TYCO INTERNATIONAL LTD /BER/ - 10-Q Quarterly Report

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

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FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2002.

OR

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

001-13836
(COMMISSION FILE NUMBER)

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

BERMUDA 04-2297459
(Jurisdiction of Incorporation) (I.R.S. Employer Identification Number)

THE ZURICH CENTRE, SECOND FLOOR, 90 PITTS BAY ROAD, PEMBROKE, HM 08, BERMUDA
(Address of Registrant's principal executive office)

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

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Indicate by check mark whether the Registrant (1) has filed all reports to
be filed by Section 13 or 15 (d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes /X/ No / /

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes /X/ No / /.

The number of common shares outstanding as of February 11, 2003 was
1,996,099,993.

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TYCO INTERNATIONAL LTD.
INDEX TO FORM 10-Q

PART I--FINANCIAL INFORMATION

ITEM 1--FINANCIAL STATEMENTS

TYCO INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)

See Notes to Consolidated Financial Statements (Unaudited).

1

TYCO INTERNATIONAL LTD.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS, EXCEPT SHARE DATA)

See Notes to Consolidated Financial Statements (Unaudited).

2

TYCO INTERNATIONAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)

See Notes to Consolidated Financial Statements (Unaudited).

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

BASIS OF PRESENTATION--The unaudited Consolidated Financial Statements
include the consolidated accounts of Tyco International Ltd., a company
incorporated in Bermuda, and its subsidiaries (hereinafter "we," the "Company"
or "Tyco").

The financial statements have been prepared in accordance with the
instructions to Form 10-Q and do not include all the information and note
disclosures required by generally accepted accounting principles in the United
States. These statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 2002.

The Consolidated Financial Statements have not been examined by independent
accountants in accordance with generally accepted auditing standards, but in the
opinion of management, such financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary to summarize fairly
the Company's financial position and results of operations. Certain prior period
amounts have been reclassified to conform with the current period presentation.
All references in this Form 10-Q to "$" are to U.S. dollars.

SHORT-TERM INVESTMENTS--Short-term investments consist of fixed income
securities with maturities of greater than three months and less than one year,
and are available for current operations.

CHARGES RELATING TO PRIOR YEARS RECORDED IN THE QUARTER ENDED DECEMBER 31,
2001--As discussed in the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 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 fiscal 2002 or any year prior. Accordingly, prior year
financial statements have not been restated. Instead, these adjustments that
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 the Company's
Form 10-K for the year ended September 30, 2002 is $185.9 million. This
amount is included on the selling, general and administrative expenses
line in the December 31, 2001 Consolidated Statement of Operations.

- 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 $39.6 million associated with the sale of common
shares of TyCom is included on a separate line in the December 31, 2001
Consolidated Statement of Operations.

- As described in Note 1 to the Company's Form 10-K for the year ended
September 30, 2002, 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, $25.4 million of which is
included in selling, general and administrative expenses and
$10.7 million of which is included in cost of sales in the December 31,
2001 Consolidated Statement of Operations.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

1. BASIS OF PRESENTATION (CONTINUED)
ACCOUNTING PRONOUNCEMENTS

During the quarter ended December 31, 2002, the Company adopted the
disclosure provisions of FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees" ("FIN 45"). FIN 45 requires increased
disclosure of guarantees, including those for which likelihood of payment is
remote, and product warranty information (see Note 14). 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, effective for the quarter
ending March 31, 2003. We are currently assessing the impact of the accounting
requirements of this new interpretation.

Effective October 1, 2002, the Company adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143 addresses accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. The adoption of this new standard did not
have a material impact on our results of operations or financial position.

Effective October 1, 2002, the Company adopted SFAS No. 144, "Accounting for
the 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. The
adoption of this new standard did not have a material impact on our results of
operations or financial position.

2. ACQUISITIONS AND DIVESTITURES

During the first quarter of fiscal 2003, the Company purchased businesses
for an aggregate cost of $239.5 million in cash. Of the $239.5 million,
$236.6 million was to acquire approximately 215,000 customer contracts for
electronic security services through the Company's dealer program. The remaining
$2.9 million relates to the acquisition of a business within the Engineered
Products and Services segment. During the quarter, the Company paid
$68.8 million of cash for utilization of purchase accounting liabilities related
to prior years' acquisitions. In addition, the Company paid cash of
approximately $43.0 million relating to holdback and earn-out liabilities
primarily related to certain prior period acquisitions. Holdback liabilities
represent a 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
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.

The Company purchased all of the voting equity interests in each of the
businesses acquired. 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
established is recorded as goodwill. As a result of acquisitions completed
during fiscal 2003, and adjustments to the fair values of assets and liabilities
and purchase accounting liabilities recorded for acquisitions completed prior to
fiscal 2003, Tyco recorded a decrease of $128.4 million in goodwill and an
additional $236.5 million in other intangible assets during the quarter ended
December 31, 2002. The decrease in goodwill includes $131.3 million associated
with prior years'

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

2. ACQUISITIONS AND DIVESTITURES (CONTINUED)
acquisitions, primarily Sensormatic Electronics Corporation ("Sensormatic"),
acquired in November 2001, as well as fiscal 2001 acquisitions of Lucent
Technologies' Power Systems ("LPS"), acquired in December 2000, and
Mallinckrodt, Inc. ("Mallinckrodt"), acquired in October 2000. Adjustments for
Sensormatic primarily relate to 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 forward of
purchase accounting accruals below. The increase in other intangible assets
primarily relates to $236.6 million of customer contracts acquired through the
Company's dealer program.

When Tyco makes acquisitions it seeks to complement existing products and
services, enhance the Company's product lines and/or expand its customer base.
Tyco determines what it is willing to pay for an acquisition partially based on
its expectation that it can cost effectively integrate the products and services
of an acquired company 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
utilizes 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 targets
companies that are perceived to be experiencing depressed financial performance.
All these factors contribute to acquisition prices in excess of the fair value
of net assets acquired and the resultant goodwill. However, the Company expects
to complete significantly fewer acquisitions prospectively due to its focus on
enhancing internal growth within its existing businesses.

The following table shows the fair values of assets and liabilities recorded
for the purchase acquisition and the acquisition of customer contracts completed
in the first quarter of fiscal 2003, adjusted to reflect changes in fair values
of assets and liabilities and purchase accounting liabilities and
holdback/earn-out liabilities recorded for purchase acquisitions completed prior
to fiscal 2003 ($ in millions):

Accounts receivables........................................ $ (0.7)
Inventories................................................. 8.7
Prepaid expenses and other current assets................... 26.5
Property, plant and equipment, net.......................... 13.7
Goodwill.................................................... (128.4)
Intangible assets........................................... 236.5
Other assets................................................ 10.3
-------
166.6
-------
Accounts payable............................................ (2.7)
Accrued expenses and other current liabilities.............. (71.4)
Holdback/earn-out liabilities............................... 3.3
Other long-term liabilities................................. (2.2)
Fair value of debt assumed.................................. 0.1
-------
(72.9)
-------
Cash consideration paid..................................... $ 239.5
=======

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

2. ACQUISITIONS AND DIVESTITURES (CONTINUED)
Purchase accounting liabilities recorded during the first quarter of fiscal
2003 in connection with the fiscal 2003 purchase acquisition were immaterial.

The following table summarizes the purchase accounting liabilities recorded
in connection with fiscal 2002 purchase acquisitions ($ in millions):

During the first quarter of fiscal 2003, we recorded additions to purchase
accounting liabilities as we continued to formulate the integration plans of
fiscal 2002 acquisitions, such as Paragon (integrated within the Healthcare
segment) and Eberle (integrated within the Electronics segment). Finalization of
components of integration plans associated with acquisitions resulted in
additional purchase accounting liabilities of $17.2 million and a corresponding
increase to goodwill and deferred tax assets. These additions reflect the
reduction of an additional 438 employees, the closure of an additional 14
facilities, additional distributor and supplier cancellation fees and other
acquisition related costs consisting primarily of professional fees and other
costs.

During the first quarter of fiscal 2003, the Company reduced its estimate of
purchase accounting liabilities relating to fiscal 2002 acquisitions by
$3.7 million primarily because actual costs were less than originally estimated
since the Company severed 395 fewer employees and closed 8 fewer facilities than
originally anticipated due to revisions to integration plans. Goodwill and
related deferred tax assets were reduced by an equivalent amount.

Tyco has not yet finalized all of its business integration plans for fiscal
2002 acquisitions. Accordingly, purchase accounting liabilities are subject to
revision in future quarters. There are approximately 10 acquisitions, with
estimated purchase accounting liabilities additions aggregating approximately
$15 million, for which business integration plans have not been finalized.
Individually, none of these acquisitions are expected to have increases in
purchase accounting liabilities in excess of $5 million as of December 31, 2002.
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 independent valuations in order to finalize
estimates for the fair values of assets acquired and liabilities assumed. We do
not expect any resulting adjustments to be significant.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

2. ACQUISITIONS AND DIVESTITURES (CONTINUED)
The following table summarizes the purchase accounting liabilities recorded
in connection with the fiscal 2001 purchase acquisitions ($ in millions):

During the first quarter of fiscal 2003, the Company reduced its estimate of
purchase accounting liabilities relating to fiscal 2001 acquisitions by
$51.7 million primarily because actual costs were less than originally estimated
since the Company severed 376 fewer employees and closed 17 fewer facilities
than originally anticipated due to revisions to integration plans. Goodwill and
related deferred tax assets were reduced by an equivalent amount.

At December 31, 2002, holdback/earn-out liabilities of $234.1 million
remained on the Consolidated Balance Sheet, of which $111.3 million are included
in accrued expenses and other current liabilities and $122.8 million are
included in other long-term liabilities. In addition, a total of $427.7 million
of purchase accounting liabilities related to all acquisitions remained on the
Consolidated Balance Sheet, of which $231.3 million are included in accrued
expenses and other current liabilities and $196.4 million are included in other
long-term liabilities. At December 31, 2002, 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 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 December 31, 2002, as the outcome of this
contingency cannot be reasonably determined. At December 31, 2002, there
remained a total of $31.8 million in reserves related to fiscal 2000 and prior
acquisitions. These liabilities primarily relate to facility-related costs
(principally for rents under non-cancelable leases for vacated premises),
employee severance (principally for payments to employees already terminated
with severance paid out over time), and other costs. Tyco expects that the
termination of employees and consolidation of facilities related to all
acquisitions will be substantially complete within two years of the related
dates of acquisition, except for certain long-term contractual obligations.

In accordance with Statement of Financial Accounting Standards No. 141,
"Business Combinations," the following unaudited pro forma data summarize the
results of operations for the period indicated as if fiscal 2002 acquisitions
and the amalgamation with TyCom had been completed as of the beginning of the
period presented. The pro forma data give effect to actual operating results
prior to the acquisitions and adjustments to 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

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

2. ACQUISITIONS AND DIVESTITURES (CONTINUED)
purport to be indicative of the results that would have actually been achieved
if the acquisitions had occurred as of the beginning of the periods presented or
that may be achieved in the future.

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

(1) Income includes restructuring and other unusual charges of $25.7 million and
charges related to prior years of $261.6 million (see Note 1).

The pro forma effects of the fiscal 2003 acquisition are immaterial.

3. CONSOLIDATED SEGMENT DATA

During the quarter ended December 31, 2002, 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. The Company has conformed its segment reporting
accordingly and has reclassified comparative prior period information to reflect
this change.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

3. CONSOLIDATED SEGMENT DATA (CONTINUED)
Selected information for the Company's five segments is presented in the
following table.

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

(1) Excludes restructuring credits of $1.7 million related to a revision of
estimates of prior years' restructuring charges.

(2) Excludes restructuring credits of $2.0 million, of which $0.2 million is
included in cost of sales, related to a revision of estimates of prior
years' restructuring charges.

(3) Excludes restructuring and other unusual charges of $7.8 million primarily
related to severance associated with the closure of existing facilities that
had become redundant due to acquisitions.

(4) Excludes restructuring and other unusual charges of $17.9 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
exiting a product line.

(5) Excludes charges related to prior years of $222.0 million (see Note 1).

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TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

4. RESTRUCTURING AND OTHER UNUSUAL (CREDITS) CHARGES

Restructuring and other unusual (credits) charges are as follows ($ in
millions):

2003 CREDITS

During the first quarter of fiscal 2003, the Electronics segment recorded
restructuring credits of $1.7 million and the Healthcare segment recorded
restructuring credits of $2.0 million, of which $0.2 million is included in cost
of sales, related to a revision of estimates of prior years' restructuring
charges.

2002 CHARGES AND CREDITS

The disclosures in the Company's fiscal 2002 Annual Report on Form 10-K
discuss net restructuring and other unusual charges of $1,954.3 million recorded
during fiscal 2002 and the related activity with respect to these charges
through September 30, 2002. The following tables provide a summary by segment of
the remaining balances as of September 30, 2002 related to these charges and the
activity with respect to these charges during the quarter ended December 31,
2002 ($ in millions):

During fiscal 2002, the Electronics segment incurred charges of
$608.2 million for inventory write-downs, of which $465.1 million had not been
utilized as of September 30, 2002. The $465.1 million is

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TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

4. RESTRUCTURING AND OTHER UNUSUAL (CREDITS) CHARGES (CONTINUED)
comprised of a lower of cost or market write-down of $131.4 million and a
write-down related to inventory to be scrapped of $333.7 million. Of the
$333.7 million, $183.0 million of inventory was scrapped during the quarter
ended December 31, 2002. We expect the remaining written-off inventory to be
scrapped over the next three to six months.

In addition to the above segment liabilities, a total of $17.2 million
remained on the balance sheet at December 31, 2002 related to 2002 corporate
restructuring and other unusual charges. These liabilities primarily relate to
severance, a legal settlement and other items associated with the downsizing of
the corporate headquarters.

During the first quarter of fiscal 2002, Tyco recorded restructuring and
other unusual charges of $25.7 million, of which $5.8 million has been included
in cost of revenue, related primarily to severance associated with the closure
of administrative buildings and a sales office within the Fire and Security
Services and Engineered Products and Services segments that became redundant due
to acquisitions.

At December 31, 2002, there remained a total of $730.1 million in reserves
related to fiscal 2002 restructuring and other unusual charges on the
Consolidated Balance Sheet, of which $601.0 million is included in accrued
expenses and other current liabilities and $129.1 million is included in other
long-term liabilities. The company currently anticipates that the restructuring
activities to which the above charges relate will be substantially completed
within fiscal 2003, except for certain long-term contractual obligations.

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TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

4. RESTRUCTURING AND OTHER UNUSUAL (CREDITS) CHARGES (CONTINUED)
2001 CHARGES AND CREDITS

The disclosures in the Company's fiscal 2002 Annual Report on Form 10-K
discuss net restructuring and other unusual charges of $418.5 million recorded
during fiscal 2001 and the related activity with respect to these charges
through September 30, 2002. The following tables provide a summary by segment of
the remaining balances as of September 30, 2002 related to these charges and the
activity with respect to these charges during the quarter ended December 31,
2002 ($ in millions):

In addition to the above segment reserves, a total of $0.1 million remained
on the balance sheet at December 31, 2002 related to fiscal 2001 corporate
severance charges.

At December 31, 2002, there remained a total of $74.9 million in liabilities
related to fiscal 2001 restructuring and other unusual charges on the
Consolidated Balance Sheet, of which $46.0 million is included in accrued
expenses and other current liabilities and $28.9 million is included in other

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TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

4. RESTRUCTURING AND OTHER UNUSUAL (CREDITS) CHARGES (CONTINUED)
long-term liabilities. The company currently anticipates that the restructuring
activities to which the above charges relate will be substantially completed
within fiscal 2003, except for certain long-term contractual obligations.

2000 AND PRIOR YEARS' CHARGES AND CREDITS

At December 31, 2002, there remained a total of $42.5 million in liabilities
related to fiscal 2000 and prior years' restructuring and other unusual charges
on the Consolidated Balance Sheet, of which $3.7 million is included in accrued
expenses and other current liabilities and $38.8 million is included in other
long-term liabilities. These liabilities primarily relate to a litigation
accrual in connection with patent infringements.

5. OTHER INCOME (EXPENSE)

Other income (expense) is as follows ($ in millions):

Tyco has repurchased some debt prior to scheduled maturities. During the
quarter ended December 31, 2002, the Company recorded other income from the
early retirement of debt totaling $1.4 million, as compared to expense of
$4.3 million during the quarter ended December 31, 2001.

During the quarter ended December 31, 2002, the Company recorded other
income of $20.0 million related to the return of an unauthorized payment to a
former director of the Company in connection with the acquisition of The CIT
Group, Inc.

6. DISCONTINUED OPERATIONS OF TYCO CAPITAL (CIT GROUP INC.)

On July 8, 2002, the Company completed the sale of 100% of the common shares
of CIT Group Inc., a wholly-owned subsidiary, through an initial public
offering. Operating results from the

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TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

6. DISCONTINUED OPERATIONS OF TYCO CAPITAL (CIT GROUP INC.) (CONTINUED)
discontinued operations of Tyco Capital for the quarter ended December 31, 2001
were as follows ($ in millions):

7. EARNINGS PER COMMON SHARE

The reconciliations of basic and diluted earnings per common share are as
follows (in millions, except per share data):

The computation of diluted earnings per common share in the quarters ended
December 31, 2002 and 2001 excludes the effect of the potential exercise of
options to purchase approximately 138.9 million and 21.0 million shares,
respectively, because the effect would be anti-dilutive. Diluted earnings per
common share for the quarter ended December 31, 2002 excludes 47.5 million and
21.1 million

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TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

7. EARNINGS PER COMMON SHARE (CONTINUED)
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 the quarter ended December 31, 2001 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.

8. GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the quarter ended
December 31, 2002 are as follows ($ in millions):

The following table sets forth the gross carrying amount and accumulated
amortization of the Company's intangible assets ($ in millions):

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

(1) Intangible assets not subject to amortization are excluded from the
calculation of the weighted average amortization period.

As of December 31, 2002 and September 30, 2002 the Company had
$140.2 million and $140.1 million, respectively, of intellectual property,
consisting primarily of trademarks acquired from Sensormatic, that are not
subject to amortization. As of December 31, 2002 and September 30, 2002, the
Company had $25.8 million and $26.2 million, respectively, of other intangible
assets that are not subject to amortization.

Intangible asset amortization expense for the quarters ended December 31,
2002 and 2001 was $155.4 million and $121.1 million, respectively. Amortization
expense on intangible assets currently owned by the Company is expected to be
approximately $650 million for each of the next five fiscal years.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

9. DEBT

Debt is as follows(1) ($ in millions):

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

(1) Debt maturity dates are presented on a calendar basis, consistent with the
respective offering documents.

(2) In January 2003, Tyco International Group S.A. ("TIG"), a wholly-owned
subsidiary of the Company, repaid its $3.855 billion unsecured term loan
scheduled to expire on February 6, 2003.

(3) Subsequent to December 31, 2002, Tyco purchased $544.7 million outstanding
under its zero coupon convertible debentures with a November 2003 put option
for cash of approximately $532.0 million.

(4) These instruments, plus $98.9 million of the amount shown as other, comprise
the current portion of long-term debt as of December 31, 2002.

(5) 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 of these debentures for cash at the
accreted value. This purchase resulted from the exercise of investors'
option under the indenture to require TIG to purchase debentures validly
surrendered by February 12, 2003.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

9. DEBT (CONTINUED)
In January 2003, TIG issued $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. These debentures are fully and
unconditionally guaranteed by Tyco, and at any time, holders may convert each of
their debentures into Tyco common shares prior to the stated maturity 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, 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
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
$4,387.5 million, before out of pocket expenses, from these debentures were used
primarily to repay debt.

Also in January 2003, 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, which 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 interest rate based 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.

Our credit agreements contain a number of financial covenants, such as
interest coverage and leverage ratios, and restrictive covenants that limit 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. We 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.

10. COMMITMENTS AND CONTINGENCIES

As a result of actions taken by our former senior corporate management, Tyco
and some members of our former senior corporate management and current and
former members of our board of directors are named defendants in a number of
purported class actions alleging violations of the disclosure provisions of the
federal securities laws, as well as a number of derivative actions. Certain of
our employees as well as Tyco and some members of our former corporate senior
management and current and former members of our board of directors are also
named as defendants in several ERISA actions. In addition, Tyco and some members
of prior senior corporate management are subject to an SEC inquiry; some members
of prior corporate senior management are named as defendants in criminal cases
being prosecuted by the District Attorney of New York County; and some members
of prior senior corporate management are subject to an investigation by 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

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
defendants in some or all of these matters. In addition, our insurance carriers
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 received notice on
February 13, 2003 that one such carrier purports to have rescinded its policy
with us on the basis of alleged misrepresentations made by us under our former
senior corporate management. Unless we are able to successfully challenge the
rescission of this policy and any similar action that may be taken by our other
carriers, we will not have insurance coverage under such policies for such
expenses and liability. 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.

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.

11. SHAREHOLDERS' EQUITY

Tyco paid a quarterly cash dividend of $0.0125 per common share in the first
quarter of fiscal 2003 and fiscal 2002.

12. COMPREHENSIVE INCOME

Total comprehensive income and its components are as follows ($ in
millions):

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

13. SUPPLEMENTARY BALANCE SHEET INFORMATION

Selected supplementary balance sheet information is presented below ($ in
millions):

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

14. GUARANTEES

TIG has issued a guarantee to a bank on behalf of an equity investee for a
reducing revolving line of credit, due November 30, 2005. The maximum borrowing
permitted under the facility is now $8.5 million, all of which is outstanding.
The maximum borrowing permitted under the facility will be further reduced by
$0.75 million on both December 20, 2003 and 2004. In the event that the equity
investee defaults on its payment obligations, the bank may demand that the
Company pay the outstanding principal on the loan. The Company does not have a
liability recorded for the guarantee as it is not probable at this time that the
Company will have to make any payments. In the instance that the Company would
be required to pay the bank, the Company has no recourse from a third-party
other than ultimate reimbursement from the equity investee in cash or common
shares.

The Company's healthcare business may, from time to time, enter into a sales
contract 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 December 31, 2002, $3.8 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 another
third-party financier in which payment is highly likely; 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 Services 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 on any
services performed, which would not have a material effect to the Company's
financial position or results of operations. However, because it is not probable
that the Company will have to make any payments or perform any services pursuant
to the guarantee, it is not accrued. The performance guarantee expires in
August 2003. Although not specified in the agreement, if the third-party
sub-contractor does not perform its obligations, Tyco may withhold any future
payment of 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 or results of
operations.

The Company has recorded liabilities for known indemnifications included as
part of environmental liabilities. The range of probability and the amount
accrued for known liabilities has not changed significantly since September 30,
2002. In view of our financial position and reserves for environmental matters,
we believe that any potential payment of such estimated amounts or additional
monetary sanctions will not have a material adverse effect on our consolidated
financial position, results of operations or liquidity.

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.

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

14. GUARANTEES (CONTINUED)
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 or results of operations.

In the normal course of business, the Company is liable for contract
completion and product performance. In the opinion of management, such
obligations will not significantly affect the Company's financial position or
results of operations.

The Company 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. 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
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. The liability, shown in the
following table, is reviewed for reasonableness at least as often as quarterly.

Following is a roll forward of the Company's warranty accrual for the
quarter ended December 31, 2002 ($ in millions).

Balance at September 30, 2002....................... $692.9
Accruals for warranties issued during the period.... 7.2
Changes in estimates related to pre-existing
warranties........................................ 17.2
Settlements made.................................... (40.1)
Additions due to acquisitions....................... 0.1
------
Balance at December 31, 2002........................ $677.3
======

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

15. TYCO INTERNATIONAL GROUP S.A.

TIG has issued public and private debt securities, which are fully and
unconditionally guaranteed by Tyco. In accordance with SEC rules, the following
presents 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
QUARTER ENDED DECEMBER 31, 2002
($ IN MILLIONS)

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

15. TYCO INTERNATIONAL GROUP S.A. (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
QUARTER ENDED DECEMBER 31, 2001
($ IN MILLIONS)

24

TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

15. TYCO INTERNATIONAL GROUP S.A. (CONTINUED)

CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2002
($ IN MILLIONS)

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

15. TYCO INTERNATIONAL GROUP S.A. (CONTINUED)
CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2002
($ IN MILLIONS)

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TYCO INTERNATIONAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

15. TYCO INTERNATIONAL GROUP S.A. (CONTINUED)

CONSOLIDATING STATEMENT OF CASH FLOWS
QUARTER ENDED DECEMBER 31, 2002
($ IN MILLIONS)