ADT 2007 Annual Report Download - page 232

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Commitments and Contingencies (Continued)
Managing Party as specified in the Tax Sharing Agreement, the Company intends to vigorously defend
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
Tyco has received and responded to various allegations and other information that certain
improper payments were made by Tyco 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. Tyco has reported to the U.S.
Department of Justice (‘‘DOJ’’) and the SEC the investigative steps and remedial measures that it has
taken in response to the allegations. Tyco also informed the DOJ and the SEC that it has retained
outside counsel to perform a company-wide baseline review of its policies, controls and practices with
respect to compliance with the Foreign Corrupt Practices Act (‘‘FCPA’’), that it would continue to make
periodic progress reports to these agencies, and that it would present its factual findings upon
conclusion of the baseline review. The Company has 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 the
Company in the course of its 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, Tyco 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 the Company may be required to pay judgments, suffer penalties
or incur settlements in amounts that may have a material adverse effect on its 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
140 2007 Financials