ADT 2008 Annual Report Download - page 246

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Commitments and Contingencies (Continued)
claims from individuals that have opted-out or from any other legacy securities litigation. Should any of
these cases result in an adverse judgment or be settled for a significant amount, they could have a
material adverse effect on our financial position, results of operations or cash flows.
Under the terms of the Separation and Distribution Agreement, each of Tyco, Covidien and Tyco
Electronics is jointly and severally liable for the full amount of any legacy securities action settlement
(including ERISA claims) and any judgments resulting from opt-out claims. Additionally, under the
Separation and Distribution Agreement, the companies shared in the liability and escrow accounts
related to the class action settlement, with Tyco assuming 27%, Covidien 42% and Tyco Electronics
31% of the settlement amount.
As a result, Tyco incurred a charge to expense, for which no tax benefit is available, and a current
liability of $2.975 billion in the third quarter of 2007. 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 Company has also recovered certain of these costs from insurers. As a result, the
Company recorded $113 million of recoveries in connection with the class action settlement in its
Consolidated Statements of Operations for 2007. Based on the Separation and Distribution Agreement,
the Company recorded payables to Covidien and Tyco Electronics for their portion of the 2007
recoveries with an offset to shareholders’ equity. The Company recovered an additional $38 million of
costs from insurers during 2008. The Company recorded payables to Covidien and Tyco Electronics for
their respective shares of the 2008 recoveries resulting in a net $10 million credit recorded to class
action settlement, net in the Consolidated Statement of Operations.
Since all legal contingencies that could have affected the settlement were exhausted on
February 21, 2008, the administration and distribution of the settlement funds in escrow has been
managed by the counsel of the certified class and Tyco is not subject to any further liability related to
the class action settlement. As a result, Tyco has extinguished the class action liability and no longer
has claim to the escrow account. The escrow accounts earned interest that was payable to the class. As
a result, interest was also accrued on the class action settlement liability. On February 21, 2008, the
class action liability and escrow account balances including interest were each $3.02 billion.
Based on the Separation and Distribution Agreement, Tyco had a receivable from Covidien and
Tyco Electronics for their portion of the liability of $1,257 million and $927 million, respectively at
September 28, 2007 and corresponding payables 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 were presented net in the Consolidated Balance Sheet.
Tyco’s portion of the liability was $808 million at September 28, 2007. These amounts were extinguished
during the second quarter of 2008.
ERISA Partial Withdrawal Liability Assessment and Demand
On June 8, 2007, SimplexGrinnell received a notice alleging that it had partially withdrawn from
the National Automatic Sprinkler Industry Pension Fund (the ‘‘Fund’’). Under Title IV of ERISA, if
the Fund can prove that an employer completely or partially withdraws from a multi-employer pension
plan such as the Fund, the employer is liable for withdrawal liability equal to its proportionate share of
the plan’s unfunded vested benefits. The alleged withdrawal results from a 1994 labor dispute between
Grinnell Fire Protection Systems, SimplexGrinnell’s predecessor, and Road Sprinkler Fitters Local
Union No. 669.
2008 Financials 143