ADT 2005 Annual Report Download - page 93

Our Healthcare business is subject to extensive regulation by the government and failure to comply with
those regulations could have a material adverse effect on our results of operations and financial
condition.
The United States Food and Drug Administration regulates the approval, manufacturing and sale
and marketing of many of our healthcare products. Failure to comply with current Good Manufacturing
Practices and other applicable regulations and quality assurance guidelines could lead, and have led, to
temporary manufacturing shutdowns, product recalls, product shortages or delays in product
manufacturing. Efficacy or safety concerns, an increase in trends of adverse events in the marketplace,
and/or manufacturing quality issues with respect to our products could lead to product recalls,
withdrawals or declining sales.
Our ADT business has generally experienced higher rates of customer attrition, which may reduce our
future revenue and has caused us to change the useful life of accounts, increasing our depreciation
and amortization expense.
Attrition rates for customers in our Global Electronic Security Services business were 14.8%,
15.1% and 15.9% on a trailing 12-month basis as of September 30, 2005, 2004 and 2003, respectively.
Although the attrition rate has been declining, if attrition rates were to trend upward, ADT’s recurring
revenue and results of operations will be adversely affected. Tyco amortizes the costs of ADT’s
contracts and related customer relationships purchased through the ADT dealer program based on the
estimated life of the customer relationships. Internally generated residential and commercial account
pools are similarly amortized. If the attrition rates were to rise Tyco may be required to accelerate the
amortization of the costs which could cause a material adverse effect on our financial condition, results
of operations and cash flows.
Our reputation and our ability to do business may be impaired by improper conduct by any of our
employees or agents or those of our subsidiaries.
Tyco and its subsidiaries operate in many parts of the world that have experienced governmental
corruption to some degree, including, but not limited to, Asia, Latin America and Europe. Tyco’s policy
mandates strict compliance with the United States Foreign Corrupt Practices Act, as amended, and
local laws prohibiting corrupt payments to government officials. Nonetheless, we cannot provide
assurance that our internal control policies and procedures will always protect us from reckless or
criminal acts committed by our employees that would violate U.S. and/or foreign laws, including the
laws governing payments to government officials. These improper actions, however, could subject the
Company to civil or criminal penalties, including substantial monetary fines, as well as disgorgement,
against us or our subsidiaries and could damage our reputation and, therefore, our ability to do
business.
From time to time Tyco receives information alleging improper conduct of Tyco employees, agents,
and/or distributors, including conduct involving potentially improper payments to foreign government
officials. Tyco’s policy is to investigate that information and respond appropriately, including, if
warranted, taking remedial control measures and reporting its findings to relevant law enforcement
authorities.
Covenants in our debt instruments may adversely affect us.
Our bank credit agreements contain financial and other covenants, such as a limit on the ratio of
debt to earnings before interest, taxes, depreciation and amortization, minimum levels of net worth,
and limits on incurrence of liens. We have synthetic lease facilities with other covenants, including
interest coverage and leverage ratios. Our outstanding indentures contain customary covenants
including limits on negative pledges, subsidiary debt and sale/leaseback transactions.
2005 Financials 17