector concurrent with the award of a major contract and continued organic growth within certain surgical stapling lines; increases in the medical sector resulting from the award of a significant wound care contract, coupled with the exit of a major competitor from the traditional wound care business, new product launches and higher demand in the ultrasound market; increases in pharmaceuticals and imaging due to higher volumes and increased market share, and; strong sales within the respiratory division. These sales increases were partially offset by a decrease in the diaper product segment of the Retail business largely resulting from the adverse impact of the industry-wide down-count issues, and a decline in the International division due to lower sales in continental Europe and Latin America. The increase in net revenues also resulted from favorable changes in foreign exchange rates ($268.2 million) and incremental revenues generated from the acquisition of Paragon Trade Brands ("Paragon") in January 2002 ($123.8 million calculated in the manner described above in "Overview"), slightly offset by a decline in revenues ($48.1 million) related to the divestiture of Surgical Dynamics, Inc. in July 2002.
        The 15.2% increase in operating income and increase in margins in fiscal 2003 compared to fiscal 2002 were due primarily to favorable margin impact as a result of higher sales and favorable manufacturing variances as a result of increased production volumes, a shift to a more favorable product mix, and cost savings as a result of the closure of certain Paragon facilities, back office consolidations and our continued focus on optimizing operating expenses. Slightly offsetting the effect of those items were increased legal fees, insurance and pension expense, and higher sales and marketing expense as a result of program development aimed at supporting organic growth initiatives. Also contributing to the increase in operating income and margins were favorable fluctuations in foreign currency exchange rates and the impact of acquisitions and divestitures. During fiscal 2003, we recorded net credits totaling $3.3 million. Included within the total credits of $3.3 million are charges
136

of $11.7 million related to asset reserves for inventory and charges of $0.7 million for adjustments to accrual balances related to workers compensation, which were changes in estimates recorded in connection with the Company's intensified internal audits, detailed controls and operating reviews and as a result of applying management's judgments and estimates. Also included within the $3.3 million are restructuring credits of $9.2 million, of which $0.2 million is included in cost of sales, due to costs being less than anticipated and a credit of $6.5 million included in selling, general and administrative expenses related to an insurance reimbursement for certain legal fees associated with product liability cases. The restructuring credits of $9.2 million include credits of $4.7 million which were also changes in estimates recorded during the quarter ended March 31, 2003.
        Net revenues for the Healthcare segment increased 11.8% in fiscal 2002 over fiscal 2001 including a 11.0%11.8% increase in product revenue and a 10.1% increase in service revenue, primarily as a result of
acquisitions. The Healthcare and Specialty Products segment is comprised of Tyco
Healthcare and Tyco Plastics and Adhesives. Tyco Healthcare's revenues increased
$833.8 million or 11.8% reflecting increased sales volume resulting from acquisitions in our U.S. healthcare businesses and, to a much lesser extent, increased revenues from our domestic and international healthcare businesses. Revenues at Tyco Plastics and Adhesives increased $140.8 million or 8.1% over
the prior year due solely to the effect of acquisitions. In addition, revenues
for fiscal 2001 included $9.9 million related to our ADT Automotive business
which was sold in October 2000. Excluding the $6.7$11.2 million decrease from foreign currency exchange fluctuations and the acquisitions of Mallinckrodt Inc. ("Mallinckrodt") in October 2000, InnerDyne, Inc. ("InnerDyne") in December 2000, Linq Industrial Fabrics, Inc. in December 2001, Paragon, Trade
Brands in January 2002, and all other acquisitions with a purchase price of $10 million or more, pro forma revenues (calculated in the manner described above in "Overview") for the Healthcare and Specialty Products segment were
level with the prior year. We expect revenues for the next fiscal year to
increase, due to the introduction of new products and growth in market share.increased an estimated 2.9%.
        Operating income increased 6.8%22.4% in fiscal 2002 compared to fiscal 2001 primarily due to a decrease in charges recorded in fiscal 2002 as compared to fiscal 2001, as well as the impact of acquisitions and operating efficiencies realized from cost reductions at Mallinckrodt. This increase was partially offset by lower margins of businesses acquired at Tyco Healthcare, and decreased
margins at Plastics and Adhesives as a result of volume shortfalls. The slight
decrease in operating margins was due primarily to a shift in the product mix,
lower selling prices in certain areas and unfavorable manufacturing variances.
In addition, the Healthcare and Specialty Products segment incurred expenses
mostly relating to inventory write-downs and uncollectable accounts receivable,
primarily related to the Plastics and Adhesives business. We expect operating
income to increase for the next fiscal year as a result of the impairment
charges incurred in the current year related to long-lived assets as well as the
restructuring and other unusual charges incurred and related improvements
resulting from such charges, in addition to the increase in revenue. However,
margins are expected to remain

                                      133

approximately level due to increased spending on research and development and,
to a lesser extent, an increase in royalty expense.Healthcare.
        Operating income and margins for fiscal 2002 reflect net restructuring and other unusual charges of $54.9$44.8 million. The $54.9$44.8 million net charge consists ofincludes charges of $58.8$48.7 million, of which inventory write-downs of $0.3$0.5 million and a
charge of $1.3 million related to the write-up of inventory under purchase
accounting are included in cost of sales. These charges primarily relate to severance associated with the consolidation of operations and facility-related costs due to exiting certain business lines, and are partially offset by a credit of $3.9 million relating to current and prior years' restructuring charges. Operating income and margins for fiscal 2002 also include a charge for the write-off of long-lived assets of $130.4$2.5 million primarily related to the write-offimpairment of intangible assets associated with a business line sold in
July 2002.

    The following table provides information about the fiscal 2002 restructuring
and other unusual charges related to the Healthcare and Specialty Products
segment:


                                                               FACILITIES-   INVENTORY-
                                                   SEVERANCE     RELATED      RELATED      OTHER      TOTAL
                                                   ---------   -----------   ----------   --------   --------

Fiscal 2002 charges..............................    $28.2        $17.1         $ 1.6      $11.9      $ 58.8
Fiscal 2002 reversals............................     (0.8)          --            --       (2.4)       (3.2)
Fiscal 2002 utilization..........................     (9.6)        (2.2)         (1.6)      (9.5)      (22.9)
                                                     -----        -----         -----      -----      ------
Balance at September 30, 2002....................    $17.8        $14.9         $  --      $  --      $ 32.7
                                                     =====        =====         =====      =====      ======


    As a result of the charges recorded within the Healthcare and Specialty
Products segment during fiscal 2002, we estimate that our overall cost structure
will be reduced due to the impact of these charges by approximately $40 million
(approximately $30 million cash and $10 million non-cash) on an annualized
basis, of which $30 million relates to other selling, general and administrative
expenses and $10 million to cost of sales. However, since business conditions do
not remain constant, the actual reductions in cost may significantly differ from
these amounts.

    Net revenues increased 36.3% in fiscal 2001 over fiscal 2000, including a
35.5% increase in product revenue and a $55.0 million increase in service
revenue, primarily due to acquisitions. These acquisitions included: General
Surgical Innovations, Inc. in November 1999; Radionics in January 2000;
Fiber-Lam in March 2000; Mallinckrodt in October 2000; and InnerDyne in
December 2000. The revenue increase was somewhat offset by the sale of our ADT
Automotive business. Excluding the $130.4 million decrease from foreign currency
exchange fluctuations, the impact of the acquisitions and the divestiture listed
above and all other acquisitions with a purchase price of $10 million or more,
pro forma revenue (calculated in the manner described above in "Overview")
remained level with the prior year.

    The 25.3% increase in operating income and the slight decrease in operating
margins in fiscal 2001 compared to fiscal 2000 was primarily due to the
acquisition of Mallinckrodt, which generally has lower operating margins than
other businesses in this segment, partially offset by a decrease in operating
income due to a charge for the write-off of purchased in-process research and
development in fiscal 2001.long-lived assets.
        Operating income and margins for fiscal 2001 include net restructuring and other unusual charges of $56.7$48.4 million primarily related to the closure of several manufacturing plants. Included within the $56.7$48.4 million are charges of $72.3$64.0 million, of which charges of $35.0 million for the write-up of inventory under purchase accounting and inventory write-downs of $9.0$5.0 million are included in cost of sales, partially offset by credits of $15.6 million related to the merger with U.S. Surgical. Operating income and margins also include a charge of $184.3 million for the write-off of purchased in-process research and development associated with the acquisition of Mallinckrodt and charges of $15.4$14.2 million

                                      134
 for the impairment of property, plant and equipment related to the closure of the manufacturing plants.

    Operating income
137
Engineered Products and margins for fiscal 2000 includes charges of
$99.0 million for the impairment of property, plant and equipment and net
merger, restructuring and other unusual credits of $10.9 million. Included
within the $10.9 million are net credits of $17.3 million primarily related to
exiting U.S. Surgical's interventional cardiology business, partially offset by
charges of $6.4 million included in cost of sales related to the write-down of
inventory.

ENGINEERED PRODUCTS AND SERVICESServices
        The following table sets forth net revenues and operating income and margins for the Engineered Products and Services segment ($ in millions):

                                                              FISCAL 2002   FISCAL 2001   FISCAL 2000
                                                              -----------   -----------   -----------

Revenue from product sales..................................   $4,055.5      $3,603.1      $3,487.2
Service revenue.............................................      645.2         576.3         450.7
                                                               --------      --------      --------
Net revenues................................................   $4,700.7      $4,179.4      $3,937.9
                                                               ========      ========      ========
Operating income............................................   $  270.9      $  755.8      $  746.9
Operating margins...........................................        5.8%         18.1%         19.0%

Restructuring and other unusual charges.....................   $   44.6      $   47.6      $     --
Inventory charges...........................................        6.2           9.7            --
Impairment of long-lived assets.............................        9.5           3.4            --
Goodwill impairment.........................................      319.2            --            --
                                                               --------      --------      --------
Total charges included in operating income..................   $  379.5      $   60.7      $     --
                                                               ========      ========      ========
 
 
Fiscal 2003
 
Fiscal 2002
 
Fiscal 2001
 
Revenue from product sales
 
$
4,010.1
 
$
4,064.1
 
$
3,594.5
 
Service revenue
 
 
674.3
 
 
645.2
 
 
576.3
 
 
 
 
 
 
Net revenues
 
$
4,684.4
 
$
4,709.3
 
$
4,170.8
 
 
 
 
 
 
Operating income
 
$
355.2
 
$
252.5
 
$
704.8
 
Operating margins
 
 
7.6
%
 
5.4
%
 
16.9
%
        Net revenues for the Engineered Products and Services segment remained essentially level in fiscal 2003 as compared to fiscal 2002, including a 1.3% decrease in product revenue partially offset by a 4.5% increase in service revenue. Net revenue decreased year over year, as the increase in net revenues due to favorable changes in foreign currency exchange rates ($233.1 million calculated in the manner described above in "Overview") and the effect of acquisitions ($41.2 million) was more than offset by continued weak conditions in major markets at Flow Control and Electrical and Metal Products, most notably in non-residential construction. Also contributing to the overall decrease was lower levels of capital spending and increased pricing pressure, resulting in lower selling prices. The $41.2 million effect from acquisitions included Century Tube Corporation ("Century") in October 2001, Water & Power Technologies ("Water & Power") in November 2001, and Clean Air Systems ("Clean Air") in February 2002 and all other acquisitions with a purchase price of $10 million or more.
        The 40.7% increase in operating income and the increase in margins in fiscal 2003 compared to fiscal 2002 were due to lower than usual operating income in the prior year period, as a result of recording charges of $379.5 million (discussed below). During fiscal 2003, we recorded charges totaling $56.7 million. Included within the $56.7 million are charges of $33.1 million related to changes in estimates recorded in connection with the Company's intensified internal audits, detailed controls and operating reviews and as a result of applying management's judgments and estimates (including $19.0 million related to adjustments to workers compensation, $1.0 million primarily related to reconciling items in the current period and $13.1 million associated with asset reserves). Also included within the $56.7 million are net restructuring and other charges of $7.8 million, of which $6.1 million is included in cost of sales, due to changes in estimates of costs being less than anticipated, and charges for the impairment of long-lived assets of $2.2 million relating to manufacturing and distribution consolidation at Flow Control and cost reduction projects, and other costs of $13.6 million included within selling, general and administrative expenses primarily related to the reorganization and consolidation of a manufacturing facility and certain business offices. Operating income and margins were also negatively effected by the lower sales discussed above, competitive conditions in major markets for valves and controls, thermal controls, and electrical and metal products, and increased raw material costs, mostly steel. The Engineered Products and Services segment expects to incur additional charges in future periods related to the comprehensive cost reduction program announced on November 4, 2003.
        Net revenues increased 12.5%12.9% in fiscal 2002 over fiscal 2001 including a 12.6%13.1% increase in product revenue and a 12.0% increase in service revenue, primarily as a result of acquisitions and, to a much lesser extent, increased revenues at Tyco Flow Control, which was largely due to increased demand of industrial valve and control and thermal control products. However, offsetting this increase in demand of valve and control products was the decline in general economic conditions, as well as a slow-down in the commercial contructionconstruction market. Acquisitions included Pyrotenax in March 2001, IMI Bailey Birkett in June 2001, Century, Tube Corporation in October 2001, Water & Power, Technologies
in November 2001, and Clean Air Systems in February 2002.Air. Excluding the $9.2 million decrease from foreign currency exchange and the impact of the acquisitions listed above, and all other
138

acquisitions with a purchase price of $10 million or more, pro forma revenues (calculated in the manner described above in "Overview") for the segment were level with the prior year. We expect
revenues for the next fiscal year to increase primarily as a result of increased
sales prices (due to increased raw material costs) and expected improved market
conditions at Tyco Infrastructure Services. Furthermore, we expect sales volume
at Tyco Fire and Building Products to show some signs of recovery in the
commercial construction markets during the latter half of fiscal 2003.
        The 64.2% decrease in operating income and the decrease in operating margins in fiscal 2002 over fiscal 2001 was primarily due to goodwill impairment charges in addition to the impact of lower margins at Tyco Electrical &and Metal Products and Tyco Flow Control, decreased royalty and licensing fee income from divested businesses and reduced market activity due to continued softness in demand and worldwide competitive pressures. This overall decrease was slightly offset by the results of acquisitions and by savings realized from cost-cutting initiatives at Tyco Flow Control. We expect operating income to increase in 2003
primarily as a result of increased selling pricesControl and reduced operating cost as
well as lower expected charges. However, we expect margins to remain level with
fiscal 2002.

                                      135
Infrastructure Services.
        Operating income and margins for fiscal 2002 reflect restructuring and other
unusual charges of $50.8 million, of which inventory write-downs of $6.2 million are included in cost of sales, primarily related to severance and facility-related costs associated with streamlining the business and charges of $9.5 million for the impairment of property, plant and equipment associated with the closure of facilities. Also included are goodwill impairment charges of $319.2 million relating to Tyco Infrastructure.Infrastructure Services. For additional information regarding our accounting for goodwill impairments, see "Accounting Policies--Goodwill"Policies—Goodwill" below.

    The following table provides additional information about the fiscal 2002
restructuring and other unusual charges related to the Engineered Products and
Services segment:


                                                                             INVENTORY-
                                                    SEVERANCE   FACILITIES    RELATED      OTHER      TOTAL
                                                    ---------   ----------   ----------   --------   --------

Fiscal 2002 charges...............................   $ 35.7        $ 4.1        $ 6.2      $ 4.8      $ 50.8
Fiscal 2002 utilization...........................    (27.7)        (1.5)        (6.2)      (4.0)      (39.4)
                                                     ------        -----        -----      -----      ------
Balance at September 30, 2002.....................   $  8.0        $ 2.6        $  --      $ 0.8      $ 11.4
                                                     ======        =====        =====      =====      ======


    As a result of the charges recorded within the Engineered Products and
Services segment during fiscal 2002, we estimate that our overall cost structure
will be reduced due to the impact of these charges by approximately $45 million
(approximately $43 million cash and $2 million non-cash) on an annualized basis,
of which $35 million relates to cost of sales and $10 million to selling,
general and administrative expenses. However, since business conditions do not
remain constant the actual reductions in cost may significantly differ from
these amounts.

    Net revenues increased 6.1% in fiscal 2001 over fiscal 2000 including a 3.3%
increase in product revenue and a 27.9% increase in service revenue as a result
of acquisitions. Acquisitions included Kitamura Valve Co. in January 2000, Flow
Control Technologies in February 2000, Tracer in August 2000, Pyrotenax in
March 2001, and IMI in June 2001. Excluding the $148.3 million decrease in
foreign currency exchange and the impact of the acquisitions listed above, and
all other acquisitions with a purchase price of $10 million or more, pro forma
revenues for the segment decreased 2.6%.

    Operating income for fiscal 2001 was level as compared to fiscal 2000 due to
acquisitions and, to a lesser extent, improved margins at both Tyco Flow Control
and Tyco Infrastructure offset by net restructuring and other unusual charges
and decreased operating income and margins at Allied Tube and Conduit resulting
from higher raw material prices. Operating margins decreased due to net
restructuring and other unusual charges in fiscal 2001 and decreased margins at
Allied Tube and Conduit partially offset by improved margins at both Tyco Flow
Control and Tyco Infrastructure.
        Operating income and margins for fiscal 2001 include restructuring and other
unusual charges of $57.3 million, of which inventory write-downs of $9.7 million are included in cost of sales, and charges for the impairment of property, plant and equipment of $3.4 million, primarily related to the closure of facilities.

CORPORATE ITEMS

FOREIGN CURRENCY
Plastics and Adhesives
        The following table sets forth net revenues and operating income and margins for the Plastics and Adhesives segment ($ in millions):
 
 
Fiscal 2003
 
Fiscal 2002
 
Fiscal 2001
 
Revenue from product sales
 
$
1,897.2
 
$
1,878.3
 
$
1,747.4
 
 
 
 
 
 
Operating income
 
$
167.4
 
$
209.2
 
$
300.9
 
Operating margins
 
 
8.8
%
 
11.1
%
 
17.2
%
        Net revenues at Tyco Plastics and Adhesives increased slightly in fiscal 2003 over fiscal 2002 due to the effect of favorable changes in foreign currency exchange rates ($29.3 million) and acquisitions ($21.0 million calculated in the manner described above in "Overview"), which included LINQ Industrial Fabrics, Inc. ("LINQ") in December 2001 and all other acquisitions with a purchase price of $10 million or more. Sales increases were achieved by higher selling prices as a result of higher raw material costs, increased sales volume of plastic sheeting and duct tape products as a result of the heightened level of security related to the potential likelihood of terrorist attacks, and a strong residential construction market for Ludlow Coated Products. These increases were more than offset by increased competition and decreases in our Corrosion Protection business, which has been negatively impacted by a slow down in the oil and gas pipeline construction markets created by uncertainty in the Middle East and Venezuela, and a decline in hanger sales due to weak demand in the retail garment industry.
        The significant decrease in operating income and decrease in operating margins in fiscal 2003 over fiscal 2002 were primarily due to increased raw material costs (mostly polyethylene) and increased pricing competition driven by excess production capacity and an increase in lower priced imported goods. During fiscal 2003, we recorded net credits totaling $1.4 million. Included within the $1.4 million are charges of $5.6 million related to changes in estimates recorded in connection with the Company's intensified internal audits, detailed controls and operating reviews and as a result of applying management's judgments and estimates (including $3.2 million for adjustments to accrual balances, $2.6 million related to asset reserves for inventory and a credit of $0.2 million related to reconciliation items). Also included within the total credits of $1.4 million are restructuring credits of $1.0 million due to costs being less than anticipated and a credit of $6.0 million, which is included in selling, general and
139

administrative expenses, related to the settlement of a lawsuit. The restructuring credits of $1.0 million include a credit of $0.4 million also recorded in connection with the Company's intensified internal audits. The Plastics and Adhesives segment expects to incur additional restructuring charges in future periods related to the comprehensive cost reduction program announced on November 4, 2003.
        Net revenues for the Plastics and Adhesives segment increased 7.5%, or $130.9 million in fiscal 2002 over fiscal 2001. The increase was solely due to the effect of acquisitions. In addition, net revenues for fiscal 2001 included $9.9 million related to our ADT Automotive business, which was sold in October 2000. Excluding the $4.5 million increase from foreign currency exchange fluctuations and the acquisition of LINQ Industrial Fabrics, Inc. in December 2001, and all other acquisitions with a purchase price of $10 million or more, pro forma revenues (calculated in the manner described above in "Overview") for the Plastics and Adhesives segment decreased an estimated 13.0%.
        Operating income decreased 30.5% in fiscal 2002 compared to fiscal 2001 primarily due to decreased margins as a result of volume shortfalls, a shift in the product mix, lower selling prices in certain areas and unfavorable manufacturing variances. In addition, the segment incurred increased expenses mostly relating to inventory write-downs and uncollectible accounts receivable.
        Operating income and margins for fiscal 2002 reflect net restructuring and other charges of $10.1 million, of which inventory write-downs of $1.1 million are included in cost of sales. These charges primarily relate to severance associated with the consolidation of operations and facility-related costs due to exiting certain business lines. Operating income and margins for fiscal 2002 also include a charge for the write-off of long-lived assets of $2.6 million primarily related to the impairment of long-lived assets.
        Operating income and margins for fiscal 2001 include net restructuring and other charges of $8.3 million primarily related to the closure of several manufacturing plants. Included within the $8.3 million are charges of $4.0 million related to inventory write-downs, which has been included in cost of sales. Operating income and margins also include a charge of $1.2 million for the impairment of long-lived assets related to the closure of the manufacturing plants.
Corporate Items
Foreign Currency
        The effect of changes in foreign exchange rates for fiscal 2003 compared to fiscal 2002 was an increase in net revenues and operating income of $1,574.2 million and $192.1 million, respectively. The effect of changes in foreign exchange rates for fiscal 2002 compared to fiscal 2001 was an increase in net revenues of approximately $0.9 million and a decrease in operating income of approximately $48.2 million. The effect of
changes in foreign exchange rates for fiscal 2001 compared to fiscal 2000 was a
decrease in revenues of approximately $1,053.6 million and a decrease in
operating income of approximately $199.5 million.

                                      136

CORPORATE EXPENSES
Corporate Expenses
        Corporate expenses were $196.2$400.6 million in fiscal 2003. Corporate expenses for fiscal 2003 include charges totaling $178.9 million. Included within the $178.9 million is a charge of $91.5 million for an incremental increase in directors and officers insurance and charges of $38.5 million related to internal investigation fees. Also included is a charge of $19.9 million primarily related to a severance accrual for corporate employees and a restructuring credit of $10.6 million due to costs being less than anticipated, both of which were changes in estimates recorded in connection with the Company's intensified internal audits, detailed controls and operating reviews and as a result of applying management's judgments and estimates. Also included within the $178.9 million are net restructuring charges of $9.0 million, other net charges of $16.0 million included in selling, general and administrative expenses, and charges for the impairment of long-lived assets of $14.6 million primarily related to the closure and relocation of corporate offices and severance. Corporate expenses were $419.7 million in fiscal 2002. This amount excludesincludes net unusualrestructuring, impairment and impairmentother charges of $213.1$199.1 million primarily related to the write-off of investment banking fees and other deal costs associated with the terminated breakup plan
140

and certain acquisitions that were not completed, costs incurred to date for the internal investigation, and severance associated with
certain corporate employees. In addition, corporate expenses for fiscal 2002
exclude charges relating to prior years of $222.0 million.severance. Corporate expenses were $197.2level in fiscal 2003 as compared to fiscal 2002, excluding all of the items noted above. Corporate expenses were $243.9 million in fiscal 2001, excluding an unusual creditand included a charge of $163.4$3.4 million primarily for the settlement of litigation in fiscal 2001, as
comparedrelated to $187.4 million in fiscal 2000.severance. Corporate expenses were leveldown slightly in fiscal 2002 as compared to fiscal 2001 due to an overall decrease in compensation expense and lower than expected advertising costs and expenses for charitable giving;giving. However, these decreases were partially offset by increased insurance costs, legal and accounting fees, and other costs associated with the business disruptions that began during the second quarter of fiscal 2002. The increase from fiscal 2000 was 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. The total costs
incurred for the internal investigation were $9.1 million in fiscal 2002. An
additional expense
Amortization of approximately $40 million is estimated to conclude this
process in 2003.

AMORTIZATION OF GOODWILLGoodwill
        Amortization of goodwill was $537.4 million and $344.4$543.0 million in fiscal 2001 and 2000, respectively.2001. In accordance with recently adopted accounting rule changes, goodwill is no longer amortized beginning with our fiscal 2002 year. See GOODWILL AND OTHER INTANGIBLESGoodwill and Other Intangibles within Note 1 to our Consolidated Financial Statements for a discussion of these accounting rule changes.

OTHER (EXPENSE) INCOME

    Fiscal 2002 includes
Other (Expense) Income, Net
        Tyco has repurchased some debt prior to scheduled maturities. In fiscal 2003, the Company recorded other income from the early retirement of debt totaling $30.6$24.1 million, as compared to losses$30.6 million in fiscal 2002, and a loss from the early retirement of debt totaling $26.3 million and $0.3 million for fiscal 20012001.
        During fiscal 2003, the Company repurchased all of its 6.25% Dealer Remarketable Securities ("Drs.") due 2013. The total Dollar Price paid was $902 million based upon the $750 million par value of the Drs. The portion in excess of par of $151.8 million was recorded as a loss on retirement of debt.
        During fiscal 2003, the Company recognized a charge of $87.1 million relating to the write-down of various investments accounted for under both the cost and 2000, respectively.equity methods, of which $81.3 million was recorded, when it became evident that the declines in the fair value of the investments were other than temporary, primarily due to the continuing depressed economic conditions specifically within the telecommunications industry. Included within the $81.3 million is $75.6 million recorded in the second quarter (see Changes in Estimates Recorded During the Quarter Ended March 31, 2003). The remaining $5.8 million charge adjusted a portion of the remaining portfolio to its net realizable value based upon estimates received in conjunction with our decision to sell such investments. During fiscal 2002, the Company recognized a $270.8 million loss on equityvarious investments, primarily related to its investments in FLAG Telecom Holdings Ltd. and other telecommunications companies("FLAG") when it became evident that the declines in the fair value of FLAG and other investments were other than temporary. During fiscal 2001, the Company recognized a $133.8 million loss on equityvarious investments, primarily related to its investment in 360Networks when it became evident that the declines in the fair value of the investments were other than temporary.
        During fiscal 2003, the Company recognized other expense of $8.6 million in connection with a bank guarantee on behalf of an equity investee (see "Off-Balance Sheet Arrangements—Guarantees" below for further information).
        During fiscal 2002, the Company sold certain of its businesses for net proceeds of approximately $138.7 million in cash that consist primarily of certain businesses within the Healthcare and Specialty Products and Fire and Security Services segments. In connection with these dispositions, the Company recorded a net gain of $7.2 million (excluding a previous charge of
$125.3 million for impairment associated with these assets which were held for
sale).$23.6 million. In fiscal 2001, the Company sold its ADT Automotive business to Manheim Auctions, Inc., a wholly-owned subsidiary of Cox Enterprises, Inc., for approximately $1.0 billion in cash. The Company recorded a net gain on the sale of businesses of $410.4 million after deducting commissions and other direct costs, principally related to the sale of ADT Automotive. This gain is net of direct and incremental costs of the transaction, as well as $60.7 million of special non-recurring bonuses paid to key employees.

INTEREST EXPENSE, NET

    
141

Interest expense, net, increased $183.2Expense, Net
        Interest income was $107.2 million in fiscal 2003, as compared to $959.7$117.3 million and $128.3 million in fiscal 2002 and 2001, respectively. Interest expense was $1,148.0 million in fiscal 2003, as compared to fiscal 2001, and increased $6.9 million to $776.5$1,077.0 million in fiscal 2001,2002 and $904.8 million in fiscal 2001. Interest expense in fiscal 2003 includes a charge of $0.4 million related to changes in estimates recorded during the quarter ended March 31, 2003, and a charge of $2.4 million related to the interest component of a state sales tax charge. Fiscal 2003 interest income includes $18.7 million related to interest received on a tax refund. The increase in net interest expense in fiscal 2003 over fiscal 2002 is primarily the result of the negative impact of the cancellation of certain swaps in fiscal 2002, a decrease in capitalized interest due to the completion of TGN, an increase in the weighted-average interest rate year over year, in addition to a decrease in interest income as compared toa result of the collection of a note receivable. Slightly offsetting this overall increase was the favorable impact of a lower average debt balance during fiscal 2000.2003. The

                                      137
 increase in fiscal 2002 as compared to fiscal 2001 was due to a higher average debt balance for the year, which more than offset the decrease in our weighted-average interest rate during fiscal 2002. The weighted-average rates of interest on our long-term debt outstanding during fiscal 2003 and 2002 were 4.7% and 2001 were 4.5%
and 4.8%, respectively. Our weighted-average rate during fiscal 2002 decreased2003 increased due to the general decline in market rates; however, this decline was partially
offset by an increase in the spreads over market rates at which we were able to
borrow due tocontinued effects of the credit downgrades that began in February 2002. The increase in
fiscal 2001 was due primarily to a higher average debt balance, resulting from
borrowings to finance acquisitions2002 including the exiting of the commercial paper market and our share repurchase program, offset bythe retirement of lower interest rates duringrate debt.
Income Tax Expense
        Income tax expense was $764.5 million on pre-tax income of $1,802.8 million for fiscal 2003 as compared to income tax expense of $208.1 million on pre-tax loss of $2,628.7 million for fiscal 2002 and income tax expense of $1,172.3 million on pre-tax income of $5,114.7 million for fiscal 2001.

INCOME TAX EXPENSE
        Our effective income tax rate was (9.2%)42.4%, 22.3%(7.9%) and 29.8%22.9% during fiscal 2003, fiscal 2002 2001 and 2000,fiscal 2001, respectively. The difference in the rate from fiscal 2002 to 2003 is primarily the result of a decrease in the non-recognition of tax benefits on impairments and a decrease in other non-deductible charges. The difference in the tax rate from fiscal 2001 to fiscal 2002 was primarily due to the non-recognition of tax benefits on significant impairment charges. Also, there are minimalcharges, which occurred in fiscal 2002.
        The tax benefits due to a
combination of having expenses in low taxing jurisdictions, the establishment of
valuation allowances and the non-deductibility of the charges. The effective
income tax rate, excluding the impact ofeffect on purchased in-process research and development, restructuring and other unusualcredits (charges) credits,, charges for the impairment of long-lived assets, charges for the impairment of goodwill, net gain on the sale of businesses and investments, net gain on the sale of common shares of a subsidiary and accounting change was 22.0%a benefit of $265.8 million during fiscal 2003, as compared to a benefit of $670.9 million during fiscal 2002 as compared to 21.2%and a benefit of $68.6 million in fiscal 2001 and 24.8% in fiscal 2000.2001.
        The increase in the effective income tax rate
from 21.2% during fiscal 2001 to 22.0% during fiscal 2002 was primarily due to
lower earnings in tax jurisdictions with lower income tax rates as well as lower
benefits from interest deductions, offsetvaluation allowance increased by goodwill (which was not deductible
for tax purposes) no longer being amortized and other favorable tax adjustments,
mainly related to settling certain tax audits during the year. The decrease in
the effective income tax rate during fiscal 2001 as compared to fiscal 2000 was
primarily due to higher earnings in tax jurisdictions with lower income tax
rates. We expect that our effective income tax rate will increase to a
percentage in the high twenties in fiscal 2003approximately $249 million due to the full year impactuncertainty of lower benefits from interest deductions, and no favorable tax adjustments as in
the prior year. A valuation allowance has been maintained due to continued
uncertainties of realizationutilization of certain non-U.S. deferred tax benefits, primarily tax loss
carryforwardsassets (see Note 10 to our Consolidated Financial Statements). We believe that we will generate sufficient future taxable income to realize the tax benefits related to the remaining net deferred tax assets on our balance sheet. The valuation allowance was calculated in accordance with the provisions of SFAS No. 109 which requires a valuation allowance be established or maintained when it is "more likely than not" that all or a portion of deferred tax assets will not be realized.
        The Company and its subsidiaries' income tax returns are routinelyperiodically examined by various regulatory tax authorities. In connection with such examinations, certain tax authorities, including the Internal Revenue Service, have raised issues and proposed tax deficiencies. The Company is reviewing the issues raised by the tax authorities and is contesting suchcertain proposed tax deficiencies. Amounts related to these tax deficiencies and other tax contingencies that management has assessed as probable and estimable have been accrued through the income tax provision. Further, management has reviewed with tax counsel the issues raised by these taxing authorities and the adequacy of these tax accrued amounts. Management believes that ultimate resolution
142
        During fiscal 2003, the Company reached an agreement with the Internal Revenue Service relating to the examination of theseone of its subsidiary's income tax deficiencies and contingencies will not havereturns. As a material adverse effect
onresult, the Company's resultsCompany recorded a tax benefit of operations, financial position or cash flows.$22.4 million.
        Except for earnings that are currently distributed, no additional provision has been made for U.S. or non-U.S. income taxes on the undistributed earnings of subsidiaries or for unrecognized deferred tax liabilities for temporary differences related to investments in subsidiaries, as such earnings are expected to be permanently reinvested, or the investments are essentially permanent in duration. A liability could arise if amounts were distributed by their subsidiaries or if their subsidiaries were disposed. It is not practicable to estimate the additional taxes related to the permanently reinvested earnings or the basis differences related to investments in subsidiaries.

                                      138

CUMULATIVE EFFECT OF ACCOUNTING CHANGES
Cumulative Effect of Accounting Changes
        As discussed in "Off-Balance Sheet Arrangements—Variable Interest Entities" below, the Company has three synthetic lease programs utilized, to some extent, by all of the Company's segments to finance capital expenditures for manufacturing machinery and equipment and for ships used by Tyco Submarine Telecommunications. During fiscal 2003, the Company adopted FIN 46 and, accordingly, restructured one of the synthetic leases to meet the requirements of FIN 46 for operating lease accounting. The Company has reclassified the remaining two leases as capital leases and consequently, recorded a cumulative effect adjustment, a $75.1 million loss after-tax ($115.5 million pre-tax) in fiscal 2003 in accordance with the provisions of FIN 46. In addition, four joint ventures within Tyco Infrastructure Services met the consolidation criteria set forth in FIN 46. As a result of both the synthetic lease reclassifications and the joint venture consolidations, the Company has increased property, plant and equipment, net, by $433.8 million and total debt by $562.2 million (effective July 1, 2003).
        In December 1999, the Securities and Exchange Commission ("SEC")SEC issued SAB 101, in which the SEC Staff expressed its views regarding the appropriate recognition of revenue inwith respect to a variety of circumstances, some of which are relevant to us. As required under SAB 101, we modified our revenue recognition policies with respect to the installation of electronic security systems (see "REVENUE
RECOGNITION""Revenue Recognition" within Note 1 to our Consolidated Financial Statements). In addition, in response to SAB 101, we undertook a review of our revenue recognition practices and identified certain provisions included in a limited number of sales arrangements that delayed the recognition of revenue under SAB 101. During the fourth quarter of fiscal 2001, we changed our method of accounting for these items retroactive to the beginning of the fiscal year to conform to the requirements of SAB 101. This was reported as a $653.7 million after-tax ($1,005.6 million pre-tax) charge for the cumulative effect of change in accounting principle in the fiscal 2001 Consolidated Statement of Operations.
        During fiscal 2003 and 2002, the Company recognized $249.4 million and $294.2 million, respectively, of revenue that had previously been included in the SAB 101 cumulative effect adjustment recorded as of October 1, 2000. The impact of SAB 101 on net revenues in fiscal 2001 was a net decrease of $241.1 million, reflecting the deferral of $520.5 million of fiscal 2001 revenues, partially offset by the recognition of $279.4 million of revenue that is included in the cumulative effect adjustment as of the beginning of the
fiscal year.2001.
        We recorded a cumulative effect adjustment, a $29.7 million loss, net of zero tax, in fiscal 2001 in accordance with the transition provisions of SFAS No. 133.

CRITICAL ACCOUNTING POLICIES133, "Accounting for Derivative Instruments and Hedging Activities."
Critical Accounting Policies
        The preparation of consolidated financial statements in conformity with GAAP requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. The following accounting policies are based on, among other things, judgments
143

and assumptions made by management that include inherent risks and uncertainties. Management's estimates are based on the relevant information available at the end of each period.

    LONG-LIVED ASSETS--Management
Long-Lived Assets—Management periodically evaluates the net realizable value of long-lived assets, including property, plant and equipment the TGN and amortizable intangible assets, relying on a number of factors including operating results, business plans, economic projections and anticipated future cash flows. We carry long-lived assets at the lower of cost or fair value. Fair values are based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates, reflecting varying degrees of perceived risk. Since judgment is involved in determining the fair value of long-lived assets, there is risk that the carrying value of our long-lived assets may be overstated or understated.

    We wrote-off
        The Company generally divides its electronic security assets into various asset pools: internally generated residential systems, internally generated commercial systems and accounts acquired through the ADT dealer program (discussed below under "Amortization Method for Customer Contracts").
        With respect to the Company's depreciation policy for security monitoring systems installed in residential and commercial customer premises, the costs of these systems are combined in separate pools for internally generated residential and commercial account customers, and generally depreciated over ten years. The Company concluded that for residential and commercial account pools the straight-line method of amortization over a significant portion of the TGN during fiscal 2002, and
managementten-year period continues to monitor developments inbe appropriate given the fiberoptic capacity markets.
It is possible that the assumptions underlying the impairment analysis will
change in such a manner that a further impairment in value may occur in the
future. In addition, we may experience additional TGN impairments if the
downturn in the telecommunications industry continues.observed actual attrition data for these pools.
        The determination of the depreciable lives of subscriber systems included in property, plant and equipment, and the amortizable lives of customer contracts and related customer relationships included in intangible assets, are primarily based on historical attrition rates, third partythird-party lifing studies and the useful life of the underlying tangible asset. The realizable value and remaining useful lives of these assets could be impacted by changes in customer attrition rates. GOODWILL--EffectiveIf the attrition rates were to rise, the Company may be required to further accelerate the amortization.
Goodwill—Effective October 1, 2001, the beginning of Tyco's fiscal year 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets," for all
of Tyco and its subsidiaries.

    Since adoption of SFAS No. 142,under which goodwill is no longer amortized but instead is assessedmanagement assesses goodwill for impairment at least as often as annually and as triggering events occur. In making this assessment, management relies on a number of factors including operating results, business plans, economic

                                      139
 projections, anticipated future cash flows, and transactions and market place data. There are inherent uncertainties related to these factors and management's judgment in applying them to the analysis of goodwill impairment. Since management's judgment is involved in performing goodwill valuation analyses, there is risk that the carrying value of our goodwill may be overstated or understated.
        We have determined that there is no impact of adopting this new
standard underelected to make July 1 the transition provisions of SFAS No. 142. However, during the
quarter ended March 31, 2002, circumstances developed that indicated a potential
impairment in the value of goodwill with respect to Tyco Telecommunications, a
reporting unit within the Electronics segment, and our Tyco Capital segment.

    During the quarter ended March 31, 2002, the Electronics segment recorded a
charge of $2,181.4 million related to the impairment of the TGN, as a result of
the fiberoptic capacity available in the market place continuing to
significantly exceed overall market demand, creating sharply declining prices
and reduced cash flows. For additional information on the TGN impairment charge,
see Note 6 to the Consolidated Financial Statements. Since the TGN represented a
significant asset group within the Tyco Telecommunications reporting unit, an
updated goodwill valuation was completed as of March 31, 2002 for that reporting
unit. The valuation was completed using an income approach based upon the
present value of future cash flows of the reporting unit as of March 31, 2002.
However, this first step analysis resulted in no impairment of the Tyco
Telecommunications reporting unit's goodwill at that date.

    During the quarter ended June 30, 2002, additional circumstances developed
that indicated a potential impairment of the value of goodwill with respect to
our reporting units. We experienced disruptions to our business surrounding the
termination of our previously announced break-up plan, the resignation of our
chief executive officer, further downgrades in our credit ratings and an
additional decline in our market capitalization. Updated valuations were
completedannual assessment date for all reporting units as of June 30, 2002units. Goodwill valuations have historically been calculated using an income approach based on the present value of future cash flows of each reporting unit. An
additionalThis approach includes many assumptions related to future growth rates, discount factor was then applied to reflectfactors, future tax rates, etc. Changes in economic and operating conditions impacting these assumptions could result in a decrease in reporting
unit valuations for recent disruptions at our corporate offices and negative
publicity, as evidenced by the decline in our total market capitalization. This
resulted in an estimated goodwill impairment on continuing operations of
$844.4 million, $607.7 million relating to Tyco Telecommunications and
$236.7 million relating to Tyco Infrastructure, a reporting unit within the
Engineered Products and Services segment.

    During the quarter ended September 30, 2002, step two analyses, as
prescribed by SFAS 142 where the book value exceeds the estimated fair value of
the individual assets and liabilities of a reporting unit, were completed for
the Tyco Telecommunications reporting unit and Tyco Infrastructure reporting
unit. This resulted in an incremental goodwill impairment on continuing
operations of $162.0 million, $79.5 million relating Tyco Telecommunications and
$82.5 million relating to Tyco Infrastructure.

    During the quarter ended September 30, 2002, circumstances associated with
the restructuring charges related to the Tyco Telecommunications reporting unit
indicated potential further impairment of the value of goodwill of this
reporting unit. An updated valuation using an income approach based on the
present value of future cash flows was completed as of September 30, 2002. The
valuation resulted in an additional estimated goodwill impairment on continuing
operations of $337.3 million.

    During fiscal 2002, we curtailed, and in certain end markets terminated, the
ADT authorized dealer program. Due to a decrease in projected purchases of
customer contracts through the authorized dealer program, an updated valuation
using an income approach based on the present value of future cash flows as of
September 30, 2002 was performed for the Security Services reporting unit. The
valuation results indicated that the fair value of the reporting unit exceeded
the book value of the reporting unit.

    Further disruptionsperiods.
        Disruptions to our business such as end market conditions and protracted economic weakness, unexpected significant declines in operating results of reporting units, continuedthe divestiture of a significant component of a reporting unit, downgrades

                                      140
 in our credit ratings, and additional market capitalization declines may result in our having to perform anothera SFAS No. 142 first step valuation analysis for all of our reporting units prior to the required annual assessment. These types of events and the resulting analysis could result in additional charges for goodwill and other asset impairments in the future. We have elected
Amortization Method for Customer Contracts—The Company purchases residential security monitoring contracts from an external network of independent dealers who operate under the ADT dealer program. The purchase price of these customer contracts is recorded as an intangible asset (i.e., contracts and related customer relationships).
144

        As discussed above in "Long-Lived Assets," the Company generally divides its electronic security assets into various asset pools: internally generated residential systems, internally generated commercial systems and accounts acquired through the ADT dealer program. Intangible assets arising from the ADT dealer program described above are amortized in pools determined by the month of contract acquisition on an accelerated basis over the period and pattern of economic benefit which is expected to make
July 1be obtained from the annual assessment datecustomer relationship. The Company believes that the accelerated method that presently best achieves the matching objective described above is the double-declining balance method based on a ten-year life for all reporting units.

    For information regarding the impairmentfirst eight years of goodwill relatingthe estimated life of the customer relationships converting to Tyco
Capital, see "Discontinued Operationsthe straight-line method of Tyco Capital (CIT Group Inc.)" below.

    REVENUE RECOGNITION--Contractamortization for the remaining four years of the estimated relationship period. Actual attrition data is regularly reviewed in order to assess the continued applicability of the accelerated method of amortization described above.
Revenue Recognition—Contract sales for the installation of fire protection systems, large security intruder systems, underwaterundersea cable systems and other construction related projects are recorded on the percentage-of-completion method. Profits recognized on contracts in process are based upon contracted revenue and related estimated cost to completion. The risk of this methodology is its dependence upon estimates of costs to completion, which are subject to the uncertainties inherent in long-term contracts. 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. If estimates are inaccurate, there is risk that our revenues and profits for the period may be overstated or understated.

    INCOME TAXES--Estimates
Income Taxes—Estimates of full year taxable income of the various legal entities and jurisdictions are used in the tax rate calculation, which change throughout the year. Management uses judgementjudgment in estimating what the income will be for the year. Since judgementjudgment is involved, there is risk that the tax rate may significantly increase or decrease in any period.

DISCONTINUED OPERATIONS OF TYCO CAPITAL
        In determining income (loss) for financial statement purposes, we must make certain estimates and judgments. These estimates and judgments occur in the calculation of certain tax liabilities and in the determination of the recoverability of certain of the deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense. SFAS 109 also requires that the deferred tax assets be reduced by a valuation allowance, if based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods.
        In evaluating our ability to recover our deferred tax assets we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in the most recent fiscal years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions including the amount of future state, federal and international pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses.
        We intend to maintain this valuation allowance until it is more likely than not the deferred tax assets will be realized. Our income tax expense recorded in the future will be reduced to the extent of offsetting decreases in our valuation allowance. The realization of our remaining deferred tax assets is primarily dependent on forecasted future taxable income. Any reduction in estimated forecasted future taxable income including but not limited to any future restructuring activities may require that we record an additional valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in such period and could have a significant impact on our future earnings.
        In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions. We recognize potential liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.
145
Discontinued Operations of Tyco Capital (CIT GROUP INC.Group Inc.)
        On April 25,July 8, 2002 the Company announced its plan to divestdivested of Tyco Capital potentially through an IPO of all of CIT's outstanding shares. In June 2002,
management and the Company's Board of Directors approved the sale of 100% of CIT's common shares of CIT in an IPO establishing a measurement date for discontinued
operations.IPO. Accordingly, the results of Tyco Capital are presented as discontinued operations for all periods. Prior year amounts include Tyco Capital's operating results after June 1, 2001, the date of acquisition of CIT by Tyco. The sale of 100% of CIT's common shares through an IPO was completed on
July 8, 2002.

    The following table presents summary balance sheet information for the
discontinued operations of Tyco Capital at September 30, 2001 ($ in millions):


                                                              SEPTEMBER 30,
                                                                   2001
                                                              --------------

Cash........................................................     $   808.0
Finance receivables, net....................................      31,386.5
Property, plant and equipment (including equipment leased to
  others), net..............................................       6,503.6
Goodwill, net...............................................       6,547.5
Other assets................................................       5,844.5
                                                                 ---------
  Total assets..............................................     $51,090.1
                                                                 =========
Loans payable and current maturities of long-term debt......     $17,050.6
Accrued expenses and other liabilities......................       4,534.4
Long-term debt..............................................      18,647.1
                                                                 ---------
  Total liabilities.........................................      40,232.1
Mandatorily redeemable preferred securities.................         260.0
  Total shareholder's equity................................      10,598.0
                                                                 ---------
  Total liabilities and shareholder's equity................     $51,090.1
                                                                 =========


                                      141
        Operating results from the discontinued operations of Tyco Capital through July 8, 2002 were as follows ($ in millions):

                                                              FOR THE PERIOD      FOR THE PERIOD
                                                                OCTOBER 1,       JUNE 2 (DATE OF
                                                               2001 THROUGH    ACQUISITION) THROUGH
                                                               JULY 8, 2002     SEPTEMBER 30, 2001
                                                              --------------   --------------------

Finance income..............................................    $ 3,327.6            $ 1,676.5
Interest expense............................................      1,091.5                597.1
                                                                ---------            ---------
Net finance income..........................................      2,236.1              1,079.4
Depreciation on operating lease equipment...................        944.4                448.6
                                                                ---------            ---------
Net finance margin..........................................      1,291.7                630.8
Provision for credit losses.................................        665.6                116.1
                                                                ---------            ---------
Net finance margin, after provision for credit losses.......        626.1                514.7
Other income................................................        741.1                335.1
                                                                ---------            ---------
Operating margin............................................      1,367.2                849.8
                                                                ---------            ---------
Selling, general, administrative and other costs and
  expenses..................................................        687.8                398.7
Goodwill impairment.........................................      6,638.1                   --
                                                                ---------            ---------
Operating expenses..........................................      7,325.9                398.7
                                                                ---------            ---------
(Loss) income before income taxes and minority interest.....     (5,958.7)               451.1
Income taxes................................................       (316.1)              (195.0)
Minority interest...........................................         (7.7)                (3.6)
                                                                ---------            ---------
(Loss) income from discontinued operations..................    $(6,282.5)           $   252.5
                                                                =========            =========

Average earning assets ("AEA")(1)...........................    $36,269.0            $39,159.2
Net finance margin as a percent of AEA (annualized).........         4.75%                4.83%


- ------------------------------

 
 
For the Period
October 1, 2001
through July 8, 2002
 
For the Period
June 2 (date of
acquisition) through
September 30, 2001
 
Finance income
 
$
3,327.6
 
$
1,676.5
 
Interest expense
 
 
1,091.5
 
 
597.1
 
 
 
 
 
Net finance income
 
 
2,236.1
 
 
1,079.4
 
Depreciation on operating lease equipment
 
 
944.4
 
 
448.6
 
 
 
 
 
Net finance margin
 
 
1,291.7
 
 
630.8
 
Provision for credit losses
 
 
665.6
 
 
116.1
 
 
 
 
 
Net finance margin, after provision for credit losses
 
 
626.1
 
 
514.7
 
Other income
 
 
741.1
 
 
335.1
 
 
 
 
 
Operating margin
 
 
1,367.2
 
 
849.8
 
 
 
 
 
Selling, general, administrative and other costs and expenses
 
 
687.8
 
 
398.7
 
Goodwill impairment
 
 
6,638.1
 
 
—
 
 
 
 
 
Operating expenses
 
 
7,325.9
 
 
398.7
 
 
 
 
 
(Loss) income before income taxes and minority interest
 
 
(5,958.7
)
 
451.1
 
Income taxes
 
 
(316.1
)
 
(195.0
)
Minority interest
 
 
(7.7
)
 
(3.6
)
 
 
 
 
(Loss) income from discontinued operations
 
$
(6,282.5
)
$
252.5
 
 
 
 
 
Average earning assets ("AEA")(1)
 
$
36,269.0
 
$
39,159.2
 
Net finance margin as a percent of AEA (annualized)
 
 
4.75
%
 
4.83
%
(1)
Average earning assets is the average of finance receivables, operating lease equipment, finance receivables held for sale and certain investments, less credit balances of factoring clients.
        During fiscal 2003, Tyco recorded income from discontinued operations of $20.0 million. The $20.0 million represented a restitution payment made by Frank E. Walsh Jr. (see Note 18 to the Consolidated Financial Statements). Tyco Capital's revenues were $4,068.7 million for the period October 1, 2001 through July 8, 2002, consisting of finance income of $3,327.6 million and other income of $741.1 million. Tyco Capital's revenues for the period June 2 through September 30, 2001 were $2,011.6 million, consisting of finance income of $1,676.5 million and other income of $335.1 million. As a percentage of AEA, finance income was 11.9% and 12.8% for the period October 1, 2001 through July 8, 2002 and for the period June 2 through September 30, 2001, respectively. For the period October 1, 2001 through July 8, 2002, Tyco Capital's loss before income taxes and minority interest was $5,958.7 million. For the period June 2 through September 30, 2001, Tyco Capital's income before income taxes and minority interest was $451.1 million.
        Interest expense totaled $1,091.5 million and $597.1 million for the period October 1, 2001 through July 8, 2002 and for the period June 2 through September 30, 2001, respectively. As a percentage of
146

AEA, interest expense was 3.9% and 4.6% for the period October 1, 2001 through July 8, 2002 and for the period June 2 through September 30, 2001, respectively.

                                      142
        Other income for Tyco Capital was $741.1 million and $335.1 million for the period October 1, 2001 through July 8, 2002 and for the period June 2 through September 30, 2001 respectively, as set forth in the following table ($ in millions):

                                                              FOR THE PERIOD      FOR THE PERIOD
                                                                OCTOBER 1,       JUNE 2 (DATE OF
                                                               2001 THROUGH    ACQUISITION) THROUGH
                                                               JULY 8, 2002     SEPTEMBER 30, 2001
                                                              --------------   --------------------

Fees and other income.......................................      $496.6              $212.3
Factoring commissions.......................................       117.8                50.7
Gains on securitizations....................................       119.8                59.0
Gains on sales of leasing equipment.........................        11.0                14.2
Losses on venture capital investments.......................        (4.1)               (1.1)
                                                                  ------              ------
Total.......................................................      $741.1              $335.1
                                                                  ======              ======
 
 
For the Period
October 1, 2001
through
July 8, 2002
 
For the Period
June 2 (date of
acquisition) through
September 30, 2001
 
Fees and other income
 
$
496.6
 
$
212.3
 
Factoring commissions
 
 
117.8
 
 
50.7
 
Gains on securitizations
 
 
119.8
 
 
59.0
 
Gains on sales of leasing equipment
 
 
11.0
 
 
14.2
 
Losses on venture capital investments
 
 
(4.1
)
 
(1.1
)
 
 
 
 
Total
 
$
741.1
 
$
335.1
 
 
 
 
 
        Included in fees and other income are miscellaneous fees, syndication fees and gains from receivable sales.
        During the period October 1, 2001 through July 8, 2002, Tyco Capital recorded charges of $355.0 million relating primarily to a weakness in the competitive local exchange carrier industry included within its telecommunications portfolio and the economic reforms instituted by the Argentine government that converted Tyco Capital's dollar-denominated receivables into peso-denominated receivables. These charges have been included in the provision for credit losses. The provision for credit losses was $665.6 million, or 2.4% of AEA, and $116.1 million, or 0.9% of AEA for the period October 1, 2001 through July 8, 2002 and the period June 2 through September 30, 2001, respectively. Financing and leasing portfolio assets totaled $40.7 billion at September 30, 2001, while managed assets totaled $50.9 billion at September 30, 2001. Managed assets include finance receivables, operating lease equipment, finance receivables held for sale, certain investments, and finance receivables previously securitized and still managed by Tyco Capital. The reduced asset levels reflect the sale and liquidation of under-performing assets in industries expected to continue to have low margins coupled with lower origination volumes due to the soft economic environment and funding constraints arising from Tyco Capital's increased costs of borrowing.
        During the quarter ended March 31, 2002, we experienced disruptions to our business surrounding our announced break-up plan, a downgrade in our credit ratings, and a significant decline in our market capitalization. During this same time period, CIT also experienced credit downgrades and a disruption to its historical funding base. Further, market-based information used in connection with our preliminary consideration of the proposed IPO of CIT indicated that CIT's book value exceeded its estimated fair value as of March 31, 2002. As a result, we performed a SFAS No. 142 first step impairment analysis as of March 31, 2002 and concluded that an impairment charge was warranted at that time.
        Management's objective in performing the SFAS No. 142 first step analysis was to obtain relevant market-based data to calculate the estimated fair value of CIT as of March 31, 2002 based on its projected earnings and market factors expected to be used by market participants in ascribing value to CIT in the planned separation of CIT from Tyco. Management obtained relevant market data from our financial advisors regarding the range of price to earnings multiples and market condition discounts applicable to CIT as of March 31, 2002 and applied these market data to CIT's projected annual earnings as of March 31, 2002 to calculate an estimated fair value and any resulting goodwill impairment. The estimated fair value was compared to the corresponding carrying value of CIT at March 31, 2002. As a result, we recorded a $4,512.7 million impairment charge as of March 31, 2002, which is included in discontinued operations.
147

        SFAS No. 142 requires a second step analysis whenever a reporting unit's book value exceeds estimated fair value. This analysis requires that we estimate the fair value of the reporting unit's individual assets

                                      143
 and liabilities to complete the analysis of goodwill as of March 31, 2002. We completed this second step analysis for CIT during the quarter ended June 30, 2002 and, as a result, recorded an additional goodwill impairment of $132.0 million. During the June 30, 2002 quarter, CIT experienced further credit downgrades and the business environment and other factors continued to negatively impact the likely proceeds of the IPO. As a result, we performed another first step and second step analysis as of June 30, 2002 in a manner consistent with the March 2002 process described above. Each of these analyses was based upon updated market data at June 30, 2002 and through the period immediately following the IPO, including the IPO proceeds. These analyses resulted in a goodwill impairment of $1,867.0 million, which is also included in discontinued operations as of June 30, 2002.operations. We also recorded an additional impairment charge of $126.4 million in order to write-down its investment in CIT to fair value for a total CIT goodwill impairment charge of $2,125.4 million for
the quarter ended June 30, 2002.million. This write-down was based upon net IPO proceeds of approximately $4.4 billion, after deducting estimated out of pocket expenses, and is included in the $6,282.5 million loss from discontinued operations. During the fourth quarter of fiscal 2002, Tyco recorded a loss on the sale of Tyco Capital of $58.8 million.

                                      144

                        LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Capital Resources
        The following table summarizes the sources of our cash flow from operating activities from our continuing operations and the use of a portion of that cash in our operations in fiscal 2002,2003, fiscal 20012002 and fiscal 2000. We refer to the net amount of cash generated
from operating activities, less capital expenditures, dividends and increases or
decreases associated with the sale of accounts receivable program, as "free cash
flow." Management believes operating cash flow and free cash flow are important
measures of operating performance. However, free cash flow as determined below
is not a measure of financial performance under GAAP, should not be considered a
substitute for cash flows from operating activities as determined in accordance
with GAAP as a measure of liquidity, and may not be comparable to similarly
titled measures reported by other companies.


                                                              FISCAL 2002   FISCAL 2001   FISCAL 2000
                                                              -----------   -----------   -----------
                                                                          ($ IN MILLIONS)

Operating income from continuing operations.................   $(1,579.0)    $ 6,186.8     $ 5,474.4
Non-cash restructuring and other unusual charges, net.......       851.5         145.2         (84.2)
Charges for the impairment of long-lived assets.............     3,489.5         120.1          99.0
Goodwill impairment.........................................     1,343.7            --            --
Write-off of purchased in-process research and
  development...............................................        17.8         184.3            --
Charges related to prior years (see Note 1).................       222.0            --            --
Depreciation and amortization(1)............................     2,032.9       1,603.2       1,300.0
Net (decrease) increase in deferred income taxes............      (535.6)        219.0         507.8
Provision for losses on accounts receivable and inventory...       493.9         593.5         354.3
Less:
  Net decrease (increase) in working capital, excluding
    current maturities of debt(2)...........................       873.8        (956.6)       (164.9)
  Expenditures relating to restructuring and other unusual
    charges(3)..............................................      (556.8)       (215.5)       (155.2)
  (Decrease in) proceeds under sale of accounts receivable
    program.................................................       (56.4)        490.6         100.0
  Interest expense, net.....................................      (959.7)       (776.5)       (769.6)
  Income tax expense........................................      (257.7)     (1,275.7)     (1,925.9)
  Other, net................................................       315.6         607.1         539.3
                                                               ---------     ---------     ---------
Cash flow from operating activities from continuing
  operations................................................     5,695.5       6,925.5       5,275.0
Less:
  Capital expenditures(4)...................................    (1,708.7)     (1,797.5)     (1,703.8)
  Dividends paid............................................      (100.3)        (90.0)        (86.2)
  Decreases in (proceeds received) under the sale of
    accounts receivable programs............................        56.4        (490.6)       (100.0)
  Construction of Tyco Global Network.......................    (1,146.0)     (2,247.7)       (111.1)
                                                               ---------     ---------     ---------
Free cash flow(5)...........................................   $ 2,796.9     $ 2,299.7     $ 3,273.9
                                                               =========     =========     =========


- ------------------------------

2001.
 
 
Fiscal 2003
 
Fiscal 2002
 
Fiscal 2001
 
($ in millions)

 
 
 
 
 
 
 
Operating income (loss) from continuing operations
 
$
3,067.0
 
$
(1,452.4
)
$
5,616.4
 
Non-cash restructuring and other (credits) charges, net
 
 
(45.9
)
 
796.5
 
 
312.0
 
Charges for the impairment of long-lived assets
 
 
824.9
 
 
3,309.5
 
 
120.1
 
Goodwill impairment
 
 
278.4
 
 
1,343.7
 
 
—
 
Write-off of purchased in-process research and development
 
 
—
 
 
17.8
 
 
184.3
 
Depreciation and amortization(1)
 
 
2,196.9
 
 
2,085.0
 
 
1,642.0
 
Net increase (decrease) in deferred income taxes
 
 
348.9
 
 
(585.2
)
 
107.3
 
Provision for losses on accounts receivable and inventory
 
 
581.1
 
 
501.6
 
 
598.2
 
Debt and refinancing cost amortization
 
 
116.4
 
 
194.0
 
 
108.4
 
Less:
 
 
 
 
 
 
 
 
 
 
 
Net decrease (increase) in working capital, excluding current maturities of debt(2)
 
 
45.1
 
 
640.2
 
 
(944.5
)
 
(Decrease) increase in sale of accounts receivable programs
 
 
(119.0
)
 
(56.4
)
 
490.6
 
 
Interest income
 
 
107.2
 
 
117.3
 
 
128.3
 
 
Interest expense
 
 
(1,148.0
)
 
(1,077.0
)
 
(904.8
)
 
Income tax expense
 
 
(764.5
)
 
(208.1
)
 
(1,172.3
)
 
Other, net(3)
 
 
(142.4
)
 
(215.1
)
 
425.1
 
 
 
 
 
 
Cash provided by operating activities from continuing operations
 
 
5,346.1
 
 
5,411.4
 
 
6,711.1
 
Cash provided by (used in) operating activities from discontinued operations
 
 
20.0
 
 
1,462.9
 
 
(260.2
)
 
 
 
 
 
Cash provided by operating activities
 
$
5,366.1
 
$
6,874.3
 
$
6,450.9
 
 
 
 
 
 
Other Cash Flow Items:
 
 
 
 
 
 
 
 
 
 
 
Cash (provided by) used in operating activities from discontinued operations
 
$
(20.0
)
$
(1,462.9
)
$
260.2
 
 
Capital expenditures(4)
 
 
(1,169.6
)
 
(1,678.8
)
 
(1,773.4
)
 
Dividends paid
 
 
(100.9
)
 
(100.3
)
 
(90.0
)
 
Decrease (increase in) in sale of accounts receivable programs
 
 
119.0
 
 
56.4
 
 
(490.6
)
 
Construction of Tyco Global Network
 
 
(112.7
)
 
(1,146.0
)
 
(2,247.7
)
 
Acquisition of customer accounts (ADT dealer program)
 
 
(596.8
)
 
(1,139.3
)
 
(798.1
)
 
Cash paid for purchase accounting and holdback/earn-out liabilities
 
 
(271.8
)
 
(624.1
)
 
(878.7
)
(1)
This amount is the sum of depreciation of tangible property ($1,465.51,471.9 million, $1,243.1$1,464.1 million and $1,095.0$1,242.7 million in fiscal 2003, fiscal 2002 and fiscal 2001, and fiscal 2000, respectively) and amortization of intangible assets other than goodwill ($567.4725.0 million, $360.1$620.9 million and $205.0$399.3 million in fiscal 2003, fiscal 2002 and fiscal 2001, and fiscal 2000, respectively).

(2)
This amount excludesincludes cash paid out for restructuring and other unusual
    charges.

charges of $503.3 million, $517.5 million and $215.5 million for fiscal 2003, fiscal 2002 and fiscal 2001, respectively.
148
(3)
This amount is cash paid outincludes $151.8 million related to a loss on the retirement of debt associated with the 6.25% Dealer Remarketable Securities ("Drs.") due 2013 for restructuring and other unusual charges.

fiscal 2003.

(4)
This amount is net of proceeds of $29.5 million $427.7 million and $172.0$427.7 million received in sale-leaseback transactions for fiscal 2002 fiscal 2001 and fiscal 2000,2001, respectively. It is also net of proceeds of $123.8 million, $166.2 million $62.0 million and $61.6$62.0 million received in sale/disposition of property, plant and equipment in fiscal 2003, fiscal 2002 and fiscal 2001, and fiscal
    2000, respectively.

(5) This amount is before cash payments for purchase accounting and
    holdback/earn-out liabilities of $624.1 million, $894.4 million and
    $544.2 million in fiscal 2002, fiscal 2001 and fiscal 2000, respectively.

                                      145
        The following table shows cash flow from operating activities and freeother cash flow items by segment for fiscal 20022003 ($ in millions).

                              FIRE AND                  HEALTHCARE      ENGINEERED
                              SECURITY                 AND SPECIALTY   PRODUCTS AND
                              SERVICES   ELECTRONICS     PRODUCTS        SERVICES     CORPORATE     TOTAL
                              --------   -----------   -------------   ------------   ---------   ---------

Operating income from
  continuing operations.....  $1,077.6    $(4,222.4)     $1,926.2         $270.9      $  (631.3)  $(1,579.0)
Non-cash restructuring and
  other unusual charges,
  net.......................      20.2        787.5           2.9            9.5           31.4       851.5
Charges for the impairment
  of long-lived assets......     217.0      3,113.7         130.4            9.5           18.9     3,489.5
Goodwill impairment.........        --      1,024.5            --          319.2             --     1,343.7
Write-off of purchased in-
  process research and
  development...............      17.8           --            --             --             --        17.8
Charges related to prior
  years (see Note 1)........        --           --            --             --          222.0       222.0
Depreciation................     570.5        479.3         279.6          123.8           12.3     1,465.5
Intangible assets
  amortization..............     413.5         67.2          83.2            3.5             --       567.4
                              --------    ---------      --------         ------      ---------   ---------
Depreciation and
  amortization..............     984.0        546.5         362.8          127.3           12.3     2,032.9
Deferred income taxes.......        --           --            --             --         (535.6)     (535.6)
Provision for losses on
  accounts receivable and
  inventory.................     196.3        104.4         139.1           54.1             --       493.9
Net decrease (increase) in
  working capital and
  other(1)..................    (255.1)       863.9         134.9           19.2          426.5     1,189.4
Expenditures relating to
  restructuring and other
  unusual charges...........     (48.3)      (312.5)        (38.1)         (47.7)        (110.2)     (556.8)
(Decrease in) proceeds under
  sale of accounts
  receivable program........     (17.4)       (89.2)         (4.0)            --           54.2       (56.4)
Interest expense, net.......        --           --            --             --         (959.7)     (959.7)
Income tax expense..........        --           --            --             --         (257.7)     (257.7)
                              --------    ---------      --------         ------      ---------   ---------
Cash flow from operating
  activities from continuing
  operations................   2,192.1      1,816.4       2,654.2          762.0       (1,729.2)    5,695.5
Capital expenditures........    (850.3)      (451.9)       (304.8)         (78.7)         (23.0)   (1,708.7)
Dividends paid..............        --           --            --             --         (100.3)     (100.3)
Sale of accounts receivable
  program elimination.......      17.4         89.2           4.0             --          (54.2)       56.4
Construction of Tyco Global
  Network...................        --     (1,146.0)           --             --             --    (1,146.0)
                              --------    ---------      --------         ------      ---------   ---------
Free Cash Flow..............  $1,359.2    $   307.7      $2,353.4         $683.3      $(1,906.7)  $ 2,796.9
                              ========    =========      ========         ======      =========   =========


- ------------------------------

 
 
Fire and
Security
Services
 
Electronics
 
Healthcare
 
Engineered
Products
and Services
 
Plastics and
Adhesives
 
Corporate
 
Total
 
Operating income (loss) from continuing operations
 
$
360.2
 
$
457.7
 
$
2,127.1
 
$
355.2
 
$
167.4
 
$
(400.6
)
$
3,067.0
 
Non-cash restructuring and other charges (credits), net
 
 
6.3
 
 
(43.1
)
 
(1.2
)
 
(2.0
)
 
—
 
 
(5.9
)
 
(45.9
)
Charges for the impairment of long-lived assets
 
 
143.0
 
 
658.9
 
 
—
 
 
2.2
 
 
—
 
 
20.8
 
 
824.9
 
Goodwill impairment
 
 
—
 
 
278.4
 
 
—
 
 
—
 
 
—
 
 
—
 
 
278.4
 
Depreciation
 
 
611.3
 
 
451.8
 
 
250.0
 
 
104.4
 
 
45.5
 
 
8.9
 
 
1,471.9
 
Intangible assets amortization
 
 
590.3
 
 
66.0
 
 
63.0
 
 
3.8
 
 
1.9
 
 
—
 
 
725.0
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
1,201.6
 
 
517.8
 
 
313.0
 
 
108.2
 
 
47.4
 
 
8.9
 
 
2,196.9
 
Deferred income taxes
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
348.9
 
 
348.9
 
Provision for losses on accounts receivable and inventory
 
 
354.9
 
 
54.3
 
 
77.4
 
 
64.7
 
 
29.8
 
 
—
 
 
581.1
 
Debt and refinancing cost amortization
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
116.4
 
 
116.4
 
Net (increase) decrease in working capital and other(1)
 
 
(71.2
)
 
(247.6
)
 
59.0
 
 
(184.9
)
 
35.7
 
 
311.7
 
 
(97.3
)
(Decrease) increase in sale of accounts receivable programs
 
 
(34.3
)
 
(6.7
)
 
(57.8
)
 
—
 
 
—
 
 
(20.2
)
 
(119.0
)
Interest income
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
107.2
 
 
107.2
 
Interest expense
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
(1,148.0
)
 
(1,148.0
)
Income tax expense
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
(764.5
)
 
(764.5
)
 
 
 
 
 
 
 
 
 
Cash provided by (used in) operating activities from continuing operations
 
 
1,960.5
 
 
1,669.7
 
 
2,517.5
 
 
343.4
 
 
280.3
 
 
(1,425.3
)
 
5,346.1
 
Cash provided by operating activities from discontinued operations
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
20.0
 
 
20.0
 
 
 
 
 
 
 
 
 
 
Cash provided by (used in) operating activities
 
$
1,960.5
 
$
1,669.7
 
$
2,517.5
 
$
343.4
 
$
280.3
 
$
(1,405.3
)
$
5,366.1
 
 
 
 
 
 
 
 
 
 
Other Cash Flow Items:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
(509.8
)
$
(403.0
)
$
(192.4
)
$
(50.1
)
$
(22.0
)
$
7.7
 
$
(1,169.6
)
Dividends paid
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
(100.9
)
 
(100.9
)
Decrease in sale of accounts receivable programs
 
 
34.3
 
 
6.7
 
 
57.8
 
 
—
 
 
—
 
 
20.2
 
 
119.0
 
Construction of Tyco Global Network
 
 
—
 
 
(112.7
)
 
—
 
 
—
 
 
—
 
 
—
 
 
(112.7
)
Acquisition of customer accounts (ADT dealer program)
 
 
(596.8
)
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
(596.8
)
Cash paid for purchase accounting and holdback/earn-out liabilities
 
 
(81.0
)
 
(67.2
)
 
(52.8
)
 
(66.3
)
 
(4.5
)
 
—
 
 
(271.8
)
(1)
These amounts excludeinclude cash paid out for restructuring and other unusual
    charges. Additionally, this amount includes $151.8 million related to a loss on the retirement of debt associated with the 6.25% Dealer Remarketable Securities ("Drs.") due 2013 for fiscal 2003.
        The net change in total working capital, net of the effects of acquisitions and divestitures, was a decreasean increase of $377.6$307.0 million in fiscal 2002,2003, including cash paid out for restructuring and other unusual charges of $556.8$503.3 million. The components of this change are set forth in detail in our Consolidated Statement of Cash Flows. The significant changes in working capital included a $1,014.5$627.6 million decrease in accounts receivablepayable due primarily to the collection
on contracts within Tyco Telecommunications and, to a lesser extent, an overall
decrease within the electronics segment as a result of lower sales. In addition,
accounts payable decreased $833.7 million primarily as a result of a

                                      146

decrease within Tyco Telecommunications due to the general downturn in the
industry, as well as, an overall decrease across all of our business segments resulting from improved inventory management, as well as a decrease within Tyco Telecommunications due to lower purchasing volumeresulting from the completion of the TGN. In addition, accrued expenses and other current liabilities decreased $559.9 million primarily as a result of the decline in sales,cash paid out associated with accruals for restructuring and the
effect of vendors demanding earlier payments as a result of liquidity concerns.other charges. 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.
149
         During fiscal 2002,2003, we decreased our participation in our sale of accounts receivable program by $56.4$119.0 million.
        During fiscal 2003, fiscal 2002 2001 and 2000fiscal 2001, we paid out $271.8 million, $624.1 million $894.4 million and $544.2$878.7 million, respectively, in cash that was charged against reservesaccruals established in connection with acquisitions accounted for under
the purchase accounting method.acquisitions. This amount is included in "Cash paid for purchase accounting and holdback/earn-out liabilities" under Cash Flows From Investing Activities in the Consolidated Statements of Cash Flows.

    Reserves
        Accruals for restructuring and other unusual items are taken as a charge against current earnings at the time the reservesaccruals are established.established in accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." Amounts expended for restructuring and other unusual costs are charged against the reservesaccruals as they are paid out. If the amount of the reservesaccruals proves to be greater than the costs actually incurred, any excess is credited against restructuring and other unusual charges in the Consolidated Statement of Operations in the period in which that determination is made.
        At September 30, 2002, there existed accruals for restructuring and other charges of $1,021.6 million on the Consolidated Balance Sheet. During fiscal 2002,2003, we recorded net restructuring and other unusual chargescredits of $1,954.3$84.8 million, of which chargescredits of $635.4$10.5 million are included in cost of sales, related primarily to the write-downa revision of inventory and the closureestimates of facilities within the Electronics segment. At September 30, 2001, there existed
reserves forprior years' restructuring and other unusual charges of $340.2 million.charges. During fiscal 2002,2003, we paid out $556.8$503.3 million in cash and incurred $381.8$0.3 million in non-cash charges.uses that were charged against these liabilities. We also reclassified $197.5 million of restructuring accruals to the appropriate balance sheet accounts, recorded $7.4 million in foreign currency translation adjustments and recorded non-cash adjustments of $40.0 million. At September 30, 2002,2003, there remained $1,355.9$293.6 million of reservesaccruals for restructuring and other unusual charges on our Consolidated Balance Sheet, of which $1,095.5$159.3 million is included in accrued expenses and other current liabilities, and $260.4$134.3 million is included in other long-term liabilities.

    In April 2002, we terminated our previously announced plan to separate into
four independent, publicly traded companies. In addition, we announced that we
planned to divest of Tyco Capital through an initial public offering ("IPO") of
all of the outstanding shares of CIT Group Inc., which was completed on July 8,
2002.
        During fiscal 2002,2003, we purchased businesses for $3,750.5 million and customer contracts for electronic security services for $1,401.0 million. The
aggregate costcash of $5,151.5$596.8 million consistsand businesses for cash of $3,084.8$44.0 million, paid in cash, net of $158.0$1.1 million of cash acquired, $1,918.8 million paid in the form of
Tyco common shares, and assumed stock options and pre-existing put option rights
with a fair value of $147.9 million ($102.6 million of put option rights have
been paid in cash). Also during fiscal 2002, we completed our amalgamation with
TyCom, and TyCom shares not already owned by Tyco were converted into
approximately 17.7 million Tyco common shares valued at $819.9 million. Fair
value of debt of acquired companies aggregated $799.1 million.acquired.
        At the beginning of fiscal 2002,2003, purchase accounting reservesaccruals were $702.1$539.0 million as a result of purchase accounting transactions made in prior years. In connection with fiscal 20022003 acquisitions, we established purchase accounting reservesliabilities of $194.6$0.2 million for transaction and integration costs. In addition, purchase accounting liabilities of $339.4$25.8 million and a corresponding increase to goodwill and deferred tax assets were recorded during fiscal 20022003 relating to fiscal 20012002 and prior years' acquisitions. These reservesaccruals related primarily to revisions associated with finalizing the exit plans of LPS, Microser S.L., DAAG,
EdisonParagon and SecurityLink, allEberle, both acquired during fiscal 2001.2002. Also, during fiscal 2002,2003, we reclassified $32.7$3.8 million of fair value adjustments related to the write-down of assets for prior yearfiscal 2002 acquisitions out of purchase accounting accruals and into the appropriate asset or liability account. We also recorded $16.5 million in cumulative translation adjustments. During fiscal 2002,2003, we paid out $474.8$171.5 million in cash for utilization of purchase accounting liabilities related to current and prior 147
years' acquisitions and incurred $0.2 million in non-cash charges.acquisitions. In addition, we paid out $149.3$100.3 million relating to holdback/earn-out liabilities primarily
related to certain prior period acquisitions (including $2.3 million relating to
earn-out liabilities) against the reserves established during and prior to
fiscal 2002. In addition, during fiscal 2002, we assumed pre-existing put option
rights of $105.9 million, of which $102.6 million has been paid in cash.acquisitions. Holdback liabilities represent a portion of the purchase price that is withheld from the seller pending finalization of the acquisition balance sheet. Certain acquisitions have provisions which require Tyco to make additional "earn-out" payments to the sellers if the acquired company achieves certain milestones subsequent to its acquisition by Tyco. These earn-out payments are tied to certain performance measures, such as revenue, gross margin or earnings growth. Also, in fiscal 2002,2003, we determined that $189.4$207.2 million of purchase accounting reservesliabilities related to acquisitions prior to fiscal 20022003 were not needed and reversed that amount against goodwill. At September 30, 2002,2003, there remained $539.0$199.0 million in purchase accounting reservesaccruals on our Consolidated Balance Sheet, of which $324.1$79.7 million is included in accrued expenses and other current liabilities and $214.9$119.3 million is included in other long-term liabilities. In addition, $268.2$211.7 million of holdback/earn-out liabilities remained on
150

our Consolidated Balance Sheet, of which $124.5$93.1 million are included in accrued expenses and other current liabilities and $143.7$118.6 million are included in other long-term liabilities.
        As required by SFAS No. 142, all business combinations completed in fiscal 2002 were accounted for under the purchase accounting method. At the time each purchase acquisition is made, we recorded transaction costs and the costs of integrating the purchased company within the relevant Tyco business segment. The amounts of such reservesliabilities established in fiscal 2002 are detailed in Note 2 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 provesliabilities prove 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. Any shortfall will be recorded in earnings.
        During the fourth quarter of fiscal 2002,2003, the Company sold certain of its businesses for net
proceeds of approximately $138.7 million in cash that consist primarily of
certaininitiated a proposed divestiture program which includes the TGN and other non-core businesses within all of our operating segments except Plastics and Adhesives. Combined fiscal 2003 revenues for businesses under consideration for potential divestiture totaled approximately $2 billion. The estimated potential proceeds from sales (excluding the HealthcareTGN) could be at least $400 million. If we dispose of these businesses, we may not fully recover their recorded book values. At September 30, 2003, however, under the held and Specialty Products and Fire and
Security Services segments. In connection withused model, the assets of these dispositions, the Company
recorded a net gain of $7.2 million (excluding a previous charge of
$125.3 million for impairment associated with these assets whichbusinesses were held for
sale).

    During fiscal 2001, we entered into an agreement to acquire C.R.
Bard, Inc., a healthcare products manufacturer. On February 6, 2002, Tyco and
C.R. Bard, Inc. mutually terminated the merger agreement. Each party bore its
own costs, and no break up fee was paid.

    During fiscal 2002, we entered into an agreement to acquire McGrath
RentCorp, a leading rental provider of modular offices and classrooms and
electronic test equipment. On July 1, 2002, McGrath RentCorp elected to
terminate the transaction agreement. Tyco reimbursed McGrath's cost and expenses
in the amount of $1.25 million.

                                      148

    The following details the fiscal 2002 capital expenditures, net, and
depreciation by segment ($ in millions):


                                                         CAPITAL
                                                    EXPENDITURES, NET   DEPRECIATION
                                                    -----------------   ------------

Fire and Security Services........................       $  850.3         $  570.5
Electronics.......................................        1,597.9(1)         479.3
Healthcare and Specialty Products.................          304.8            279.6
Engineered Products and Services..................           78.7            123.8
Corporate.........................................           23.0             12.3
                                                         --------         --------
                                                         $2,854.7(2)      $1,465.5
                                                         ========         ========


- ------------------------------

(1) Includes $1,146.0 million in spending for construction of the TGN.

(2) Net of $29.5 million received in sale-leaseback transactions and
    $166.5 million of proceeds received on sale of property, plant and
    equipment.fully recoverable.
        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
exceed, depreciation due to growth in the number of new security system
installations. During fiscal 2002,2003, we spent $1,146.0$112.7 million on construction of the TGN. Construction of the TGN was substantially completed during fiscal 2002.2003. Consequently, the level of capital expenditures in the Electronics segment is expected to decrease significantly in fiscal 2003.2004. The level of capital expenditures in the other segments should not exceed depreciation in fiscal 20032004 and should approximate the level of spending in fiscal 2002.2003.
        The provision for income taxes relating to continuing operations in the Consolidated Statement of Operations for fiscal 20022003 was $257.7$764.5 million, and the amount of income taxes paid (net of refunds) during the year was $368.1$142.5 million. The difference is due to timing differences, as well as the tax
benefits related to the exercise of share options. The current income tax
liability at September 30, 2002 was $2,218.9 million, as compared to
$1,845.0 million at September 30, 2001.

    During fiscal 2002, we received proceeds of $185.7 million from the exercise
of common share optionsnet operating loss carryforward and used $789.2 million of cash to repurchase our own
common shares. Other than to satisfy the pre-existing put option rights
associated with the acquisition of Sensormatic, we ceased repurchasing our
common shares and will not consider implementing future repurchases until our
short-term debt levels are significantly reduced.

CAPITALIZATIONcarryback utilization.
Capitalization
        Shareholders' equity was $24,790.6$26,369.0 million, or $12.42$13.20 per share, at September 30, 2002,2003, compared to $31,737.4$24,081.3 million, or $16.40$12.07 per share, at September 30, 2001.2002. The decreaseincrease in shareholders' equity was due primarily to a
net losscurrency translation adjustments of $9,411.7$1,445.4 million and the repurchasenet income of our common shares discussed
above. This decrease was partially offset by the following: (i) the issuance of
approximately 47.8 million common shares valued at $1,918.8 million for the
acquisition of Sensormatic, (ii) the conversion of TyCom shares not already
owned by Tyco into 17.7 million Tyco common shares valued at $819.9 million in
connection with the amalgamation with TyCom, (iii) $235.6 million for the fair
value of shares issued and options assumed in connection with the fiscal 2001
acquisition of Mallinckrodt, (iv) the issuance of 44,139 common shares valued at
$2.3 million related to an earn-out payment, and (iv) $42.0 million for the fair
value of options assumed.$979.6 million.
        Tangible shareholders' deficit was $7,865.2$5,359.7 million and $7,745.0 million at September 30, 2003 and 2002, and tangible shareholders' equity was $2,996.5 million at September 30, 2001.respectively. Goodwill and other intangible assets 149
were $32,655.8$31,728.7 million at September 30, 2002,2003, compared to $28,740.9$31,826.3 million at September 30, 2001.2002. Acquisitions have been an important part of Tyco's growth in recentprior years. While we may continuehave continued to make selected complementary acquisitions, we anticipate that the amount of acquisition activity will behas been significantly reduced and, therefore, our growth rate from acquisitions will continue to behas been reduced as compared to prior quarters.periods.
        Total debt as a percentage of total capitalization (total debt and shareholders' equity) was 49%44% at September 30, 20022003 and 41%50% at September 30, 2001. Some of our debt agreements, including our bank credit agreements, contain
covenants that would result in a default if our total debt as a percentage of
total capitalization exceeds 52.5%. A significant decline in our shareholders'
equity, including a decline due to a significant impairment of goodwill or other
assets, could cause a default under this covenant.2002. We had $6.2approximately $4.2 billion of cash and cash equivalents as of September 30, 2002.2003. Net debt (total debt less cash and cash equivalents) as a percent of net capitalization (net debt and shareholders' equity) was 42% at September 30, 2002 and 39% at September 30, 2001.

    The source2003 and
151

43% at September 30, 2002. Management believes net debt is an important measure of the cash used for acquisitions in fiscal 2002 was primarily
proceeds from the issuance of debt.liquidity which it uses to measure its ability to meet its future debt obligations.
        At September 30, 2002,2003, total debt was $24,205.8$20,969.1 million, as compared to total debt relating to continuing operations
of $21,619.0$24,248.1 million at September 30, 2001.2002. This increasedecrease resulted principally from the repayment of Tyco International Group S.A.'s ("TIG"), a wholly-owned subsidiary of Tyco, $3.855 billion unsecured term loan, the repurchase of TIG's $750 million par value 6.25% Dealer Remarketable Securities due 2013, the repurchase of TIG's remaining Floating Rate Notes and 4.95% Notes of approximately $488 million and $534 million, respectively, the purchase of $1,850.1 million (par value $2,421.1 million) of TIG's zero coupon convertible debentures due 2021 for cash of $1,850.1 million, and the purchase of $1,085.7 million (par value $1,415.2 million) of Tyco's zero coupon convertible debentures due 2020 for cash of approximately $1,062.8 million. The decrease was partially offset by the issuance of $3.0 billion of 2.75% Series A convertible senior debentures due January 2018 and $1.5 billion of 3.125% Series B convertible senior debentures due January 2023 for net proceeds of approximately $1,726.6 million from the sale of notes under
TIG's European Medium Term Note Programme and $1,487.8 million from the sale of
notes due 2011. For a full discussion of$4,387.5 million. Our debt activity see Note 18 to the
Consolidated Financial Statements.is discussed in more detail below. Our cash balance increaseddecreased to $6,186.8$4,186.7 million at September 30, 2002,2003, as compared to cash relating to
continuing operations of $1,779.2$6,185.7 million at September 30, 2001.

                                      150
2002.
        The following summarizes Tyco's change in net debt for fiscal 20022003 ($ in millions):
Total debt at September 30, 2001........................             $21,619.0
Less: cash and cash equivalents at September 30, 2001...              (1,779.2)
                                                                     ---------
NET DEBT BALANCE AT SEPTEMBER 30, 2001..................              19,839.8
Less the following:
Operating cash flow from continuing operations..........   5,695.5
Purchase of property, plant and equipment...............  (1,708.7)
Dividends...............................................    (100.3)
Sales of accounts receivable program elimination........      56.4
Construction in progress--TGN...........................  (1,146.0)
                                                          --------
Free cash flow..........................................   2,796.9
Acquisition of businesses, net of cash acquired.........  (3,084.8)
Cash paid for purchase accounting and holdback/earn-out
  liabilities...........................................    (624.1)
Net proceeds from the sale of CIT.......................   4,395.4
Proceeds from the sale of businesses....................     138.7
Proceeds from exercise of options.......................     185.7
Repurchase of common shares.............................    (789.2)
Debt of acquired companies..............................    (799.1)
Net cash payments to Tyco Capital.......................    (200.0)
Restricted cash.........................................    (196.2)
Other items.............................................      (2.5)
                                                          --------
                                                                       1,820.8
                                                                     ---------
NET DEBT BALANCE AT SEPTEMBER 30, 2002..................              18,019.0
Plus: cash and cash equivalents at September 30, 2002...               6,186.8
                                                                     ---------
Total debt at September 30, 2002........................             $24,205.8
                                                                     =========
Total debt at September 30, 2002
 
 
 
$
24,248.1
 
Less: cash and cash equivalents at September 30, 2002
 
 
 
 
(6,185.7
)
 
 
 
 
 
Net debt balance at September 30, 2002
 
 
 
 
18,062.4
 
Less the following:
 
 
 
 
 
 
Operating cash flow from continuing operations(1)
 
5,346.1
 
 
 
 
Purchase of property, plant and equipment, net
 
(1,169.6
)
 
 
 
Dividends paid
 
(100.9
)
 
 
 
Construction of TGN
 
(112.7
)
 
 
 
Acquisition of customer accounts (ADT dealer program)
 
(596.8
)
 
 
 
Cash paid for purchase accounting and holdback/earn-out liabilities
 
(271.8
)
 
 
 
Acquisition of businesses, net of cash acquired
 
(44.0
)
 
 
 
Increase in current and non-current restricted cash
 
(228.4
)
 
 
 
Cash invested in short-term investments
 
(392.1
)
 
 
 
Currency translation adjustments on debt
 
(352.7
)
 
 
 
Impact of adoption of FIN 46
 
(562.2
)
 
 
 
Other items
 
(234.9
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,280.0
 
 
 
 
 
 
Net debt balance at September 30, 2003
 
 
 
 
16,782.4
 
Plus: cash and cash equivalents at September 30, 2003
 
 
 
 
4,186.7
 
 
 
 
 
 
Total debt at September 30, 2003
 
 
 
$
20,969.1
 
 
 
 
 
 
(1)
Includes decrease in sales of accounts receivable programs of $119.0 million.
        In October 2001, Tyco International Group S.A. ("TIG"), a wholly-owned
subsidiaryJanuary 2003, TIG repaid its $3,855 million unsecured term loan from banks scheduled to expire on February 6, 2003.
        In January 2003, TIG issued $3.0 billion of Tyco, sold $1,500.0 million 6.375% notes2.75% Series A convertible senior debentures due 2011 under its
$6.0January 2018 and $1.5 billion shelf registration statement in a public offering. The notesof 3.125% Series B convertible senior debentures due January 2023. These debentures are fully and unconditionally guaranteed by Tyco. The netTyco, and at any time prior to the stated maturity, holders may convert each of their debentures into Tyco common shares at a rate of $22.7832 and $21.7476 respectively, per share. Additionally, holders of the Series A debentures may require the Company to purchase all or a portion of their debentures on January 15, 2008 and January 15, 2013,
152

and holders of the Series B debentures may require the Company to purchase all or a portion of their debentures on January 15, 2015. If the option is exercised at any one of the aforementioned dates, TIG must repurchase the debentures at par plus accrued but unpaid interest, and may elect to repurchase the securities for cash, Tyco common shares, or some combination thereof. TIG may redeem for cash some or all of the Series A debentures and Series B debentures at any time on or after January 20, 2006 and January 20, 2008, respectively. Net proceeds of approximately
$1,487.8$4,387.5 million, before out of pocket expenses, from these debentures were used primarily to repay borrowings under TIG's commercial paper
program. TIG has $4.5 billion available under this shelf registration statement.

    In November 2001, TIG sold E500.0 million 4.375% notes due 2005,
E685.0 million 5.5% notes due 2009, L200.0 million 6.5% notes due 2012 and
L285.0 million 6.5% notes due 2032, utilizing capacity available under TIG's
European Medium Term Note Programme establisheddebt.
        Also in September 2001. The notes are
fully and unconditionally guaranteed by Tyco. The net proceeds of all four
tranches were the equivalent of $1,726.6 million and were used to repay
borrowings under TIG's commercial paper program.

    During the first quarter of fiscal 2002, Tyco repaid upon maturity its
$300.0 million 6.5% public notes due 2001.

    In January 2002,2003, TIG entered into a $1.5 billion bridge loan, which was
fully and unconditionally guaranteed by Tyco, which had a weighted average
interest rate of 3.66%. TIG repaid $645.0 million in April 2002 and the
remainder in June 2002.

    In February 2002, TIG borrowed the available $2.0 billion of capacity under
its 5-year364-day unsecured revolving credit facility which had been maintained as
liquidity supportalso provides for its commercial paper

                                      151

program.issuance of unsecured letters of credit. The facility, which expires in February 2006, is fully and unconditionally guaranteed by Tyco and certain of its subsidiaries and is guaranteed in part by various subsidiaries of TIG, has a variable LIBO-basedinterest rate whichbased on LIBOR. The margin over LIBOR payable by TIG can vary depending upon changes in its credit rating and in the market price of one of its outstanding debt securities. TIG also pays a commitment fee of 0.50% annually on any unused portion of the line of credit. The facility was 4.94% asnot utilized in fiscal 2003.
        At February 12, 2003, the accreted value of September 30, 2002.

    Also, inTIG's zero coupon convertible debentures with a February 2002,2003 put option was $1,850.8 million. On February 13, 2003, TIG borrowed $3.855 billion under its 364-day
unsecured revolving credit facility and exercised its option to convert this
facility into a term loan expiring on February 6, 2003. The loan, which is fully
and unconditionally guaranteed by Tyco, has a variable LIBO-based rate, which
was 4.99% aspurchased $1,850.1 million accreted value of September 30, 2002.

    Proceedsthese debentures for cash. This purchase resulted from the bridge loan and credit facilities were used to pay off
maturing commercial paper at the scheduled maturities and to provide additional
available capital.

    During the fourth quarterexercise of fiscal 2002 TIG paid off its $1.037 billion
6.875% private placement notes due 2002.

    The following table details our debt ratings at September 30, 2001,
March 31, 2002 and September 30, 2002. Following the borrowings in
February 2002, Standard & Poor's and Fitch downgraded our long-term debt and
commercial paper ratings, while Moody's confirmed its ratings, resulting in the
ratings shown in the March 31, 2002 column in the table below. Subsequent to
March 31, 2002, Moody's, Standard & Poor's and Fitch further downgraded our
ratings as shown in the September 30, 2002 column in the table below primarily
as a result of Tyco's revision of its plan to separate into four independent
public companies, the weak economic environment of the electronics and
telecommunications industries, public speculation regarding liquidity concerns
at Tyco, and the resignations of our former chief executive officer, chief
financial officer and chief corporate counsel.


                                AT SEPTEMBER 30, 2001      AT MARCH 31, 2002        AT SEPTEMBER 30, 2002
                               -----------------------   ----------------------   -------------------------
                               SHORT TERM   LONG TERM    SHORT TERM   LONG TERM   SHORT TERM    LONG TERM
                               ----------   ----------   ----------   ---------   ----------   ------------

Moody's......................      P2          Baa1          P2         Baa1      Not prime             Ba2
Standard & Poor's............      A1             A          A3          BBB             A3            BBB-
Fitch........................      F1             A          F2           A-              B              BB


- ------------------------------

(1) At September 30, 2002, Moody's differentiated the ratings between Tyco's and
    TIG's outstanding debt. The Moody's debt rating on Tyco's convertible
    debentures was downgraded to a Ba3 rating.

    THE SECURITY RATINGS SET FORTH ABOVE ARE NOT A RECOMMENDATION TO BUY, SELL
OR HOLD SECURITIES AND MAY BE SUBJECT TO REVISION OR WITHDRAWAL BY THE ASSIGNING
RATING ORGANIZATION. EACH RATING SHOULD BE EVALUATED INDEPENDENTLY OF ANY OTHER
RATING.

    As a result of the rating agencies' downgrade of Tyco's debt to below
investment grade status in June 2002, TIG was required to pay $256.7 million to
repurchase its Y30 billion 3.5% notes due 2030 in July 2002. In addition, the
rating of below investment grade status caused the interest rate on our
$400 million 7.2% notes due 2008 to increase to 8.2%, until such time that the
rating by Moody's returns to investment grade. The downgrade also gave the
investors in two of our accounts receivable programs theinvestors' option to discontinue
reinvestment in new receivables and terminate the programs. The investors did
not exercise this option and one program was subsequently amended to continue
reinvestment. The amount outstanding under the other program was $132.4 millionindenture to require TIG to purchase at September 30, 2002.accreted values debentures validly surrendered by February 12, 2003.
        In June 1998,2003, TIG issued $750.0 millionrepurchased for cash all of its 6.25% Dealer Remarketable Securities ("Drs.") due 2013. UnderThe total Dollar Price paid was $902 million, based upon the terms$750 million par value of the Drs., plus the Remarketing Dealer has an
option to remarketdifference between a Base Rate of 5.55% and the Drs. in June 2003. If this option is exercised it would
subjectthen current ten-year United States Treasury yield-to-maturity.
        On July 30, 2003 and on August 1, 2003, TIG paid from cash the Drs. to mandatory tender to the Remarketing Dealerentire remaining par value of its Floating Rate Notes 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. If these debentures are tendered, TIG would be
required to repurchase them for cash.

                                      152

    The table below includes our projected cash flows through December 2003, our
first quarter of fiscal 2004 ($ in millions). This table assumes that the
convertible debentures described above are retired for cash.


                                        FY 2002                            FY 2003                            FY 2004
                                        --------      --------------------------------------------------      --------
FISCAL QUARTER                          Q4 ACT.       Q1 EST.       Q2 EST.       Q3 EST.       Q4 EST.       Q1 EST.
- --------------                          --------      --------      --------      --------      --------      --------

BEGINNING CASH BALANCE............      $ 2,794        $6,187       $ 5,994        $  608       $   448       $    92
Free cash flow(1).................        1,301           150           700           900         1,000           150
Acquisitions, including purchase
  accounting spending.............         (431)         (300)         (275)         (275)         (275)         (250)
CIT divestiture...................        4,395            --            --            --            --            --
Other divestiture proceeds........          139            --            --            --            --            --
Other.............................         (148)           --            --            --            --            --
Net debt repayments...............       (1,863)          (43)       (5,811)(2)      (785)       (1,081)       (3,640)(3)
                                        -------        ------       -------        ------       -------       -------
ENDING CASH BALANCE...............      $ 6,187(4)     $5,994       $   608        $  448       $    92       $(3,648)
                                        =======        ======       =======        ======       =======       =======


- ------------------------------

(1) Fiscal 2002 free cash flow was $2.8 billion. Fiscal 2003 free cash flow is
    estimated to be in a range of $2.5 billion to $3.0 billion. Free cash flow
    for the first quarter of fiscal 2004 is estimated to be in a range of
    break-even to $300 million.

(2) $1.9 billion of this amount represents payment for repurchase of the zero
    coupon convertible bonds at the option of the holders in February 2003. We
    intend to negotiate a new bank credit facility to refinance a portion of the
    $3.9 billion outstanding under our existing facility, which expires in
    February 2003.

(3) This amount represents payment for repurchase of the zero coupon convertible
    bonds at the option of the holders in November 2003.

(4) This amount excludes approximately $196 million of short-term restricted
    cash and treasury bills with maturities in excess of ninety days but less
    than one year4.95% Notes of approximately $94 million.

    The fiscal 2003$488 million and 2004 free cash flow ranges reflect uncertainties as a
result of our liquidity issues and general economic uncertainties. In
July 2002, we received net proceeds of $4.4 billion, after deducting estimated
out of pocket expenses, from the sale of all of CIT's common shares through an
initial public offering. We plan to use the net proceeds to repay short-term and
long-term borrowings and for working capital and other corporate purposes.$534 million, respectively.
        In November 2000, Tyco issued $4,657.5 million principal amount at maturity of zero coupon convertible debentures due 2020 for aggregate net proceeds of approximately $3,374.0 million. The debentures accrete interest at a rate of 1.5% per annum. During fiscal 2003, Tyco is required to repurchasepurchased $1,085.7 million (par value $1,415.2 million) of the remaining securitiesdebentures for cash at the option of theapproximately $1,062.8 million. On November 17, 2003, holders at the then accreted value in November 2003, 2005,
2007 and 2014.

    In February 2001, TIG issued $3,035.0 millionof principal amount at maturity of zero coupon convertible debentures due 2021 for aggregate net proceeds of
$2,203.4 million. The debentures, which are guaranteed by$3,196.7 million notified Tyco accrete interestthat they had exercised their option to require Tyco to repurchase their notes at a rate of 1.5% per annum. TIG is required to repurchase the remaining
securities at the option of the holders at the accreted value of approximately
$1.9 billion in February 2003. TIG may elect to refinance these debentures, or
repurchase them for cash or Tyco common shares or some combination thereof. If
the holders of the debentures exercise their put option, the number of common
shares needed to satisfy the put option in lieu of cash is the fair value of
Tyco's stock, based on the stock price for a defined period of time around the
settlement date. Based on Tyco's stock price as of a recent date (December 20,
2002), we would need to issue approximately 110 million common shares if all of
the debentures were put back to the Company and we elected to use common shares
to satisfy all of the debentures. Any shares issuable under the debentures were
registered at the time of the offering. TIG may also be required to repurchase
these securities for cash at the option of the holders at the then accreted
value in February 2005, 2007, 2009 and 2016. During fiscal 2002 TIG repurchased
$475.7 million (principal amount at maturity) of these debentures.

                                      153

    As illustrated in the foregoing table and discussed above, we have
significant amounts of debt which matures in fiscal 2003 as well as future
periods, including, without limitation approximately $1.9 billion which matures
in February 2003. In addition, we have outstanding approximately $3.9 billion
under our existing credit facility which expires in February 2003. We intend to
enter into a new credit facility to refinance a portion of the $3.9 billion
outstanding under our existing credit facility. We believe that our cash flow
from our operations, together with proceeds from the CIT IPO, is adequate to
fund our operations and service our debt through the end of fiscal 2003.
However, events beyond our control such as the result of ongoing litigation and
governmental investigations, a decrease in demand for our products and services,
further debt rating downgrades or deterioration in our financial ratios could
negatively impact our accessibility to financing and cost of funds. In addition
to negotiating a new bank credit facility, we believe there are a number of
financing alternatives which could be available to meet the projected cash
deficit in the first quarter of fiscal 2004, including refinancing maturing
debt, raising funds through the sale of non-core businesses, raising capital
through new debt, and/or equity issuances. In calendar year 2003, total
maturities and potential puts of convertible debentures amounts to approximately
$11.3 billion.

    Our zero coupon convertible debentures due 2020 and zero coupon convertible
debentures due 2021 may be converted into Tyco common shares at the option of
the holders if any one of the following conditions is satisfied for the relevant
debentures:

    - if the closing sale price of Tyco common shares for$775.66 per $1,000 principal at least 20 trading
      days in the 30 trading day period ending on the trading day prior to the
      date of surrender is more than 110% of the accreted conversion price per
      common share of the relevant debentures on that preceding trading day;

    - if the Company has called the relevant debentures for redemption after a
      certain date; and

    - upon the occurrence of specified corporate transactions, such as if Tyco
      makes a significant distribution to its shareholders or if it is a party
      to specific consolidations, mergers or binding share exchanges.

    The conversion feature of the zero coupon convertible debentures due 2020
and 2021 was not available to the debt holders at September 30, 2002 as shown in
the following table:


                                                      ZERO COUPON   ZERO COUPON
                                                      CONVERTIBLE   CONVERTIBLE
                                                      DEBENTURES    DEBENTURES
                                                       DUE 2020      DUE 2021
                                                      -----------   -----------

Stock price at September 30, 2002...................    $14.10        $14.10
Accreted conversion price per common share at
  September 30, 2002(1).............................    $73.63        $86.94


- ------------------------------

(1) Accreted conversion price per common share is equal tomaturity representing the accreted value of the respective debenturesnotes on that date. On November 18, 2003, Tyco purchased these notes for cash of $2,479.6 million.
        Our bank credit agreements contain a number of financial covenants, such as interest coverage, debt to EBITDA and leverage ratios, and minimum levels of net worth and restrictive covenants that limit the amount of debt we can incur and restrict our ability to (i) pay dividends or make other payments in connection with our capital stock (ii) make acquisitions or investments (iii) enter into sale/leaseback transactions (iv) pledge assets and (v) prepay debt that matures after December 31, 2004. Specifically, TIG is the borrower under a 5-year, $2.0 billion revolving credit facility that contains a financial covenant based on the Company's leverage ratio. The maximum allowable leverage ratio as defined under this agreement is 52.5%. At September 30, 2003, this ratio declined to 46.3% from 51.3% at September 30, 2001 divided2002. We also have several synthetic lease facilities with similar covenants. Our outstanding indentures contain customary covenants including a negative pledge, limit on subsidiary debt and limit on sale/leasebacks. None of these covenants is presently considered restrictive to our operations.
        As a result of the rating agencies' downgrade of Tyco's debt in fiscal 2002, investors in one of our accounts receivable programs have the option to discontinue reinvestment in new receivables. The amount outstanding under this program was $103.2 million at September 30, 2003.
153
        On November 12, 2003, TIG issued $1.0 billion par value 6% Notes due 2013 in a private placement offering. The Notes are fully and unconditionally guaranteed by their respective
    conversion rates.Tyco. The conversion price increases asCompany announced its intention to negotiate new revolving bank credit facilities and, upon negotiation of such facilities, to use the note proceeds to reduce the $2.0 billion outstanding under the 5-year revolving credit facility due 2006. In addition, subsequent to year end, TIG executed LIBOR-in-arrears interest rate swaps on notional value $875 million against these notes. Under these swaps Tyco will receive 6% and pay on average 6-month LIBOR plus 90.3 basis points.
        Tyco is currently negotiating a $1.5 billion 3-year revolving credit facility which includes a $500 million sublimit for the issuance of standby and commercial letters of credit and a $1.0 billion 364-day revolving credit facility with a 1-year term out option. These facilities have a variable interest rate based on LIBOR. The margin over LIBOR payable by TIG can vary depending upon changes in its credit rating. These new facilities will replace the $1.5 billion undrawn 364-day revolving credit facility, due to expire at the end of January 2004, and the $2.0 billion drawn 5-year revolving credit facility, due to expire in February 2006.
        The following table details our debt ratings at September 30, 2003.

At September 30, 2003

Short Term
Long Term
Moody's
Not prime
Ba2
Standard & Poor's
A3
BBB-
Fitch
B
BB
        On December 3, 2003, Fitch upgraded its rating to BB+ on the notes
    accreted.

                                      154

COMMITMENTS AND CONTINGENCIESsenior unsecured debt of Tyco as well as on the unconditionally guaranteed debt of TIG. Fitch's upgrade of Tyco's long-term debt recognizes the progress made by the Company with respect to debt reduction and improving cash flow.
        On December 11, 2003, Moody's confirmed the debt ratings of TIG and raised the rating outlook of Tyco to positive. Moody's indicated that this action reflects the progress the Company has made in addressing recent liquidity concerns through the refinancing/repayment of approximately $11 billion of debt maturities and putable debt in 2003, as well as Moody's expectation for continued-strong free cash flow generation, profit improvement and debt reduction over the near-to-intermediate-term.
The security ratings set forth above are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal by the assigning rating organization. Each rating should be evaluated independently of any other rating.
Commitments and Contingencies
        A summary of our contractual obligations and commitments for debt, minimum lease payment obligations under non-cancelable operating leases and other obligations are as follows ($ in millions):

                                FISCAL 2003   FISCAL 2004   FISCAL 2005   FISCAL 2006   FISCAL 2007   THEREAFTER
                                -----------   -----------   -----------   -----------   -----------   ----------

Long-term debt(1).............   $7,719.0      $3,680.6      $1,755.9      $3,744.2       $602.3      $ 6,703.8
Operating leases..............      808.4         685.1         511.5         397.9        258.1        1,087.5
                                 --------      --------      --------      --------       ------      ---------
Total contractual cash
  obligations.................   $8,527.4      $4,365.7      $2,267.4      $4,142.1       $860.4      $ 7,791.3
                                 ========      ========      ========      ========       ======      =========


- ------------------------------

 
 
Fiscal 2004
 
Fiscal 2005
 
Fiscal 2006
 
Fiscal 2007
 
Fiscal 2008
 
Thereafter
Debt(1)
 
$
2,718.4
 
$
2,258.6
 
$
3,949.2
 
$
704.0
 
$
122.6
 
$
11,216.3
Operating leases(2)
 
 
714.2
 
 
563.2
 
 
421.4
 
 
303.1
 
 
227.8
 
 
1,030.1
Purchase obligations
 
 
23.2
 
 
11.6
 
 
10.1
 
 
8.8
 
 
8.3
 
 
—
 
 
 
 
 
 
 
Total contractual cash obligations
 
$
3,455.8
 
$
2,833.4
 
$
4,380.7
 
$
1,015.9
 
$
358.7
 
$
12,246.4
 
 
 
 
 
 
 
(1)
Includes capital lease obligations.

(2)
Includes obligations under an off-balance sheet leasing arrangement for five cable laying sea vessels.
        In addition to the commitments discussed in the table above, a subsidiary of the Company has the option to buy five cable laying sea vessels upon expiration of the lease in fiscal 2007 for approximately
154

$280 million, or return the vessels to the lessor and, under a guarantee, pay any shortfall in sales proceeds from a third party in an amount not to exceed $235 million.
        At September 30, 2002,2003, the Company had outstanding letters of credit and letters of guarantee in the amount of $627.2$849.2 million.
        At September 30, 2002, in addition to the2003, Tyco had unsecured credit facilities of $3.9$1.5 billion due 2004, all of which is undrawn and available, and $2.0 billion due 2003 and 2006, respectively,all of which is drawn (see Note 19 to the Consolidated Financial Statements). In addition, certain of the Company's operating subsidiaries have overdraft and similar types of facilities which total $0.7$1.1 billion, of which $0.4$0.7 billion was undrawn and available. These facilities expire at various dates through the year 20122015, most of which are renewable and are established primarily within international operations.

    In January 2002,
        At September 30, 2003, the Company issuedhad a $200contingent liability of $80 million guarantee that can be
exercised by a customer if certain specifications relatingrelated to the recently
completed Pacific componentfiscal 2001 acquisition of Com-Net by the TGNElectronics segment. The $80 million is the maximum amount payable to the former shareholders of Com-Net only after the construction and installation of a communications system for the State of Florida is finished and the State has approved the system based on the guidelines set forth in the contract. The $80 million is not completed by March 2003. The
Company does not anticipate any problems with meetingaccrued at September 30, 2003, as the outcome of this deadline.contingency cannot be reasonably determined.
        As a result of actions taken by our former senior corporate management, Tyco, and
certainsome members of our former senior corporate management, former members of our Board of Directors and our current Chief Executive Officer are named defendants in a number of purported class actions alleging violations of the disclosure provisions of the federal securities laws, as well as in a number of derivative actions. In the consolidated derivative action, the plaintiffs have filed a motion which seeks to add certain members of our current Board of Directors and management as defendants. Tyco, certain of our current and former employees, some members of our former senior corporate management and some former members of our Board of Directors also are named as defendants in several Employee Retirement Income Security Act ("ERISA") actions. In addition, Tyco and some members of our former senior corporate management are subject to an SEC inquiry, and some members of our former senior corporate management are named as defendants in criminal cases being prosecuted by the District Attorney of New York County. The findings and outcomes of the prosecutions and the SEC civil action may affect the course of the purported class actions, derivative actions and several ERISA claims.claims pending against Tyco. In May and July 2003, complaints were filed against Tyco and our current Chairman and Chief Executive Officer purporting to represent a class of purchasers of Tyco securities alleging violations of the disclosure provisions of the federal securities laws. We may beare generally obliged to indemnify our directors and officers and our former directors and officers who are also are named as defendants in some or all of these matters.matters to the extent permitted by Bermuda law. In addition, our insurance carriercarriers may decline coverage, or suchour coverage may be insufficient to cover our expenses and liability, if any, in some or all of these matteres.matters. See "Business--Risk"Risk Factors" below and "Legal Proceedings." We are unable at this time to estimate what our ultimate liability in these matters may be, and it is possible that we will be required to pay judgments or settlements and incur expenses in aggregate amounts that would have a material adverse effect on our financial condition, results of operations and liquidity. It is not possible to estimate the amount of loss or probable losses, if any, that might result from an adverse settlement of these matters.
        We and others have received various subpoenas and requests from the SEC,SEC's Division of Enforcement, the District Attorney of New York County, the U.S. Attorney for the District of New Hampshire, the Equal Opportunity Employment Commission and others seeking the production of voluminous documents in connection with various investigations into our governance, management, operations, accounting and related controls. The Department of Labor is investigating Tyco and the administrators of certain of our benefit plans. In addition, while we believe we have adequately responded to a Governmental Services Action ("GSA") action questioning whether Tyco lacked the present responsibility to be a
155

government contractor due to concerns the GSA has expressed as a result of the alleged serious criminal misconduct of our former Chief Executive Officer, Chief Financial Officer and General Counsel, the GSA has reserved the right to take appropriate actions if additional information warrants it. We cannot predict when these investigations will be completed, nor can we predict what the results of these investigations may be. It is possible that we will be required to pay material fines, consent to injunctions on future conduct, lose the ability to conduct business with government instrumentalities (which in time could negatively impact our business with non-governmental customers) or suffer other penalties, each of which could have a material adverse effect on our business. See "Bussiness--Risk
Factors"It is not possible to estimate the amount of loss, or range of possible loss, if any, that might result from an adverse settlement of these matters.
        Tyco and "Legal Proceedings."our subsidiaries' income tax returns are periodically examined by various regulatory tax authorities. In connection with such examinations, tax authorities, including the Internal Revenue Service, have raised issues and proposed tax deficiencies. We are reviewing the issues raised by the tax authorities and are contesting certain of the proposed tax deficiencies. Amounts related to these tax deficiencies and other tax contingencies that management has assessed as probable and estimable have been accrued through the income tax provision. Management believes that the ultimate resolution of these tax deficiencies and contingencies will not have a material adverse effect on the Company's financial condition, annual results of operations or cash flows.
        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, annual results of operations or liquidity.
        Tyco 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. As of September 30, 2003, Tyco concluded that it was probable that it would incur remedial costs in the range of approximately $142 million to $451 million. As of September 30, 2003, Tyco concluded that the best probable estimate within this range is approximately $270 million, of which $32 million is included in accrued expenses and other current liabilities and $238 million is included in other long-term liabilities on the Consolidated Balance Sheet. In view of the Company's financial position and reserves for environmental matters of $270 million, the Company has concluded that any potential payment of such estimated amounts will not have a material adverse effect on its financial position, annual results of operations or liquidity.
        Like many other companies, Tyco and some of our subsidiaries are named as defendants in personal injury lawsuits based on alleged exposure to asbestos-containing materials. Consistent with the national trend of increased asbestos-related litigation, we have observed an increase in the number of these lawsuits in the past several years. The majority of these cases have been filed against subsidiaries in our Healthcare and Specialty Products division and our Engineered Products and Services division. A limited number of the cases allege premises liability, based on claims that individuals were exposed to asbestos while on a subsidiary's property. Some of the cases involve product liability claims, based principally on allegations of past distribution of heat-resistant industrial products incorporating asbestos or the past distribution of industrial valves that incorporated asbestos-containing gaskets or packing. Each case typically names between dozens to hundreds of corporate defendants.
        Tyco's involvement in asbestos cases has been limited because our subsidiaries did not mine or produce asbestos. Furthermore, in our experience, a large percentage of these claims were never

                                      155
 substantiated and have been dismissed by the courts. Our vigorous defense of these lawsuits has resulted in judgments in our favor in all cases tried to verdict. We have not suffered an adverse verdict in a trial court proceeding related to asbestos claims.
156

        When appropriate, we settle claims. However, the total amount paid to date to settle and defend all asbestos claims has been immaterial. Currently,As of September 30, 2003, there arewere approximately 11,00014,000 asbestos liability cases pending against us and our subsidiaries.
        We believe that we and our subsidiaries have substantial indemnification protection and insurance coverage, subject to applicable deductibles, with respect to asbestos claims. These indemnitors and the relevant carriers typically have been honoring their duty to defend and indemnify. We believe that we have valid defenses to these claims and intend to continue to defend them vigorously. Additionally, based on our historical experience in asbestos litigation and an analysis of our current cases, we believe that we have adequate amounts accrued for potential settlements and adverse judgments in asbestos-related litigation. While it is not possible at this time to determine with certainty the ultimate outcome of these asbestos-related proceedings, we believe that the final outcome of all known and anticipated future claims, after taking into account our substantial indemnification rights and insurance coverage, will not have a material adverse effect on our financial position, annual results of operations financial position or cash flows.

BACKLOGliquidity.
Backlog
        At September 30, 2002,2003, we had a backlog of unfilled orders of $11,591.3$11,533.9 million, compared to a backlog of $11,174.2$11,015.5 million at September 30, 2001.2002. We expect that approximately 79%83% of our backlog at September 30, 20022003 will be filled during fiscal 2003.2004. Backlog by reportable industry segment is as follows ($ in millions):

                                                             SEPTEMBER 30,
                                                         ---------------------
                                                           2002        2001
                                                         ---------   ---------

Fire and Security Services.............................  $ 6,811.2   $ 6,252.9
Engineered Products and Services.......................    2,263.9     2,023.0
Electronics............................................    2,076.5     2,719.9
Healthcare and Specialty Products......................      439.7       178.4
                                                         ---------   ---------
                                                         $11,591.3   $11,174.2
                                                         =========   =========
 
 
September 30,
 
 
2003
 
2002
Fire and Security
 
$
6,964.7
 
$
6,691.5
Electronics
 
 
2,071.0
 
 
2,076.5
Engineered Products and Services
 
 
2,061.4
 
 
1,873.4
Healthcare
 
 
327.4
 
 
239.7
Plastics and Adhesives
 
 
109.4
 
 
134.4
 
 
 
 
 
$
11,533.9
 
$
11,015.5
 
 
 
        Backlog for Fire and Security Services includes recurring "revenue in
force,"revenue-in-force," which represents one year's fees for security monitoring and maintenance services under contract. The amount of recurring revenue in forcerevenue-in-force at September 30, 2003 and 2002 and 2001 is $3,492.0$3,606.7 million and $3,099.6$3,483.9 million, respectively. Within the Fire and Security Services segment, backlog increased primarily due to an increase in recurring revenue in force as a result of growth
in certain geographies in ADT's dealer program, offset in part byfavorable foreign currency exchange rates.
        Within the curtailment, and in certain end-markets, the termination of the ADT dealer
program. Backlog also increased due to an increase at our U.K. Fire Protection
business and the acquisition of Sensormatic, which resulted in an addition of
approximately $57 million to backlog.Electronics segment, backlog remained level. Backlog for Engineered Products and Services increased primarily due to acquisitions completed in the current fiscal year. Fiscal 2001 backlog for the
segment has been increased by $175.1 million as a result of certain long-term
contracts not previously reported offset by an adjustment to reflect net
revenues instead of gross revenues at Tyco Infrastructure Services. Of the
$643.4 million decrease within the Electronics segment, backlog decreased
approximately $500 million as there were noseveral new contracts for undersea cable
communication systems signed in fiscal 2002 asand, to a result of the downturn in the
telecommunications industry. Backlog also decreased in the electronics
components grouplesser extent, due to the cancellation and/or delay of orders by customers
primarily in end-markets including the communications, computer and consumer
electronics industries.favorable foreign currency exchange rates. Backlog in the Healthcare and Specialty Products segmentPlastics and Adhesives segments represents unfilled orders, which, in the nature of the business,businesses, are normally shipped shortly after purchase orders are received. We do not view backlog in the Healthcare and Specialty Products segmentPlastics and Adhesives segments to be a significant indicator of the level of future sales activity.

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           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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Off-Balance Sheet Arrangements
Sales of Accounts Receivable
        Tyco has several programs under which it sells participating interests in accounts receivable to investors who, in turn, purchase and receive ownership and security interests in those receivables. As collections reduce accounts receivable included in the pool, the Company sells new receivables. The Company has the risk of credit loss on the receivables and, accordingly, the full amount of the allowance for doubtful accounts has been retained on the Consolidated Balance Sheets. At September 30, 2003, the availability under these programs is $1,025 million. At September 30, 2003 and 2002, $803 million and $933 million, respectively, was utilized under the programs. The proceeds from the sales were used to repay short-term and long-term borrowings and for working capital and other corporate purposes and are reported as operating cash flows in the Consolidated Statements of Cash Flows. The sale proceeds are less than the face amount of accounts receivable sold by an amount that approximates the cost that would be incurred if commercial paper were issued 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 $29.0 million, $17.0 million, and $25.3 million, or 3.5%, 2.7%, and 5.3% of the weighted-average balance of the receivables outstanding, during fiscal 2003, 2002 and 2001, respectively. The Company retains collection and administrative responsibilities for the participating interests in the defined pool. Also, some of our international businesses sell accounts receivable as a short-term financing mechanism. These transactions qualify as true sales. The aggregate amount outstanding under these arrangements was $202 million and $157 million at September 30, 2003 and 2002, respectively.
        As a result of the rating agencies' downgrade of Tyco's debt in June 2002, investors of one of our accounts receivable programs have the option to discontinue reinvestment in new receivables and terminate the program. However, the investors have not exercised this option. The amount outstanding under this program was $103.2 million and $132.4 million at September 30, 2003 and 2002, respectively.
Variable Interest Entities
        During fiscal 2003, the Company adopted FIN 46, which requires identification of the Company's participation in VIE's, which are entities with a level of invested equity that is not sufficient to fund future activities to permit them to operate on a stand alone basis, or whose equity holders lack certain characteristics of a controlling financial interest. For entities identified as VIE's, FIN 46 sets forth a model to evaluate potential consolidation based on an assessment of which party to VIE's, if any, bears a majority of the risk to its expected losses, or stands to gain from a majority of its expected returns.
        The Company has programs under which it sells machinery and equipment to investors who, in turn, purchase and receive ownership and security interests in those assets. As such, the Company may have certain investments in those affiliated companies whereby it provides varying degrees of financial support and where the investors are entitled to a share in the results of those entities but do not consolidate these entities. While these entities may be substantive operating companies, they have been evaluated for potential consolidation under FIN 46.
        As discussed in "Results of Operations—Cumulative Effect of Accounting Changes," the Company has three synthetic lease programs utilized, to some extent, by all of the Company's segments to finance capital expenditures for manufacturing machinery and equipment and for ships used by Tyco Submarine Telecommunications. During fiscal 2003, the Company restructured one of the synthetic leases to meet the requirements of FIN 46 for operating lease accounting and reclassified the remaining two leases as capital leases. In addition, the Company evaluated other investments and concluded that four joint ventures that were previously accounted for under the equity method of accounting within Tyco Infrastructure Services, in which we own a minority interest, meet the consolidation criteria set forth in
158

FIN 46. Accordingly, these ventures have been consolidated onto the Company's balance sheet. The following table presents balance sheet information for the VIE's that were included within the Company's Consolidated Balance Sheet under the transitional accounting prescribed by FIN 46 effective July 1, 2003 ($ in millions):
Restricted cash
 
$
21.7
 
Accounts receivable
 
 
7.5
 
Property, plant and equipment
 
 
433.8
 
Other assets(1)
 
 
28.2
 
 
 
 
 
Total assets
 
$
491.2
 
 
 
 

Loans payable and current maturities of long-term debt

 

$

10.6

 
Accounts payable
 
 
2.1
 
Accrued expenses and other current liabilities(2)
 
 
(31.6
)
Long-term debt
 
 
551.6
 
Other long-term liabilities(3)
 
 
(12.8
)
Minority interest
 
 
46.4
 
 
 
 
 
Total liabilities
 
 
566.3
 
 
 
 
 
Cumulative effect of accounting change, net of tax
 
$
(75.1
)
 
 
 
(1)
Includes the elimination of $16.2 million of equity investments related to joint ventures previously recorded under the equity method which are now consolidated under FIN 46.

(2)
Includes the elimination of $32.7 million of accrued expenses associated with synthetic leases previously recorded as operating leases which are now recorded as capital leases under FIN 46.

(3)
Includes the elimination of $14.7 million of long-term liabilities associated with synthetic leases previously recorded as operating leases which are now recorded as capital leases under FIN 46.
Guarantees
        The Company may, from time to time, enter into sales contracts whereby it will buy back (at a discount) a transaction from a customer's third-party financier in the event of a customer's default. For such transactions that include "shared risk," the Company accrues a liability based on historical loss data. As of September 30, 2003, $3.2 million was accrued related to these contracts. In the event the Company must pay for this shared risk, the Company's recourse is as follows: place the lease with a financially viable third-party financier; repossess the purchased products or equipment; seek payment through a personal guarantee issued by the customer; or, alternatively, sue the customer.
        The Company's Fire and Security business has guaranteed the performance of a third-party contractor. The performance guarantee arose from contract negotiations, because the contractor could provide cost-effective service on a telecommunications contract. In the event the contractor does not perform its contractual obligations, Tyco Fire and Security would perform the service itself. Therefore, the Company's exposure would be the cost of any services performed, which would not have a material effect to the Company's financial position or annual results of operations. Because it is not probable that the Company will have to make any payments or perform any services pursuant to the guarantee it has not recorded any obligation related to the guarantee. The contract was entered into in July 2002 and expires at the end of the warranty period, July 2004. If the third-party sub-contractor does not perform its obligations, Tyco may consider withholding any future payment for work performed by the contractor.
        The Company, in disposing of assets or businesses, often provides representations, warranties and/or indemnities to cover various risks including, for example, unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate
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environmental contamination at hazardous waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal fees related to periods prior to disposition. The Company does not have the ability to estimate the potential liability from such indemnities because they relate to unknown conditions. However, we have no reason to believe that these uncertainties would have a material adverse effect on the Company's financial position, annual results of operations or liquidity.
        The Company has recorded liabilities for known indemnifications included as part of environmental liabilities. See "Liquidity and Capital Resources—Commitments and Contingencies" above for a discussion of these liabilities.
        The Company has guaranteed the fair value of certain vessels not to exceed $235 million and has accrued $10.4 million and $4.4 million as of September 30, 2003 and 2002, respectively, based on its estimate of fair value of the vessels (see "Liquidity and Capital Resources—Commitments and Contingencies" above).
        Due to the Company's downsizing of certain operations as part of restructuring plans, acquisitions, or otherwise, the Company has leased properties which it has vacated but has sub-let to third parties. In the event third parties vacate the premises, the Company would be legally obligated under master lease arrangements. The Company believes that the financial risk of default by sub-lessors is individually and in the aggregate not material to the Company's financial position, annual results of operations or liquidity.
        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, annual results of operations or liquidity.
        The Company generally accrues estimated product warranty costs at the time of sale. In other instances, additional amounts are recorded when such costs are probable and can be reasonably estimated. For further information on estimated product warranty, see Notes 1 and 20 to the Consolidated Financial Statements.
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Risk Factors
You should carefully consider the risks described below before investing in our publicly traded securities. The risks described below are not the only ones facing us. Our business is also subject to the risks that affect many other companies, such as competition, technological obsolescence, labor relations, general economic conditions, geopolitical events and international operations. Additional risks not currently known to us or that we currently believe are immaterial also may impair our business operations and our liquidity.
Risks Relating to Recent Developments at Tyco
Continuing negative publicity may adversely affect our business.
        As a result of actions taken by our former senior corporate management, Tyco has been the subject of continuing negative publicity focusing on former senior corporate management's actions. This negative publicity contributed to significant declines in the prices of our publicly traded securities in 2002 and has brought increased regulatory scrutiny upon us. A number of suppliers have requested letters of credit to support our purchase orders. We also believe that many of our employees are operating under stressful conditions, which reduces morale and could lead to increased employee turnover. Continuing negative publicity could have a material adverse effect on our results of operations and liquidity and the market price of our publicly traded securities.
Pending litigation could have a material adverse effect on our liquidity and financial condition.
        As a result of actions taken by our former senior corporate management, Tyco, some members of our former senior corporate management, former members of our Board of Directors and our current Chief Executive Officer are named defendants in a number of purported class actions alleging violations of the disclosure provisions of the federal securities laws, as well as in a number of derivative actions. In the consolidated derivative action, the plaintiffs have filed a motion which seeks to add certain members of our current Board of Directors and management as defendants. Tyco, certain of our current and former employees, some members of our former senior corporate management and some former members of our Board of Directors also are named as defendants in several Employee Retirement Income Security Act ("ERISA") actions. In addition, Tyco and some members of our former senior corporate management are subject to an SEC inquiry, and some members of our former senior corporate management are named as defendants in criminal cases being prosecuted by the District Attorney of New York County. The findings and outcomes of the prosecutions and the SEC civil action may affect the course of the purported class actions, derivative actions and ERISA claims pending against Tyco. In May and July 2003, complaints were filed against Tyco and our current Chairman and Chief Executive Officer purporting to represent a class of purchasers of Tyco securities alleging violations of the disclosure provisions of the federal securities laws. We are generally obliged to indemnify our directors and officers and our former directors and officers who are also named as defendants in some or all of these matters to the extent permitted by Bermuda law. In addition, our insurance carriers may decline coverage, or our coverage may be insufficient to cover our expenses and liability, in some or all of these matters. We are unable at this time to estimate what our ultimate liability in these matters may be, and it is possible that we will be required to pay judgments or settlements and incur expenses, in excess of any insurance coverage, in aggregate amounts that would have a material adverse effect on our financial condition, results of operations and liquidity.
Our senior corporate management team is required to devote significant attention to matters arising from actions of prior management.
        We have replaced our senior corporate executives with an entirely new team, and our entire Board of Directors determined not to stand for reelection. A new Board of Directors was elected at our annual general meeting of shareholders in March 2003. It will take some time for our new management
161
team and our new Board of Directors to learn about our various businesses and to develop strong working relationships with our cadre of operating managers at our various subsidiary companies. Our new senior corporate management team's ability to complete this process has been and continues to be hindered by their need to spend significant time and effort dealing with internal and external investigations, developing effective corporate governance procedures, strengthening reporting lines and reviewing internal controls. During this period and in order to complete this process, our new executives will depend in part on advisors, including certain former directors. We cannot assure you that this major restructuring of our Board of Directors and senior management team, and the accompanying distractions, in this environment, will not adversely affect our results of operations.
Continued scrutiny resulting from ongoing investigations may have an adverse effect on our business.
        We and others have received subpoenas and requests from the SEC's Division of Enforcement, the District Attorney of New York County, the U.S. Attorney for the District of New Hampshire, the Equal Opportunity Employment Commission and others seeking the production of voluminous documents in connection with various investigations into our governance, management, operations, accounting and related controls. The Department of Labor is investigating Tyco and the administrators of certain of our benefit plans. In addition, while we believe we have adequately responded to a GSA action questioning whether Tyco lacked the present responsibility to be a government contractor due to concerns the GSA has expressed as a result of the alleged serious criminal misconduct of our former Chief Executive Officer, Chief Financial Officer and General Counsel, the GSA has reserved the right to take appropriate actions if additional information warrants it. We are also subject to ongoing audits by the Internal Revenue Service and various State tax authorities. We cannot predict when these investigations will be completed, nor can we predict what the results of these investigations may be. It is possible that we will be required to pay material fines, consent to injunctions on future conduct, lose the ability to conduct business with government instrumentalities (which in turn could negatively impact our business with non-governmental customers) or suffer other penalties, each of which could have a material adverse effect on our business. We cannot assure you that the effects and results of these or other investigations will not be material and adverse to our business, financial condition, results of operations and liquidity.
        Tyco and our subsidiaries' income tax returns are periodically examined by various regulatory tax authorities. In connection with such examinations, tax authorities, including the Internal Revenue Service, have raised issues and proposed tax deficiencies. We are reviewing the issues raised by the tax authorities and are contesting certain of the proposed tax deficiencies. Amounts related to these tax deficiencies and other tax contingencies that management has assessed as probable and estimable have been accrued through the income tax provision. We believe, but we cannot assure you, that the ultimate resolution of these tax deficiencies and contingencies will not have a material adverse effect on our financial condition, annual results of operations and liquidity.
An ongoing SEC Investigation may require us to further amend or restate our public disclosures.
        We are subject to an investigation by the SEC's Division of Enforcement. We cannot assure you the resolution of the Division of Enforcement's investigation will not necessitate further amendments or restatements to our previously-filed periodic reports or lead to some enforcement proceedings against Tyco. The SEC Division of Enforcement has not completed its review of prior management's actions and our accounting, including the matters covered by the Company's Form 8-K filed on December 30, 2002.
162
Further instances of breakdowns in our internal controls and procedures could have an adverse effect on us.
        New management has determined that, in the past, Tyco in general suffered from: poor documentation; inadequate policies and procedures to prevent the misconduct of senior corporate executives; inadequate procedures for proper corporate authorizations; inadequate approval procedures and documentation; a lack of oversight by senior management at the corporate level; a pattern of using aggressive accounting that, even when in accordance with GAAP, was intended to increase reported earnings above what they would have been if more conservative accounting had been employed; pressure on, and inducements to, segment and unit managers to increase current earnings, including by decisions as to what accounting treatment to employ; and a lack of a stated and demonstrable commitment by former senior corporate management to set high standards of ethics, integrity, accounting, and corporate governance. While we have implemented new procedures, we cannot assure you that we will not discover that there have been further instances of breakdowns in our internal controls and procedures.
Material adverse legal judgments, fines, penalties or settlements could adversely affect our financial health and prevent us from fulfilling our obligations under our outstanding indebtedness.
        We estimate that our available cash and our cash flow from operations will be adequate to fund our operations and service our debt for the forseeable future. In making this estimate, we have not assumed the need to make any material payments in connection with our pending litigation and have assumed that we will be able to renegotiate our bank credit facilities prior to its expiration in January 2004. Any material adverse legal judgments, fines, penalties or settlements arising from our pending investigations and litigations could require additional funding. If such developments require us to obtain additional funding, we cannot assure you that we will be able to obtain the additional funding that we need on commercially reasonably terms or at all, which would have a material adverse effect on our results of operations and liquidity.
        Such an outcome could have important consequences to you. For example, it could:
•
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes;

•
increase our vulnerability to general adverse economic and industry conditions;

•
limit our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate;

•
restrict our ability to introduce new technologies or exploit business opportunities;

•
make it more difficult for us to satisfy our payment obligations with respect to our outstanding indebtedness; and

•
increase the difficulty and/or cost to us of refinancing our indebtedness.
Restrictive covenants in our debt instruments may adversely affect us.
        Our bank credit agreements contain a number of financial covenants, such as interest coverage, debt to EBITDA and leverage ratios, and minimum levels of net worth and restrictive covenants that limit the amount of debt we can incur and restrict our ability to (i) pay dividends or make other payments in connection with our capital stock (ii) make acquisitions or investments (iii) enter into sale/leaseback transactions (iv) pledge assets and (v) prepay debt that matures after December 31, 2004. We have three synthetic lease facilities with similar covenants. Our outstanding indentures contain customary covenants including a negative pledge, limit on subsidiary debt and limit on sale/leasebacks.
163
        Although we believe none of these covenants is presently considered restrictive to our operations, our ability to meet these financial ratios can be affected by events beyond our control, and we cannot assure you that we will meet those tests. A breach of any of these covenants could result in a default under our credit agreements or indentures. Upon the occurrence of an event of default under any of our credit facilities or indentures, the lenders or trustees could elect to declare all amounts outstanding thereunder to be immediately due and payable and terminate all commitments to extend further credit. If the lenders or trustees accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay our credit facilities and our other indebtedness. Acceleration of any obligation under any of our material debt instruments will permit the holders of our other material debt to accelerate their obligations.
Downgrades of our ratings would adversely affect us.
        Certain downgrades by Moody's and S&P would permit the providers of our receivables facilities to cease further purchases under the facilities and would increase the interest cost of our credit facility borrowings. Downgrades may also increase our cost of capital and make it more difficult for us to obtain new financing.
Risks Relating to Our Businesses
Cyclical industry and economic conditions have affected and may continue to adversely affect our financial condition and results of operations.
        Our operating results in some of our segments are affected adversely by the general cyclical pattern of the industries in which they operate. For example, demand for the products and services of our Fire and Security and Engineered Products and Services segments is significantly affected by levels of commercial construction and consumer and business discretionary spending. Most importantly, our electronic components business is heavily dependent on the end markets it serves and therefore has been affected by the weak demand and declining capital investment in the communications, computer, industrial machine and commercial aerospace industries. We have also experienced pricing pressures, which have reduced margins in several of our businesses, and we cannot assure you that there will be significant margin improvements in the near future. This cyclical impact can be amplified because some of our business segments purchase products from other business segments. For example, our Fire and Security segment purchases certain products sold by our Engineered Products and Services segment. Therefore, a drop in demand for our fire prevention products, due to lower new residential or office construction or other factors, can cause a drop in demand for certain of our products sold by our Engineered Products and Services segment.
Our operations expose us to the risk of material environmental liabilities, litigation and violations.
        We are subject to numerous foreign, federal, state and local environmental protection and health and safety laws governing, among other things: the generation, storage, use and transportation of hazardous materials; emissions or discharges of substances into the environment; and the health and safety of our employees. There can be no assurances that we have been or will be at all times in compliance with environmental laws. If we violate these laws, we could be fined, criminally charged or otherwise sanctioned by regulators. One of our subsidiaries in our Electronics segment was advised by the U.S. Attorney for the District of Connecticut that it is the target of a federal grand jury investigation concerning alleged Clean Water Act violations at two manufacturing plants. We understand that certain former and current employees at these plants are subjects of the investigation relating to violations of applicable permits, and that those employees at one of these plants have pleaded guilty to felony violations of the Clean Water Act. In addition, the Connecticut Commissioner of Environmental Protection has filed a civil action in Hartford Superior Court alleging violations of Connecticut environmental statutes and regulations.
164
        Certain environmental laws assess liability on current or previous owners or operators of real property for the cost of removal or remediation of hazardous substances at their properties or at properties at which they have disposed of hazardous substances and costs to restore damage to natural resources. In addition to cleanup costs resulting from environmental laws, private parties could bring personal injury or other claims due to the presence of, or exposure to, hazardous substances used, stored or disposed of by us or contained in our products.
        We have been notified by the U.S. Environmental Protection Agency and certain foreign and 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 and may require that we reimburse the government or otherwise pay for the cost of cleanup of those sites and for natural resource damages. We also have a number of projects underway at several of our current and former manufacturing facilities in order to comply with environmental laws. These projects relate to a variety of activities, including radioactive materials decontamination and decommissioning, solvent and metal contamination cleanup 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. In addition, we remain responsible for certain environmental issues at manufacturing locations sold by us.
        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. We have concluded that it is probable that we will incur remedial costs in the range of approximately $142 million to $451 million. As of September 30, 2003, we concluded that the best estimate within this range is approximately $270 million, of which $32 million is included in accrued expenses and other current liabilities and $238 million is included in other long-term liabilities on the Consolidated Balance Sheet as of September 30, 2003. Environmental laws are complex, change frequently and have tended to become more stringent over time. While we have budgeted for future capital and operating expenditures to maintain compliance with such laws, we cannot assure you that our costs of complying with current or future environmental protection and health and safety laws, or our liabilities arising from past or future releases of, or exposures to, hazardous substances will not exceed our estimates or adversely affect our financial condition and results of operations or that we will not be subject to additional environmental claims for personal injury or cleanup in the future based on our past, present or future business activities. We may be required to recognize additional impairment charges.
We may be required to recognize additional impairment charges.
        Pursuant to GAAP, we are required to periodically assess our goodwill, intangibles and other long-lived assets to determine if they are impaired. Further disruptions to our business, end market conditions and protracted economic weakness, unexpected significant declines in operating results of reporting units, the divestiture of a significant component of a reporting unit, and market capitalization declines may result in additional charges to goodwill and other asset impairments. Future impairment charges could substantially affect our reported earnings in the period of such charge. In addition, such charges would reduce our consolidated net worth and our shareholders' equity, increasing our debt-to-total-capitalization ratio. Such reduction in consolidated net worth and increase in debt as a percentage of total capitalization could result in a default under our credit facilities.
We are subject to a variety of litigation in the course of our business that could cause an adverse effect on our results of operations and financial condition.
        In the ordinary course of business, we are subject to a significant amount of litigation, including litigation alleging the infringement of intellectual property rights, litigation alleging anti-competitive behavior and product liability litigation. Patent infringement and anti-trust laws permit successful
165
plaintiffs to recover treble damages. In addition, our Healthcare business is subject to regulation and potential litigation. The defense of these lawsuits may divert our management's attention, and we may incur significant expenses in defending these lawsuits. In addition, we may be required to pay awards or settlements that could cause a material adverse effect on our financial condition and results of operations.
Our healthcare business is subject to extensive regulation by the government and failure to comply with those regulations could have an adverse effect on our results of operations and financial condition.
        The Food and Drug Administration ("FDA") regulates the approval, manufacturing and sale and marketing of many of our healthcare products. Failure to comply with current Good Manufacturing Practices and other applicable regulations and quality assurance guidelines could lead to temporary manufacturing shutdowns, product shortages or delays in product manufacturing. Efficacy or safety concerns, an increase in trends of adverse events in the market place, and/or manufacturing quality issues with respect to our products could lead to product recalls, withdrawals or declining sales.
Our ADT business has recently experienced higher rates of customer attrition, which may reduce our future revenues and has caused us to change the useful life of accounts, increasing our depreciation and amortization expense.
        Attrition rates for customers in our global electronic security services business were 15.9%, 13.2% and 12.3% on a trailing 12-month basis for the fiscal years ended September 30, 2003, 2002 and 2001, respectively. If attrition rates continue to rise, ADT's recurring revenues and results of operations will be adversely affected. The Company amortizes the costs of ADT's contracts and related customer relationships purchased through the ADT dealer program using a double-declining balance method based on a ten-year life for the first eight years of the estimated life of the customer relationships, converting to the straight-line method of amortization to completely amortize the asset pool by the end of the twelfth year. Internally generated residential and commercial account pools are amortized using a straight-line method over ten to fourteen years. If the attrition rates were to rise for these account pools, then the Company may be required to accelerate the amortization of the costs related to these pools.
Risks Relating to Our Jurisdictions of Incorporation
Legislation and negative publicity regarding Bermuda companies could increase our tax burden and affect our operating results.
        Several members of the U.S. Congress have introduced legislation relating to the tax treatment of U.S. companies that have undertaken certain types of expatriation transactions, which could be deemed to cover the combination in 1997 with ADT, as a result of which ADT, a Bermuda company, changed its name to Tyco and became the parent of the Tyco group. Any such legislation, if enacted, could have the effect of substantially reducing or eliminating the tax benefits of our structure and materially increasing our future tax burden or otherwise adversely affecting our business. In addition, even if no tax legislation is ultimately enacted that specifically covers our 1997 combination, the enactment of other tax proposals that have been or may be made in the future to address expatriation transactions could have a material impact on our future tax burden. The State of California has recently adopted legislation that purports to limit the eligibility of certain Bermuda and other foreign-chartered companies to participate in certain state contracts. Although the California law provides that waivers may be issued permitting such companies to participate in state contracts under certain circumstances, it is unclear how that waiver authority will be exercised. Other federal and state legislative proposals, if enacted, could limit or even prohibit our eligibility to be awarded U.S. or state government contracts. We are unable to predict the likelihood or final form in which any proposed legislation might become law or the nature of regulations that may be promulgated under any such future legislative enactments.
166
As a result of these uncertainties, we are unable to assess the impact on us of any proposed legislation in this area. There has recently been negative publicity regarding, and criticism of, U.S. companies' use of, or relocation to, offshore jurisdictions, including Bermuda. As a Bermuda company, this negative publicity could harm our reputation and impair our ability to generate new business if companies or government agencies decline to do business with us as a result of the negative public image of Bermuda companies or the possibility of our clients receiving negative media attention from doing business with a Bermuda company.
Bermuda law differs from the laws in effect in the United States and may afford less protection to holders of our securities.
        Holders of Tyco securities may have more difficulty protecting their interests than would holders of securities of a corporation incorporated in a jurisdiction of the United States. See "Enforcement of Civil Liabilities."
        As a Bermuda company, Tyco is governed by the Companies Act 1981 of Bermuda, which differs in some material respects from laws generally applicable to United States corporations and shareholders, including, among others, differences relating to interested director and officer transactions, shareholder lawsuits and indemnification. Under Bermuda law, directors and officers may have a personal interest in contracts or arrangements with a company or its subsidiaries transactions so long as such personal interest is first disclosed to the company. Likewise, the duties of directors and officers of a Bermuda company are generally owed to the company only. Shareholders of Bermuda companies do not generally have a personal right of action against directors or officers of the company and may only exercise such rights of action on behalf of the company in limited circumstances. Under Bermuda law, a company may also agree to indemnify directors and officers for any personal liability, not involving fraud or dishonesty, incurred in relation to the company.

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. We do not anticipate any material changes in our primary market risk exposures in fiscal 2003.2004.
        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 A+ long-term debt rating.

INTEREST RATE SENSITIVITY
Interest Rate Sensitivity
        The table below provides information about our financial instruments that are sensitive to changes in interest rates, including debt obligations and interest rate swaps. For debt obligations, the table presents cash flows of principal repayment and weighted-average interest rates. For interest rate swaps, the table presents notional amounts and weighted-average interest rates. Notional amounts are used to
167

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 2003    FISCAL 2004    FISCAL 2005    FISCAL 2006    FISCAL 2007    THEREAFTER    TOTAL
                             ------------   ------------   ------------   ------------   ------------   ----------   --------

Total debt:
  Fixed rate (US$).........    3,283.5        3,639.0        1,227.0        1,725.1           1.1         5,206.0    15,081.7
    Average interest
      rate.................        3.2%           1.6%           6.4%           6.0%          9.4%            6.5%
  Fixed rate (Euro)........       14.0            9.4          494.6            6.4         584.7           668.6     1,777.7
    Average interest
      rate.................        2.1%           1.1%           4.3%           0.9%          6.0%            5.3%
  Fixed rate (Yen).........       25.8            3.4            0.4            0.4           0.4            49.4        79.8
    Average interest
      rate.................        2.3%           2.5%           1.4%           1.4%          1.4%            5.0%
  Fixed rate (British
    Pound).................        0.5            6.4           20.0            0.2           0.2           732.7       760.0
    Average interest
      rate.................        0.3%           4.8%           4.4%           5.0%          5.0%            6.4%
  Fixed rate (Other).......        5.9            3.0            0.8            0.6           0.3             3.7        14.3
    Average interest
      rate.................        2.7%           8.4%           2.6%           1.5%          2.9%            2.9%
  Variable rate (US$)......    4,351.5            1.3            1.8        2,000.2           0.2            15.6     6,370.6
    Average interest
      rate(1)..............        4.7%           5.5%           5.1%           4.9%         10.9%            1.5%
  Variable rate (Euro).....       18.4           14.5           11.2           11.2          15.4            21.1        91.8
    Average interest
      rate(1)..............        3.5%           4.0%           4.2%           4.4%          4.4%            4.5%
  Variable rate (Other)....       19.4            3.6            0.1            0.1            --             6.7        29.9
    Average interest
      rate(1)..............        5.3%           4.0%           8.3%           6.5%                          0.2%
Interest rate swap:
  Fixed to variable
    (British Pound)........         --             --             --             --            --           198.0       198.0
  Average pay rate(1)......                                                                                   3.4%
  Average receive rate.....                                                                                   6.5%


                             FAIR VALUE
                             ----------

Total debt:
  Fixed rate (US$).........   13,410.3
    Average interest
      rate.................
  Fixed rate (Euro)........    1,422.4
    Average interest
      rate.................
  Fixed rate (Yen).........       79.8
    Average interest
      rate.................
  Fixed rate (British
    Pound).................      560.1
    Average interest
      rate.................
  Fixed rate (Other).......       14.3
    Average interest
      rate.................
  Variable rate (US$)......    6,326.0
    Average interest
      rate(1)..............
  Variable rate (Euro).....       91.8
    Average interest
      rate(1)..............
  Variable rate (Other)....       29.9
    Average interest
      rate(1)..............
Interest rate swap:
  Fixed to variable
    (British Pound)........        2.5
  Average pay rate(1)......
  Average receive rate.....


- ------------------------------

 
 
Fiscal 2004
 
Fiscal 2005
 
Fiscal 2006
 
Fiscal 2007
 
Fiscal 2008
 
Thereafter
 
Total
 
Fair Value
Total debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate (US$)
 
2,620.6
 
1,591.9
 
3,922.7
 
2.0
 
106.6
 
9,211.0
 
17,454.8
 
18,145.0
 
 
Average interest rate
 
0.3
%
6.2
%
5.9
%
4.9
%
6.5
%
5.2
%
—
 
—
 
Fixed rate (Euro)
 
12.5
 
578.7
 
5.4
 
688.0
 
1.6
 
785.6
 
2,071.8
 
2,068.2
 
 
Average interest rate
 
5.5
%
4.4
%
2.4
%
6.1
%
4.2
%
5.5
%
—
 
—
 
Fixed rate (Yen)
 
3.9
 
0.4
 
0.4
 
0.4
 
0.4
 
53.6
 
59.1
 
59.1
 
 
Average interest rate
 
2.2
%
1.8
%
2.1
%
2.1
%
2.1
%
5.0
%
—
 
—
 
Fixed rate (British Pound)
 
0.3
 
0.8
 
0.1
 
0.2
 
0.2
 
762.4
 
764.0
 
764.3
 
 
Average interest rate
 
4.9
%
4.2
%
5.0
%
5.0
%
5.0
%
6.6
%
—
 
—
 
Fixed rate (Other)
 
2.6
 
1.4
 
1.5
 
0.3
 
0.1
 
—
 
5.9
 
5.9
 
 
Average interest rate
 
4.7
%
2.8
%
1.3
%
4.5
%
4.5
%
—
 
—
 
—
 
Variable rate (US$)
 
53.0
 
74.3
 
8.4
 
0.7
 
0.8
 
392.6
 
529.8
 
529.8
 
 
Average interest rate(1)
 
2.9
%
0.2
%
1.3
%
2.0
%
2.0
%
8.1
%
—
 
—
 
Variable rate (Euro)
 
19.1
 
10.8
 
10.4
 
12.3
 
12.9
 
11.1
 
76.6
 
76.6
 
 
Average interest rate(1)
 
3.3
%
3.3
%
3.4
%
3.4
%
3.5
%
3.3
%
—
 
—
 
Variable rate (Yen)
 
0.5
 
—
 
—
 
—
 
—
 
—
 
0.5
 
0.5
 
 
Average interest rate(1)
 
1.4
%
—
 
—
 
—
 
—
 
—
 
—
 
—
 
Variable rate (British Pound)
 
0.7
 
0.1
 
0.1
 
—
 
—
 
—
 
0.9
 
0.9
 
 
Average interest rate(1)
 
4.4
%
2.5
%
2.5
%
—
 
—
 
—
 
—
 
—
 
Variable rate (Other)
 
5.2
 
0.2
 
0.2
 
0.1
 
—
 
—
 
5.7
 
5.7
 
 
Average interest rate(1)
 
1.6
%
5.3
%
5.3
%
5.3
%
—
 
—
 
—
 
—
Interest rate swap:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed to variable (British Pound)
 
—
 
—
 
—
 
—
 
—
 
328.4
 
328.4
 
20.9
 
Average pay rate(1)
 
—
 
—
 
—
 
—
 
—
 
2.6
%
—
 
—
 
Average receive rate
 
—
 
—
 
—
 
—
 
—
 
6.5
%
—
 
—
(1)
Weighted-average variable interest rates are based on applicable rates at September 30, 20022003 per the terms of the contracts of the related financial instruments.

EXCHANGE RATE SENSITIVITY
Exchange Rate Sensitivity
        The table below provides information about our financial instruments that are sensitive to foreign currency exchange rates. These instruments include debt obligations and forward and option foreign currency exchange contracts. For debt obligations, the table presents cash flows of principal repayment and weighted-average interest rates. For forward and option foreign currency exchange contracts, the table presents notional amounts and weighted-average contractual exchange rates. Notional amounts
168

are used to

                                      157
 calculate the contractual payments to be exchanged under the contract. The amounts included in the table below are in U.S. dollars, unless noted ($ in millions).

                              FISCAL 2003    FISCAL 2004    FISCAL 2005    FISCAL 2006    FISCAL 2007    THEREAFTER    TOTAL
                              ------------   ------------   ------------   ------------   ------------   ----------   --------

Long-term debt:
  Fixed rate (Euro).........        14.0          9.4          494.6            6.4          584.7          668.6     1,777.7
    Average interest rate...         2.1%         1.1%           4.3%           0.9%           6.0%           5.3%
  Fixed rate (Yen)..........        25.8          3.4            0.4            0.4            0.4           49.4        79.8
    Average interest rate...         2.3%         2.5%           1.4%           1.4%           1.4%           5.0%
  Fixed rate (British
    Pound)..................         0.5          6.4           20.0            0.2            0.2          732.7       760.0
    Average interest rate...         0.3%         4.8%           4.4%           5.0%           5.0%           6.4%
  Fixed rate (Other)........         5.9          3.0            0.8            0.6            0.3            3.7        14.3
    Average interest rate...         2.7%         8.4%           2.6%           1.5%           2.9%           2.9%
  Variable rate (Euro)......        18.4         14.5           11.2           11.2           15.4           21.1        91.8
    Average interest
      rate(1)...............         3.5%         4.0%           4.2%           4.4%           4.4%           4.5%
  Variable rate (Other).....        19.4          3.6            0.1            0.1             --            6.7        29.9
    Average interest
      rate(1)...............         5.3%         4.0%           8.3%           6.5%                          0.2%
Forward contracts:
  Pay US$/Receive Australian
    Dollar..................        14.5           --             --             --             --             --        14.5
    Average contractual
      exchange rate.........        0.54
  Receive US$/Pay British
    Pound...................        72.5           --             --             --             --             --        72.5
    Average contractual
      exchange rate.........        1.48
  Receive US$/Pay Euro......       126.8           --             --             --             --             --       126.8
    Average contractual
      exchange rate.........        0.94
  Pay US$/Receive Yen.......       109.9           --             --             --             --             --       109.9
    Average contractual
      exchange rate
      (Yen/US$).............       125.67
  Pay US$/Receive Singapore
    Dollar..................       127.7           --             --             --             --             --       127.7
    Average contractual
      exchange rate.........        0.56
  Receive US$/Pay Columbian
    Peso....................         2.0           --             --             --             --             --         2.0
    Average contractual
      exchange rate.........     2,467.0
  Receive Euro/Pay British
    Pound (in Euro).........        34.4           --             --             --             --             --        34.4
    Average contractual
      exchange rate.........        1.59
  Receive Euro/Pay Swedish
    Krona (in Euro).........        19.6           --             --             --             --             --        19.6
    Average contractual
      exchange rate.........        9.20
  Receive Euro/Pay Polish
    Zloty (in Euro).........        11.5           --             --             --             --             --        11.5
    Average contractual
      exchange rate.........        4.16
  Receive Canadian
    Dollar/Pay Euro (in
    CAD)....................        13.0           --             --             --             --             --        13.0
    Average contractual
      exchange rate.........        1.54


                              FAIR VALUE
                              ----------

Long-term debt:
  Fixed rate (Euro).........    1,422.4
    Average interest rate...
  Fixed rate (Yen)..........       79.8
    Average interest rate...
  Fixed rate (British
    Pound)..................      560.1
    Average interest rate...
  Fixed rate (Other)........       14.3
    Average interest rate...
  Variable rate (Euro)......       91.8
    Average interest
      rate(1)...............
  Variable rate (Other).....       29.9
    Average interest
      rate(1)...............
Forward contracts:
  Pay US$/Receive Australian
    Dollar..................        0.1
    Average contractual
      exchange rate.........
  Receive US$/Pay British
    Pound...................      (14.7)
    Average contractual
      exchange rate.........
  Receive US$/Pay Euro......       35.8
    Average contractual
      exchange rate.........
  Pay US$/Receive Yen.......       12.5
    Average contractual
      exchange rate
      (Yen/US$).............
  Pay US$/Receive Singapore
    Dollar..................        0.6
    Average contractual
      exchange rate.........
  Receive US$/Pay Columbian
    Peso....................         --
    Average contractual
      exchange rate.........
  Receive Euro/Pay British
    Pound (in Euro).........         --
    Average contractual
      exchange rate.........
  Receive Euro/Pay Swedish
    Krona (in Euro).........         --
    Average contractual
      exchange rate.........
  Receive Euro/Pay Polish
    Zloty (in Euro).........         --
    Average contractual
      exchange rate.........
  Receive Canadian
    Dollar/Pay Euro (in
    CAD)....................       (0.5)
    Average contractual
      exchange rate.........


- ------------------------------

 
 
Fiscal 2004
 
Fiscal 2005
 
Fiscal 2006
 
Fiscal 2007
 
Fiscal 2008
 
Thereafter
 
Total
 
Fair Value
 
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate (Euro)
 
12.5
 
578.7
 
5.4
 
688.0
 
1.6
 
785.6
 
2,071.8
 
2,068.2
 
 
 
Average interest rate
 
5.5
%
4.4
%
2.4
%
6.1
%
4.2
%
5.5
%
—
 
—
 
 
Fixed rate (Yen)
 
3.9
 
0.4
 
0.4
 
0.4
 
0.4
 
53.6
 
59.1
 
59.1
 
 
 
Average interest rate
 
2.2
%
1.8
%
2.1
%
2.1
%
2.1
%
5.0
%
—
 
—
 
 
Fixed rate (British Pound)
 
0.3
 
0.8
 
0.1
 
0.2
 
0.2
 
762.4
 
764.0
 
764.3
 
 
 
Average interest rate
 
4.9
%
4.2
%
5.0
%
5.0
%
5.0
%
6.6
%
—
 
—
 
 
Fixed rate (Other)
 
2.6
 
1.4
 
1.5
 
0.3
 
0.1
 
—
 
5.9
 
5.9
 
 
 
Average interest rate
 
4.7
%
2.8
%
1.3
%
4.5
%
4.5
%
—
 
—
 
—
 
 
Variable rate (Euro)
 
19.1
 
10.8
 
10.4
 
12.3
 
12.9
 
11.1
 
76.6
 
76.6
 
 
 
Average interest rate(1)
 
3.3
%
3.3
%
3.4
%
3.4
%
3.5
%
3.3
%
—
 
—
 
 
Variable rate (Yen)
 
0.5
 
—
 
—
 
—
 
—
 
—
 
0.5
 
0.5
 
 
 
Average interest rate(1)
 
1.4
%
—
 
—
 
—
 
—
 
—
 
—
 
—
 
 
Variable rate (British Pound)
 
0.7
 
0.1
 
0.1
 
—
 
—
 
—
 
0.9
 
0.9
 
 
 
Average interest rate(1)
 
4.4
%
2.5
%
2.5
%
—
 
—
 
—
 
—
 
—
 
 
Variable rate (Other)
 
5.2
 
0.2
 
0.2
 
0.1
 
—
 
—
 
5.7
 
5.7
 
 
 
Average interest rate(1)
 
1.6
%
5.3
%
5.3
%
5.3
%
—
 
—
 
—
 
—
 
Forward contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay US$/Receive Australian Dollar
 
52.9
 
—
 
—
 
—
 
—
 
—
 
52.9
 
5.1
 
 
 
Average contractual exchange rate
 
0.62
 
—
 
—
 
—
 
—
 
—
 
—
 
—
 
 
Pay US$/Receive British Pound
 
22.4
 
—
 
—
 
—
 
—
 
—
 
22.4
 
(2.0
)
 
 
Average contractual exchange rate
 
1.58
 
—
 
—
 
—
 
—
 
—
 
—
 
—
 
 
Pay US$/Receive Euro
 
317.0
 
—
 
—
 
—
 
—
 
—
 
317.0
 
11.8
 
 
 
Average contractual exchange rate
 
1.11
 
—
 
—
 
—
 
—
 
—
 
—
 
—
 
 
Pay US$/Receive Yen
 
339.3
 
—
 
—
 
—
 
—
 
—
 
339.3
 
24.3
 
 
 
Average contractual exchange rate (Yen/US$)
 
119.6
 
—
 
—
 
—
 
—
 
—
 
—
 
—
 
 
Pay US$/Receive Canadian Dollar
 
23.7
 
—
 
—
 
—
 
—
 
—
 
23.7
 
0.7
 
 
 
Average contractual exchange rate
 
1.40
 
—
 
—
 
—
 
—
 
—
 
—
 
—
 
 
Pay US$/Receive Singapore Dollar
 
201.7
 
—
 
—
 
—
 
—
 
—
 
201.7
 
2.7
 
 
 
Average contractual exchange rate
 
1.75
 
—
 
—
 
—
 
—
 
—
 
—
 
—
 
 
Pay US$/Receive Hong Kong Dollar
 
74.5
 
—
 
—
 
—
 
—
 
—
 
74.5
 
0.6
 
 
 
Average contractual exchange rate
 
7.80
 
—
 
—
 
—
 
—
 
—
 
—
 
—
 
 
Receive US$/Pay Mexican Peso
 
28.7
 
—
 
—
 
—
 
—
 
—
 
28.7
 
1.0
 
 
 
Average contractual exchange rate
 
10.6
 
—
 
—
 
—
 
—
 
—
 
—
 
—
 
 
Receive US$/Pay Czech. Republic Koruna
 
21.9
 
—
 
—
 
—
 
—
 
—
 
21.9
 
—
 
 
 
Average contractual exchange rate
 
27.6
 
—
 
—
 
—
 
—
 
—
 
—
 
—
 
(1)
Weighted-average variable interest rates are based on applicable rates at September 30, 20022003 per the terms of the contracts of the related financial instruments.

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
169

Accounting and notional quantity amounts are

                                      158

presented for forward commodity contracts. Contract amounts are used to
calculateTechnical Pronouncements
        Effective October 1, 2002, the contractual payments quantity of the commodity to be exchanged
under the contracts ($ in millions).

                                FISCAL 2003    FISCAL 2004    FISCAL 2005    FISCAL 2006    FISCAL 2007    THEREAFTER    TOTAL
                                ------------   ------------   ------------   ------------   ------------   ----------   --------

Forward contracts:
Copper
  Contract amount (US$).......       4.9               --             --             --             --            --       4.9
  Contract quantity (in 000
    metric tons)..............       2.7               --             --             --             --            --       2.7
Silver
  Contract amount (US$).......       0.5               --             --             --             --            --       0.5
  Contract quantity (in 000
    ounces)...................     120.0               --             --             --             --            --     120.0
Zinc
  Contract amount (US$).......       1.4               --             --             --             --            --       1.4
  Contract quantity (in 000
    metric tons)..............       1.4               --             --             --             --            --       1.4


                                FAIR VALUE
                                ----------

Forward contracts:
Copper
  Contract amount (US$).......     (0.9)
  Contract quantity (in 000
    metric tons)..............
Silver
  Contract amount (US$).......       --
  Contract quantity (in 000
    ounces)...................
Zinc
  Contract amount (US$).......     (0.3)
  Contract quantity (in 000
    metric tons)..............


                    ACCOUNTING AND TECHNICAL PRONOUNCEMENTS

    In June 2001, the FASB issuedCompany adopted SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 which addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement is effective for fiscal years
beginning after June 15, 2002. We do not expect the adoption of this new
standard to have a material impact on our results of operations or financial
position.

    In July 2001, the FASB issued SFAS No. 144, "Impairment or Disposal of
Long-Lived Assets," which is effective for fiscal years beginning after
December 15, 2001. The provisions of this statement provide a single accounting
model for impairment of long-lived assets. We do not expect the adoption of this
new standard to have a material impact on our results of operations or financial
position.

    In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," which is effective for fiscal years beginning after May 15, 2002.
This statement rescinds the indicated statements and amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. SFAS
No. 145 encourages early adoption of the provision of this standard that
rescinds SFAS No.4, "Reporting Gains and Losses from Extinguishments of Debt."
Accordingly, the Company elected to early adopt this provision during the fourth
quarter of fiscal 2002, which resulted in increased pre-tax income of $30.6
million in fiscal 2002. We reclassified prior year extraordinary losses related
to the early retirement of debt to other (expense) income in our Consolidated
Statements of Operations, which decreased pre-tax income by $26.3 million and
$0.3 million in fiscal 2001 and 2000, respectively. However net income remains
unchanged in both periods. See Note 8 to the Consolidated Financial Statements
for further information. The adoption of this new standard did not have a material impact on our results of operations or financial position.

    In July
        Effective October 1, 2002, the FASB issuedCompany adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The provisions of this statement provide a single accounting model for impairment of long-lived assets. The initial adoption of this new standard did not have a material impact on our results of operations or financial position.
        Effective January 1, 2003, the Company adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which is effective for exit or disposal activities that are initiated after December 31, 2002. This statement nullifies the FASB's Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This statement requires that liabilities associated with exit or disposal activities initiated after adoption
be recognized and measured at fair value when incurred as opposed to at the date an entity commits to the exit or disposal plans. We expect theThe initial adoption of this new standard todid not have ana material impact on our results of operations or financial position.
        Effective January 1, 2003, the timingCompany adopted SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure," which amends SFAS No. 123, "Accounting for Stock-Based Compensation" to provide transition methods for a voluntary change to measuring compensation cost in connection with employee share option plans using a fair value based method. The Statement also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures about the method of accounting for compensation cost associated with employee share option plans, as well as the effect of the method used on reported results. The Company adopted the disclosure requirements of SFAS No. 148 and has not changed its method for measuring the compensation cost of share options.
        During fiscal 2003, the Company adopted FASB Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees." FIN 45 requires increased disclosure of guarantees, including those for which likelihood of payment is remote, and product warranty information (see Note 20 to the Consolidated Financial Statements). FIN 45 also requires that guarantors recognize a liability for certain types of guarantees equal to the fair value of the guarantee upon its issuance. The adoption of FIN 45 did not have a material impact on our results of operations or financial position.
        In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities." This interpretation clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," relating to consolidation of certain entities. FIN 46 requires identification of the Company's participation in variable interest entities (VIE's), which are defined as entities with a level of invested equity that is not sufficient to fund future activities to permit them to operate on a stand alone basis, or whose equity holders lack certain characteristics of a controlling financial interest. For entities identified as VIE's, FIN 46 sets forth a model to evaluate potential consolidation based on an assessment of which party to VIE's, if any, future restructuring
charges.

                                      159

                          FORWARD-LOOKING INFORMATIONbears a majority of the risk to its expected losses, or stands to gain from a majority of its expected returns. FIN 46 also sets forth certain disclosures regarding interests in VIE's that are deemed significant, even if consolidation is not required. The Company adopted FIN 46's accounting provisions as of July 1, 2003. See Notes 12 and 30 to the Consolidated Financial Statements for further discussion of the impact of FIN 46.
        In November 2002, the EITF reached a consensus on EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF No. 00-21 provides guidance on how to determine
170

when an arrangement that involves multiple revenue-generating activities or deliverables should be divided into separate units of accounting for revenue recognition purposes. It further states, that if this division is required, the arrangement consideration should be allocated among the separate units of accounting. The guidance in the consensus is effective for revenue arrangements entered into in fiscal periods that began after June 15, 2003. The adoption of this new standard did not have a material impact on our results of operations or financial position.
        In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149, which is to be applied prospectively, is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of this new standard did not have a material impact on our results of operations or financial position.
        In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) and is effective for instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this new standard did not have a material impact on our results of operations or financial position.

Forward-Looking Information
        Certain statements in this report are "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. All forward-looking statements involve risks and uncertainties. All statements contained herein that are not clearly historical in nature are forward-looking, and the words "anticipate," "believe," "expect," "estimate," "project" and similar expressions are generally intended to identify forward-looking statements. Any forward-looking 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, webcasts, phone calls and conference calls, regarding expectations with respect to sales, earnings, cash flows, operating efficiencies, product expansion, backlog, the consummation and benefits of acquisitions or other matters, as well as financings and share repurchases, are subject to known and unknown risks, uncertainties and contingencies, many of which are beyond our control, 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 tax requirements (including tax rate changes, new tax laws and revised tax law interpretations);

    - 

•
results and consequences of Tyco's internal investigation and governmental investigations concerning the Company's governance, management internal controls and operations;

    - 

•
the outcome of litigation and governmental proceedings as a result of actions taken by our former management;

    - 
171
•
the ratings on our debt and our ability to repay or refinance our outstanding indebtedness as it matures;

    - 

•
interest rate fluctuations and other changes in borrowing costs;

    - 

•
other capital market conditions, including foreign currency rate fluctuations;

    - 

•
economic and political conditions in international markets, including governmental changes and restrictions on the ability to transfer capital across borders;

    - 

•
the ability to achieve anticipated synergies and other cost savings in connection with acquisitions;

    - the timing, impactCompany's strategic restructuring and other uncertainties of future acquisitions;

    - Six Sigma initiatives;

•
potential further impairment of our goodwill;

    - 

•
the impact of fluctuations in the share price of Tyco common shares;

    - 

•
changes in U.S. and non-U.S. government regulations in general, and in particular changes in rules and regulations regarding the safety, efficacy, sales, promotions, insurance reimbursement and pricing of Tyco's disposable medical products and other specialty products, and regarding Tyco's ability to operate and set prices with respect to its undersea cable communications systems;

    - 

•
impact of recent management changes;

    - 

•
the possible effects on Tyco of pending legislation in the U.S., if enacted, that may limit or eliminate potential U.S. tax benefits resulting from Tyco's incorporation in Bermuda or that may deny U.S. government contracts to Tyco based upon its incorporation in Bermuda; and

    - 

•
the potential continuing disruption to our business and related distraction costs associated with negative publicity and recent announcements.

                                      160
172

TYCO INTERNATIONAL LTD.

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
(in millions)
Description
 
Balance at
Beginning of
Year
 
Additions
Charged to
Income
 
Acquisitions,
Disposals, and
Other
 
Deductions
 
Balance at
End of Year

Allowances for Doubtful Accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
 

Fiscal Year Ended September 30, 2001

 

$

442.1

 

$

199.3

 

$

93.4

 

$

(181.7

)

$

553.1
 

Fiscal Year Ended September 30, 2002

 

 

553.1

 

 

329.9

 

 

103.9

 

 

(348.9

)

 

638.0
 

Fiscal Year Ended September 30, 2003

 

 

638.0

 

 

379.7

 

 

27.7

 

 

(319.2

)

 

726.2


QuickLinks
TABLE OF CONTENTS
PART I
PART II
PART III
PART IV
SIGNATURES
TYCO INTERNATIONAL LTD. Index to Consolidated Financial Information
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
TYCO INTERNATIONAL LTD. CONSOLIDATED STATEMENTS OF OPERATIONS (in millions, except per share data)
TYCO INTERNATIONAL LTD. CONSOLIDATED BALANCE SHEETS (in millions, except share data)
TYCO INTERNATIONAL LTD. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in millions)
TYCO INTERNATIONAL LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions)
TYCO INTERNATIONAL LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF OPERATIONS For the Year Ended September 30, 2003 ($ in millions)
CONSOLIDATING STATEMENT OF OPERATIONS For the Year Ended September 30, 2002 ($ in millions)
CONSOLIDATING STATEMENT OF OPERATIONS For the Year Ended September 30, 2001 ($ in millions)
CONSOLIDATING BALANCE SHEET September 30, 2003 ($ in millions)
CONSOLIDATING STATEMENT OF CASH FLOWS For the Year Ended September 30, 2001 ($ in millions)
TYCO INTERNATIONAL LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations
Liquidity and Capital Resources
Off-Balance Sheet Arrangements
Risk Factors
Quantitative and Qualitative Disclosures About Market Risk
Accounting and Technical Pronouncements
Forward-Looking Information
TYCO INTERNATIONAL LTD. SCHEDULE II--VALUATIONII—VALUATION AND QUALIFYING ACCOUNTS (IN MILLIONS)


                                         BALANCE AT   ADDITIONS    ACQUISITIONS,
                                         BEGINNING    CHARGED TO    DISPOSALS,                  BALANCE AT
DESCRIPTION                               OF YEAR       INCOME       AND OTHER     DEDUCTIONS   END OF YEAR
- -----------                              ----------   ----------   -------------   ----------   -----------

Allowances for Doubtful Accounts:
  Fiscal Year Ended September 30,
    2000...............................    $329.8       $226.1         $ 29.5        $(143.3)     $442.1
  Fiscal Year Ended September 30,
    2001...............................     442.1        196.6           93.4         (181.7)      550.4
  Fiscal Year Ended September 30,
    2002...............................     550.4        323.7          103.9         (348.9)      629.1


                                      161