ADT 2005 Annual Report Download - page 89

Examinations and audits by tax authorities, including the IRS, could result in additional tax payments
for prior periods.
Tyco’s and our subsidiaries’ income tax returns are periodically examined by various tax authorities.
Tyco is currently under audit by the Internal Revenue Service (‘‘IRS’’) for the years 1997 through 2000.
In connection with such examinations, tax authorities, including the IRS, have raised issues and
proposed tax deficiencies. We are reviewing the issues raised by the tax authorities and are contesting
certain of the proposed tax deficiencies. Amounts related to these tax deficiencies and other tax
contingencies that management has assessed as probable and estimable have been accrued through the
income tax provision, equity or adjustments to goodwill, as appropriate. The calculation of our tax
liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude
of jurisdictions across our global operations. We recognize potential liabilities and record tax liabilities
for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of
whether, and the extent to which, additional income taxes will be due. These tax liabilities are reflected
net of related tax loss carryforwards. We adjust these liabilities in light of changing facts and
circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution
may result in a payment that is materially different from our current estimate of the tax liabilities.
In connection with the IRS audits for the years 1997 through 2000, the Company prepared
proposed adjustments to these prior period U.S. federal income tax returns. The proposed amendments
are currently being reviewed by the IRS and if accepted will result in receipt of refunds or credits and
a corresponding reduction to our net deferred tax assets and liabilities. The Company is in the process
of preparing proposed amendments to prior period U.S. federal income tax returns for additional
periods. The proposed amendments are not expected to have a material adverse impact on our
financial condition, results of operations or cash flows.
Ongoing SEC inquiries may require us to further amend or restate our public disclosures.
We are subject to inquiries by the SEC’s Division of Enforcement. We cannot provide assurance
that the resolution of the Division of Enforcement’s inquiries will not necessitate further amendments
or restatements to our previously-filed periodic reports or lead to some enforcement proceedings
against Tyco. The SEC’s Division of Enforcement has not completed its review of prior management’s
actions and our accounting, including the matters covered by the Company’s Current Report on
Form 8-K filed on December 30, 2002.
During 2005, the Company recorded a charge of $50 million, which represents the Company’s best
estimate of the amount in fines and penalties management believes the Company will likely pay to
resolve the matters raised in the SEC’s investigation. The Company is engaged in discussions with the
SEC’s Division of Enforcement to resolve the matters raised in the SEC’s investigation. Final
resolution of these matters is subject to a number of uncertainties, including finalizing the terms of a
settlement that the Enforcement Staff will agree to recommend to the Commission, the Company’s
submission of an offer of settlement approved by the Tyco Board of Directors, and the Commission’s
approval of the settlement offer. Until such events have occurred, the charge is subject to change.
Material adverse legal judgments, fines, penalties or settlements could adversely affect our financial health
and prevent us from fulfilling our obligations under our outstanding indebtedness.
We estimate that our available cash and our cash flow from operations will be adequate to fund
our operations and service our debt for the foreseeable future. In making this estimate, we have not
assumed the need to make any material payments in connection with our pending litigation or
investigations. Any material adverse legal judgments, fines, penalties or settlements arising from our
pending investigations and litigation could require additional funding. If such developments require us
to obtain additional funding, we cannot provide assurance that we will be able to obtain the additional
2005 Financials 13