ADT 2007 Annual Report Download - page 121

to Tyco all of their claims against defendants Kozlowski, Swartz and Walsh. In exchange, we will agree
to pay to the certified class 50% of any net recovery against these defendants.
The parties to the Memorandum of Understanding have applied to the court for approval of the
settlement agreement. On July 13, 2007, the U. S. District Court in Concord, New Hampshire granted
preliminary approval of the settlement. On November 2, 2007, the final fairness hearing for the class
settlement was held. The Court indicated it would approve the settlement and stated a formal ruling
would be issued in a few weeks. If the settlement agreement does not receive final court approval, the
Memorandum of Understanding will be null and void. By December 28, 2007, class participants must
file their proofs of claim demonstrating their right to recovery under the class settlement.
The deadline for deciding not to participate in the class settlement was September 28, 2007. As of
such date, Tyco had received opt-out notices from individuals and entities totaling approximately 4% of
the shares owned by class members. These individuals and entities may pursue their claims separately
against Tyco and any judgments resulting from such claims would not reduce the settlement amount.
One entity, Franklin Mutual Advisers, LLC, has filed a complaint against Tyco on September 24, 2007
in an action styled Franklin Mutual Advisers, LLC v. Tyco International Ltd. in the United States District
Court for the District of New Jersey alleging violations of Section 11 of the Securities Act of 1933, 15
U.S.C. Sec. 77(b), Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. Sec. 78(b), and
Rule 10b-5 promulgated thereunder and Section 18 of the Securities and Exchange Act of 1934, 15
U.S.C. Sec. 78(k) in connection with the plaintiffs’ purchases and sales of Tyco securities between
June 4, 2001 and April 30, 2002. The plaintiffs seek unspecified compensatory damages and reasonable
attorneys’ fees and costs. Tyco has requested that this action be transferred to the United States
District Court for the District of New Hampshire. Tyco intends to vigorously defend this litigation. It is
not possible at this time to predict the final outcome or to estimate the amount of loss or range of
possible loss, if any, that might result from an adverse resolution of the Franklin matter or other
unasserted claims from individuals that have opted-out.
Under the terms of the Separation and Distribution Agreement entered into in connection with
the Separation, each of Tyco, Covidien and Tyco Electronics are jointly and severally liable for the full
amount of the class action settlement and any judgments resulting from opt-out claims. Additionally,
under the Separation and Distribution Agreement, the companies will share in the liability and related
escrow accounts, with Tyco assuming 27%, Covidien 42% and Tyco Electronics 31% of the settlement
amount.
Tyco incurred a charge to expense, for which no tax benefit is available, and a current liability of
$2.975 billion in 2007. The Company has also recovered or expects to recover certain of these costs
from insurers. As such, the Company recorded $113 million of recoveries in connection with the class
action settlement in its Consolidated Statements of Operations. Tyco borrowed under its unsecured
bridge and credit facilities to fund the liability and placed the proceeds in escrow for the benefit of the
class. In connection with the Separation, Covidien and Tyco Electronics assumed their portion of the
related borrowing. The escrow accounts will earn interest that is payable to the class. Interest is also
accrued on the class action settlement liability. Based on the Separation and Distribution Agreement, at
September 28, 2007, Tyco had a receivable from Covidien and Tyco Electronics for their portion of the
liability of $1,257 million and $927 million, respectively, and a payable to Covidien and Tyco Electronics
for their interest in the escrow accounts. Receivables and payables that pertain to the class action
settlement and related escrow accounts with the same counterparty are presented net in the
consolidated balance sheet. Tyco’s portion of the liability is $808 million. Additionally, Tyco has paid
$73 million and recorded payables of $9 million at September 28, 2007, with an offset to shareholders’
equity for amounts due to Covidien and Tyco Electronics for their portion of the insurance recovery.
If the proposed settlement were not consummated on the agreed terms or if the unresolved
proceedings were to be determined adversely to Tyco, it is possible that the Company will be required
to pay judgments or settlements and incur expenses, in excess of any insurance coverage, in aggregate
2007 Financials 29