ADT 2007 Annual Report Download - page 114

Our senior corporate management team is required to devote significant attention to matters arising from
actions of prior management.
As a result of the actions of prior management, we replaced our senior corporate executives with a
new team during 2002 through 2004, and a new Board of Directors was elected at our annual general
meeting of shareholders in March 2003. We cannot provide assurance that the distractions related to
matters arising from the actions of prior management will not adversely affect our financial condition,
results of operations or cash flows.
Risks Relating to the Separations
If the distribution of Covidien and Tyco Electronics common shares to our shareholders or certain
internal transactions undertaken in connection with the Separation are determined to be taxable for
U.S. federal income tax purposes, we could incur significant U.S. federal income tax liabilities.
We have received private letter rulings from the U.S. Internal Revenue Service regarding the U.S.
federal income tax consequences of the distribution of Covidien and Tyco Electronics common shares
to our shareholders substantially to the effect that the distribution of such shares, except for cash
received in lieu of fractional shares, will qualify as tax-free under Sections 355 and 368(a)(1)(D) of the
Internal Revenue Code of 1986. The private letter rulings also provided that certain internal
transactions undertaken in anticipation of the Separation would qualify for favorable treatment under
the Code. In addition to obtaining the private letter rulings, we have obtained opinions from the law
firm of McDermott Will & Emery LLP confirming the tax-free status of the distribution and certain
internal transactions. The private letter rulings and the opinions relied on certain facts and
assumptions, and certain representations and undertakings, from Tyco, Covidien and Tyco Electronics
regarding the past and future conduct of our respective businesses and other matters. Notwithstanding
the private letter rulings and the opinions, the Internal Revenue Service could determine on audit that
the distribution or the internal transactions should be treated as taxable transactions if it determines
that any of these facts, assumptions, representations or undertakings are not correct or have been
violated, or that the distributions should be taxable for other reasons, including as a result of significant
changes in stock or asset ownership after the distribution. If the distribution ultimately is determined to
be taxable, we would recognize gain in an amount equal to the excess of the fair market value of the
Covidien and Tyco Electronics common shares distributed to our shareholders on June 29, 2007 over
our tax basis in such common shares, but such gain, if recognized, generally would not be subject to
U.S. federal income tax. However, we would incur significant U.S. federal income tax liabilities if it
ultimately is determined that certain internal transactions undertaken in connection with the Separation
should be treated as taxable transactions.
In addition, under the terms of the Tax Sharing Agreement that we have entered into with
Covidien and Tyco Electronics in connection with the Separation, in the event the distribution or the
internal transactions are determined to be taxable and such determination was the result of actions
taken after the Separation by Tyco, Covidien or Tyco Electronics, the party responsible for such failure
would be responsible for all taxes imposed on Tyco, Covidien or Tyco Electronics as a result thereof. If
such determination is not the result of actions taken after the Separation by Tyco, Covidien or Tyco
Electronics, then we, Covidien and Tyco Electronics would be responsible for 27%, 42% and 31%,
respectively, of any taxes imposed on us, Covidien or Tyco Electronics as a result of such
determination. Such tax amounts could be significant. In the event that any party to the Tax Sharing
Agreement defaults in its obligation to pay distribution taxes to another party that arise as a result of
no party’s fault, each non-defaulting party would be responsible for an equal amount of the defaulting
party’s obligation to make a payment to another party in respect of such other party’s taxes.
22 2007 Financials