ADT 2007 Annual Report Download - page 131

its prior filed tax return positions. The Company continues to believe that the amounts recorded in its
financial statements relating to these tax adjustments are sufficient. However, the ultimate resolution of
these matters is uncertain and could result in a material impact to the Company’s financial position,
results of operations or cash flows. In addition, ultimate resolution of these matters could result in the
Company filing amended U.S. federal income tax returns for years subsequent to the current 1997 to
2000 audit period and could have a material impact on the Company’s effective tax rate in future
reporting periods.
Additionally, the IRS proposed civil fraud penalties against a prior subsidiary that was distributed
to Tyco Electronics arising from alleged actions of former executives in connection with certain
intercompany transfers of stock of Simplex Technologies in 1998 and 1999. Based on statutory
guidelines, we estimate the proposed penalties could range between $30 million and $50 million. The
Company as Audit Managing Party will vigorously oppose the assertion of such penalties against Tyco
Electronics, in part, because beginning in 2003 the Company discovered, investigated and reported the
conduct at issue to the IRS and fully cooperated in the criminal prosecution of the Company’s former
Chief Tax Officer on a charge of willful filing of a false tax return.
Compliance Matters
As previously reported in our periodic filings, we have received and responded to various
allegations and other information that certain improper payments were made by our subsidiaries in
recent years. As previously reported, we have been informed that two subsidiaries in our Flow Control
business in Italy have been named in a request for criminal charges filed by the Milan public
prosecutor’s office. We have reported to the U.S. Department of Justice (‘‘DOJ’’) and the SEC the
investigative steps and remedial measures that we have taken in response to the allegations. We also
informed the DOJ and the SEC that we retained outside counsel to perform a company-wide baseline
review of our policies, controls and practices with respect to compliance with the Foreign Corrupt
Practices Act (‘‘FCPA’’), that we would continue to make periodic progress reports to these agencies,
and that we would present our factual findings upon conclusion of the baseline review. We have and
will continue to communicate with the DOJ and SEC to provide updates on the baseline review being
conducted by outside counsel, including, as appropriate, briefings concerning additional instances of
potential improper payments identified by us in the course of our ongoing compliance activities.
Covidien and Tyco Electronics agreed, in connection with the Separation, to cooperate with the
Company in its response to these allegations. To date, the baseline review has revealed that some
business practices may not comply with Tyco and FCPA requirements. At this time, we cannot predict
the outcome of these matters and other allegations reported to regulatory and law enforcement
authorities and therefore cannot estimate the range of potential loss or extent of risk, if any, that may
result from an adverse resolution of these matters. However, it is possible that we may be required to
pay judgments, suffer penalties or incur settlements in amounts that may have a material adverse effect
on our financial position, results of operations or cash flows.
Any judgment required to be paid or settlement or other cost incurred by Tyco in connection with
these matters would be subject to the liability sharing provisions of the Separation and Distribution
Agreement, which assigned liabilities primarily related to the former Healthcare and Electronics
businesses of Tyco to Covidien or Tyco Electronics, respectively, and provides that Tyco will retain
liabilities primarily related to its continuing operations. Any liabilities not primarily related to a
particular segment will be shared equally among Tyco, Covidien and Tyco Electronics.
The German Federal Cartel Office (‘‘FCO’’) charged that certain German subsidiaries in Tyco’s
Flow Control business have engaged in anti-competitive practices, in particular with regard to its
hydrant, valve, street box and fittings business. Tyco investigated this matter and determined that the
conduct may have violated German anti-trust-law. Tyco is cooperating with the FCO in its investigation
of this violation. Tyco cannot estimate the range of potential loss that may result from this violation. It
2007 Financials 39