Tyco International Ltd.
Filed 12/30/02
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 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) (IRS Employer Identification No.)
THE ZURICH CENTRE, SECOND FLOOR, 90 PITTS BAY ROAD, PEMBROKE HM 08, BERMUDA
(Address of registrant's principal executive office)
441-292-8674
(Registrant's telephone number)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Shares, Par Value $0.20 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III or this Form 10-K or any
amendment to this Form 10-K. / /.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act
Rule 12b-2) Yes /X/ No / /.
The aggregate market value of voting common shares held by nonaffiliates of
registrant was $30,277,630,426 as of December 27, 2002.
The number of common shares outstanding as of December 20, 2002 was
1,995,888,624.
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 2003
annual shareholders' meeting are incorporated by reference into Part III of this
Form 10-K.
See pages 31 to 34 for the exhibit index.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 18
Item 3. Legal Proceedings........................................... 18
Item 4. Submission of Matters to a Vote of Security Holders......... 22
PART II
Item 5. Market For the Registrant's Common Shares and Related
Security Holder Matters..................................... 24
Item 6 Selected Financial Data..................................... 24
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 26
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 26
Item 8. Financial Statements and Supplementary Data................. 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 27
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 28
Item 11. Executive Compensation...................................... 28
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 28
Item 13. Certain Relationships and Related Transactions.............. 29
Item 14. Controls and Procedures..................................... 29
Item 15. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 31
Signatures............................................................ 35
Index to Consolidated Financial Statements............................ 38
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Tyco International Ltd. ("we" or "Tyco") is a diversified manufacturing and
service company that, through its subsidiaries:
- designs, manufactures, installs, monitors and services electronic security
and fire protection systems;
- designs, manufactures and distributes electrical and electronic
components, and designs, manufactures, installs, operates and maintains
undersea fiber optic cable communications systems;
- designs, manufactures and distributes medical devices and supplies and
other specialty products; and
- designs, manufactures, distributes and services engineered products
including industrial valves and controls and steel tubular goods and
provides environmental consulting services.
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, our current business strategy and near-term actions
focus on enhancing internal growth within 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. While we may continue to make selected
complementary acquisitions, we anticipate that the amount of acquisition
activity will be significantly reduced for the foreseeable future. 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 striving to establish 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 SERVICES
Tyco is the world's leading provider of both electronic security services
and fire protection services. With fiscal 2002 revenues of $10,637.6 million,
our Fire and Security Services businesses comprise approximately 30% of our
total revenues from continuing operations. The group's products and services
include:
- designing, manufacturing, installing, monitoring and servicing electronic
security systems;
- designing, manufacturing, installing and servicing a broad line of fire
detection, suppression systems, and manufacturing and servicing of fire
extinguishers and related products; and
- providing fully integrated solutions that integrate both electronic
security, fire protection and fire detection systems.
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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 our Personal
Emergency Response Systems, and other activities where around-the-clock
monitoring and response is 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, video surveillance, access control,
electronic asset protection and security management systems, products and
services. These and other security services are provided principally under the
ADT trade name.
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 remotely from the customer's
premises, where alarm and supervisory signals are received and recorded. In most
systems, control panels can identify the nature of the alarm and the areas
within a building where the sensor was activated. Depending upon the type of
service for which the subscriber has contracted, monitoring center personnel
respond to alarms by relaying appropriate information to the local fire or
police departments, notifying the customer or taking other appropriate action,
such as dispatching employees to the customer's premises. In some instances, the
customer may monitor the system at its own premises or the system may be
connected to local fire or police departments.
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.
During fiscal 2002, we refocussed our authorized dealer program, encouraging
growth in some geographic areas while curtailing activities in others, as part
of an enhanced focus on return on investment. A separate national accounts sales
force services most commercial customers. We also utilize advertising,
telemarketing and direct mail to market our services.
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 commercial and residential contracts are generally renewed after
their initial terms. Contract discontinuances occur principally as a result of
customer relocation or closure.
We out-source most of the electronic components we install. We manufacture
certain alarm, detection and activation devices and central monitoring station
equipment both for installation by us and for sale to other installers.
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 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
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relation to quality of service. We believe that the quality of our electronic
security services is higher than that of many of our competitors and, therefore,
our prices may be higher than those charged by our competitors.
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, 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. 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. These are often
especially suited to fire protection in certain manufacturing, power generation,
petrochemical, offshore oil exploration, transportation, telecommunications,
mining and marine applications.
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 and bridge
construction, primarily through its O'Donnell Griffin division.
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. 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. ELECTRONICS
Tyco is the world's leading supplier of passive electronic components and a
leading provider of undersea fiber optic networks and services. With fiscal 2002
revenues of $10,528.0 million, our
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Electronics businesses comprise approximately 30% of our total revenues from
continuing operations. The group's products and services include:
- 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, printed circuit boards and
assemblies, electronic modules, application tooling, switches and battery
assemblies; and
- designing, manufacturing, installing, operating and maintaining undersea
fiber optic cable communications systems through Tyco Telecommunications
and selling bandwidth on our own cable network.
TYCO ELECTRONICS
Tyco Electronics designs, manufactures and markets 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, 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,
direct sales represent 86% of revenue while the remaining revenue is via
distributors. These customers are found in the automotive, communications,
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 Telecommunications is a leading provider of undersea fiber optic
networks and services. Tyco 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- ("TGN"). Tyco 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 Telecommunications is on
maintenance services on existing systems and selling bandwidth capacity on the
TGN.
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III. HEALTHCARE AND SPECIALTY PRODUCTS
Tyco is a world leader in the medical products industry and has a strong
leadership position in the plastics industry. With fiscal 2002 revenues of
$9,777.4 million, our Healthcare and Specialty Products businesses comprise
approximately 27% of our total revenues from continuing operations. The group's
products include:
- 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;
products for vascular therapy and wound care; bulk and unit dose
pharmaceuticals; and 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 GROUP
The Tyco Healthcare Group consists of seven primary business units: Medical,
Surgical, Respiratory, Imaging, Pharmaceutical, Retail and International.
The Medical Division consists primarily of Kendall, Sherwood 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 to hospitals, surgi-centers, alternate care facilities and homes.
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 needles and
syringes, SHARPSAFETY needle stick prevention products and KANGAROO enteral
feedings systems. Ludlow Technical Products' significant brands are DEVON O.R.
surgical kits, and MEDI-TRACE diagnostic and monitoring electrodes.
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 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 division 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
combines U.S. Surgical's reputation as an innovator with Davis & Geck's century
of specialized suture experience. Leading brand names for U.S. Surgical include
ENDO GIA and VITAL VUE endoscopic instruments, DEXON sutures and PREMIUM skin
staplers.
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. Among
Valleylab and Radionics' leading brand names are the FORCE FX electro-surgical
generator; the LIGASURE vessel occlusion system; the CUSA EXCEL ultrasonic
surgical system; and the COOL-TIP RF system.
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, the
SHILEY tracheostomy tubes and the DAR breathing systems are industry leaders.
Puritan Bennett is known around the world for its critical care ventilators, and
recently released HELIOS liquid oxygen system for patients in need of oxygen
therapy at home.
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 partnered with radiologists,
cardiologists, urologists and nuclear medicine physicians to improve the quality
of diagnosis in multiple disease states through well known branded products
including CONRAY and OPTIRAY X-ray contrast media agents, OPTIMARK MRI contrast
media agents and thallium and MAG3 radiopharmaceutical agents. The Mallinckrodt
family of imaging products is sold into hospitals, radiopharmacies and alternate
site imaging centers throughout the world.
Tyco Healthcare's Mallinckrodt Pharmaceutical Division comprises three
businesses--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 segment has three distinct segments: 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. 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.
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 Canadian 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
Tyco Plastics & Adhesives consists of Tyco Plastics, A&E Products, Tyco
Adhesives and Ludlow Coated Products.
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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 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.
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 produces a variety of specialty laminates and coated
products principally derived from paper, film, foil and fabrics. Ludlow markets
its 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.
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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
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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
At September 30, 2002, we had a backlog of unfilled orders of
$11,591.3 million, compared to a backlog of $11,174.2 million at September 30,
2001. We expect that approximately 79% of our backlog
9
at September 30, 2002 will be filled during fiscal 2003. Backlog by reportable
industry segment is as follows ($ 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
========= =========
Backlog for Fire and Security Services includes recurring "revenue in
force," which represents one year's fees for security monitoring and maintenance
services under contract. The amount of recurring revenue in force at
September 30, 2002 and 2001 is $3,492.0 million and $3,099.6 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 by 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.
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 no new contracts for undersea cable communication systems signed in
fiscal 2002 as a result of the downturn in the telecommunications industry.
Backlog also decreased in the electronics components group due to the
cancellation and/or delay of orders by customers primarily in end-markets
including the communications, computer and consumer electronics industries.
Backlog in the Healthcare and Specialty Products segment represents unfilled
orders, which, in the nature of the business, are normally shipped shortly after
purchase orders are received. We do not view backlog in the Healthcare and
Specialty Products segment to be a significant indicator of the level of future
sales activity.
PROPERTIES
Our operations are conducted in facilities throughout the world aggregating
approximately 126.5 million square feet of floor space, of which approximately
69.5 million square feet are owned and approximately 57.0 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
27.5 million square feet, of which 5.7 million square feet are owned and
21.8 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 34.6 million square feet, of which 22.5 million square feet are
owned and 12.1 million square feet are leased.
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The Healthcare and Specialty Products segment has manufacturing facilities
in North America, Europe and Asia. The group occupies approximately
35.3 million square feet, of which 22.5 million square feet are owned and
12.8 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
28.8 million square feet, of which 18.8 million square feet are owned and
10.0 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 20 to Consolidated Financial Statements for a description
of our rental obligations.
RESEARCH AND DEVELOPMENT
The amounts expended for Tyco-sponsored research and development during
fiscal 2002, fiscal 2001 and fiscal 2000 were $633.4 million, $572.0 million and
$527.5 million, respectively. Customer-funded research and development
expenditures were $20.4 million, $40.4 million and $18.6 million, respectively.
Approximately 5,842 full-time scientists, engineers and other technical
personnel were engaged in our product research and development activities as of
September 30, 2002.
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 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 fire protection systems or for distribution. 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 manage 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 S & P 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
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 and tubing manufacture
and cable manufacture. We also own a portfolio of trademarks and are a licensee
under various patents. Although these have been of value and are expected to
continue to be of value in the future, in the opinion of management the loss of
any single patent or group of patents would not materially affect the conduct of
the business in any of our segments. In several cases, one product may be sold
under more than one tradename, which also helps minimize risk. In addition,
management believes that the likelihood of losing key patents or trademarks is
remote. The patents and licenses have estimated useful lives ranging from 5 to
40 years. As of September 30, 2002, we had approximately $140.1 million of
trademarks not subject to amortization.
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EMPLOYEES
Tyco employed approximately 267,500 people at September 30, 2002, of which
approximately 113,600 are employed in the United States and 153,900 are outside
the United States. We have collective bargaining agreements with labor unions
covering approximately 66,900 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 participating in a proceeding to
determine what payments are necessary 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 action has not had, and is not expected to
have, any material adverse effect on our business or results of operations.
PROPOSED LEGISLATION
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. 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 of the 1997 business
combination of Tyco International Ltd., a Massachusetts corporation, and 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 to U.S. federal government contracts account for less
than 3% of net revenues for the fiscal year ended September 30, 2002. In
addition, various state and other municipalities in the U.S. have proposed
similar legislation. There is also other similar 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. 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. As a
result of these uncertainties, we are unable to assess the impact on us of any
proposed legislation in this area.
See Item 3. "Legal Proceedings" for a description of investigations
initiated by certain government agencies.
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 into the ground, air or water; and the health and safety of our
employees. 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-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. 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 be the basis for monetary sanctions. We have projects underway at
several current and former manufacturing facilities to investigate and remediate
environmental contamination resulting from past operations.
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 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. 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 million, 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.
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
Our Internet website is HTTP://INVESTORS.TYCOINT.COM/EDGAR.CFM. 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 and amendments to
those reports as soon as reasonably practicable after we electronically file or
furnish such materials to the SEC.
ITEM 2. PROPERTIES
See Item 1. "Business--Properties" for information relating to our owned and
leased properties.
ITEM 3. LEGAL PROCEEDINGS
SECURITIES CLASS ACTIONS
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 and officers have been named as defendants in more than two dozen
securities class actions.
All but two of the securities class actions assert causes of action under
Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated
thereunder, and Section 20(a) of the Securities Exchange Act of 1934. The
plaintiffs in each of these actions seek class certification, declaratory
relief, compensatory damages, rescission, disgorgement and attorneys' fees and
expenses. These complaints allege that the defendants are responsible for Tyco
making materially false and misleading statements and omissions concerning,
among other allegations, the following: the earnings performance of certain
companies that we acquired and our accounting therefor; the impact of a new
accounting standard (SAB 101, promulgated in 1999) on our earnings performance;
undisclosed sales of Tyco stock by certain former executives of Tyco; our
undisclosed payment of $20 million to one of our directors; and the fact that
our former Chief Executive Officer was under criminal investigation. All of
these securities class actions are now pending in the United States District
Court for the District of New Hampshire, by virtue of certain orders of the
Judicial Panel on Multidistrict Litigation that transferred to that court for
coordinated or consolidated pretrial proceedings the securities class actions
that had been filed in other courts.
The remaining securities class actions are BRAZEN V. TYCO
INTERNATIONAL LTD. ET AL, which was filed in June 2002 in the Circuit Court of
Cook County, Illinois, and PREMUROSO V. TYCO INTERNATIONAL LTD., ET AL., which
was filed in November 2002, in the Circuit Court for Palm Beach County, Florida.
Plaintiffs in each of these actions assert claims under the Securities Act of
1933, and seek class certification, compensatory damages and attorneys' fees and
expenses. The BRAZEN complaint 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. This 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. The PREMUROSO complaint purports to bring suit on behalf of
persons who exchanged their Sensormatic Electronics Corp. stock for shares of
Tyco in connection with our acquisition of Sensormatic in November 2001. This
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 our mergers and
acquisitions and the accounting therefor, 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. 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 new class action complaint, SCHULDT LIMITED PARTNERSHIP
V. TYCO INTERNATIONAL LTD., ET AL., was filed in the Circuit Court for Palm
Beach County, Florida. The allegations in SCHULDT are identical to those in the
previously-dismissed PREMUROSO complaint. The defendants have removed the
SCHULDT action from state court to the United States District Court for the
Southern District of Florida. The plaintiffs have not yet responded to
defendants' motion.
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 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.
Each of these actions asserts causes of action that include breach of
fiduciary duty, gross mismanagement, waste of corporate assets and/or
conversion. The actions allege that individual defendants engaged in, permitted
and/or acquiesced in the following alleged improper conduct of former officers
of Tyco: the use of our 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; entering
into improper undisclosed retention agreements; and/or filing false and
misleading financial statements with the Securities and Exchange Commission that
were based on improper accounting methods, including the use of reserves to
improperly increase earnings after acquisitions. Plaintiffs seek money damages
and, in one case, an order enjoining the payment of any severance benefits to
one of our former officers.
Two of the actions are pending in the United States District Court for the
District 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 briefed and a decision is expected from
the Judicial Panel in the near future. The fourth derivative action is pending
in the Supreme Court of the State of New York (New York County). Plaintiffs in
that action have agreed to stay the action and join with the plaintiffs in New
Hampshire in prosecuting one derivative action.
ERISA LITIGATION AND INVESTIGATION
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, have been named as defendants in putative class action
litigation brought under the Employee Retirement Income Security Act ("ERISA").
The complaints purport to bring claims on behalf of participants in the Tyco
International (US) Inc. Retirement Savings and Investment Plans and/or the
retirement plans 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 consolidated in the
United States District Court for the District of New Hampshire. The complaints
allege failure to disclose material information regarding the financial status
of Tyco, including alleged misreporting of revenues, improper accounting
practices, and manipulation of accounting rules with respect to mergers and
acquisitions. The complaints further allege breach of ERISA's fiduciary duty of
prudence. The plaintiffs seek to recover losses they allegedly experienced due
to their investments, through the plans, in our stock.
19
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. 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 A. BELNICK, UNITED STATES DISTRICT COURT,
SOUTHERN DISTRICT OF NEW YORK, FILED JUNE 17, 2002. As previously reported in
our Current Report on Form 8-K filed on September 17, 2002, 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 stock 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; refused to cooperate with internal investigations;
and engaged in other improper conduct. The action 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 Office to delay discovery
until after the completion of its prosecution 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 JUNE 17, 2002. As previously reported in
our Current Report on Form 8-K filed on September 17, 2002, 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 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. The New York County District Attorney's
Office has filed a motion to stay all discovery until after the completion of
its pending prosecution 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 SEPTEMBER 12, 2002. As previously
reported in our Current Report on Form 8-K filed on September 17, 2002, we have
filed a civil complaint against our former Chairman and Chief Executive Officer
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; 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 action alleges
causes of action for breach of fiduciary duty, fraud, unjust enrichment, breach
of contract, 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 director's conduct. Discovery in this action has not yet begun. The 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. 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 in New York City, New York. Discovery 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. 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
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 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 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 December 17, 2002.
21
INTELLECTUAL PROPERTY LITIGATION
APPLIED MEDICAL RESOURCES CORP. V. U.S. 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 VERSASEAL 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, the appeal of which is pending in the U.S. Court
of Appeals for the Federal Circuit. A trial on invalidity of the other two
patents and on damages is currently scheduled for April 2003. If there is
ultimately a determination of liability, 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
As previously reported in our Annual Report on Form 10-K for the year ended
September 30, 2001, 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 TPCG's 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
Tyco and its subsidiaries, taken as a whole. We are cooperating fully in the
investigation.
See also the discussions under Item 1. "Business--Environmental Matters" and
"--Risk Factors"
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Tyco's executive officers and executive officers of certain subsidiaries are
as follows:
Edward D. Breen, age 46, 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's Broadband Networks
Group. Mr. Breen also serves as a director of McLeod USA Incorporated.
Jerry R. Boggess, age 58, President of Tyco Fire and Security Services since
August 1993. Mr. Boggess 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, 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.
William B. Lytton, age 54, 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 IP
from 1996 to 1999.
Robert P. Mead, 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; and 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, 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
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED SECURITY HOLDER
MATTERS
The number of registered holders of Tyco's common shares at December 20,
2002 was 44,884.
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." 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 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 board of directors and will depend on, among other
things, our results of operations, cash requirements and surplus, financial
condition, contractual restrictions and other factors that the board of
directors may deem relevant.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial information
of Tyco as, at and for the fiscal years ended September 30, 2002, 2001, 2000,
1999 and 1998. This selected financial information should be read in conjunction
with Tyco's Consolidated Financial Statements and related notes. The selected
financial data reflect the combined results of operations and financial position
of Tyco, United States Surgical Corporation ("U.S. Surgical") and AMP
Incorporated ("AMP"). During fiscal 1999,
24
subsidiaries of Tyco merged with U.S. Surgical and AMP. Both merger transactions
were accounted for under 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) Loss from continuing operations in the fiscal year ended September 30, 2002
includes net restructuring and other unusual charges of $1,954.3 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 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 million and
$30.6 million of income relating to the early retirement of debt. Net (loss)
income also includes a $6,282.5 million loss from 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 16 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) 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) Income from continuing operations in the fiscal year ended September 30,
2001 includes a net charge of $418.5 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 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) 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 and 9 to the Consolidated
Financial Statements.
(5) 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) Per share amounts have been retroactively restated to give effect to the
mergers with U.S. Surgical and AMP; and two-for-one stock splits on
October 22, 1997 and October 21, 1999, both of which were effected in the
form of a stock dividend.
(8) 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. The payment of dividends by
Tyco in the future will depend on business conditions, Tyco's financial
condition and earnings and other factors.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
See Management's Discussion and Analysis of Financial Condition and Results
of Operations which appears on pages 123 to 160 of this Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Management's Discussion and Analysis of Financial Condition and Results
of Operations which appears on pages 123 to 160 of this Form 10-K.
26
ITEM 8. FINANCIAL 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
Consolidated Statements of Operations for the fiscal years ended
September 30, 2002, 2001 and 2000
Consolidated Balance Sheets at September 30, 2002 and 2001
Consolidated Statements of Shareholders' Equity for the fiscal years
ended September 30, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the fiscal years ended
September 30, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts
All other financial statements and schedules have been omitted since the
information required to be submitted has been included in the consolidated
financial statements and related notes or because they are either not applicable
or not required under the rules of Regulation S-X.
See Notes to Consolidated Financial Statements for Summarized Quarterly
Financial Data (unaudited).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Directors 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 PROCEDURES
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.
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
LLP 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, the 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 findings 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 and were recorded in the first quarter of fiscal 2002. These adjustments
are discussed further in Note 1 to our Consolidated Financial Statements
included elsewhere herein.
Additionally, our new senior management team in conjunction with our 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 senior 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 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 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 senior 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 management is committed to improving the state of our internal
controls, corporate governance and financial reporting. Our Board of Directors
and new senior management have initiated the following actions:
- Added new nominees for the Board of Directors;
- Created new Board charters;
30
- Created a new employee code of conduct;
- Created new mission, values and goals statements;
- 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 a controllership assessment process to identify the status of
key routines and controls;
- 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 financial
and legal executives; and
- Instituted a code of conduct for all financial executives.
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. 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
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 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2) Financial Statements and Schedules--See Item 8.
(3) Exhibit Index:
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) (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).
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).
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 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).
4.5 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).
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)
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).(1)
10.17 William B. Lytton Employment Contract dated September 30,
2002 (Filed herewith).(1)
10.18 Tyco International Ltd. UK Savings Related Share Option Plan
(Filed herewith).(1)
10.19 Tyco Employee Stock Purchase Plan (Filed herewith)(1)
10.20 Tyco International (Ireland) Employee Share Scheme (Filed
herewith).
21.1 Subsidiaries of the registrant (Filed herewith).
23.1 Consent of PricewaterhouseCoopers LLP (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 filed on July 26, 2002 including, as an exhibit,
the press release of Tyco dated July 25, 2002 announcing the appointment of
Edward D. Breen as Chairman of the Board of Directors and Chief Executive
Officer of Tyco International Ltd.
Current Report on Form 8-K filed on September 17, 2002 including the "Boies
Report" and, as exhibits, the following press releases:
- Dated August 6, 2002 announcing the appointment of John A. Krol to the
Board of Directors.
- Also dated August 6, 2002 announcing the appointment 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 vacancies on the Board.
(c) See Item 15(a)(3) above.
(d) See Item 15(a)(2) above.
34
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/ DAVID J. FITZPATRICK
-----------------------------------------
David J. FitzPatrick
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
Date: December 30, 2002
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, 2002 in the capacities indicated below.
NAME TITLE
---- -----
/s/ EDWARD D. BREEN Chairman, Chief Executive Officer and
- -------------------------------------------- Director (Principal Executive Officer)
Edward D. Breen
/s/ DAVID J. FITZPATRICK Executive Vice President and Chief Financial
- -------------------------------------------- Officer (Principal Financial and Accounting
David J. FitzPatrick Officer)
/s/ RICHARD S. BODMAN
- -------------------------------------------- Director
Richard S. Bodman
/s/ GEORGE W. BUCKLEY
- -------------------------------------------- Director
George W. Buckley
/s/ JOHN F. FORT
- -------------------------------------------- Director
John F. Fort
/s/ STEPHEN W. FOSS
- -------------------------------------------- Director
Stephen W. Foss
/s/ JOHN A. KROL
- -------------------------------------------- Director
John A. Krol
/s/ WENDY E. LANE
- -------------------------------------------- Director
Wendy E. Lane
/s/ MACKEY J. MCDONALD
- -------------------------------------------- Director
Mackey J. McDonald
/s/ W. PETER SLUSSER
- -------------------------------------------- Director
W. Peter Slusser
/s/ JOSEPH F. WELCH
- -------------------------------------------- Director
Joseph F. Welch
/s/ JEROME B. YORK
- -------------------------------------------- Director
Jerome B. York
35
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Edward D. Breen, 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/ EDWARD D. BREEN
----------------------------
Edward D. Breen
CHIEF EXECUTIVE OFFICER
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
PAGE
--------
Management's Responsibility for Financial Statements........ 39
Report of Independent Accountants........................... 40
Consolidated Statements of Operations....................... 41
Consolidated Balance Sheets................................. 42
Consolidated Statements of Shareholders' Equity............. 43
Consolidated Statements of Cash Flows....................... 44
Notes to Consolidated Financial Statements.................. 45
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 123
Liquidity and Capital Resources........................... 145
Quantitative and Qualitative Disclosures About Market
Risk.................................................... 157
Accounting and Technical Pronouncements................... 159
Forward-Looking Information............................... 160
Schedule II--Valuation and Qualifying Accounts.............. 161
38
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The financial statements of Tyco International Ltd. and its subsidiaries 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 integrity and objectivity of the financial
statements, including estimates and judgments reflected in them and fulfills
this responsibility primarily by establishing and maintaining accounting systems
and practices adequately supported by internal accounting controls. We take
these responsibilities very seriously and are committed to building ourselves as
a recognized leader in governance, controls and clarity and transparency of
financial statements. We have just begun this mission and it will take some time
to develop and additional time to permeate 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 preparing financial statements. Even an effective internal
control system, no matter how well designed, has inherent limitations, including
the possibility of the circumvention or overriding of controls 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, consisting of directors who
are not officers or employees of the Company, meets regularly with management,
the independent accountants and the internal auditors, to review matters
relating to financial reporting, internal accounting controls and auditing.
/s/ EDWARD D. BREEN /s/ DAVID J. FITZPATRICK
------------------------------------- ----------------------------------------------
Edward D. Breen David J. FitzPatrick
CHAIRMAN AND CHIEF EXECUTIVE OFFICER EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
39
REPORT OF INDEPENDENT ACCOUNTANTS
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, 2002 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 2002, 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 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.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
New York, New York
December 23, 2002
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
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
========= =========
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
=========
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
========= ========== =========
See Notes to Consolidated Financial Statements.
44
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. 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 principles in the United States
("GAAP"). As described in Note 11, CIT Group Inc. ("CIT"), which comprised 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 fiber optic undersea cable communications systems.
- Healthcare and Specialty Products designs, manufactures and distributes
medical devices and supplies and other specialty products.
- Engineered Products and Services designs, manufactures, distributes and
services engineered products including industrial valves and controls and
steel tubular goods and provides environmental consulting services.
PRINCIPLES OF CONSOLIDATION--Tyco is a holding company whose assets consist
of its investments in its subsidiaries, intercompany balances and holdings of
cash and cash equivalents. The businesses of the consolidated group are
conducted through 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. 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 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
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.
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 relate primarily to
fire protection and electronics contracts and become due upon contract
completion and acceptance. Of the balance of $164.8 million at September 30,
2002, $128.3 million is included in accounts receivable and is expected to be
collected during fiscal 2003.
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 costs are expensed when incurred and are included
in selling, general and administrative expenses.
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 of the Company's
subsidiaries operating outside the United States which account in a functional
currency other than U.S. dollars, other than those operating in highly
inflationary environments, are translated into U.S. dollars using year-end
exchange rates. Revenues and expenses are translated at the average exchange
rates effective during the year. Foreign currency translation gains and losses
are included as a component of accumulated other comprehensive (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 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, are included in net income.
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 amounts at September 30, 2002 was $196.2 million. There was
no restricted cash at September 30, 2001.
INVENTORIES--Inventories are recorded at the lower of cost (primarily
first-in, first-out) or market value.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment is recorded at
cost less accumulated depreciation. Maintenance and repair expenditures are
charged to expense when incurred. For the years ended September 30, 2002, 2001
and 2000, the Company capitalized interest of $110.7 million, $76.3 million and
$10.8 million, respectively. The increase in capitalized interest is primarily
due to
48
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
construction of the TGN, which began during the last quarter of fiscal 2000. The
straight-line method of depreciation is used over the estimated useful lives of
the related assets as follows:
Buildings and related improvements... 5 to 50 years
Leasehold improvements............... Remaining term of the lease
Subscriber systems(1)................ 10 to 14 years
Other plant, machinery, equipment and 2 to 25 years
furniture and fixtures.............
Tyco Global Network--placed in 15 years
service............................
- ------------------------
(1) Security monitoring systems.
The TGN is being constructed and is recorded at cost within the Consolidated
Balance Sheets as part of Tyco Global Network. When certain geographic segments
of the TGN are completed and are available for capacity sales, the costs of that
segment are removed from construction in progress and reclassified to placed in
service. The portion of the TGN that has been placed in service is recorded
within the Consolidated Balance Sheet as Tyco Global Network--placed in service
(see Note 26).
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--The Company periodically evaluates the net realizable
value of long-lived assets, including property, plant and equipment and
intangible 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. 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--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. Under the transition provisions of SFAS No. 142,
there was no goodwill impairment at October 1, 2001. Additionally, 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,
2002 were as follows: Security Services, Fire Protection, Electronics,
Telecommunications, Healthcare, Plastics and Adhesives, Flow Control, Electrical
and Metal Products, and Tyco Infrastructure. See Note 16 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 include contracts and related customer relationships,
intellectual property and other items. The 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 monitoring contracts from an external network of
independent dealers who operate under ADT's authorized dealer program. The
purchase price of customer 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 the
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. The Company
incurs costs associated with maintaining and operating its dealer program,
including brand advertising, and for due diligence performed by the Company with
respect to contracts offered by the dealers for purchase. Dealers reimburse the
Company a non-refundable amount for each of the contracts purchased representing
their reimbursement of those costs described above. The Company recognizes this
non-refundable charge at the time the contract is 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 after 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 Company records the chargeback amount
from the dealer as a reduction of the previously recorded intangible asset.
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 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 which 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, 2002 and 2001, 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, of which
$219.6 million and $708.1 million were included in long-term assets
respectively.
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 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 bases 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 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 are met. 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 swaps are provided to the Company by banks 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.
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. 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 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), purchase
accounting reserves, allowances for doubtful accounts receivable, estimates of
future cash flows associated with assets, asset impairments, useful lives for
depreciation and amortization, loss contingencies, net realizable value of
inventories, 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.
ACCOUNTING PRONOUNCEMENTS--In June 2001, the FASB issued 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. 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 2002, the FASB issued 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
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 the adoption of this
new standard to have an impact on the timing of any future restructuring
charges.
RECLASSIFICATIONS--Certain prior year amounts have been reclassified to
conform with current year presentation.
STOCK SPLITS--Per share amounts and share data have been retroactively
restated to give effect to the two-for-one stock 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, 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 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
$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 amalgamation with TyCom (see
Note 9). In addition, the Company recorded $235.6 million 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 for
purchase accounting liabilities related to current and prior years'
acquisitions. In addition, 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'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 recorded is recorded as
goodwill. Once the appraisals or valuation data are obtained, the Company will
record adjustments to the fair value of net assets acquired and liabilities
assumed. Purchase price allocations for certain fiscal 2002 acquisitions are
preliminary. 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 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. 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 $13.4 million.
54
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS AND DIVESTITURES (CONTINUED)
Acquisitions were an important part of Tyco's growth during fiscal 2002.
Tyco makes acquisitions that complement existing products and services, enhance
the Company's product lines and/or expand its customer base. The Company begins
formulating exit plans as part of the acquisition approval process. Tyco
determines what it is willing to pay for an acquisition, partially based on its
expectation that it can cost effectively integrate the products and services of
an acquired company into Tyco's existing infrastructure and improve earnings by
removing costs in areas where there are duplicate sales, administrative or other
facilities and functions. In addition, the Company utilizes existing
infrastructure (e.g., established sales force, distribution channels, customer
relations, etc.) of acquired companies to cost effectively introduce Tyco's
products to new geographic areas. The Company also targets companies that are
perceived to be experiencing depressed financial performance. All of these
factors contribute to acquisition prices in excess of the fair value of
identifiable net assets acquired and the resultant goodwill.
The following table shows the fair values of assets and liabilities and
purchase accounting liabilities recorded for purchase acquisitions completed in
fiscal 2002, adjusted to reflect changes in fair values of assets and
liabilities and purchase accounting liabilities and holdback/earn-out
liabilities recorded for acquisitions completed prior to fiscal 2002 ($ 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 of common shares issued is based upon the average of the
volume-weighted average trading prices on the New York Stock Exchange for
three days before and three days after the measurement date. The stock
options assumed relate to the acquisition of Sensormatic in the first
quarter of fiscal 2002 and the acquisition of Mallinckrodt in fiscal 2001.
The value of the stock options was determined using the Black-Scholes
valuation model based on the following assumptions: 39.0% volatility 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 term of the options was less, in which case
one-half 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 million in cash and has been
integrated within the Fire and Security Services segment. Century, a
manufacturer 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 been integrated within the Fire and Security Services segment. The
primary reason for the 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. 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. 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. Clean Air Systems, a manufacturer 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. In addition to the
acquisitions listed above, Tyco paid cash of $1,401.0 million to acquire
approximately 1.4 million customer contracts for electronic security services
through its dealer program and $459.0 million to acquire approximately 120 other
smaller companies. The acquisitions comprised
56
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS AND DIVESTITURES (CONTINUED)
primarily businesses which: manufacture a broad range of electronic products;
manufacture a wide range of products used in the disposable medical products
industry as well as other plastic products; manufacture fire and security
products; manufacture valves and related products; and provide electronic
security services. All acquisitions were integrated within the Electronics, Fire
and Security Services, Healthcare and Specialty Products, or Engineered Products
and Services segments.
The following table summarizes the purchase accounting liabilities recorded
in connection with the fiscal 2002 purchase acquisitions ($ 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 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. These purchase accounting
liabilities relate primarily to the acquisitions of Sensormatic, CII and
Paragon.
In connection with fiscal 2002 purchase acquisitions, Tyco began to
formulate plans at the date of each acquisition for workforce reductions and the
closure and consolidation 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 revision 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 million and $5 million, respectively, will be recorded for
severance, facilities and other fees related to the finalization 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, 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 million of purchase accounting liabilities
related to fiscal 2002 acquisitions remained on the Consolidated Balance Sheet,
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
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 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).
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 for 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 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
- ------------------------------
(1) Includes charges for the impairment of long-lived assets of
$3,489.5 million; net restructuring and other unusual charges of
$1,954.3 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 million;
gain on the early extinguishment of debt of $30.6 million; and loss from
discontinued operations of $6,341.3 million, net of tax. Excludes charge of
$17.8 million for the write-off of purchased in-process research and
development associated with the acquisition of Sensormatic 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 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 million; loss on the early extinguishment of debt of $26.3 million;
and cumulative effect of accounting changes of $683.4 million, net of tax.
Excludes 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 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 million, consisting of
$6,313.8 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 million. Of this $6,313.8 million, Tyco paid $994.6 million for
approximately 1.0 million customer contracts for electronic security services
through its 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. 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 $39,050.9 million of debt of
CIT. Each
59
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS AND DIVESTITURES (CONTINUED)
acquisition was accounted for as a purchase, and the results of operations of
the acquired companies have been included in the Company's consolidated results
from their respective acquisition dates.
The following table summarizes the purchase accounting liabilities recorded
in connection with the fiscal 2001 purchase acquisitions ($ 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 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 relate primarily to 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.")
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 CIT (see Note 17).
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 million for severance and related costs,
$207.5 million for the shutdown and consolidation of acquired facilities,
$28.7 million for distributor and supplier contractual cancellation fees and
$29.1 million in transaction and other direct costs remained on the Consolidated
Balance Sheet at September 30, 2002. The Company expects that the termination of
employees and consolidation of facilities related to all such acquisitions will
be substantially complete within one year of plan finalization, except for
long-term non-cancellable lease obligations and certain long-term severance
arrangements.
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 $410.4 million principally related to the sale of ADT
Automotive, which is recorded as other income in the Consolidated Statement of
Operations.
The following unaudited pro forma data summarize the results of operations
for the periods indicated as if the fiscal 2001 and 2000 acquisitions and
divestitures had been completed as of the beginning of the periods presented.
The pro forma data give effect to actual operating results prior to the
acquisitions and divestitures and adjustments to interest expense, goodwill
amortization and income taxes. No effect has been given to cost reductions or
operating synergies in this presentation, and amounts have been revised to
reflect the disposition of CIT as discontinued operations (see Note 11). These
pro forma amounts do not purport to be indicative of the results that would have
actually been
61
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS AND DIVESTITURES (CONTINUED)
obtained if the acquisitions and divestitures had occurred as of the beginning
of the periods presented or that may be obtained in the future.
FOR YEAR ENDED SEPTEMBER 30,
---------------------------------------
2001(1) 2000(2)
------------------ ------------------
($ 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
- ------------------------------
(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 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 million; loss on the early extinguishment of debt of $26.3 million;
and cumulative effect of accounting changes of $683.4 million, net of tax.
Excludes 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
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
$0.3 million.
3. CONSOLIDATED SEGMENT DATA
The Company's reportable segments are strategic business units that operate
in different industries and are managed separately. The format of the segment
data presented below is consistent with how business activities were reported
internally to management through the period covered by this report. Certain
corporate expenses were allocated to each operating segment's operating income,
based generally on net revenues. For additional information, including a
description of the products and services included in each segment, see Note 1.
During fiscal 2002, the Company changed its internal reporting structure
(due to the amalgamation with TyCom which eliminated the publicly held minority
interest) such that the operations of the former Telecommunications segment are
now reported as part of the Electronics segment. In addition, during fiscal
2002, a change was made to the Company's internal reporting structure such that
the operations of Tyco's flow control businesses and the environmental
engineering business (previously
64
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. CONSOLIDATED SEGMENT DATA (CONTINUED)
reported within the Fire and Security Services segment) and Tyco's electrical
and metal products business (previously reported within the Electronics segment)
now comprise the Company's new Engineered Products and Services segment. Also in
fiscal 2002, Tyco sold its financial services business (Tyco Capital) through an
IPO. The historical results of our financial services business are presented as
"Discontinued Operations." See Note 11 for more information regarding the
discontinued operations of Tyco Capital. The Company has conformed its segment
reporting accordingly and has reclassified comparative prior period information
to reflect these changes.
Selected information by industry segment is presented in the following
tables ($ in millions). Amounts exclude restructuring and other unusual 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), 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 years of $261.6 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 million, and net restructuring 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 charges for the impairment of long-lived assets of $99.0 million
and restructuring 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)
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
========= ========= =========
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)
========= ========= =========
- ------------------------------
(1) Capital expenditures presented in this table represent purchases of
property, plant and equipment net of proceeds received in sale-leaseback
transactions and in sale/disposition of property, plant and equipment.
(2) Includes $1,146.0 million in spending for construction of the TGN.
(3) Net of $29.5 million received in sale-leaseback transactions 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
$61.6 million of proceeds received on sale of property, plant and equipment.
4. CONSOLIDATED GEOGRAPHIC DATA
Selected information by geographic area is presented below ($ 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
========= ========= =========
- ------------------------------
(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 $8,962.7
========= ========= ========
5. RESTRUCTURING AND OTHER UNUSUAL CHARGES (CREDITS), NET
Restructuring and other unusual charges (credits), net, are as follows ($ 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
The Fire and Security Services segment recorded net restructuring and other
unusual charges of $94.9 million. The net $94.9 million charge consists of
charges of $113.5 million, of which charges of $19.4 million are included in
cost of sales, 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 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 facilities
primarily in Australia and Europe consisting primarily of sales offices and
manufacturing plants. At September 30, 2002, 1,754 employees had been terminated
and 6 facilities had been shut down.
The other charges of $34.9 million consist primarily of an accrual for
anticipated resolution and disposition of various labor and employment matters.
The Electronics segment recorded net restructuring and other unusual charges
of $1,559.5 million. The $1,559.5 million net charge consists of charges
totaling $1,585.8 million (of which charges 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) 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 reductions of $198.1 million includes the
elimination of 8,996 positions across all regions consisting primarily of
manufacturing personnel. Facilities-related costs of $250.2 million include
building lease termination fees and other contract cancellation costs 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 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 unusual
credit in Tyco's Consolidated Financial Statements and Managements' Discussion
and Analysis. To the extent that any of the inventory is subsequently sold, the
related amount of income, if any will be disclosed separately as an unusual
credit in Tyco's Consolidated Financial Statements and Managements' Discussion
and Analysis.
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 million, of which charges of $1.6 million are included in
cost of sales, related primarily to severance associated with the consolidation
of operations and facility-related costs due to exiting certain business lines.
These charges were 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 reductions of $28.2 million includes 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 of the shutdown of 9 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 million consist primarily of legal fees and other
deal costs associated with acquisitions that were not completed.
The Engineered Products and Services segment recorded restructuring and
other unusual charges of $50.8 million, of which $6.2 million are included in
cost of sales, primarily related to severance and facility-related costs
associated with streamlining the business. The following table provides
information about the restructuring and other unusual charges (excluding
impairments of long-lived assets which are
71
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. RESTRUCTURING AND OTHER UNUSUAL CHARGES (CREDITS), NET (CONTINUED)
discussed in Note 6) related to the Engineered Products and Services segment
recorded in fiscal 2002 ($ 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 reductions of $35.7 million includes the
elimination of 1,217 positions primarily in the United States and Europe
consisting primarily of manufacturing and sales personnel. Facilities-related
costs of $4.1 million include the shutdown of 48 facilities primarily in the
United States and Europe consisting primarily of sales offices and manufacturing
facilities. At September 30, 2002, 712 employees had been terminated and 27
facilities had been shut down.
In addition to segment charges, the Company recorded net charges of
$194.2 million consisting of $78.6 million for severance and $39.6 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,
$49.0 million remained in accrued expenses and other current liabilities on the
Consolidated Balance Sheet.
2001 CHARGES 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, 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 $1.6 million representing a revision of estimates of prior years' merger,
restructuring and other unusual charges. The following table provides
information about the restructuring and other unusual charges (excluding
impairments of long-lived
72
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. RESTRUCTURING AND OTHER UNUSUAL CHARGES (CREDITS), NET (CONTINUED)
assets, which are discussed in Note 6) related to the Fire and Security Services
segment recorded in fiscal 2001 ($ 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 reductions of $13.0 million includes 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 facility closures of $47.6 million consists of
the shutdown of 176 facilities 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.
The other charges of $19.7 million consist primarily of contract
cancellation costs and charges relating to an environmental remediation project.
The total 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
$15.0 million is included in other long-term liabilities on the Consolidated
Balance Sheet, is 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 $125.8 million are
included in cost of sales, related primarily to facility closures and related
employee terminations within the computer and consumer electronics and
communication industries. The following table provides information about the
restructuring and other unusual charges (excluding impairments of long-lived
assets, which are discussed in Note 6) related to the Electronics segment
recorded in fiscal 2001 ($ 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 reductions of $177.1 million for the elimination
of 10,375 positions primarily in the United States and Latin America consisting
primarily of manufacturing personnel; the cost of facility closures of
$44.4 million include building lease termination fees and other contract
cancellation costs for the shutdown of 38 facilities; and other charges of
$36.5 million consisting 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 at
September 30, 2002 of $32.2 million, of which $27.7 million is included in
accrued expenses and other current liabilities and $4.5 million is included in
other long-term liabilities on the Consolidated Balance Sheet, is 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. The $56.7 million net
charge consists of charges of $72.3 million, of which charges of $44.0 million
are included in cost of sales, related primarily 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 $15.6 million representing a revision in
estimates of prior years' merger, restructuring and other unusual charges
related primarily to the merger with U.S. Surgical. The following table provides
information about the restructuring and other unusual charges (excluding
impairments of long-lived assets, which are discussed in Note 6) related to the
Healthcare and Specialty Products segment recorded in fiscal 2001 ($ 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 reductions of $19.2 million includes the
elimination of 1,100 positions primarily in the United States consisting
primarily of manufacturing and sales personnel. The cost of facility closures of
$1.5 million consists of the shutdown of 5 manufacturing and administrative
facilities 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 $9.7 million
are included in cost of sales, primarily related to a restructuring of the
valves and controls business. The following table provides information about the
restructuring and other unusual charges (excluding impairments of long-lived
assets which are discussed in Note 6) related to the Engineered Products and
Services segment recorded in fiscal 2001 ($ 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
==== ===== === ===== ===== ===== ======
The cost of announced workforce reductions of $14.1 million includes the
elimination of 970 positions primarily in the United States consisting primarily
of manufacturing personnel. Facilities-related costs of $3.3 million include the
shutdown of 24 facilities primarily in the United States consisting primarily of
manufacturing and distribution facilities. At September 30, 2002, 957 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 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. 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.
2002 CHARGES
During fiscal 2002, the Company recorded total charges for the impairment of
long-lived assets in continuing operations of $3,489.5 million.
During fiscal 2002, the Fire and Security Services segment recorded a charge
of $110.0 million related to the impairment of intangible assets resulting from
the curtailment, and in certain markets, the termination of the authorized
dealer program. In addition, the Fire and Security Services segment recorded a
charge of $107.0 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 million.
During fiscal 2002, the Electronics segment recorded a charge of
$3,113.7 million, of which $2,544.7 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 capacity available in the market continues to significantly exceed
overall market demand, creating sharply declining prices and reduced anticipated
future cash flows.
The Company has assessed the carrying value of the TGN using an analysis
that employs estimates as to current and future market pricing, demand and
network completion costs. This analysis is highly sensitive to changes in those
estimates noted above. Based upon management's estimates, the Company concluded
that the value of its fiberoptic network was 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 flows forecasts were prepared
using the fifteen year estimated weighted 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 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 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 construction in progress of the TGN. 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 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. 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 million related to the impairment of property, plant and
equipment associated with the closure of facilities discussed in Note 5.
During fiscal 2002, 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 Company recorded a charge of $18.9 million related
to the impairment of certain corporate properties associated with the downsizing
of corporate headquarters discussed in Note 5.
2001 CHARGES
The Electronics, Healthcare and Specialty Products, Engineered Products and
Services and Fire and Security Services segments recorded charges of
$98.5 million, $15.4 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 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 DEVELOPMENT
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. Management 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
was 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's 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's estimate of future expenses that would be necessary to bring the
projects to 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 $184.3 million. Although work
on the projects related to the IPR&D continued after the acquisition, the amount
of purchase price allocated to IPR&D was written off because the projects
underlying the IPR&D that was being developed were not considered
technologically feasible as of the acquisition date. As of September 30, 2002,
approximately 44% of the IPR&D projects have been successfully completed and
approximately 30% of the projects have been discontinued or are currently
inactive. The remainder are in various stages of completion. There are currently
no expected material variations between projected results from the projects
versus those at the time of the acquisition.
8. OTHER (EXPENSE) INCOME
Other (expense) income is as follows ($ 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)
Tyco has repurchased some debt prior to scheduled maturities. In fiscal
2002, the Company recorded other income from the early retirement of debt
totaling $30.6 million, as compared to losses from the early retirement of debt
totaling $26.3 million and $0.3 million for fiscal 2001 and 2000, respectively.
During fiscal 2002, the Company recognized a $270.8 million loss on equity
investments, primarily related to its investments in FLAG Telecom Holdings Ltd.
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 equity 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 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). 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 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 $39.6 million adjustment to this gain (see Note 1).
On December 18, 2001, the Company completed its amalgamation with TyCom and
each of the approximately 56 million TyCom common shares not owned by Tyco were
converted into the right to receive 0.3133 of a Tyco common share. Upon
completion of the amalgamation, TyCom became a
80
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. TYCOM LTD. (CONTINUED)
wholly-owned subsidiary of Tyco, and each outstanding option to purchase TyCom
common shares is exercisable for Tyco common shares, with the number of Tyco
shares equal to the number of TyCom common shares issuable upon exercise
immediately prior to the consummation multiplied by the exchange ratio of
0.3133. The per share exercise price for the Tyco common shares issuable upon
the exercise of TyCom options equals the exercise price per TyCom common share,
at the price such options were exercisable prior to the amalgamation, divided by
the exchange ratio. In addition, each outstanding TyCom restricted share was
converted into a restricted Tyco common share based on the exchange ratio. The
options and restricted shares are subject to the same terms and conditions that
were applicable immediately prior to the amalgamation.
10. INCOME TAXES
The provision for income taxes and the reconciliation between the notional
United States federal income taxes at the statutory rate on consolidated income
before taxes and the Company's income tax provision are as follows ($ in
millions):
YEAR ENDED SEPTEMBER 30,
-------------------------------
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
========= ======== ========
The provisions for fiscal 2002, fiscal 2001, and fiscal 2000 include
$503.1 million, $629.2 million and $648.6 million, respectively, for non-U.S.
income taxes. The non-U.S. component of income/(loss) before income taxes was
$(739.9) million, $4,398.8 million and $3,343.6 million for fiscal 2002, fiscal
2001, and fiscal 2000, respectively.
81
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
The deferred income tax balance sheet accounts result from temporary
differences between the amount of assets and liabilities recognized for
financial reporting and tax purposes. The components of the net deferred income
tax asset are as follows ($ in millions):
SEPTEMBER 30,
---------------------
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
========= =========
At September 30, 2002, the Company had approximately $1,275.0 million of net
operating loss carryforwards in certain non-U.S. jurisdictions. Of these,
$647.0 million have no expiration, and the remaining $628.0 million will expire
in future years through 2012. U.S. operating loss carryforwards at
September 30, 2002 were approximately $2,501.0 million and 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 such tax
benefits. A 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 primarily due to the uncertainty of the utilization of certain non-U.S. net
operating losses. At September 30, 2002, approximately $119.0 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 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. The Company is reviewing the issues raised by the tax
authorities and is 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.
Further, management has reviewed with tax counsel the issues raised by these
taxing authorities and the adequacy of these tax accrued amounts. Management
believes but cannot assure you that 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 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 CAPITAL (CIT GROUP INC.)
On April 25, 2002, the Company announced its plan to divest 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 common
shares of CIT in an IPO establishing a measurement date for discontinued
operations. 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
========= ========
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 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 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, we recorded a $4,512.7 million
impairment charge as of March 31, 2002, which is included in discontinued
operations.
SFAS 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. 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. 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 Capital provides funding for a variety of
financing arrangements, including term loans, lease financing and operating
leases. The amounts outstanding on loans and leases are referred to as finance
receivables. Financing and leasing assets consist of finance receivables,
finance receivables held for sale, net book value of operating lease equipment
and certain investments.
At the time of designation for sale, securitization or syndication, assets
are classified as finance receivables held for sale, which are included in Net
Assets of Discontinued Operations on the Consolidated Balance Sheet. These
assets are carried at the lower of aggregate cost or market value.
LEASE FINANCING--Direct financing leases are recorded at the aggregate
future minimum lease payments plus estimated residual values less unearned
finance income. Operating lease equipment is carried at cost less accumulated
depreciation and is 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 is recorded at the lower of carrying value or estimated fair
value when acquired. Lease receivables include leveraged leases, for which a
major portion of the funding is provided by third-party lenders on a nonrecourse
basis, with Tyco Capital providing the balance and acquiring title to the
property. Leveraged leases are recorded at the aggregate value of future minimum
lease payments plus estimated residual value, less nonrecourse third-party debt
and unearned finance income. Management performs periodic reviews of the
estimated residual values with impairment, other than temporary, recognized in
the current period.
RESERVE FOR CREDIT LOSSES ON FINANCE RECEIVABLES--The reserve for credit
losses is 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 necessitate additions or
deductions to the reserve for credit losses.
CHARGE-OFF OF FINANCE RECEIVABLES--Finance receivables are reviewed
periodically to determine the probability of loss. Charge-offs are 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 are deducted from the carrying value of the
related finance receivables. To the extent that an unrecovered balance remains
due, a final charge-off is taken at the time collection efforts are no longer
deemed useful. Charge-offs are 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 loans include primarily large loans that are placed
on non-accrual status or any troubled debt restructuring. Loan impairment is
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 is collateral dependent, or the present value of
expected future cash flows discounted at the loan's effective interest rate.
SECURITIZATIONS--Pools of assets are originated and sold to independent
trusts which, in turn, issue securities to investors backed by the asset pools.
Tyco Capital retains the servicing rights and participates in certain cash flows
from the pools. The present value of expected net cash flows that exceeds the
estimated cost of servicing is 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
reviews such values on an asset by asset basis at least as often as quarterly.
Fair values of retained interests are calculated utilizing current and
anticipated credit losses, prepayment speeds and discount rates and are then
compared to the respective carrying values. Losses, representing the excess of
carrying value over estimated current fair market value, are recorded as
impairments and are recognized as a charge to operations. Unrealized gains are
not credited to current earnings but are reflected in shareholders' equity as
part of other comprehensive income.
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 are deferred and amortized
as an adjustment of finance income over the contractual life of the
transactions. Income on finance receivables other than leveraged leases is
recognized on an accrual basis commencing in the month of origination using
methods that generally approximate the interest method. Leveraged lease income
is recognized on a basis calculated to achieve a constant after-tax rate of
return for periods in which Tyco Capital has a positive investment in the
transaction, net of related deferred tax liabilities. Rental income on operating
leases is recognized on an accrual basis.
The accrual of finance income on commercial and consumer finance receivables
is generally suspended and an account is placed on non-accrual status when
payment of principal or interest is contractually delinquent for 90 days or
more, or earlier when, in the opinion of management, full collection of all
principal and interest due is doubtful.
FINANCIAL INSTRUMENTS--See the Company's discussion of significant
accounting policies included in Note 1 for information related to financial
instruments. Additionally, Tyco Capital has derivatives which
86
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. DISCONTINUED OPERATIONS OF TYCO CAPITAL (CIT GROUP INC.) (CONTINUED)
are designated as a cash flow hedge. If a derivative is designated as a cash
flow hedge, the effective portions of changes in the fair value of the
derivative are recorded in other comprehensive (loss) income and are recognized
in the Consolidated Statement of Operations when the hedged item affects
earnings. Ineffective portions of changes in the fair value of cash flow hedges
are recognized as a charge or credit to earnings.
12. CUMULATIVE EFFECT OF ACCOUNTING CHANGES
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" 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.
During fiscal 2002, the Company recognized $294.2 million 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.
The Company recorded a cumulative effect adjustment, a $29.7 million loss,
net of tax, in fiscal 2001 in accordance with the transition provisions of SFAS
No. 133.
13. (LOSS) EARNINGS PER COMMON SHARE
The reconciliations between basic and diluted (loss) earnings per common
share are as follows ($ 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
========= ======= ======== ======= ======== =======
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) earnings per common share for
fiscal 2002 also excludes 47.5 million and 22.4 million shares respectively,
related to the Company's zero coupon convertible debentures due 2020 and 2021,
respectively, because conversion conditions have not been met. 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.
14. SALE 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, the availability under these programs is
$1,025 million. At September 30, 2002 and 2001, $933 million and $695 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 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
$17.0 million, $25.3 million, and $25.7 million, or 2.7%, 5.3% and 6.6% of the
weighted-average balance of the receivables outstanding, during fiscal 2002,
2001 and 2000, 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 million and $153 million at
September 30, 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 two of our accounts
receivable programs had the option to discontinue reinvestment in new
receivables and terminate the programs. The investors have not exercised this
option and one program was subsequently amended to continue reinvestment. The
amount outstanding under the other program was $132.4 million at September 30,
2002.
In addition, during fiscal 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.
15. INVESTMENTS
At September 30, 2002 and 2001, Tyco had available-for-sale equity
investments with a fair market value of $24.6 million and $84.4 million and a
cost basis of $32.4 million and $205.6 million, respectively. The gross
unrealized losses of $8.2 million and $149.6 million and 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. These
amounts have been included as a separate component of shareholders' equity. See
Note 8 for discussion of realized losses on equity investments. At September 30,
2002, Tyco also had held-to-maturity investments 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, "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 million and $23,264.0 million at
September 30, 2002 and 2001, respectively. Accumulated amortization amounted to
$1,556.5 million at September 30, 2001. The changes in the carrying amount of
goodwill for fiscal 2002, including a reclassification from other intangibles to
goodwill upon the adoption of SFAS 142, are as follows ($ 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
======== ========= ======== ======== =========
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 million related to the impairment of the TGN
(fixed asset), 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. 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
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 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 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 SFAS142 were completed for the Tyco Telecommunications and Tyco
Infrastructure reporting units. 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 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 $337.3 million.
During fiscal 2002 we curtailed, and in certain markets terminated, the ADT
authorized dealer program. Due to a decrease in projected purchases of customer
contracts through the authorized dealer program, an updated valuation using an
income approach based on the present value of future cash flows as of
September 30, 2002 was performed for the Security Services reporting unit. The
valuation results indicated that the fair value of the reporting unit exceeded
the book value of the reporting unit resulting in no impairment of the Security
Services reporting unit's goodwill at that date.
Further disruptions to Tyco's business such as end market conditions and
protracted economic weakness, unexpected significant declines in operating
results of reporting units, continued downgrades in Tyco's credit ratings, and
additional market capitalization declines may result in the Company having to
perform another SFAS 142 first step valuation analysis for all of its reporting
units prior to the required annual assessment. These types of events and the
resulting analysis could result in additional charges to goodwill and other
asset impairments in the future. We have elected to make July 1 the annual
assessment date for all reporting units.
See Note 11, "Discontinued Operations of Tyco Capital (CIT Group Inc.)," for
information regarding the impairment of goodwill relating to Tyco Capital.
90
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
Following is a reconciliation of previously reported financial information
to adjusted amounts excluding goodwill amortization for fiscal 2001 and 2000 ($
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 assets, net were $6,562.6 million and $5,476.9 million at
September 30, 2002 and 2001, respectively. Accumulated amortization amounted to
$1,472.9 million and $864.6 million at September 30, 2002 and 2001,
respectively. The following table sets forth the gross carrying amount and
accumulated amortization of the Company's intangible assets ($ 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
======== ======== ======== ======
- ------------------------------
(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, 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. As of
September 30, 2002 and 2001, the Company had $26.2 million and $3.9 million,
respectively, of other intangible assets that are not subject to amortization.
Intangible asset amortization expense for Fiscal 2002, 2001 and 2000 was
$567.4 million, $360.1 million and $205.0 million, respectively. Amortization
expense on intangible assets currently owned by the Company is expected to be
approximately $600 million for each of the next five fiscal years.
17. RELATED PARTY TRANSACTIONS
The Company has amounts due related to loans and advances issued to
employees under the Company's Key Employee Loan Program, relocation programs and
other advances made to executives. Loans are provided to employees under the
Company's Key Employee Loan Program for the payment of taxes upon the vesting of
shares granted under our Restricted Share Ownership Plans. The loans are
unsecured 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. In addition, the
Company issued mortgages to certain employees under employee relocation
programs. These mortgages are generally payable in 15 years and are secured by
the underlying property. During fiscal 2002, the maximum amount outstanding
under these programs was $117.5 million. Loans receivable under these programs,
as well as other unsecured advances outstanding, were $88.1 and $93.4 million at
September 30, 2002 and 2001, respectively. Certain of the above loans totaling
$30.3 million and $33.7 million at September 30, 2002 and 2001, respectively,
are non-interest bearing. Interest income on interest bearing loans totaled
$5.5 million, $1.3 million, and $3.7 million in fiscal 2002, fiscal 2001 and
fiscal 2000, respectively.
During fiscal 2002, L. Dennis Kozlowski, our former Chairman and Chief
Executive Officer, 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 $3.2 million, and the
amount outstanding at September 30, 2002 was $47.0 million.
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 fiscal 2002, 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 2002 was $16.5 million and the
amount outstanding at September 30, 2002 was $14.8 million. Of the
$14.8 million, $14.5 million is a non interest bearing mortgage loan 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 fiscal 2002.
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 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 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 is a director of Tyco. Mr. Foss is the owner of a corporate
aircraft which we leased from him starting in May 2001 after seeking competitive
bids of which 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 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 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 $20 million in restitution to Tyco on December 17, 2002. Our claims against
Mr. Walsh are still pending.
94
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. DEBT
Debt is as follows(1) ($ 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
========= =========
- ------------------------------
(1) Debt maturity dates are presented on a calendar basis, consistent with the
respective offering documents.
(2) In February 2002, Tyco International Group S.A. ("TIG") borrowed the
available $2.0 billion of capacity under its 5-year unsecured revolving
credit facility, which had been maintained as liquidity support for its
commercial paper program. The facility, which expires in February 2006, is
fully and unconditionally guaranteed by Tyco and has a variable LIBO-based
rate, which 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, in February 2002, 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% 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.
(4) During the fourth quarter of fiscal 2002 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 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
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 million 6.25% Dealer Remarketable Securities
("Drs.") due 2013. Under the terms of the Drs., 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 Dealer and
reset the interest rate to an adjusted fixed rate until June 2013. If the
Remarketing Dealer does not exercise its option, then all Drs. are required
to be tendered to the Company in June 2003. 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 accreted value in
November 2003. Tyco may be required to repurchase these debentures for cash
at the option of the holders at the then accreted value in November 2005,
2007 and 2014.
(8) In November 2001, TIG sold E500.0 million 4.375% notes 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 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.
(9) In October 2001, 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 fully and unconditionally guaranteed by Tyco. The net proceeds of
approximately $1,487.8 million were used to repay borrowings under TIG's
commercial paper program.
(10) 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 becomes investment grade by both S&P
and Moody's.
(11) These debentures, plus $108.6 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 rate of 3.66%. TIG repaid $645.0 million in April 2002 and the
remainder in June 2002.
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 (total debt and shareholders'
96
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. DEBT (CONTINUED)
equity) exceeds 52.5%. Total debt as a percentage of total capitalization was
49.4% at September 30, 2002.
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 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 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.
The fair value of debt was approximately $21,934.6 million (book value of
$24,205.8 million) and $21,895.0 million (book value of $21,619.0 million) at
September 30, 2002 and 2001, 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 in fiscal 2004,
$1,755.9 in fiscal 2005, $3,744.2 in fiscal 2006, and $602.3 in fiscal 2007.
The weighted-average rate of interest on all debt was 4.69% and 4.27% at
September 30, 2002 and 2001, respectively. The weighted-average rate of interest
on all variable debt was 4.71% and 3.50% at September 30, 2002 and 2001,
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 $116.1 million,
$9.7 million and $6.6 million for fiscal 2002, fiscal 2001 and fiscal 2000,
respectively.
19. 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, 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, 2002 and 2001. See Note 18 for the fair
value estimates of debt.
In accordance with SFAS No. 133, 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 of forward foreign currency exchange contracts, forward commodity
contracts and interest rate swaps at September 30, 2002 would have resulted in a
$34.0 million gain, a $1.2 million loss, and a $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. At September 30, 2002
and 2001, the book values of derivative financial instruments recorded on the
Consolidated Balance Sheets approximate fair values.
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, as
assessed using the short-cut method under SFAS No. 133, were highly effective.
The ineffective 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, have 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
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,
intercompany loan balances and subsidiary earnings denominated in certain
foreign currencies.
20. COMMITMENTS AND CONTINGENCIES
The Company occupies certain facilities under leases that expire at various
dates through the year 2027. Rental expense under these leases and leases for
equipment was $848.9 million, $634.7 million and $442.7 million for fiscal 2002,
fiscal 2001 and fiscal 2000, respectively. At September 30, 2002, 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 million in fiscal 2004, $511.5 million in fiscal 2005,
$397.9 million in fiscal 2006, $258.1 million in fiscal 2007 and an aggregate of
$1,087.5 million in fiscal years 2008 through 2027. In addition, the Company has
the option to buy the equipment under sale-leaseback upon expiration of the
lease term. These payments
98
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. COMMITMENTS AND CONTINGENCIES (CONTINUED)
would approximate $200 million 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 results of operations.
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 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.
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.
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). The Company does not expect the outcome of these proceedings, either
individually or in the aggregate, to have a material adverse effect on its
financial position, results of operations or liquidity.
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, Tyco has concluded 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, Tyco concluded 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
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 million, the Company has concluded that any potential payment of such
estimated amounts will not have a material adverse effect on its financial
position, results of operations or liquidity.
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 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 results of operations,
financial position or cash flows.
21. 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 cost 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 with the advice of
professionally qualified actuaries in the countries concerned or is based on
subsequent formal reviews. The Company's funding policy is to make contributions
in accordance with the laws and customs of the various countries in which it
operates. 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 pension 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
======= ======= =======
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.
The net pension amount recognized on the Consolidated Balance Sheet at
September 30, 2002 and 2001 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)
======== ======== ======== ========
The net pension amounts recognized on the Consolidated Balance Sheet at
September 30, 2002 and 2001 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%
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 $2,038.0 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.
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 $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)
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 $17.1 million, $6.4 million and $8.2 million for fiscal 2002, fiscal
2001 and fiscal 2000, respectively.
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, 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--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 $179.9 million, $152.8 million and
$132.7 million for fiscal 2002, 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 $16.1 million, $9.3 million
and $10.8 million in fiscal 2002, fiscal 2001 and fiscal 2000, respectively.
POSTRETIREMENT BENEFIT PLANS--The Company generally does not provide
postretirement benefits other than pensions for its employees. Certain of the
Company's acquired operations provide these benefits to employees who were
eligible at the date of acquisition. The following tables exclude amounts
related to the discontinued operations of CIT for all periods presented.
Net periodic postretirement benefit cost reflects the following components
($ 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
===== ===== =====
The components of the accrued postretirement benefit obligation, 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) $(341.4)
======= =======
For measurement purposes, in fiscal 2002, a 7.05% composite annual rate of
increase in the per capita cost of covered health care benefits was assumed. The
rate was assumed to decrease gradually to 5.00% by the year 2008 and remain at
that level thereafter. At year-end, the composite annual rate of increase in
health care benefit costs was increased to 11.55%, decreasing to 5.00% by the
year 2011. A one-percentage-point change in assumed healthcare cost trend rates
would have the following effects ($ in millions):
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
-------------- --------------
Effect on total of service and interest cost components..... $ 1.3 $ (1.1)
Effect on postretirement benefit obligation................. 18.0 (15.8)
The combined weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 6.75% at September 30, 2002
(7.50% at September 30, 2001).
22. PREFERENCE SHARES
Tyco has authorized 125,000,000 preference shares, par value of $1 per
share, at September 30, 2002 and September 30, 2001, 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
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 $89.9 million, $116.8 million and $137.4 million for fiscal
2002, fiscal 2001 and fiscal 2000, respectively.
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, there were 49,740,623
shares authorized under the plan, of which 15,339,021 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 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 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, there were approximately 764,000 options outstanding and
9.2 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 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, there were approximately
18.6 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, there were approximately 14.6 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)
Share option activity for all Tyco plans since September 30, 1999 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
===========
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.
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, all of which were outstanding at September 30, 2002. 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 receive cash dividends. However, they have the right to
receive dividends in the form of additional DSU's.
DIVIDENDS--Tyco has paid a quarterly cash dividend of $0.0125 per common
share since July 1997.
24. COMPREHENSIVE (LOSS) INCOME
The purpose of reporting comprehensive (loss) income is to report a measure
of all changes in equity, other than transactions with shareholders. Total
comprehensive (loss) income is included in the Consolidated Statements of
Shareholders' Equity. The components of accumulated other comprehensive (loss)
income are as follows ($ 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)
========= ========= ======= ======= =========
- ------------------------------
(1) Primarily related to Tyco's investment in 360networks, Inc.
(2) Includes $112.8 million pre-tax ($100.6 million after-tax) reclassification
of unrealized losses related to the other than temporary impairment of
investments.
25. SUPPLEMENTARY INCOME STATEMENT INFORMATION
Selected supplementary income statement information is presented below ($ 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 $149.3
109
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
26. SUPPLEMENTARY BALANCE SHEET INFORMATION
Selected supplementary balance sheet information is presented below ($ 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 $4,736.9
========= ========
110
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
27. SUPPLEMENTARY CASH FLOW INFORMATION
Selected supplementary cash flow information is presented below ($ in
millions).
Net 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)
As described in Note 1 to these Consolidated Financial Statements, during
the fourth quarter of fiscal 2002, the Company identified various adjustments
relating to prior year financial statements, the effects of which are not
material individually or in the aggregate to any prior year or quarter, and
therefore prior year financial statements have not been restated. Instead, these
adjustments that aggregate $261.6 million on a pre-tax basis have been recorded
in the first quarter of fiscal 2002. Also during the fourth quarter of fiscal
2002, the Company identified certain matters requiring adjustment to the
previously reported quarterly results for the first three quarters of fiscal
2002. The nature and amounts of these adjustments are described in Notes
(1) through (3) of the quarterly table below for fiscal 2002.
Summarized quarterly financial data for the year ended September 30, 2002 on
an as previously reported basis (as adjusted to reflect the reclassification of
Tyco Capital as discontinued operations)
111
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
28. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
and restated for the adjustments referred to above are included in the table
below ($ 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 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 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 million. The
charges consist of impairment charges of $2,351.7 million primarily related
to the write-down of the TGN; restructuring and other unusual charges of
$655.1 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, 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 million. The charges consist of goodwill
impairment charges of $844.4 million relating to continuing operations;
impairment charges of $239.4 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 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 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 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; 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; and gain on sale of businesses of $7.2 million. Also
includes $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 $5.3 million related to
the early retirement of debt.
(6) Cumulative effect of accounting changes in fiscal 2001 relate to the
adoption of SAB 101 and SFAS No. 133.
114
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
29. TYCO INTERNATIONAL GROUP S.A.
Tyco International Group S.A. ("TIG"), a wholly-owned subsidiary of the
Company, has public debt securities outstanding (see Note 18) which are fully
and unconditionally guaranteed by Tyco. The following tables present condensed
consolidating financial information for Tyco, TIG and all other subsidiaries.
Condensed financial information for Tyco and TIG on a stand-alone basis are
presented using the equity method of accounting for subsidiaries in which they
own or control twenty percent or more of the voting shares.
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 2002
($ 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 $(9,411.7)
========== ======== ========= ======== =========
115
TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
29. TYCO INTERNATIONAL GROUP S.A. (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 2001
($ 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)
CONSOLIDATING STATEMENT OF OPERATIONS
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)
CONSOLIDATING BALANCE SHEET
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.......................... --