ADT 2008 Annual Report Download - page 134

Financial Condition and Results of Operations. Additionally, the IRS is auditing the prior tax returns
of the Company, which include legal entities of Tyco, Covidien and Tyco Electronics for the 2001 to
2004 period. The IRS has not issued any RARs for this period. The ultimate resolution of these
matters is uncertain and could result in a material impact to the Company’s financial position, results
of operations, cash flows or the effective tax rate in future reporting periods.
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 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 as specified in the Tax Sharing Agreement, intends to 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. This is a pre-Separation shared tax matter under the Tax Sharing Agreement.
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 and
follow-up investigations, 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 material
fines, consent to injunctions on future conduct, or suffer other penalties or adverse impacts, each of
which could 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
the FCPA investigations 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 in early 2007 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
is possible that the Company may be subject to civil or criminal proceedings and may be required to
2008 Financials 31