ADT 2002 Annual Report Download - page 20

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 employees
are operating under stressful conditions, which reduces morale and could lead to increased employee
turnover. Continuing negative publicity could have a material adverse effect on our results of
operations and liquidity and the market price of our publicly traded securities.
Pending litigation could have a material adverse effect on our liquidity and financial condition.
As a result of actions taken by our former senior corporate management, Tyco, some members of
our former senior corporate management, former members of our board of directors, and our current
Chief Executive Officer are named defendants in a number of purported class actions alleging
violations of the disclosure provisions of the federal securities laws, as well as in a number of derivative
actions. In the consolidated derivative action, the plaintiffs have filed a motion which seeks to add
certain members of our current board of directors and management as defendants. Tyco, certain of our
current and former employees, some members of our former senior corporate management, and some
former members of our board of directors also are named as defendants in several Employee
Retirement Income Security Act (‘‘ERISA’’) actions. In addition, Tyco and some members of our
former senior corporate management are subject to a SEC inquiry and some members of our former
senior corporate management are named as defendants in criminal cases being prosecuted by the
District Attorney of New York County. The findings and outcomes of the prosecutions and the SEC
civil action may affect the course of the purported class actions, derivative actions and ERISA claims
pending against Tyco. In May and July 2003, complaints were filed against Tyco and our current
Chairman and Chief Executive Officer purporting to represent a class of purchasers of Tyco securities
alleging violations of the disclosure provisions of the federal securities laws. We are generally obliged to
indemnify our directors and officers and our former directors and officers who are also named as
defendants in some or all of these matters to the extent permitted by Bermuda law. In addition, our
insurance carriers may decline coverage, or our coverage may be insufficient to cover our expenses and
liability in some or all of these matters. On February 13, 2003, one of Tyco’s insurance carriers filed an
action in the Supreme Court of the State of New York seeking to rescind certain directors and officers
liability and fiduciary liability insurance policies issued to Tyco and its directors, officers and fiduciaries
on the basis of alleged misrepresentations made by our former senior corporate management. We are
unable at this time to estimate what our ultimate liability in these matters may be, but we may be
required to pay judgments or settlements and incur expenses in aggregate amounts that would have a
material adverse effect on our financial condition, results of operations and liquidity.
Our senior corporate management team is new to Tyco and is required to devote significant attention to
matters arising from actions of prior management.
In the past year, we replaced our senior corporate executives with an entirely new team, and our
entire board of directors determined not to stand for reelection. A new board of directors was elected
at our annual general meeting of shareholders in March 2003. It will take some time for our new
management team and our new board of directors to learn about our various businesses and to develop
strong working relationships with our cadre of operating managers at our various subsidiary companies.
Our new senior corporate management team’s ability to complete this process has been and continues
to be hindered by their need to spend significant time and effort dealing with internal and external
investigations, developing effective corporate governance procedures, strengthening reporting lines and
reviewing internal controls. During this period and in order to complete this process, our new
executives will depend in part on advisors, including certain former directors. We cannot assure you
that this major restructuring of our board of directors and senior management team and the
accompanying distractions, in this environment, will not adversely affect our results of operations.
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