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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-16979
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ADT LIMITED
(Exact Name of Registrant as Specified in its Charter)
BERMUDA Cedar House Not Applicable
(Jurisdiction of Incorporation 41 Cedar Avenue (I.R.S. Employer
or Organization) Hamilton HM12, Bermuda Identification No.)
(Address of Principal
Executive Offices)* Not Applicable
(Zip Code)
Registrant's telephone number, including area code 441-295-2244* *See page 2
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Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Shares, par value
$0.10 per share New York Stock Exchange
Series A First Preference
Share purchase rights New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.[ ]
Based on the closing market price per Common Share of $26 7/8 on March 24,
1997, the aggregate market value of the voting shares held by non
affiliates of the registrant was $4,125.7 million.
At March 24, 1997, the number of shares outstanding of the registrant's Common
Shares par value $0.10 per share was 156,696,447 shares. A subsidiary of ADT
Limited owns 3,182,787 Common Shares which are included in the number
outstanding.
Table of Contents
Page
PART I
ITEM 1. DESCRIPTION OF BUSINESS................................ 1
ITEM 2. DESCRIPTION OF PROPERTIES.............................. 15
ITEM 3. LEGAL PROCEEDINGS...................................... 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS...................................... 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS........................ 19
ITEM 6. SELECTED FINANCIAL DATA................................ 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......... 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............ 34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..... 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..... 34
ITEM 11. EXECUTIVE COMPENSATION................................. 37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
AND MANAGEMENT......................................... 45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......... 47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K................................ 47
SIGNATURES............................................. 52
i
ADT LIMITED ANNUAL REPORT ON FORM 10-K
The consolidated financial statements of ADT Limited (ADT Limited and its
subsidiaries, where appropriate, is sometimes referred to hereinafter as "ADT"
or the "Company") appearing in this Annual Report have been prepared in United
States dollars ("US dollars" or "$") in accordance with generally accepted
accounting principles in the United States.
This Annual Report contains translations of certain amounts from various
currencies into US dollars. The translations of such foreign currencies into
US dollars appearing in this Annual Report have been made in accordance with
the principles set out in notes 2 and 3 of the notes to consolidated financial
statements of the Company.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
ADT, through its subsidiaries, is engaged in two service businesses,
electronic security services in North America and Europe and vehicle auction
and related services in the United States.
History of ADT Limited
ADT Limited was incorporated in Bermuda on September 28, 1984 under the name
Hawley Group Limited. In December 1984, as part of a corporate
reorganization, Hawley Group Limited became the parent company of the Hawley
group of companies. Prior to this reorganization, the parent company of the
Hawley group of companies was Hawley Group PLC ("Hawley Group"), a company
into which new management had been introduced in 1977, headed by Mr. M.A.
Ashcroft, Chairman and Chief Executive Officer of ADT Limited. At the time of
the reorganization, the Hawley group of companies had a number of interests in
service and other industries. ADT Limited became a publicly traded company
under the name Hawley Group Limited on December 24, 1984 when its common
shares were listed for trading on the London Stock Exchange. Prior to this
date, the ordinary shares of Hawley Group had been listed on the London Stock
Exchange. Hawley Group Limited changed its name to ADT Limited in 1988 after
its acquisition in 1987 of ADT, Inc. (now named ADT Security Services, Inc.,
hereinafter "ADT Security Services"). ADT Limited's businesses are conducted
through its subsidiaries.
ADT Limited operates under the Companies Act, 1981 of Bermuda (as amended).
Development of ADT's Electronic Security Services Business
The electronic security services division in North America principally
consists of ADT Security Services, ADT Canada, Inc., Alert Centre, Inc.
("Alert") and API Security, Inc., a subsidiary of Automated Security
(Holdings) PLC ("ASH"). ADT built the core of its North American electronic
security services business by acquiring Electro-Protective Corporation of
America in 1981, the business of Crime Control, Inc., and ADT Security
Services in 1987. Between 1982 and 1985, ADT also acquired several small
security services businesses in North America. The electronic security
services division in Europe consists of ASH, principally doing business as
Modern Security Systems Limited in the United Kingdom, and Electric Protection
Services Limited doing business as ADT Security Systems in the United Kingdom
("Electric Protection") and other subsidiaries doing business under the ADT
name in continental Europe. Electric Protection and the principal continental
European subsidiaries were acquired as part of the acquisition of ADT Security
Services in 1987.
1
In 1990, ADT acquired Britannia Security Group PLC
("Britannia"), operating principally in the United Kingdom and, in the third
quarter of 1996 merged with and acquired ASH, which provides electronic
security services in the United Kingdom and North America. In the fourth
quarter of 1995, ADT disposed of its electronic article surveillance business
which was based in Europe and which was previously acquired as part of
Britannia. Alert, which provides electronic security services in the United
States, was acquired in the fourth quarter of 1995.
Development of ADT's Vehicle Auction Business
ADT's auction division was established in 1987 by the acquisition of The
British Car Auction Group PLC ("BCA") which, at that time, had 14 auction
centers in the United Kingdom and 12 auction centers in the United States.
BCA was established in the United Kingdom in 1946 and, during the period from
1946 to 1982, it expanded its vehicle auction business in the United Kingdom.
In 1982, BCA entered the vehicle auction business in the United States by
acquiring two vehicle auctions. From 1982 to 1987, BCA acquired and
constructed additional auction sites in both the United States and the United
Kingdom. Since 1987, the auction division has expanded its vehicle auction
operations by the purchase of eight auction businesses and four auction
centers in the United States, the development and construction of seven new
auction centers and by internal growth. In the fourth quarter of 1995, ADT
disposed of its vehicle auction businesses in the United Kingdom and
continental Europe, retaining a 10 per cent equity interest. In the United
States, the auction division consists of ADT Automotive Holdings, Inc. and its
subsidiaries (formerly Anglo American Auto Auctions).
Registered and Principal Executive Offices
The registered and principal executive offices of ADT Limited are located at
Cedar House, 41 Cedar Avenue, Hamilton HM 12, Bermuda. The executive offices
of the subsidiary which supervises ADT's North American activities are located
in the United States at 1750 Clint Moore Road, PO Box 5035, Boca Raton, Florida
33431. The telephone number there is 561-988-3600.
BUSINESS DESCRIPTION
ADT, through its subsidiaries, is engaged in two service businesses,
electronic security services in North America and Europe and vehicle auction
and related services in the United States. In this business description, the
term "ADT" is used to refer to the relevant operating subsidiary of ADT
Limited engaged in that part of the business being described where the term
appears.
ADT's principal activities in the electronic security services business are
the electronic monitoring and maintenance of its installed base of security
systems and the installation of new, monitored security systems to add to its
installed base. Monitored systems may be sold or, as is most often the case,
ADT may retain ownership of installed systems. ADT receives contractual
recurring fees for monitoring security systems through its electronic customer
monitoring centers and for maintenance of security systems installed at
customer premises and other related services. ADT sells, installs and
maintains monitored security systems, integrated electronic security systems
and other electronic security products for additional fees. Annualized
contractually recurring fees for electronic monitoring and maintenance of
security systems installed at customer premises, and other related services,
as of December 31, 1996, represented approximately 65 per cent of ADT's total
electronic security services revenues in North America and Europe for 1996.
The remainder of ADT's security revenues were derived from the outright sale
and installation of security systems, the installation of security systems in
accordance with monitoring service agreements and the maintenance of security
systems on a non-contractual basis.
2
ADT's vehicle auction business operates a network of large modern auction
centers in the United States which provide an organized wholesale marketplace
for the sale and purchase of used vehicles. Principal sellers, or consignors,
include new and used vehicle dealers, vehicle manufacturers, fleet operators,
leasing companies, financial institutions and government agencies. Principal
purchasers include franchise and non-franchise vehicle dealers and
distributors who acquire vehicles to sell in the retail market.
The following table presents the proportion of revenues derived by ADT from
electronic security services and vehicle auction services in 1995 and 1996.
Proportion of total Proportion of total
Electronic Security Services Business Revenues
Revenues
1995 1996 1995 1996
Electronic Security Services
North America 71% 75% 54% 62%
United Kingdom and Continental Europe 29% 25% 22% 20%
Proportion of total Vehicle
Auction Services Revenues
Vehicle Auction Services
United States 62% 100% 15% 18%
United Kingdom and Continental Europe 38% * 9% *
* ADT's vehicle auction services businesses in the United Kingdom and
continental Europe were disposed of in the fourth quarter of 1995.
Electronic Security Services
The Industry
The security services industry encompasses a wide range of products and
services, which can be broadly divided into electronic security products and
services and highly labor intensive manned guarding and patrol services.
ADT's electronic security services division competes primarily in the
comparatively capital intensive electronic monitoring security services sector
of the industry. Electronic security products and services consist of the
sale, installation, continuous monitoring and maintenance of electronic
security systems for commercial and residential use. This business utilizes
modern electronic devices installed in customers' businesses and residences to
provide detection of events, such as intrusion or fire, surveillance and
control of access or articles. Event detection devices may be monitored by
monitoring centers, such as ADT's customer monitoring centers, which are
linked to the customer through telephone lines. These centers are often
located at remote distances from the customer's premises. In some instances,
the customer may monitor these devices at its own premises or the devices may
be connected to local fire or police departments. The products and services
marketed in the electronic security services industry range from residential
systems that provide basic entry and fire protection to sophisticated
commercial systems incorporating closed circuit television systems and access
control.
3
The development of centrally monitored alarm systems began at the turn of the
century and, historically, these systems were considered a relatively
expensive form of security and were purchased primarily by businesses and
affluent individuals. The industry continued to evolve as telephone networks
spread and technology advanced. Progress continued steadily until the early
1970's when computer technology and semi-conductor components began to be
incorporated into monitoring systems. Since then, the development of
telecommunications technology and its application in security systems has
accelerated, and technological advances have increased the availability of
lower cost, sophisticated electronics. These advances have enabled the
industry to access a wider market by providing a broader range of monitored
security services at a variety of price levels. Concurrently with these
technological advances, demand for security systems has grown with the
increase in the general awareness of security issues and rising crime rates.
Customers also purchase security systems due to the practice in the insurance
industry of reducing premiums for customers who have a security system
installed, or requiring the installation of a security system as a condition
of coverage.
STAT Resources, Inc., an independent market research firm ("STAT Resources"),
estimates that total United States commercial electronic security systems and
services market revenues and total residential electronic security systems and
services market revenues were approximately $8.0 billion and $5.0 billion,
respectively in 1996. ADT accounted for approximately 7.7 per cent and 7.5
per cent of these amounts, respectively. Although a certain amount of
industry consolidation has taken place, the industry in North America remains
highly fragmented and STAT Resources estimates that there were approximately
13,000 companies in the United States electronic security systems and services
market in 1996. The electronic security services industry in Europe is also
highly fragmented.
Business Strategy
ADT[Registered] is a leading name in electronic security services, and ADT
believes that its name is important in the marketing of its security services
and in competing with other electronic security service providers. Before
1987, ADT's electronic security services business served predominantly
commercial customers. Since 1987, ADT's goals have been to create a lower
cost, more efficient operation, suitable for long-term growth and greater
profitability, and to take advantage of the economies of scale resulting from
increased utilization of its infrastructure. Since 1987, ADT has (i) reduced
the number of central stations and equipped its customer monitoring centers
with enhanced computer technology to further automate the monitoring process
and thus provide increased monitoring capacity, (ii) modernized and
streamlined its computer-based administration and control systems, (iii)
enhanced customer service programs through improved training programs for
sales, management, installation and service employees and (iv) intensively
marketed electronic monitoring services to residential customers to take
greater advantage of the increased monitoring capacity created by the
monitoring center consolidation and modernization program.
Between 1987 and 1993, ADT significantly reduced the number of its central
stations from 162 to 30 in North America and Europe while increasing
monitoring capacity and maintaining geographical coverage. Since then ADT has
continued to pursue its strategy of central station consolidation, although
closures have taken place at a slower rate. Further opportunities for central
station consolidation now exist following the acquisition of ASH. In the first
quarter of 1997, ADT announced that it was investing in planned enhancements
to its technological infrastructure to facilitate a further consolidation of
its monitoring center network in order to provide for future anticipated growth
opportunities while lowering costs and increasing monitoring capacity and
operating efficiency.
As a result of ADT's program implemented in 1988 to target the residential
sector in North America, as well as growth in the level of consumer concern
over crime and security generally and the availability of lower priced
systems, ADT has significantly expanded its residential customer base in North
America. Since 1988, ADT has enjoyed an annual compound growth rate in
residential unit sales in excess of 36 per cent. ADT believes that because of
the success of its sales and marketing efforts since 1988, it is uniquely
positioned to benefit from the range of technological developments that are
expanding and diversifying the types of services that ADT is able to offer.
4
During the past several years, ADT's business has been evolving from that of
primarily an intrusion alarm company into a data information company. ADT has,
in the past few years, been offering energy management products and services
to regulate the temperature and lighting in a customer's premises. This
service has been achieved through the use of a communication protocol which
utilizes the premises' existing alternating-current wiring. Another creative
use of new technologies has permitted the launch of CarCop[Registered] which
combines three significant infrastructures, cellular communications, the
global positioning satellite system and ADT's 24 hour monitoring services, to
provide a revolutionary new personal protection and vehicle security service.
ADT believes that its broad customer base, its unique national distribution
system and its highly skilled workforce provide it with a strong capacity to
exploit new technologies and, given the rapid pace of technological change, ADT
anticipates that it will explore partnering opportunities with premier
companies in a variety of industries.
ADT's overall goal is to expand its customer base in both the commercial and
residential sectors. The commercial sectors in North America, the United
Kingdom and continental Europe represent well established markets with growth
prospects closely related to the overall economic growth in these markets.
ADT's strategy is to retain a high percentage of its existing commercial and
residential customers by continuing to provide high quality service. As part
of its strategy to maintain and enhance its commercial market position in
North America, ADT has a national accounts sales team in place in the United
States to serve customers that have multiple locations. ADT believes that the
North American residential marketplace continues to represent a relatively
unpenetrated market and ADT's strategy is to continue to market and install
large numbers of new residential security systems, primarily in this market.
ADT is continuing to implement this strategy through intensive advertising and
marketing in metropolitan areas. ADT believes that incremental monitoring
revenues from new customers should enhance operating margins because
additional customers can be served through ADT's existing monitoring
facilities with very little impact on ADT's total operating costs associated
with monitoring security systems. ADT, however, incurs marketing costs
associated with the sale of new systems and incremental installation costs in
respect of each new system sold which are partly offset by a fee charged to
the customer on installation of the system. In the first quarter of 1997, ADT
announced that it was investing in planned enhancements to its technological
infrastructure to facilitate monitoring center consolidation and provide
increased capacity for future anticipated growth opportunities.
Consistent with its strategy, ADT acquired Alert in the fourth quarter of 1995
and merged with ASH in the third quarter of 1996 adding, in aggregate, over
375,000 customers to ADT's customer base. The acquisition of Alert also
provided ADT with an established dealer program under which security systems
are installed by third parties with the monitoring contracts being onsold to
ADT for monitoring. Such a program represents a cost effective way for ADT to
further enhance its operating leverage. The acquisition of ASH gave ADT
leadership in the electronic security services sector in the United Kingdom
and will provide ADT with a new marketing opportunity in the UK residential
market place.
The following table presents the approximate number of commercial and
residential customers in North America and Europe contracting with ADT for the
monitoring or maintenance of electronic security systems, together with the
aggregate annualized service revenue under contract, as of December 31, 1996,
and the annual combined discontinuance rate for commercial and residential
contracts in respect of 1996.
Number of Commercial Number of Residential Annualized Service Annual Combined
Customers Customers Revenue Discontinuance Rate
672,000 1,149,000 $920m 10.4%
Annualized service revenue and annual combined discontinuance rate are defined
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Results of Operations-Electronic Security Services".
5
Commercial
ADT provides electronic security services and products to financial
institutions, industrial and commercial businesses and complexes, warehouses,
facilities of federal, state and local government departments, defense
installations, and health care and educational facilities. ADT conducts its
commercial operations in the United States, Canada, the United Kingdom, Spain,
France, Belgium, Greece, The Netherlands and the Republic of Ireland. ADT
sells, installs, monitors and maintains electronic security systems and
products located at its customers' premises. These systems and products are
tailored to customers' specific needs and include electronic monitoring
services that provide intrusion and fire detection, as well as card or keypad
activated access control systems and closed circuit television systems. ADT
also markets standard security packages for specific types of commercial
customers, such as retailers and banks. Certain commercial customers require
more complex electronic security systems. To meet this demand, ADT also sells
integrated electronic security systems that combine a variety of electronic
security services and products. These systems are integrated by ADT to
provide a single computer controlled security system. Integrated security
systems are typically owned by the customer and can range in price from a few
thousand to several million dollars. Integrated security systems may be
monitored by the customer at its premises or connected to an ADT monitoring
center. In either case, ADT usually provides support and maintenance for these
systems through service contracts.
The systems installed at commercial customers' premises may be owned by ADT
or, as in the case of most integrated systems, by the customer. When the
system is sold, the customer pays ADT the purchase price upon installation and
the customer also pays an installation fee. When monitoring equipment is
owned by ADT, as is most often the case, only an installation fee is charged.
Most customers also agree to pay an annual service charge for monitoring and
maintenance. Some customers elect to pay for maintenance on a per visit
basis. Service contracts for integrated security systems are negotiated on an
individual basis. For integrated systems, a separate fee is charged for
systems integration and installation. Service contracts are negotiated on an
individual basis depending upon the number of systems monitored, the type of
alarm transmission and the level of response services required.
STAT Resources estimates that total United States commercial electronic
security systems and services market revenues were approximately $8.0 billion
in 1996. ADT accounted for approximately 7.7 per cent of this amount.
Commercial customers are motivated to purchase security systems to protect
their property, employees and customers and by their insurance carriers which
may offer lower premium rates if a security system is installed or require
that a system be installed as a condition to coverage. Of those insurance
carriers in North America which offer lower premiums or will provide coverage
only to customers with centrally monitored alarm systems, most require the
monitoring center to be approved by Underwriters Laboratories, Inc. ("UL").
UL requires each monitoring center to meet specified design, technical and
operational standards, including back up power capability. UL confirms
compliance with its specifications through periodic on-site inspections. All
of ADT's customer monitoring centers in the United States are UL approved.
As of December 31, 1996, approximately 478,000 commercial customers, some of
which have multiple locations, were under contract in North America,
approximately 153,000 were under contract in the United Kingdom and
approximately 41,000 were under contract in continental Europe. The
electronic security services business in Europe services primarily commercial
customers. In 1996, approximately 68 per cent of ADT's total electronic
security services revenues in North America and Europe were derived from
commercial customers. The electronic security services division is not
dependent upon any single customer, as the revenue from any one customer does
not exceed one per cent of the division's total net revenues.
Contracts with commercial customers for monitoring and maintenance services
are usually for an initial five-year term, automatically renewing on a
year-to-year basis thereafter, unless canceled. A substantial number of
contracts are now beyond their initial term and are therefore on an automatic
renewal basis. It has been ADT's experience that monitoring contracts for
security systems are generally renewed upon their expiration. Contract
discontinuances, however, do occur, principally as a result of customer
relocation or closure.
ADT markets its electronic security services to commercial customers through a
direct sales force in North America and Europe and through direct mail and
print advertising. Customers which have multiple locations in North America
are serviced by a separate national accounts sales force.
6
Residential
Residential electronic security services are primarily marketed to customers
in North America and consist of the sale, installation, monitoring and
maintenance of electronically monitored security systems to detect intrusion
and fire. Residential customer service and monitoring are performed from the
same facilities as those used for commercial accounts.
STAT Resources estimates that total United States residential electronic
security systems and services market revenues were approximately $5.0 billion
in 1996. ADT accounted for approximately 7.5 per cent of this amount.
As part of its business strategy, ADT began to intensively market monitored
security systems to residential customers in North America in 1988 and ADT
believes that it has been able to sell a large number of residential security
systems due to the growing level of consumer concern over crime and security
generally and the availability of lower priced systems. In addition,
residential customers are usually able to obtain more favorable insurance rates
if an electronically monitored security system is installed in their home.
ADT targets two groups of residential customers, those who typically require
relatively inexpensive, standard electronically monitored security systems and
a smaller group of residential customers who require more sophisticated
systems.
In 1996, ADT contracted to install and monitor approximately 280,000 new
residential security systems, principally in North America, and as of
December 31, 1996, ADT had approximately 1,149,000 residential customers under
contract for monitoring services, of which approximately 90 per cent were
located in North America. In 1996, approximately 32 per cent of ADT's total
electronic security services revenues in North America and Europe were derived
from residential customers. On average, fees charged by ADT for residential
monitoring services are lower than the fees charged for commercial monitoring
services. Contracts for residential services entered into after 1990 have
usually been for an initial three-year term, automatically renewing on a
year-to-year basis thereafter, unless canceled. For contracts entered into
after April 1992, automatic renewal has been for two-year terms, unless
canceled. A substantial number of contracts are now beyond their initial term
and are therefore on an automatic renewal basis. It has been ADT's experience
that residential contracts are generally renewed upon their expiration.
Contract discontinuances, however, do occur, principally as a result of
customers relocating.
In North America, ADT usually retains ownership of standard residential
systems whereas the more sophisticated systems are usually purchased by the
customer. When the system is sold, the customer pays ADT the purchase price
upon installation and the customer also pays an installation fee. When the
system is owned by ADT, as is most often the case, only an installation fee is
charged. Substantially all residential customers agree to pay an annual
service charge for monitoring and may also subscribe for maintenance services.
Uniform package prices are offered to residential customers who purchase ADT's
standard residential security system which includes a fixed number of
detection devices. Frequently, customers add detection devices to expand the
coverage of the system for which ADT charges an additional installation fee
and an additional sales charge if the system is purchased. Pricing for
residential customers who require more sophisticated systems depends upon the
monitoring components installed, the type of alarm transmission and other
services required.
ADT markets its electronic security services to residential customers through
television and radio advertising, print advertising, telemarketing, direct
mail and through a direct residential sales force as well as through
approximately 120 independent ADT authorized dealers and through third party
affinity marketing arrangements.
Installation, Service and Maintenance
As part of its effort to provide high quality service to its commercial and
residential customers, ADT maintains a trained installation, service and
maintenance force of in North America and Europe. These employees are trained
by ADT to install and service the various types of commercial and residential
security systems which are marketed by ADT. ADT also uses sub-contracted
personnel where appropriate.
7
Product Sourcing
ADT does not manufacture any of the components used in its electronic security
services business, although it does provide its own specifications to
manufacturers for certain security system components and undertakes some final
assembly work in respect of more sophisticated systems. Due to the general
availability of the components used in its electronic security services
business, ADT believes that it is not consistent with its role as a services
company to be involved in manufacturing. This policy allows ADT to obtain the
components of its systems from a number of different sources and, by so doing,
to supply its customers with the latest technology generally available in the
industry. ADT is not dependent on any single source for its supplies and
components and has not experienced any material shortages of components.
Monitored Electronic Security Systems
ADT's electronically monitored security systems involve the use on a
customer's premises of devices designed to detect or react to various
occurrences or conditions, such as intrusions, movement, fire, smoke, flooding,
environmental conditions (including temperature or humidity variations),
industrial operations (such as water, gas or steam pressure and process flow
controls) and other hazards. In most systems, these detection devices are
connected to a microprocessor based control panel which communicates through
telephone lines to an ADT monitoring center where alarm and supervisory
signals are received and recorded. Systems may also incorporate an emergency
"panic button", which when pushed causes the control panel to transmit an
alarm signal that takes priority over other alarm signals. In most systems,
control panels can identify the nature of the alarm and the areas within a
building where the sensor was activated and transmit the information to an ADT
customer monitoring center. Depending upon the type of service for which the
subscriber has contracted, monitoring center personnel respond to alarms by
relaying appropriate information to the local fire or police departments,
notifying the customer or taking other appropriate action, such as dispatching
employees to the customer's premises.
In most systems, the control panel communicates with an ADT customer
monitoring center through one of four telephone line transmission systems,
direct wire, multiplex, digital communicator or derived channel. Direct wire
and multiplex systems are used mainly for commercial customers who require a
higher level of security, whereas digital communicator or derived channel
systems are used primarily in systems where cost is more important. Direct
wire transmission uses a dedicated leased telephone line and is the most
expensive form of monitoring connection. The multiplex system uses a remote
device to receive signals from multiple customers' premises and concentrate
and retransmit them over a dedicated leased telephone line to an ADT customer
monitoring center. These two transmission methods allow ADT to continuously
monitor the customer's security system to confirm that the connection to the
monitoring center is functioning properly. The multiplex system provides the
same level of security as direct wire but is less costly due to the reduced
number of dedicated telephone lines which are necessary to monitor the same
number of customers. ADT has a continuing selective conversion program to
replace direct wire transmission systems with lower cost multiplex or digital
systems. These conversions typically replace older equipment and result in a
reduction in telephone line costs and in the frequency of customer service
calls.
A security system which utilizes a digital communicator responds to an event
by dialing the monitoring center through the customer's regular telephone
line. Unlike multiplex and direct wire systems, these systems are not
continuously monitored, and if a control panel or the telephone line is not
functioning properly the monitoring center may not be alerted. The derived
channel system, which is not available in all markets, ties into the existing
regular telephone line network but allows parallel simultaneous communication
on one line using separate distinct frequencies. Using the derived channel
system, it is possible to continuously monitor a digital communicator
connection over the customer's regular telephone line. In certain markets ADT
also offers systems with backup transmission capability through radio
frequency transmission or the local cellular telephone network.
8
Other Security Businesses
ADT entered the mobile security services market in 1996 with the launch of
CarCop[Registered], a vehicle security system introduced in the fourth quarter
of 1996 in conjunction with Mobile Security Communications, Inc. which is
responsible for the sale and installation of the CarCop product. CarCop
combines ADT's 24 hour monitoring services with cellular communications
technology and the Global Positioning Satellite system to provide constant
security coverage for a vehicle and its occupants whether the vehicle is
parked, unattended or in use. The system can detect a range of emergency
situations and, through utilizing ADT's 24 hour monitoring services and
employing satellite tracking technology, the appropriate assistance can be
despatched to the vehicle's exact location at any time, day or night.
Competition
The electronic security services business in North America is highly
competitive. New competitors, who have not necessarily had any previous
involvement in the provision of electronic security services, are continually
entering the field. Competition is based primarily on price in relation to
quality of service. ADT believes that the quality of its services is higher
than that of many of its competitors. Accordingly, ADT's prices may therefore
be higher than those charged by many of its competitors. Sources of
competition in the security services business are other providers of central
monitoring services, systems directly connected to police and fire
departments, local alarm systems and other methods of protection, such as
manned guarding. ADT believes the number of local police and fire departments
that perform monitoring has been declining for some years.
The central monitoring sector of the electronic security services business is
characterized by high fixed costs but has low marginal costs associated with
monitoring additional customers. Opportunities exist within the industry to
achieve economies of scale by consolidation of monitoring and administrative
functions and a certain amount of industry consolidation is currently taking
place. The industry in both North America and Europe, however, remains highly
fragmented. ADT believes that it services more customers through its customer
monitoring centers in North America than any other company. Individual
competitors, however, may service more customers in a given local market.
ADT competes with other major firms in North America, which have substantial
financial resources, including Ameritech Corporation (operating under the
SecurityLink from Ameritech[Registered] brand name); Borg-Warner Security
Corporation (operating under the Wells Fargo[Registered] and Pony
Express[Registered] brand names); the Honeywell Protection Services division
of Honeywell, Inc.; the Brink's Home Security division of The Pittston
Company; and approximately 13,000 smaller regional and local companies. ADT
also competes with several national companies and several thousand regional
and local companies in the United Kingdom and continental Europe.
In February 1996, a federal telecommunications reform bill was enacted which
contained provisions specific to the electronic security services industry.
Ameritech Corporation was prohibited from acquiring additional equity or
financial interests in alarm monitoring companies for five years from the date
of enactment of the law and the other regional Bell operating companies are
barred from acquiring more than a 10 per cent equity interest in alarm
monitoring companies or otherwise entering the business for five years from
the same date.
9
Regulation
ADT's operations are subject to a variety of federal, state, county and
municipal laws, regulations and licensing requirements in the United States
and national and local government laws, regulations and licensing requirements
in countries outside the United States. Many of the states and countries in
which ADT operates, as well as certain local authorities, require ADT to
obtain licenses or permits to conduct its security services business. Certain
governmental entities also require persons engaged in the alarm business to be
licensed and to meet certain standards in the selection and training of
employees and in the conduct of business. ADT believes that it is in
substantial compliance with all such licensing and regulatory requirements in
each jurisdiction in which it operates. In addition, there has been a trend
recently on the part of municipalities and other localities to attempt to
reduce the level of false alarms through various measures such as the
licensing of individual alarm systems and the imposition of fines upon
customers, revocation of licenses or non-response to alarms after a certain
number of false alarms. While such statutes and ordinances have not had a
material adverse affect on ADT's business operations to date, ADT is unable
to predict whether such statutes or ordinances, or any similar statutes or
ordinances enacted by other jurisdictions, will adversely affect ADT's
business and operations in the future. The alarm industry is also subject to
the oversight and requirements of various insurance, approval, listing and
standards organizations. Adherence to the standards and requirements of such
organizations may be mandatory or voluntary depending upon the type of
customer served, the nature of security service provided and the requirements
of the local governmental jurisdiction. ADT has not had any material
difficulties in complying with such standards and requirements in the past.
ADT's electronic security business relies upon the use of telephone lines to
transmit signals, and the cost of such lines and the type of equipment which
may be utilized are currently regulated by both the federal and state
governments in the United States and national and local governments in other
countries.
Risk Management
The nature of the services provided by ADT potentially exposes it to greater
risks of liability for employee acts or omissions or product liability than
may be inherent in many other service businesses. To attempt to reduce this
risk, ADT's electronic security service contracts contain provisions limiting
its liability and requiring indemnification by its customers. ADT also
carries insurance of various types, including general liability and errors and
omissions insurance, to protect it from product defects and negligent acts of
its employees. ADT obtains such insurance at rates and upon terms negotiated
periodically with various underwriters. The loss experience of ADT and, to
some extent, other security services companies, may affect premium rates
charged to ADT. As of December 31, 1996 such policies provided that ADT
retain liability for the first $1.0 million per occurrence. Certain of ADT's
insurance policies and the laws of some states may limit or prohibit insurance
coverage for punitive or certain other kinds of damages arising from employee
misconduct. In addition, in some states ADT's limitation of liability clause
may be ineffective in cases of gross negligence and in certain other
situations.
Patents and Trademarks
ADT Security Services holds approximately 40 active patents worldwide and has
several pending patent applications. No patents are due to expire in the near
future that would materially affect the operations of ADT's electronic
security services business. The ADT[Registered] trademark and service mark
are important to ADT's electronic security business. ADT Security Services
uses several other trademarks and service marks in marketing its products and
services,including Focus[Registered], Centrascan[Registered],
Safewatch[Registered] and Customer Link[Registered] . ADT believes that the
rights in these trademarks and service marks, including Focus, Centrascan,
Safewatch and the ADT trademark are adequately protected.
Employees
As of December 31, 1996, the electronic security services division had
approximately 16,000 employees, of whom approximately 12,000 were based in
North America and approximately 4,000 were based in Europe. The majority of
these employees are not represented by unions or covered by collective
bargaining agreements. ADT believes its relations with employees and their
unions are generally good.
10
Vehicle Auction Services
The Industry
Vehicle auctions constitute a principal channel of distribution and
redistribution for used vehicles. An auction brings together, in one
location, dealers seeking to restock and diversify their inventory of used
cars with a high volume of various makes and models provided by sellers
seeking to dispose of their vehicles. The vehicle auction industry provides a
reliable marketplace where many dealers participate in the auction's bid
process and thus establish true wholesale prices for used vehicles. Vehicle
auctions are preferred by many dealers, financial institutions and other
sellers because an auction provides an efficient, cost-effective and
convenient method of vehicle resale at the prevailing market price.
The principal sources of vehicles for sale through auctions are consignments
by new and used vehicle dealers, vehicle manufacturers, corporate owners of
vehicles such as fleet operators, daily rental companies, leasing companies,
banks and other financial institutions, manufacturers' credit subsidiaries and
government agencies. The vehicles consigned by dealers include vehicles of
all types and ages and include vehicles that have been traded in against new
car sales. Vehicles consigned by corporate and financial owners include both
repossessed and off-lease vehicles and, as a result, are normally in the range
of one to four years old. The principal purchasers of vehicles at ADT's
auctions are new and used vehicle dealers and distributors.
ADT believes that the consignment of vehicles from dealers is the foundation
of the auction industry. Dealers rely on the sale of used vehicles for a
significant proportion of their profits and are both buyers and sellers at
auction.
A significant number of vehicles sold at auction in recent years has been
attributable to vehicles being disposed of by domestic and import
manufacturers who contract with certain auctions to sell used vehicles on
their behalf. In the late 1980's, vehicle manufacturers found it advantageous
to produce more vehicles than were necessary to satisfy immediate retail
demand. These vehicles were either sold to daily rental car companies with a
guarantee by such manufacturers to repurchase the vehicles or were leased to
the daily rental car companies ("Program Cars"). Upon repurchase, the vehicle
manufacturers chose to remarket these late-model cars to their dealers
primarily through the vehicle auction network. Program Car auctions are
restricted to each manufacturer's franchised dealers with the exception of
auctions for some small volume import manufacturers. According to industry
sources, the number of vehicles coming to auction from this source reached a
peak of 1.6 million units in 1991. As the industry came out of recession in
1992, volumes reduced and have stabilized at around 1.1 million vehicles per
year. When the number of cars available to daily rental companies through
manufacturers' guaranteed repurchase programs was at its peak, many of the top
rental companies obtained large numbers of their vehicles through such
programs. As manufacturers have reduced their buy back programs , the daily
rental companies have been obliged to purchase more vehicles in their own
names and, consequently, their need to remarket vehicles at the end of their
life cycle has increased.
Vehicles owned by corporations and financial institutions represent another
major source of vehicles for sale at auction and include vehicles owned by
daily rental companies, vehicles from company fleets, end of term or early
termination vehicles from leasing companies, including manufacturers' finance
subsidiaries, vehicles from finance companies, including repossessed vehicles,
and vehicles from the public sector. The dynamics of this segment are
changing, particularly as the trend towards leasing new vehicles by
individuals under manufacturers' lease programs increases.
ADT Auctions
As of December 31, 1996, ADT operated 27 vehicle auction centers in the United
States where it is the second largest provider of vehicle auction services.
In 1996 the aggregate value of vehicles sold through ADT auction centers was
approximately $8.7 billion. Substantially all of the vehicles sold at ADT
auction centers are passenger cars and light trucks with the balance
consisting of heavy trucks and industrial vehicles.
11
The following table presents the approximate number of vehicles entered and
sold through all of ADT's vehicle auction centers in the United States during
1994, 1995 and 1996.
1994 1995 1996
Vehicles Entered 1,660,000 1,798,000 1,881,000
Vehicles Sold 967,000 994,000 1,064,000
Business Strategy
ADT has been a leader in developing the wholesale vehicle auction business in
the United States. ADT aims to provide a wholesale redistribution system for
used vehicles which is efficient, economical and reliable. ADT's specific
strategies are (i) to maintain and further strengthen its current
relationships with vehicle manufacturers, fleet/lease operators, daily rental
companies and other significant vehicle suppliers and dealers that both supply
vehicles for auction and purchase vehicles at auction and (ii) to increase
ADT's share of total used vehicle transactions. ADT is pursuing these
strategies in part by encouraging more vehicle dealers to attend its auctions.
Where possible, ADT categorizes its auction sales in order to facilitate the
matching of appropriate buyers with vehicles being offered for sale. Auctions
may be categorized by the type of vehicle being sold or by age of vehicle,
mileage or source, for example ex-rental vehicles. ADT maintains a record of
dealers that are authorized to bid at its auctions and employs direct
marketing techniques to target dealers who are known buyers for the category of
vehicle being auctioned and who are registered with ADT as approved buyers.
ADT also holds closed sales for manufacturers' vehicles, including Program
Cars and fleet vehicles, restricted to dealers holding a franchise from that
particular manufacturer.
ADT keeps its site location strategy and real estate requirements under
continuous review together with the potential benefits of expanding its
network through the acquisition of vehicle auction businesses and the
development of new auction centers. ADT however believes that the geographic
coverage of its auction network in the United States is substantially
complete.
Auction Operations
ADT operates a network of large modern auction centers and provides a
comprehensive range of vehicle redistribution services. These services
include collection and transportation of a seller's vehicles to an auction
center, reconditioning the vehicles to retail standards, matching the vehicles
with the auction market most likely to generate the highest amount of sale
proceeds and delivering the vehicles to the buyer. Separate fees are charged
for each of these services. ADT acts solely as an agent in auction
transactions and does not purchase vehicles for its own account. ADT
repurchases a small number of vehicles under its buyer protection programs
which require it to repurchase vehicles that have suffered odometer tampering
or that have an undisclosed salvage history. See "Vehicle Auction
Services-Services and Fees-Insurance." ADT operates almost exclusively in the
wholesale marketplace. In general, the public is not permitted to attend
auctions.
When a vehicle arrives at an ADT auction center, it is checked in and assigned
a computer tracking number. A seller may instruct ADT to perform various
services including vehicle appraisal, appearance reconditioning and paint or
body work to prepare the vehicle for auction. The title is checked against a
computer database held by ADT. If a salvage history appears, the seller must
either disclose the damage or withdraw the vehicle from the auction. ADT
completes all requested services and holds the vehicles in secure parking
areas until the scheduled auction day. The auction centers use computerized
control systems to track vehicles through each step of the auction process.
ADT is responsible for the vehicles while they are under its control.
12
Generally, ADT's auction centers hold regularly scheduled auctions for
vehicles from specific market sources. Additional auctions are scheduled as
necessary, including auctions for specific types or categories of vehicles,
such as heavy trucks, municipal and agricultural equipment and classic cars. A
typical auction center consists of an auction hall, large paved areas for the
storage of vehicles, facilities for reconditioning and separate areas for
parking vehicles immediately prior to auction, some of which are covered.
Auction halls typically have a number of lanes through which vehicles are
normally driven, and where the auction bidding process takes place. This is a
continuous process that enables a large number of vehicles to be auctioned
quickly and efficiently. The auction hall building also contains the cashiers
and other administrative personnel, as well as cafeteria and other customer
facilities. When a vehicle is sold, the paperwork associated with a sale,
including conveyance instruments, title or title applications and tag
applications, is generally processed within one hour of the sale and immediate
delivery arrangements are made. A particular vehicle may pass through the
auction system more than once prior to being sold to a new owner.
ADT is responsible for payment to sellers upon presentation of title after a
vehicle is sold. If purchases are made other than on a cash basis, ADT
determines in advance the credit-worthiness of the buyer. It is customary for
buyers at ADT's auctions to pay by banker's draft. The auction collects funds
on drafts within an average of ten working days. ADT's bad debt experience on
these transactions is negligible.
Sources of Vehicles
The principal sources of vehicles for sale at ADT's auctions are consignments
by new and used vehicle dealers, vehicle manufacturers, corporate owners such
as fleet operators, daily rental companies, leasing companies, banks and other
financial institutions, manufacturers' credit subsidiaries and government
agencies.
The supply of consignment vehicles from dealers is relatively constant
throughout the year. The number of Program Cars and vehicles consigned to
auction by corporate fleet owners may fluctuate considerably throughout the
year. As a consequence, auction revenues may fluctuate from quarter to
quarter and at certain times during the year ADT may be storing large numbers
of vehicles awaiting auction.
ADT contracts with vehicle manufacturers for the auction of Program Cars.
These contracts, which do not require the manufacturers to sell any minimum
number of vehicles through ADT's auctions, generally have a term of one year
and may be terminated upon 30 days' notice. In 1996, approximately 27 per
cent of the vehicles sold at ADT auctions were Program Cars, compared to
approximately 31 per cent in 1995. ADT also auctions vehicles from the
manufacturers' own fleets and from manufacturers' affiliates such as their
credit subsidiaries.
During 1996, General Motors Corporation and its credit subsidiaries accounted
for approximately 8 per cent of the vehicle auction division's United States
revenues. ADT believes that its relationship with General Motors Corporation
and the other vehicle manufacturers with which it does business is good. The
loss of General Motors Corporation's business would, however, have a material
adverse effect on the auction division's operations.
Services and Fees
Auction Services: ADT receives a variety of fees for its auction services.
Entry fees are set charges assessed on the majority of vehicles registered for
auction, except Program Cars, and are payable irrespective of whether the
vehicle is sold. If the vehicle is sold, ADT also receives an auction fee
from the seller and a fee from the buyer of the vehicle. At most sales, the
buyer's auction fee is based upon the sale price of the vehicle, except for
Program Cars where a fixed fee is charged. At most sales, other than
fleet/lease consignment sales and Program Car sales, the seller's auction fee
is based on the sale price of the vehicle. For fleet/lease consignment sales,
the seller's auction fees are based on a fixed fee for national fleet/lease
consignors and on the sale price of the vehicle for local fleet/lease
consignors. For sales of Program Cars, auction fees are fixed periodically by
agreement with the vehicle manufacturers on a per vehicle sold basis.
13
Reconditioning Services: Customers may request ADT to prepare, for a fee, a
detailed condition report on vehicles entered for auction. For a separate
fee, ADT also performs on-site reconditioning services. The largest portion
of reconditioning revenue relates to appearance reconditioning and paint and
body work but more extensive body work services including body panel painting
and repair of minor collision damage are also carried out. Appearance
reconditioning services include engine steam-cleaning, washing, detailing,
buffing and waxing, and upholstery cleaning. Other services at certain
centers include replacement of parts, upholstery, tires and glass.
Most manufacturers' vehicles and some fleet/lease vehicles receive appearance
reconditioning and, if necessary, paint and body work. The reconditioning of
manufacturers' Program Cars generates a significant portion of ADT's
reconditioning revenues. Program Cars are delivered to the auction centers
directly from rental car lots or marshaling yards, financial institutions
deliver vehicles directly off-lease or after repossession and fleet operators
deliver vehicles immediately from use. These vehicles generally require
reconditioning to bring them up to sale standards. In many instances, these
sellers do not have the facilities necessary to recondition the vehicles
expediently or economically. ADT does not usually recondition vehicles
consigned by dealers, who generally bring fully serviced cars to auction
directly from their lots. Dealers who purchase reconditioned vehicles are
able to place them in their showrooms or lots immediately, thereby minimizing
the time between purchase and retail sale.
ADT also provides high quality vehicle paint and body repair services under
the Quality Image Services name for vehicles other than those going through
the auction process, principally for fleet owners and insurance companies.
The service, which is aimed at new customers in addition to traditional
auction customers, utilizes ADT's existing reconditioning facilities and
expertise.
Transportation Services: ADT collects and delivers customers' vehicles and
believes that its ability to provide transportation services at competitive
prices is extremely valuable to its marketing efforts. ADT operates a fleet
of vehicle transporters and sub-contracts any additional vehicle
transportation requirements that cannot be met by this fleet.
Insurance: ADT offers, for a fee, a 15-day power and drive train service
contract provided by a third party. ADT also undertakes to repurchase
vehicles that have suffered odometer tampering or have an undisclosed prior
salvage history. ADT also assists sellers in complying with laws regarding
title and odometer readings by providing forms which include the necessary
representations as part of the paperwork signed and delivered in connection
with the auction sale. ADT's liability for losses arising from title and
odometer insurance, power and drive train service contracts and prior salvage
history has been negligible.
Valuation and Appraisal: ADT provides valuation and appraisal advice to
customers in connection with their vehicle disposal programs with a view to
assisting its customers to obtain the best possible price for their vehicles.
Specialized Services: Specialized auctions carried out by the division include
sales of government vehicles, to which the general public is invited, sales of
plant and equipment, sales of construction vehicles, sales of heavy trucks,
sales of municipal and agricultural equipment and sales of classic cars. ADT
provides a vehicle repossession service whereby vehicles are recovered from a
defaulting party and delivered directly to an auction center for liquidation.
ADT's market expertise allows it to offer a comprehensive vehicle remarketing
service to fleet operators, ranging from collection of vehicles leaving the
fleet to advice on vehicle replacement cycles.
Competition
ADT considers its competition to be two other significant auction chains and a
large number of independently owned local auctions which are members of the
National Auto Auction Association. The competing auction chains are Manheim
Auctions, a subsidiary of Cox Broadcasting Company, and ADESA Corporation, a
subsidiary of Minnesota Power & Light Company. Competition is based primarily
on price in relation to the quality and range of services offered to sellers
and buyers of vehicles and ease of accessibility of auction locations. ADT
believes it provides a higher quality of service than its competitors and its
prices may therefore be higher.
14
Regulation
Each auction center is licensed by the state in which it is located, in most
cases as a vehicle auction or dealer. These licensing authorities may revoke
a license if an auction is not conducted according to regulations then in
effect. In addition, ADT's vehicle transportation fleet is regulated by the
Interstate Commerce Commission. ADT believes that it is in substantial
compliance with the regulations to which it is subject and has not had any
material difficulties with these regulatory authorities.
Employees
As of December 31, 1996, the vehicle auction division in the United States
employed approximately 3,900 persons on a full-time basis and approximately
2,400 persons on a part-time basis. The part-time employees are utilized
primarily on auction sale days. The majority of these employees are not
represented by unions or covered by collective bargaining agreements. ADT
believes its relations with employees and their unions are generally good.
ITEM 2. DESCRIPTION OF PROPERTIES
In North America, as of December 31, 1996, ADT, through its subsidiaries,
owned 2 customer monitoring centers, leased 19 customer monitoring centers,
owned 22 offices and other properties and leased 315 offices and other
properties which were used in connection with the electronic security services
business. In the United States, as of December 31, 1996, ADT, through its
subsidiaries, owned 21 auction centers, leased 6 auction centers and owned or
leased 6 offices and other properties, which were used in connection with the
vehicle auction business. In Europe, as of December 31, 1996, ADT, through
its subsidiaries, owned 5 customer monitoring centers, leased 8 customer
monitoring centers, owned 11 offices and other properties and leased 107
offices and other properties which were used in connection with the electronic
security services business. In addition, as of December 31, 1996, ADT,
through its subsidiaries, owned approximately 1,294 acres of land and leased
approximately 284 acres of land in the United States used in connection with
the vehicle auction business.
15
ITEM 3. LEGAL PROCEEDINGS
On December 27, 1996, Westar Capital, Inc. ("WCI") filed a complaint in the
U.S. District Court for the Southern District of Florida (the "Court") against
the Company, the directors of the Company and Republic Industries, Inc.
("Republic"). The complaint alleges that the Company and its directors
breached their fiduciary duties to WCI and the Company's other shareholders
(i) by issuing to Republic a share purchase warrant for 15,000,000 Common
Shares (the "Republic Warrant") in connection with a proposed amalgamation
with Republic in July 1996 (the "Republic Merger"), (ii) by adopting the
Rights Plan, and (iii) by holding shares of the Company in one of the
Company's subsidiaries with the intention of voting those shares as needed to
entrench existing management. The complaint seeks a court order (i) declaring
the Republic Warrant null and void or preventing the Company and Republic from
exercising their rights under the Republic Warrant, (ii) directing the Company
to redeem the Rights Plan, and (iii) preventing the Company from voting the
shares held by its subsidiary.
On January 3, 1997, WCI filed an amended complaint which, in addition to the
allegations made in the prior complaints, alleges that the Company and its
directors have attempted to interfere with WCI's voting rights by seeking
certain information from WCI pursuant to procedures established in the
Company's Bye-Laws. The amended complaint seeks the same relief as the prior
complaint and also requests that the Court confirm WCI's voting rights.
On January 21, 1997, the Court granted WCI leave to file a second amended
complaint. The second amended complaint contains the same allegations as the
amended complaint and in addition alleges (i) that the Company and its
directors breached their fiduciary duties by setting a July 8, 1997 date for a
meeting of the Company's shareholders, and (ii) that the Company and its
directors violated Section 14(d) of the Securities Exchange Act of 1934, as
amended, by making a recommendation to the Company's shareholders regarding
the tender offer without first making certain filings with the Securities and
Exchange Commission ("SEC"). WCI asks for a court order (i) enjoining the
Company from holding the shareholders meeting (the "Special General Meeting")
on July 8, 1997, (ii) compelling the Company to hold the special General
Meeting on or before March 20, 1997, and (iii) declaring that the Company has
violated Section 14(d) and enjoining the Company from making any further
recommendations relating to the tender offer until the required SEC filings
are made.
On January 23, 1997, WCI filed a motion for a preliminary injunction asking
the Court to enjoin the Company from holding the Special General Meeting on
July 8, 1997, and compelling the Company to hold the Special General Meeting
on or before March 20, 1997. On March 4, 1997, WCI filed a supplemental brief
in support of its motion for a preliminary injunction representing that WCI is
no longer seeking a Special General Meeting on or before March 20, 1997 on the
grounds that such a meeting date would now be impractical. In its
supplemental brief, WCI requests that the meeting date be set 30 days after
its proxy materials for the Special General Meeting are distributed. As of
this date, the Court has not rendered any decision with respect to plaintiff's
motion for a preliminary injunction.
On January 27, 1997, the Company and its directors filed a motion to dismiss
the second amended complaint based on, among other things, the Court's lack of
personal jurisdiction over the Company and its directors and for failure to
state a claim upon which relief can be granted. WCI has filed papers in
opposition to the motion. On February 21, 997, the Court entered an order
ruling that the second amended complaint did not adequately plead personal
jurisdiction over the ADT defendants. On February 27, 1997, WCI filed a third
amended complaint. The third amended complaint contains the same allegations
as the second amended complaint and contains additional allegations relating
to personal jurisdiction.
16
On March 11, 1997, the court granted WCI leave to file a fourth amended
complaint. The fourth amended complaint contains the same allegations as
those in the third amended complaint as well as additional allegations
relating to the Amendment to the Rights Plan implemented by the Company on
March 3, 1997. In addition to the relief previously requested, the fourth
amended complaint seeks judicial nullification of the Amendment to the Rights
Plan and a rescission of actions by ADT if it is shown that a subsidiary of
ADT cast decisive votes as a shareholder with respect to those actions.
On March 17, 1997, the Company and its directors filed a motion to dismiss the
fourth amended complaint based on, among other things, the Court's lack of
personal jurisdiction over the Company and its directors and for failure to
state a claim upon which relief can be granted.
The Company and the Board believe that the allegations in the WCI's fourth
amended complaint are without merit and intend to vigorously defend against
them.
On March 24, 1997, WCI filed a motion for a preliminary injunction (i)
preventing Republic from selling or transferring any of the warrant shares
it currently owns, and (ii) preventing the Chairman of ADT from exercising the
proxy on the warrant shares. The Company and the Board have yet to respond
to this motion.
On December 26, 1996, Charles Gachot filed a complaint in the Circuit Court
for the Fifteenth Judicial Circuit in Palm Beach County, Florida against the
Company, certain of its directors, Western and WCI. The complaint was brought
on behalf of a class of all shareholders of the Company and alleges that
Western and WCI have breached their fiduciary duties to the Company's
shareholders by offering an inadequate price for the outstanding Common
Shares. The complaint seeks to enjoin Western and WCI from acquiring the
outstanding Common Shares. The complaint also alleges that the Company and
its directors have refused to negotiate with Western and WCI and that the
Republic Warrant and the Rights Plan are improper. The complaint seeks
unspecified monetary relief from all defendants. The Company and the Board
believe that the allegations in Gachot's complaint against the Company and the
directors are without merit and intend to vigorously defend against them.
On February 7, 1997, ADT Operations, Inc. ("ADT Operations"), a subsidiary of
ADT, filed a complaint in the Supreme Court of the State of New York, County
of New York against The Chase Manhattan Bank, N.A. ("Chase"). The complaint
states that Chase has been an important lender and financial advisor to ADT
Operations since 1993, and that in the course of this business relationship,
ADT Operations has disclosed confidential business information to Chase. The
complaint asserts that ADT Operations and Chase expressly agreed that Chase
would not aid any third party in a hostile takeover bid for ADT. The
complaint alleges that Chase is currently aiding Western in its attempt to
take control of ADT and that Chase's actions constitute: (i) a breach of an
express agreement between Chase and ADT Operations; (ii) a breach of the
implied covenant of good faith that is part of the express agreement between
Chase and ADT Operations; and (iii) a breach of the fiduciary duties that Chase
owes to ADT Operations. The complaint seeks $50 million in monetary damages.
The complaint also seeks to enjoin Chase from advising, funding, or
participating in Western's attempts to take control of ADT and from disclosing
any confidential information regarding ADT Operations and ADT. On March 3,
1997, Chase filed a motion for dismissal of ADT Operations' complaint or,
alternatively, summary judgment. This motion is scheduled to be heard on
April 11, 1997.
On February 7, 1997, ADT Operations filed a motion for a preliminary
injunction, seeking to enjoin Chase from: (i) advising, funding, or assisting
Western in its efforts to take over ADT or participating in these efforts; and
(ii) using or disclosing any confidential information that ADT Operations
provided to Chase. The motion was argued before the Court on February 24,
1997 and is currently pending.
On March 11, 1997, Crandon Capital Partners ("CCP") filed a complaint in the
Circuit Court for the Fifteenth Judicial Circuit in Palm Beach County, Florida
against the Company, certain of its current and former directors, and
Republic. The complaint was brought by CCP in a derivative capacity on behalf
of ADT. The complaint alleges that ADT's directors breached their fiduciary
duties and wasted corporate assets in connection with (i) the granting of
options to certain officers of ADT in 1996, (ii) the issuance of the Republic
Warrant, (iii) the implementation of the Rights Plan, and (iv) harassing and
attempting to disenfranchise WCI. The complaint seeks an unspecified amount
of damages and a court order directing ADT's directors to establish a system
of internal controls to prevent repetition of the alleged breaches of
fiduciary duty and corporate waste.
The Company and its directors believe that the allegations in the complaint
brought by CCP are without merit and intend to vigorously defend against them.
17
ADT Limited and various of its subsidiaries are defendants in a number of
other pending legal proceedings incidental to present and former operations,
acquisitions and dispositions. ADT does not expect that the outcome of these
proceedings, either individually or in the aggregate, will have a material
adverse effect upon ADT's consolidated results of operations and cash flows or
its consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the last
quarter of the period covered by this Annual Report.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ADT Limited's common shares ("Common Shares") have been listed on the New York
Stock Exchange ("NYSE") since August 1991 and on the London Stock Exchange
since December 1984.
The following table sets forth, for the periods indicated, the high and low
sales prices for the Common Shares as reported in the consolidated transaction
reporting system on the NYSE.
High Low
$ $
1995
First Quarter 12 1/4 9 5/8
Second Quarter 12 1/4 10 1/8
Third Quarter 14 1/8 11 5/8
Fourth Quarter 15 1/4 13
1996
First Quarter 18 14
Second Quarter 19 1/2 16 1/4
Third Quarter 24 3/4 15 7/8
Fourth Quarter 23 1/4 18 1/2
1997
First Quarter to March 24 27 5/8 21 1/4
At March 24, 1997, 156,696,447 Common Shares were held of record by 15,749
record holders. Since a number of the Common Shares were held by brokers
or other nominees, the number of record holders may not be representative
of the number of beneficial holders. A subsidiary of ADT Limited owns
3,182,787 Common Shares which are included in the number outstanding.
Dividends
ADT Limited has not declared any dividends on the Common Shares since April
1991. ADT Limited has no present intention to pay any dividends on the Common
Shares but will keep its dividend policy under review in the light of
prevailing circumstances. Under the terms of the senior notes and revolving
bank credit agreement ADT Limited may not declare, pay or make any dividend or
distribution with respect to its Common Shares, except in certain defined
circumstances (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources").
19
Exchange Controls and Other Limitations Affecting Security Holders
ADT Limited has been designated as a non-resident for exchange control
purposes by the Bermuda Monetary Authority, Foreign Exchange Control. There
are no limitations on the rights of non-Bermuda owners of the Common Shares
arising out of such designation to hold or vote their shares. Because ADT
Limited has been designated as a non-resident for Bermuda exchange control
purposes, there are no exchange control restrictions on its ability to
transfer funds in and out of Bermuda or to pay dividends to United States
residents who are holders of the Common Shares, except that ADT Limited may
not hold Bermuda dollars except external Bermuda dollars.
The transfer of Common Shares already issued between persons regarded as
resident outside Bermuda for exchange control purposes and the issue of Common
Shares for which consent has already been granted to such persons, may be
effected without specific consent under the Exchange Control Act of 1972 and
regulations thereunder. All further issues of Common Shares and any transfers
of Common Shares involving any person regarded as resident in Bermuda for
exchange control purposes require specific prior approval under the Exchange
Control Act of 1972.
In accordance with Bermuda law, share certificates are only issued in the
names of corporations, partnerships or individuals. In the case of an
applicant acting in a special capacity (for example, as an executor or
trustee), certificates may, at the request of the applicant, record the
capacity in which the applicant is acting. Notwithstanding the recording of
any such special capacity, ADT Limited is not bound to investigate or incur any
responsibility in respect of the proper administration of any such estate or
trust.
Shares purchased for those under 21 years of age must be registered in the
name of the parent or guardian but may be designated with the minor's initials
for the purpose of identification. ADT Limited will take no notice of any
trust applicable to the shares represented by such certificates.
As an "exempted company", ADT Limited is exempt from Bermuda laws which
restrict the percentage of share capital that may be held by non-residents of
Bermuda, but as an exempted company ADT Limited may not participate in certain
business transactions, including (i) the acquisition or holding of land in
Bermuda (other than that required for its business and held by way of lease or
tenancy for terms of not more than 21 years) without the express authorization
of the Bermuda legislature or the Minister of Finance; (ii) the taking of
mortgages on land in Bermuda to secure an amount in excess of $50,000; (iii)
the acquisition of securities created or issued by, or any interest in, any
local company or business, other than certain types of Bermuda Government
securities or securities of another "exempted" company, partnership or any
other corporation resident in Bermuda but incorporated abroad; or (iv) the
carrying on of business of any kind in Bermuda, except as necessary in
furtherance of the business of the ADT Limited carried on outside Bermuda or
under a license granted by the Minister of Finance of Bermuda.
Under current Bermuda law, no Bermuda withholding tax will be imposed upon
payment of dividends by ADT Limited to its common shareholders. Furthermore,
ADT Limited has received from the Minister of Finance of Bermuda, under the
Exempted Undertakings Tax Protection Act of 1966, as amended, an undertaking
that, in the event of there being enacted in Bermuda any legislation imposing
any tax computed on profits or income, including any dividend or capital gains
withholding tax, or computed on any capital assets, gain or appreciation, or
any tax in the nature of an estate or inheritance tax or duty, the imposition
of such tax shall not be applicable to ADT Limited or any of its operations,
nor to the Common Shares, preference shares or other obligations of ADT
Limited, until the year 2016. This undertaking does not, however, prevent the
application of Bermuda taxes to persons ordinarily resident in Bermuda.
Under current Bermuda law, ADT Limited is required to pay the Bermuda
Government an annual registration fee, which is calculated by a reference to
the authorized capital and share premium of ADT Limited. ADT Limited pays the
maximum fee, which is currently $25,000 per annum.
20
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below has been derived from the audited
consolidated financial statements of the Company. The information presented
below should be read in conjunction with, and is qualified by reference to,
the consolidated financial statements of the Company and the related notes
thereto and the consolidated financial statement schedules and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Consolidated income statement data
Year ended December 31 1996 1995 1994 1993 1992
$m $m $m $m $m
Net sales 1,704.0 1,783.8 1,629.4 1,528.5 1,552.2
======= ======= ======= ======= =======
Operating (loss) income (i) (765.5) 200.8 206.0 186.8 165.3
Interest income 27.5 16.2 15.2 13.3 25.3
Interest expense (101.0) (116.3) (99.3) (76.7) (95.7)
Gain (loss) on disposal of businesses (ii) 1.7 (36.6) (0.3) - 60.5
Other income less expenses (iii) 128.8 (5.0) (4.1) 9.8 23.8
------ ------ ------ ------ ------
(Loss) income before income taxes (708.5) 59.1 117.5 133.2 179.2
Income taxes 21.8 (28.1) (34.9) (22.5) (20.1)
------ ------ ------ ------ ------
(Loss) income from continuing operations (686.7) 31.0 82.6 110.7 159.1
Loss from discontinued operations (iv) - - (3.3) - (2.7)
------ ------ ------ ------ ------
(Loss) income before extraordinary items (686.7) 31.0 79.3 110.7 156.4
Extraordinary items (net of
income taxes) (v) (8.4) (9.8) - - 5.6
------ ------ ------ ------ ------
Net (loss) income (695.1) 21.2 79.3 110.7 162.0
======= ======= ======= ======= =======
$ $ $ $ $
Primary (loss) earnings per common share (vi):
(Loss) income from continuing operations (5.01) 0.22 0.51 0.74 1.19
Loss from discontinued operations - - (0.03) - (0.02)
Extraordinary items (0.06) (0.07) - - 0.05
------ ------ ------ ------ ------
Net (loss) income per common share (5.07) 0.15 0.48 0.74 1.22
======= ======= ======= ======= =======
Consolidated balance sheet data
At December 31 1996 1995 1994 1993 1992
$m $m $m $m $m
Total assets (vii) 2,730.4 3,419.7 3,412.3 3,477.4 3,368.9
Long-term debt (including
current portion) 1,068.7 1,180.3 1,211.4 953.4 1,067.8
Convertible redeemable preference
shares (viii) - 4.9 5.2 427.2 434.6
Non-voting exchangeable shares - - - 15.0 15.1
Exchangeable redeemable preference shares - - - - 21.0
Total shareholders' equity (ix) 759.8 1,425.3 1,376.5 1,264.8 1,054.4
21
(i) Operating loss in 1996 included restructuring and other non-recurring
charges of $237.3 million relating principally to the electronic security
services divisions in the United States and the United Kingdom, and a charge
of $744.7 million relating to the impairment of long-lived assets following
the adoption by the Company of Statement of Financial Accounting Standards No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS 121"). Operating income in 1995 included
restructuring and other non-recurring charges of $34.2 million relating
principally to the United States electronic security services division and to
corporate restructuring in Europe. Operating income in 1994 included
restructuring and other non-recurring charges of $4.5 million relating to
corporate restructuring in Europe.
(ii) Loss on disposal of businesses in 1995 included a net loss of $65.8
million relating to the disposal by the Company of an interest in its United
Kingdom and Continental European vehicle auction services businesses offset by
a net gain of $31.4 million relating to the disposal by the Company of its
entire European electronic article surveillance business. Gain on disposal of
businesses in 1992 related to the disposal by the ASH group of its entire
European loss prevention business.
(iii) Other income less expenses in 1996 included a net gain of $53.4
million relating to the disposal of the Company's entire investment in
Limelight Group plc, and a net settlement gain of $65.0 million relating to an
agreement in full and final settlement of the Company's litigation against BDO
Binder Hamlyn ("BDO"). Other income less expenses in 1994 included net gains
of $21.5 million arising from the ownership of investments and a net write off
of $30.7 million relating to the Company's entire equity investment in Arius,
Inc. which was held by the ASH group. Other income less expenses in 1992
included a $50.9 million deferred net gain arising from the Company's
investment in Quoteplan PLC and a net write off of $33.7 million of the
Company's equity investment in Nu-Swift plc.
(iv) Discontinued operations comprised the disposal during 1994 of all the
Company's non-core businesses, principally Insight Travel Group. The company
no longer has any interests in non-core businesses. Included in the loss from
discontinued operations for 1994 were net losses on disposal of the non-core
businesses amounting to $3.7 million. Net sales from discontinued operations
amounted to $80.6 million in 1994, $96.9 million in 1993 and $101.4 million in
1992. These net sales are not included in net sales in the consolidated
income statement data.
(v) Extraordinary items principally were comprised of the gains and losses
arising on reacquisition/ repayment and the write off of net unamortized
deferred refinancing costs relating to the early extinguishment of certain
amounts outstanding under the Company's long-term debt obligations, and were
stated net of applicable income taxes.
(vi) The calculation of primary earnings per common share was based on the
weighted average number of common shares in issue during the period. Such
weighted average number of common shares in issue for the years ended December
31, 1996, 1995, 1994, 1993 and 1992 was 137,114,415, 138,283,458, 136,148,361,
122,043,139 and 113,480,672 common shares, respectively.
(vii) Following the adoption of SFAS 121 during 1996, the Company recorded a
charge of $744.7 million relating to the impairment of long-lived assets.
(viii) During 1994 the Company redeemed a significant proportion of its
convertible redeemable preference shares. The net effect of this transaction
was to reduce the carrying value of the convertible redeemable preference
shares by $422.0 million. The Company funded the redemption from cash on hand
and through the drawdown of long-term debt facilities.
(ix) During 1993 the Company issued common shares for cash resulting in net
proceeds of $154.8 million.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
In September 1996 the Company merged with and acquired the whole of the issued
capital of ASH, a United Kingdom quoted company. ASH is engaged in the
provision of electronic security services in North America and Europe. The
merger with and acquisition of ASH by the Company has been accounted for by
means of the pooling of interests method of accounting pursuant to Accounting
Principles Board Opinion No. 16. The pooling of interests method of
accounting assumes that the combining companies have been merged since their
inception, and the historical consolidated financial statements for periods
prior to consummation of the merger are restated as though the companies have
been combined since their inception. Accordingly, the accompanying
consolidated financial statements give effect to the transaction by means of
the pooling of interests and have been restated.
During 1995 management commenced a strategic review of the Company's business
operations and its corporate organizational structure with a view to
developing a business strategy which would place the Company in a stronger
position to deal with the changing business environment and challenges facing
its core service businesses in the late 1990s. As part of this strategic
review, management approved the redeployment of certain of the Company's assets
in order to further concentrate the Company's resources on the electronic
security services operations, principally in the United States, where
management believes the greatest potential for future growth lies.
Consequently, Actron Group, the Company's European electronic article
surveillance business, was disposed of in November 1995 and in December 1995
the Company disposed of an interest in its European vehicle auction services
businesses.
During the fourth quarter of 1995, the Company entered into an agreement for
the acquisition of Alert, the tenth largest electronic security services
company in the United States, with a predominantly residential customer base
located principally in Texas, Florida and Georgia.
As part of the strategic review of its business operations undertaken during
1995, and in the context of the acquisition of Alert and the disposal of an
interest in the European vehicle auction services businesses, management
commenced an evaluation of the entire group corporate structure, and the
administrative, accounting and management information systems of its United
States electronic security services division (the "Re-Engineering Project").
The Re-Engineering Project, which is on-going, is intended to modify and
improve the entire structure of the business operations in order to create a
more profitable, efficient organization with significantly improved marketing,
selling, installation and servicing capabilities supported by upgraded
management information systems.
During 1996 the restructuring in the electronic security services division
included a reorganization of senior management, the closure of a major
corporate office in Parsippany, New Jersey, and a realignment of the
organizational structure along the functional business lines of residential,
commercial and customer service, rather than along geographic lines.
During 1996, as a result of the acquisition of ASH and the further development
of the Re-Engineering Project under the control of new senior management, the
Company identified the need to extend the process of strategic change to
include a significantly expanded agenda. As a result, various strategic
initiatives have been added to the corporate plan and the implementation of
these plans is currently in progress and will continue throughout 1997. In
the United States the plans relate principally to a significant investment in
technological infrastructure enhancements to facilitate further consolidation
of the Company's entire customer monitoring center network down to four, state
of the art, customer service centers, and to place the Company in a stronger
position to take advantage of the significant opportunities in the changing
market place. In Europe, the plans relate principally to the merger,
integration and consolidation of the Company's existing electronic security
services businesses with that of ASH.
23
RECENT DEVELOPMENTS
In November 1996 the Company announced that it intended to dispose of the
vehicle auction services operations in the United States in order to
concentrate further on the expansion of the Company's electronic security
services business. Accordingly, the Company's vehicle auction services
business segment was then initially reclassified as a discontinued operation
for all years presented. The preliminary, summarized consolidated results of
operations of the Company for the year ended December 31, 1996 were announced
on March 3, 1997, and were filed under Schedule 14A. On March 17, 1997 the
Company announced that the aforementioned intention had been rescinded and
that the vehicle auction services operations in the United States would no
longer be disposed of. Accordingly, all consolidated financial information
set forth in this Form 10-K, including the audited consolidated financial
statements of the Company, is presented with the Company's vehicle auction
services business segment classified as a continuing operation for all years
presented. There is no net effect on the reported net income and total
shareholders' equity when comparing the preliminary, summarized consolidated
results of operations of the Company referred to above and the consolidated
financial information set forth in this Form 10-K. All differences
relate to the reclassification of the vehicle auction services business
segment from discontinued operations to continuing operations.
In December 1996 Western Resources, Inc. ("Western") announced its intention
to commence an offer to exchange all of ADT Limited's outstanding common
shares for consideration consisting of cash and shares of Western common
stock. On March 3, 1997 the Company announced that its board of directors had
determined that the offer made by Western was inadequate and not in the best
interests of ADT Limited's shareholders. On March 17, 1997 the offer made by
Western commenced.
On March 17, 1997 the Company announced that it had entered into a definitive
merger agreement, subject to shareholder approval and other customary matters,
with Tyco International Ltd. ("Tyco"), a United States quoted company engaged
in the manufacture of industrial and commercial products. Tyco shareholders
will receive one common share in the combined company for each Tyco common
share and ADT Limited shareholders, through a reverse stock split, will
receive 0.48133 common shares in the combined company for each ADT Limited
common share.
The information presented below should be read in conjunction with, and is
qualified by reference to, the consolidated financial statements of the
Company and the related notes thereto and the consolidated financial statement
schedules.
24
RESULTS OF OPERATIONS
The following discussion of results of operations addresses net sales,
operating (loss) income and certain other line items in the consolidated
financial statements.
Net sales
Year ended December 31 1996 1995 1994
$m $m $m
Electronic security services 1,406.2 1,350.9 1,253.3
Vehicle auction services 297.8 432.9 376.1
------- ------- -------
1,704.0 1,783.8 1,629.4
======= ======= =======
Operating (loss) income and (loss) income before income taxes
Year ended December 31 1996 1995 1994
$m $m $m
Electronic security services (756.5) 172.4 182.1
Vehicle auction services 27.1 70.2 62.7
Corporate expenses (36.1) (41.8) (38.8)
------- ------- -------
Operating (loss) income (765.5) 200.8 206.0
------- ------- -------
Interest income 27.5 16.2 15.2
Interest expense (101.0) (116.3) (99.3)
Gain (loss) on disposal of businesses 1.7 (36.6) (0.3)
Other income less expenses 128.8 (5.0) (4.1)
------- ------- -------
(Loss) income before income taxes (708.5) 59.1 117.5
======= ======= =======
Restructuring and other non-recurring charges 237.3 34.2 4.5
Charge for the impairment of long-lived assets 744.7 - -
Depreciation and amortization 224.8 247.9 226.7
Capital expenditures 344.4 325.8 282.6
Electronic Security Services
Net sales derived from the electronic security services division are dependent
on the volume of new customer installations and the number of customers under
contract for the provision of electronic monitoring services. A majority of
the division's revenues are derived from contractually recurring fees for
electronic monitoring and maintenance of security systems installed at
customer premises and other related services. The remainder of the division's
revenues are derived from the outright sale and installation of security
systems, the installation of security systems in accordance with a monitoring
service agreement and the maintenance of security systems on a non-contractual
basis. Security system installation revenues are recognized when the
installation of a system is complete. Where a system has been installed in
accordance with the terms of a monitoring service agreement, the Company
retains ownership of the system and all direct installation costs, which
include materials, labor and installation overheads, are capitalized and
recorded as a fixed asset under subscriber systems. These subscriber systems
are depreciated over their estimated useful life, which is principally 14
years and 10 years for commercial and residential systems, respectively, or,
in the case of commercial systems, the actual contract duration if shorter.
All selling and marketing costs are expensed in the year incurred.
25
The following table presents the approximate number of commercial and
residential customers in North America and Europe contracting with the Company
for the monitoring or maintenance of electronic security systems together with
the annualized service revenue under contract as of December 31, 1996, and the
annual combined discontinuance rate for commercial and residential contracts
in respect of 1996.
Number of Commercial Number of Residential Annualized Service Annual Combined
Customers Customers Revenue Discontinuance Rate
672,000 1,149,000 $920m 10.4%
ADT defines annualized service revenue as the annualized service billing
arising from its customer base at a point in time for monitoring, maintenance
and related services. The aggregate annualized service billings amount takes
account of cancellations or terminations, increases in contract revenues due
to new contracts, additional services to existing customers and rate
variations at the date of computation. The actual amount of service revenue
for future periods will vary in accordance with changes in the customer base
and fees charged.
ADT calculates the annual combined discontinuance rate by dividing the
annualized service revenue from contracts cancelled or reduced in price during
the year by the annualized service revenue in force at the beginning of the
year, expressed as a percentage.
Since 1987 the division's goals have been to create a lower cost, more
efficient operation, suitable for long-term growth and greater profitability,
and to take advantage of the economies of scale resulting from the utilization
of the existing infrastructure which services its commercial customer base.
During this period the Company equipped its regional customer monitoring
centers with enhanced computer technology to further automate the monitoring
process and increase monitoring capacity. As a result of increased monitoring
and service capacity, and a lower cost structure due to manpower reductions
and reduced facility costs, in the early 1990s the Company began marketing
electronically monitored security systems and services at lower installation
price points to residential customers throughout North America. As a result
of the rapid expansion of the Company's business during the recent past and a
broader business strategy adopted by the Company in a changing market place,
the Company has identified the need to improve and expand its technological
and physical capacity in order to expand its customer base and product range.
Consequently, the Company has approved a plan to significantly enhance its
monitoring capacity, service quality and ability to expand its service and
product range. The Company will continue to aggressively market residential
security systems in North America, while also focusing on opportunities for
growth in the commercial sector as the economies in North America and Europe
improve.
Further details of the electronic security services division's business
strategy are set out under "Description of Business - Business Description -
Electronic Security Services."
26
1996 compared with 1995
Net sales of the division increased 4.1 per cent in 1996 to $1,406.2 million
from $1,350.9 million in 1995. This sales increase was attributable to an
increase of $102.1 million in the sales of the North American operations offset
by a $46.8 million decline in the sales of the European operations, which was
due to the exclusion of sales of the European electronic article surveillance
operation and certain businesses operating in the ASH group, all of which were
disposed of during 1995. In North America the increase in sales was
principally due to the first time inclusion of the sales of Alert which was
acquired in December 1995, as well as increased recurring monitoring and
maintenance revenues arising from a larger base of residential security
systems. Although unit residential security systems sales in North America
increased in 1996 compared to 1995, due to price competition in the market
place, residential installation revenues in North America showed a modest
decline in 1996 compared with 1995. The commercial business in the United
States remained flat in both new system sales and installation revenues, and
growth in recurring commercial revenues continues to be affected by these
factors. In Europe, after allowing for business disposals and the effect of
foreign exchange, sales showed a modest increase in 1996 compared with 1995.
Operating results of the division declined from $172.4 million income in 1995
to a $756.5 million loss in 1996, principally due to a charge for the
impairment of long-lived assets of $731.7 million and restructuring and other
non-recurring charges of $232.5 million in 1996.
Operating income of the division before the charge for the impairment of
long-lived assets and restructuring charges increased 7.2 per cent in 1996 to
$207.7 million from $193.8 million in 1995. Operating income before the charge
for the impairment of long-lived assets and restructuring charges as a
percentage of net sales ("operating margin") increased to 14.8 per cent in
1996 from 14.3 per cent in 1995. The increase in operating income before the
charge for the impairment of long-lived assets and restructuring charges
principally reflected the first time inclusion of Alert, the disposal of the
European electronic article surveillance operation in November 1995, and the
continuing success of the North American residential security systems sales
program, which has achieved further advances in recurring revenues in 1996.
However, this improvement has been offset by continued price competition and by
increased marketing and selling costs, which have caused the contribution from
residential installation revenues and outright residential sales to show a
modest decline. The North American commercial installation revenues and
outright sales remained flat. The contribution in Europe showed a modest
increase.
1995 compared with 1994
Net sales of the division increased 9.2 per cent in 1995 to $1,350.9 million
from $1,236.6 million in 1994 (excluding net sales of $16.7 million relating
to the Company's electronic security services businesses in Australia and New
Zealand, disposed of in June 1994). This increase was attributable to
increases in net sales of $90.2 million and $24.1 million in North America and
Europe, respectively. The sales increase in North America was principally due
to increased recurring monitoring and maintenance revenues arising from a
larger base of residential security systems. In addition, the commercial
business in the United States experienced improved growth in new system sales
and installation revenues. However, corporate downsizing and cost containment
has meant that growth in recurring revenues from the commercial sector has
been modest. Sales in Canada, however, have marginally declined. The
increase in sales in Europe was due to increased sales in the commercial
business, particularly in the United Kingdom, as well as increased recurring
monitoring and maintenance revenues from commercial customers, and the
strengthening of European currencies against the US dollar.
Operating income of the division declined from $182.1 million in 1994 to
$172.4 million in 1995, principally due to restructuring and other
non-recurring charges of $21.4 million in 1995.
27
Operating income of the division before restructuring charges increased 6.5
per cent in 1995 to $193.8 million from $181.9 million in 1994 (excluding
operating income of $0.2 million relating to Australia and New Zealand,
disposed of in June 1994). Operating margin declined from 14.7 per cent in
1994 (after excluding Australia and New Zealand) to 14.3 per cent in 1995
reflecting the higher cost of adding new residential customers in North America
during 1995. The increase in operating income before restructuring charges in
North America reflected the continuing success in the United States of the
residential security systems sales program and growth in the sale of new
systems and installation revenues in the commercial sector. The growth in
residential and commercial sales resulted in increased installation fees and
related monitoring and maintenance revenues and increased utilization of the
monitoring network in the United States. In Canada, however, sales and
margins have fallen and the overall business performance was disappointing.
In Europe operating income before restructuring charges showed a modest
increase despite pressure on margins in the electronic article surveillance
business. In November 1995 the Company disposed of its entire electronic
article surveillance business.
Restructuring and other non-recurring charges
During 1995, the Company commenced a strategic review of its business
operations with a view to developing a business strategy which would place the
Company in a stronger position to deal with the changing business environment
and challenges facing its core electronic security services businesses in the
late 1990s. This strategic review process continued during 1996 following the
completion of the acquisition of Alert, the senior management reorganization
which took place in the first quarter of 1996, and the identification by the
new senior management team of the need to expand significantly the terms of
reference of the restructuring in the United States. The effects of the
Re-Engineering Project and the consequent restructuring are more fully
described in note 5(i) of the notes to consolidated financial statements. As
a consequence of the Re-Engineering Project, in each of the fourth quarters
of 1996 and 1995, senior executive management approved a restructuring plan
which resulted in a charge for restructuring and other non-recurring items of
$134.7 million and $21.4 million, respectively.
During the fourth quarter of 1996, the Company commenced a strategic and
detailed review of the electronic security services businesses acquired as
part of the acquisition of ASH in September 1996. In December 1996 senior
executive management approved a restructuring plan which is intended to merge
and integrate fully the ASH group into the ADT group by the end of 1997. As a
consequence of the restructuring plan a charge for restructuring and other
non-recurring items of $97.8 millon was recorded in the fourth quarter of
1996. Details of the restructuring are more fully described in note 5(i) of
the notes to consolidated financial statements.
Charge for the impairment of long-lived assets
Effective January 1, 1996, the Company was required to adopt SFAS 121.
Following the adoption of SFAS 121, in the first quarter of 1996 the Company
recorded an aggregate non-cash charge for the impairment of long-lived assets
of $731.7 million in the electronic security services division with a
consequential tax credit of $10.8 million. The impairment charge comprised
$397.1 million relating to the ADT group, principally all of which related to
the carrying value of goodwill and other intangibles, and $334.6 million
relating to the ASH group, of which $121.0 million related to the carrying
value of subscriber systems installed at customers' premises which are
included in property, plant and equipment, and $213.6 million related to the
carrying value of goodwill and other intangibles. Further details are set out
in note 6(i) of the notes to consolidated financial statements.
28
Vehicle Auction Services
Net sales of the vehicle auction services division are a function of the
number of vehicles handled, the number of vehicles sold at auction and the
number of vehicles handled for which ancillary services are provided. The
Company charges an entry fee for the majority of vehicles entered at auction.
On the sale of a vehicle at auction, the Company charges a separate seller's
and buyer's fee for each vehicle sold. This fee per vehicle sold is either
a fixed fee or a variable fee directly related to the sale price achieved.
The fee structure for each vehicle transaction is based upon the contractual
relationship with the customer. Revenues from additional services, which
include reconditioning, body repair, inspection, transportation and insurance
are related to the number of vehicles handled and are an additional integral
source of the division's revenue.
In December 1995 the Company disposed of an interest in its United Kingdom and
Continental European vehicle auction services businesses.
1996 compared with 1995
Net sales of the division declined from $432.9 million in 1995 to $297.8
million in 1996 due to the exclusion of the sales of European Auctions which
was sold in December 1995.
Net sales of the United States vehicle auction services business increased
10.4 per cent in 1996 to $297.8 million from $269.8 million in 1995. The
volume of vehicles sold increased by approximately 7 per cent which was
principally due to an increase in the volume of vehicles sold for fleet lease
customers of approximately 35 per cent, while the volume of vehicles sold for
vehicle manufacturers and new and used vehicle dealers declined by
approximately 5 per cent and approximately 2 per cent, respectively.
Operating income of the division declined from $70.2 million in 1995 to $25.2
million in 1996 due to a charge for the impairment of long-lived assets of
$13.0 million (see note 6(ii) of the notes to consolidated financial
statements) and the exclusion of the operating income of European Auctions.
Operating income before the charge for the impairment of long-lived assets of
the United States vehicle auction services business increased 11.4 per cent in
1996 to $38.2 million from $34.3 million in 1995. Operating margin increased
to 12.8 per cent in 1996 from 12.7 per cent in 1995. The increase in
operating income and operating margin were due principally to the increase in
the volume of vehicles sold and to an increase in the ratio of vehicles sold
to vehicles entered for sale ("conversion ratio") to 56.6 per cent in 1996
from 55.3 per cent in 1995, which was due to a higher proportion of vehicles
entered for sale by fleet lease customers.
In December 1995 the Company disposed of an interest in European Auctions for
an aggregate consideration of $334.9 million. The net loss on disposal of
$65.8 million included $136.5 million relating to the write off of net
unamortized goodwill and other intangibles and a $23.2 million charge relating
to cumulative currency translation adjustments.
1995 compared with 1994
Net sales of the division increased 15.1 per cent in 1995 to $432.9 million
from $376.1 million in 1994. This increase was attributable to increases in
net sales of $40.3 million and $16.5 million in Europe and the United States,
respectively. The increase in Europe was primarily attributable to an
increase in the number of vehicles sold in 1995 of approximately 7 per cent,
the inclusion of the vehicle reconditioning and transportation business in the
United Kingdom which was acquired in December 1994 and the strengthening of
European currencies against the US dollar. In Europe the volume of vehicles
sold for new and used vehicle dealers, fleet lease customers and vehicle
manufacturers increased by approximately 5 per cent, approximately 10 per cent
and approximately 8 per cent, respectively. In the United States the volume
of vehicles sold increased by approximately 3 per cent. This was principally
due to an increase in the volume of vehicles sold for fleet lease customers of
approximately 30 per cent, offset by a decline, in each case, in the volume of
vehicles sold for vehicle manufacturers and new and used vehicle dealers of
approximately 5 per cent.
Operating income of the division increased 12.0 per cent in 1995 to $70.2
million from $62.7 million in 1994. Operating income in Europe increased by
$6.9 million due to the increase in revenue per vehicle sold at auctions, the
inclusion of the vehicle reconditioning and transportation business in the
United Kingdom, effective overhead containment and the strengthening of
European currencies against the US dollar. Operating income in the United
States increased by $0.6 million and operating margin declined from 13.3 per
cent to 12.7 per cent. This was principally due to a decline in the
conversion ratio from 58.3 per cent in 1994 to 55.3 per cent in 1995 which was
due to a lower proportion of vehicles entered for sale by manufacturers and to
lower dealer conversion ratios.
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Corporate expenses
Corporate expenses comprise administrative, legal and general corporate
expenses net of other income and include all central costs