UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _____________________ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 Commission file number 0-16979 - ------------------------------------------------------------------------------ ADT LIMITED (Exact Name of Registrant as Specified in its Charter) BERMUDA Cedar House Not Applicable (Jurisdiction of 41 Cedar Avenue (I.R.S. Employer Incorporation or Hamilton HM12, Bermuda Identification No.) Organization) (Address of Principal Executive Offices)* Not Applicable (Zip Code) Registrant's telephone number, including area code 441-295-2244* *See page i - ------------------------------------------------------------------------------ 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 [ ] At May 8, 1997, the number of shares outstanding of the registrant's common shares par value $0.10 per share was 156,902,489 shares. A subsidiary of ADT Limited owns 3,182,787 common shares which are included in the number outstanding.
ADT LIMITED INDEX TO FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 1997 PAGE ---- PART I FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996...................................... 1 CONSOLIDATED BALANCE SHEETS AT MARCH 31, 1997 AND DECEMBER 31, 1996.................................................. 2 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996...................................... 3 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS......................... 4 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................................. 13 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS.................................................. 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................... 18 SIGNATURE.................................................................. 18 The consolidated financial statements were approved by the Board of Directors on May 8, 1997. Registered and Principal Executive Offices The registered and principal executive offices of ADT Limited are located at Cedar House, 41 Cedar Avenue, Hamilton HM12, Bermuda. The executive offices of the subsidiary which supervises the Company's North American activities are located in the United States at 1750 Clint Moore Road, P.O. Box 5035, Boca Raton, Florida 33431. The telephone number there is 561-988-3600. i
ADT LIMITED PART I FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Income (unaudited) Three months ended March 31 1997 1996 $m $m Net sales 460.7 411.3 Cost of sales (239.3) (221.5) Selling, general and administrative expenses (155.5) (131.9) Charge for the impairment of long-lived assets - (744.7) ------ ------ Operating income (loss) 65.9 (686.8) Interest income 4.7 6.5 Interest expense (21.4) (27.4) Other expenses less income - (0.3) ------ ------ Income (loss) before income taxes 49.2 (708.0) Income taxes (14.2) 2.4 ------ ------ Net income (loss) 35.0 (705.6) ====== ====== Primary earnings (loss) per common share $0.23 $(5.20) ====== ====== Fully diluted earnings (loss) per common share $0.22 $(5.20) ====== ====== See notes to consolidated financial statements 1
ADT LIMITED Consolidated Balance Sheets (unaudited) March 31 December 31 1997 1996 $m $m Assets Current assets: Cash and cash equivalents 492.0 215.9 Accounts receivable - net 318.7 210.7 Inventories 41.3 39.2 Prepaid expenses and other current assets 66.8 117.0 ------- ------- Total current assets 918.8 582.8 Property, plant and equipment - net 1,527.6 1,513.6 Goodwill and other intangibles - net 476.6 458.0 Long-term investments 100.6 100.6 Other long-term assets 70.8 75.4 ------- ------- Total assets 3,094.4 2,730.4 ======= ======= Liabilities and shareholders' equity Current liabilities: Short-term debt 74.3 209.2 Accounts payable 173.8 138.0 Other current liabilities 267.8 293.6 ------- ------- Total current liabilities 515.9 640.8 Long-term debt 1,057.1 910.1 Deferred revenue 163.2 146.1 Deferred income taxes 102.1 91.5 Other long-term liabilities 169.3 182.1 ------- ------- Total liabilities 2,007.6 1,970.6 ------- ------- Shareholders' equity: Common shares 15.7 14.1 Additional paid-in capital Share premium 1,184.0 882.5 Contributed surplus 1,563.1 1,563.1 Treasury shares (79.7) (79.7) Accumulated deficit (1,564.7) (1,598.8) Cumulative currency translation adjustments (31.6) (21.4) ------- ------- Total shareholders' equity 1,086.8 759.8 ------- ------- Total liabilities and shareholders' equity 3,094.4 2,730.4 ======= ======= See notes to consolidated financial statements 2
ADT LIMITED Consolidated Statements of Cash Flows (unaudited) Three months ended March 31 1997 1996 $m $m Cash flows from operating activities Net income (loss) 35.0 (705.6) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Charge for the impairment of long-lived assets - 744.7 Depreciation 52.2 48.5 Goodwill and other intangibles amortization 5.6 4.4 Interest on ITS Vendor Note (2.5) (2.1) Liquid Yield Option Notes discount amortization 5.3 5.0 Refinancing costs amortization 1.0 0.9 Deferred income taxes 11.5 (4.9) Gain on disposal of investment in associate - (1.2) Loss on currency transactions 2.4 1.7 Other (1.5) (0.1) Changes in assets and liabilities (59.1) (39.0) ----- ----- Net cash provided by operating activities 49.9 52.3 ----- ----- Cash flows from investing activities Purchase of property, plant and equipment - net (100.5) (75.5) Acquisition of businesses (6.1) (20.6) Purchase of customer contracts (17.7) (3.9) Proceeds from litigation settlement 77.5 - Disposal of investment in and loans to associate - 15.4 Other (1.9) 1.5 ----- ----- Net cash utilized by investing activities (48.7) (83.1) ----- ----- Cash flows from financing activities Net (repayments) receipts of short-term debt (168.3) 8.9 Repayments of long-term debt - (15.0) Proceeds from long-term debt 141.8 6.0 Proceeds from issue of common shares 303.1 4.6 Other (1.9) - ----- ----- Net cash provided by financing activities 274.7 4.5 ----- ----- Effect of currency translation on cash and cash equivalents 0.2 (0.6) ----- ----- Net increase (decrease) in cash and cash equivalents 276.1 (26.9) Cash and cash equivalents at beginning of period 215.9 350.9 ----- ----- Cash and cash equivalents at end of period 492.0 324.0 ===== ===== See notes to consolidated financial statements 3
ADT LIMITED Notes to Consolidated Financial Statements (unaudited) (i) Basis of presentation The accompanying unaudited interim consolidated financial statements incorporate the financial statements of ADT Limited ("ADT"), a company incorporated in Bermuda, and its subsidiaries (the "Company") and have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and in accordance with generally accepted accounting principles in the United States. Accordingly, these unaudited interim consolidated financial statements do not include all of the disclosures required by generally accepted accounting principles for annual consolidated financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included and all such adjustments are of a normal, recurring nature, except that the financial year end of Automated Security (Holdings) PLC ("ASH") has now been aligned to that of the Company's and, accordingly, ASH's consolidated results of operations for December 1996 of $0.9 million have been charged to the accumulated deficit account and not to the consolidated statements of income. The preparation of consolidated financial statements in accordance with generally accepted accounting principles in the United States requires management to make extensive use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain figures at December 31, 1996 and for the three months ended March 31, 1996 have been reclassified to conform to the 1997 presentation. Results of operations for the three months ended March 31, 1997 are not necessarily indicative of the results that may be expected for the full year ending December 31, 1997. For further information, see the Company's consolidated financial statements, including the accounting policies and notes thereto, included in the Annual Report on Form 10-K for the year ended December 31, 1996. ADT is a holding company with no independent business operations or assets other than its investment in its subsidiaries, intercompany balances and holdings of cash and cash equivalents. ADT's businesses are conducted through its subsidiaries. 4
(ii) Business segments Three months ended March 31 1997 1996 $m $m Net sales Electronic security services 373.7 336.7 Vehicle auction services 87.0 74.6 ----- ----- 460.7 411.3 ===== ===== Operating income (loss) Electronic security services 65.7 (679.2) Vehicle auction services 15.4 (2.2) Corporate (15.2) (5.4) ----- ----- 65.9 (686.8) ===== ===== In the first quarter of 1996 electronic security services and vehicle auction services operating income was stated after a charge for the impairment of long-lived assets of $731.7 million and $13.0 million, respectively. Net sales and operating income (loss) of the electronic security services and vehicle auction services divisions are discussed in Item 2. In the first quarter of 1997 corporate expenses included $9.6 million related to professional and other transaction costs arising in connection with the proposed merger with Tyco International Ltd. and the offer by and litigation with Western Resources, Inc. (iii) Interest income and interest expense Interest income and interest expense are discussed in Item 2. (iv) Other expenses less income Other expenses less income for the three months ended March 31, 1996 included net gains of $1.2 million relating to the disposal of investment in associate. 5
(v) Earnings (loss) per common share The calculation of primary earnings (loss) per common share was based on the weighted average of 149,093,478 (1996 - 135,840,581) common shares in issue during the period, which in 1996 did not include common stock equivalents because their effect was anti-dilutive as a consequence of the net loss for the period. Common stock equivalents included in the weighted average number of common shares in issue during the three months ended March 31, 1997 was 8,832,376. Primary earnings (loss) per common share was based on adjusted net income of $35.0 million (1996 - $705.7 million loss). The calculation of fully diluted earnings per common share in the three months ended March 31, 1997 was based on the weighted average of 173,713,618 common shares in issue during the period and was based on adjusted net income of $38.5 million. The Company will be required to adopt Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128") in the fourth quarter of 1997. SFAS 128 specifies the revised computation, presentation and disclosure requirements for earnings per share and supercedes Accounting Principles Board Opinion No. 15. The impact that adoption of SFAS 128 would have on primary (to be renamed basic) earnings per common share and fully diluted (to be renamed diluted) earnings per common share for the three months ended March 31, 1997 would be to revise such data to $0.25 and $0.23, respectively. There would be no impact on the comparable earnings per common share for the three months ended March 31, 1996. (vi) Inventories March 31 December 31 1997 1996 $m $m Raw materials and consumables 9.3 8.6 Work in process 19.0 18.9 Finished goods 13.0 11.7 ---- ---- 41.3 39.2 ==== ==== (vii) Common shares March 31 December 31 1997 1996 Number of common shares of $0.10 each: Authorized 220,000,000 220,000,000 Issued and outstanding 156,732,059 141,382,697 6
In July 1996, ADT granted to Republic Industries, Inc. ("Republic") a warrant to acquire 15 million common shares of ADT at an exercise price of $20 per common share. In March 1997 the warrant was exercised by Republic and ADT received $300 million in cash. (viii) Contingencies In December 1996 Westar Capital, Inc. ("WCI"), a wholly owned subsidiary of Western Resources, Inc. and a 25 per cent shareholder of ADT, filed a complaint (as subsequently amended) in the US Courts against ADT and its directors, among others. The complaint alleges, among other things, that ADT and its directors breached their fiduciary duties to WCI and ADT's other shareholders (a) by adopting the Shareholder Rights Plan (the "Plan"), and (b) by issuing to Republic a warrant. The complaint seeks a court order (a) directing ADT to redeem the Plan, and (b) declaring the warrant issued to Republic null and void or preventing ADT and Republic from exercising their rights under the warrant or preventing Republic from selling or transferring any of the warrant shares. The complaint also seeks unspecified damages, attorneys' fees and costs. Accordingly, an estimate of any potential loss or range of possible losses, if any, cannot be made. ADT and its board of directors believe that the allegations in WCI's complaint against ADT and its directors are without merit and intend vigorously to defend against them. In December 1996 Mr. C. Gachot filed a complaint in the US Courts against ADT and certain of its directors, among others. The complaint was brought on behalf of a class of all shareholders of ADT and alleges, among other things, that the Plan and the warrant issued to Republic are improper. The complaint seeks unspecified monetary relief. Accordingly, an estimate of any potential loss or range of possible losses, if any, cannot be made. ADT and its board of directors believe that the allegations in Mr. Gachot's complaint against ADT and certain of its directors are without merit and intend vigorously to defend against them. In March 1997 Crandon Capital Partners ("CCP") filed a complaint in the US Courts against ADT and certain of its current and former directors, among others. The complaint was brought by CCP in a derivative capacity on behalf of ADT. The complaint alleges, among other things, that ADT's directors breached their fiduciary duties and wasted corporate assets in connection with (a) the granting of options to certain officers of ADT in 1996, (b) the implementation of the Plan, and (c) the issuance to Republic of the warrant. The complaint seeks 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, and an unspecified amount of damages. Accordingly, an estimate of any potential loss or range of possible losses, if any, cannot be made. ADT and its directors believe that the allegations in CCP's complaint against ADT and certain of its directors are without merit and intend vigorously to defend against them. 7
(ix) ADT Operations, Inc. ADT Operations, Inc., a company incorporated in the State of Delaware, United States, is an indirect wholly owned subsidiary of ADT. ADT Operations, Inc. is a holding company that, through its subsidiaries, conducts a substantial proportion of the Company's electronic security services businesses in the United States and all of the Company's vehicle auction services businesses in the United States. ADT Operations, Inc. has no independent business operations or assets other than its investment in its subsidiaries, intercompany balances and holdings of cash and cash equivalents. Consolidated statements of income Three months ended March 31 1997 1996 $m $m Net sales 339.2 295.4 Cost of sales (167.0) (146.2) Selling, general and administrative expenses (111.4) (99.1) Charge for the impairment of long-lived assets - (316.4) ------ ------ Operating income (loss) 60.8 (266.3) Interest income - affiliates 1.1 - Interest income - non-affiliates 0.3 0.6 Interest expense - affiliates (21.3) (7.5) Interest expense - non-affiliates (20.3) (18.9) Other expenses less income (0.1) 25.7 ------ ------ Income (loss) before income taxes 20.5 (266.4) Income taxes (7.2) (6.6) ------ ------ Net income (loss) 13.3 (273.0) ====== ====== 8
Consolidated balance sheets March 31 December 31 1997 1996 $m $m Assets Current assets: Cash and cash equivalents 70.7 82.9 Accounts receivable - net - affiliates 38.2 44.4 Accounts receivable - net - non-affiliates 247.4 149.4 Inventories 23.4 21.6 Prepaid expenses and other current assets 46.4 22.9 ------- ------- Total current assets 426.1 321.2 Property, plant and equipment - net 1,154.2 1,131.3 Goodwill and other intangibles - net 355.0 351.1 Long-term notes receivable - affiliates - 51.3 Other long-term assets 30.1 31.2 ------- ------- Total assets 1,965.4 1,886.1 ------- ------- Liabilities and shareholder's equity Current liabilities: Short-term debt - non-affiliates 70.5 129.8 Accounts payable - affiliates 10.6 14.5 Accounts payable - non-affiliates 154.8 91.8 Other current liabilities - non-affiliates 126.8 143.5 ------- ------- Total current liabilities 362.7 379.6 Long-term debt - affiliates 690.1 690.1 Long-term debt - non-affiliates 882.5 877.2 Deferred revenue 77.7 72.4 Deferred income taxes 84.8 78.9 Other long-term liabilities - affiliates 114.0 117.4 Other long-term liabilities - non-affiliates 117.7 119.4 ------- ------- Total liabilities 2,329.5 2,335.0 ------- ------- Shareholder's equity: Common shares - - Contributed surplus 930.0 858.5 Accumulated deficit (1,294.1) (1,307.4) ------- ------- Total shareholder's equity (364.1) (448.9) ------- ------- Total liabilities and shareholder's equity 1,965.4 1,886.1 ======= ======= 9
Consolidated statements of cash flows Three months ended March 31 1997 1996 $m $m Cash flows from operating activities Net income (loss) 13.3 (273.0) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Charge for the impairment of long-lived assets - 316.4 Depreciation 35.0 33.4 Goodwill and other intangibles amortization 2.9 2.8 Interest on long-term notes receivable - affiliates (1.0) - Liquid Yield Option Notes discount amortization 5.3 5.0 Refinancing costs amortization 1.0 0.8 Deferred income taxes 5.9 5.7 Gain on customer contract transactions - affiliates - (26.8) Other (0.3) (0.3) Changes in assets and liabilities (38.0) (12.4) ----- ----- Net cash provided by operating activities 24.1 51.6 ----- ----- Cash flows from investing activities Purchase of property, plant and equipment - net (67.3) (59.4) Short-term notes receivable - affiliates 8.0 - Long-term notes receivable - affiliates 52.3 - Acquisition of businesses from non-affiliates (6.1) (20.6) Purchase of customer contracts (0.4) (3.3) Disposal of assets to affiliates - 73.5 Other (0.6) (0.3) ----- ----- Net cash utilized by investing activities (14.1) (10.1) ----- ----- Cash flows from financing activities Net (repayments) receipts of short-term debt - non-affiliates (92.7) 8.9 Proceeds from long-term debt - affiliates - 26.0 Repayments of long-term debt - non-affiliates - (15.0) Capital contributions from parent 71.5 - Other (1.0) - ----- ----- Net cash (utilized) provided by financing activities (22.2) 19.9 ----- ----- Net (decrease) increase in cash and cash equivalents (12.2) 61.4 Cash and cash equivalents at beginning of period 82.9 54.0 ----- ----- Cash and cash equivalents at end of period 70.7 115.4 ===== ===== 10
Business segments Three months ended March 31 1997 1996 $m $m Net sales Electronic security services 252.2 220.8 Vehicle auction services 87.0 74.6 ----- ------ 339.2 295.4 ===== ===== Operating income (loss) Electronic security services 45.5 (264.0) Vehicle auction services 15.4 (2.2) Corporate (0.1) (0.1) ----- ----- 60.8 (266.3) ===== ===== In the first quarter of 1996 electronic security services and vehicle auction services operating income was stated after a charge for the impairment of long-lived assets of $303.4 million and $13.0 million, respectively. March 31 December 31 1997 1996 $m $m Inventories Raw materials and consumables 7.1 6.0 Work in process 12.0 11.4 Finished goods 4.3 4.2 ---- ---- 23.4 21.6 ==== ==== Long-term debt - non-affiliates Under the terms of the indenture governing ADT Operations, Inc. senior subordinated notes a payment blockage prevents ADT Operations, Inc. and its guarantor subsidiaries and ADT from making any payment of principal, interest or premium on the senior subordinated notes and from purchasing, redeeming or otherwise acquiring any senior subordinated notes during the continuance of any payment blockage period. No payment blockage is currently in effect. 11
At March 31, 1997, ADT Operations, Inc. had $81.2 million of Senior Indebtedness related to letters of credit issued under the terms of the revolving bank credit agreement and $250.0 million of Senior Indebtedness related to the Senior Notes, (in each case as defined in the Senior Subordinated Note Indenture). At March 31, 1997, ADT had $139.4 million of Guarantor Senior Indebtedness (as defined in the Senior Note Indenture, but excluding Indebtedness in respect of guarantees issued by ADT of debt of ADT Operations, Inc. or its subsidiaries). At March 31, 1997, the subsidiary guarantors had $76.9 million of Guarantor Senior Indebtedness (as defined in the Senior Note Indenture), in each case ranking pari passu in right of payment with the Senior Note Guarantees. All of the subsidiary guarantors under the senior notes and the revolving bank credit agreement are direct or indirect, wholly owned subsidiaries of ADT Operations, Inc. Separate financial statements and other disclosures for the subsidiary guarantors are not included herein because the subsidiary guarantors have guaranteed the senior notes on a joint and several basis, the aggregate assets, liabilities, earnings and equity of the subsidiary guarantors are substantially equivalent to the assets, liabilities, earnings and equity of ADT Operations, Inc. on a consolidated basis and such separate financial statements and other disclosures are not considered material to investors. March 31 December 31 1997 1996 Common shares Number of common shares of $0.10 each: Authorized 10,000 10,000 Issued and outstanding 1,820 1,820 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of operations The following discussion of results of operations addresses net sales, operating income (loss) and certain other line items in the consolidated financial statements. Net sales Three months ended March 31 1997 1996 $m $m Electronic security services 373.7 336.7 Vehicle auction services 87.0 74.6 ----- ----- Net sales 460.7 411.3 ----- ----- Operating income (loss) and income (loss) before income taxes Three months ended March 31 1997 1996 $m $m Electronic security services 65.7 (679.2) Vehicle auction services 15.4 (2.2) Corporate expenses (15.2) (5.4) ----- ----- Operating income (loss) 65.9 (686.8) ----- ----- Interest income 4.7 6.5 Interest expense (21.4) (27.4) Other expenses less income - (0.3) ----- ----- Income (loss) before income taxes 49.2 (708.0) ===== ===== Charge for the impairment of long-lived assets - 744.7 Depreciation and amortization 57.8 52.9 Capital expenditures 101.6 76.6 Corporate expenses and other expenses less income are discussed in Item 1. 13
Electronic Security Services - Results of operations Three months ended March 31, 1997 compared with three months ended March 31, 1996 Net sales of the division, which represented approximately 81 per cent of the Company's consolidated net sales for the quarter, increased 11.0 per cent in 1997 to $373.7 million from $336.7 million in the first quarter of 1996. This sales increase was attributable to an increase of $23.7 million in the sales of the North American operations and a $13.3 million increase in the sales of the European operations. In North America the increase in sales was due to increased recurring monitoring and maintenance revenues arising from a larger base of residential security systems and a solid improvement in outright sales in the commercial sector. Approximately 88,000 new residential security systems were installed in the first quarter of 1997 compared with approximately 60,000 systems in the first quarter of 1996. However, due to price competition in the market place, residential installation revenues showed a modest decline in the first quarter of 1997 compared with 1996. The commercial business in the United States experienced good growth in new system sales and a modest increase in installation revenues. Growth in recurring revenues in the commercial sector in the United States showed a modest improvement. In Europe the increase in sales was principally due to a significant improvement in revenue from outright sales in the commercial sector. Operating results of the division increased to $65.7 million income in the first quarter of 1997 from a $679.2 million loss in 1996, due to a charge for the impairment of long-lived assets of $731.7 million in the first quarter of 1996. Operating income of the division before the charge for the impairment of long-lived assets increased 25.1 per cent in 1997 to $65.7 million from $52.5 million in the first quarter of 1996. Operating income before the charge for the impairment of long-lived assets as a percentage of net sales ("operating margin") increased to 17.6 per cent in 1997 from 15.6 per cent in the first quarter of 1996. The increase in operating income before the charge for the impairment of long-lived assets and the increase in operating margin reflected the continuing success of the residential security system sales program, which has achieved further advances in recurring revenues in the first quarter of 1997, and an improvement in outright sales in the commercial sector. However, this improvement has been offset by continued price competition which has caused the contribution from residential installation revenue and residential outright sales to remain flat. In Europe operating income increased due to the margins on improved sales. Vehicle Auction Services - Results of operations Three months ended March 31, 1997 compared with three months ended March 31, 1996 14
Net sales of the United States vehicle auction services business, which represented approximately 19 per cent of the Company's consolidated net sales for the quarter, increased 16.6 per cent in 1997 to $87.0 million from $74.6 million in the first quarter of 1996. The volume of vehicles sold increased by approximately 14 per cent which was principally due to increases in the volume of vehicles sold for fleet lease customers, vehicle manufacturers and new and used vehicle dealers of approximately 26 per cent, approximately 18 per cent and approximately 1 per cent, respectively. Operating results of the division increased to $15.4 million income in the first quarter of 1997 from a $2.2 million loss in 1996, due to a charge for the impairment of long-lived assets of $13.0 million in the first quarter of 1996. Operating income before the charge for the impairment of long-lived assets of the United States vehicle auction services business increased 42.6 per cent in 1997 to $15.4 million from $10.8 million in the first quarter of 1996. Operating margin increased to 17.7 per cent in 1997 from 14.5 per cent in 1996. The increase in operating income and operating margin were due principally to the significant increase in volume of vehicles sold. The ratio of vehicles sold to vehicles entered for sale increased to 62.7 per cent in 1997 from 60.1 per cent in 1996, which was due to a higher proportion of vehicles entered for sale by fleet lease customers. Interest income and interest expense Interest income declined from $6.5 million in the first quarter of 1996 to $4.7 million in the first quarter of 1997, partly due to the decrease in the average level of cash deposits held by the Company in 1997. During the first quarter of 1997 interest income included $2.5 million (1996 - $2.1 million) relating to the ITS Vendor Note. Interest expense declined from $27.4 million in the first quarter of 1996 to $21.4 million in the first quarter of 1997, principally due to the repayments by the Company during the latter part of 1996 of long-term debt owed by the ASH group. During the first quarter of 1997 interest expense included $5.3 million (1996 - $5.0 million) relating to Liquid Yield Option Notes discount amortization. Liquidity and capital resources The net increase in cash and cash equivalents amounted to $276.1 million, after the positive effect of currency translation on cash and cash equivalents of $0.2 million. Net cash of $49.9 million provided by operating activities and $274.7 million provided by financing activities was offset by net cash utilized by investing activities of $48.7 million. 15
Net cash provided by operating activities of $49.9 million principally included cash provided by the Company's electronic security services and vehicle auction services divisions less other expenses and adjusted for the net increase in working capital. Within the net increase of $59.1 million in working capital, increases in accounts receivable of $107.4 million and other assets of $13.1 million were offset by a net increase in liabilities of $61.4 million, principally relating to increases in accounts payable and deferred revenue and a decrease in other liabilities. The movements in accounts receivable and accounts payable were principally due to the timing of cash receipts and payments in the vehicle auction business in respect of vehicle sales which took place in the latter part of March 1997, together with an increase in accounts receivable in the electronic security services division. The movement in deferred revenue was principally due to the timing of billings within the electronic security services division. Net cash utilized by investing activities of $48.7 million was principally due to capital expenditures of $95.6 million and $4.4 million in the electronic security services and vehicle auction services divisions, respectively, $17.7 million relating to the purchase of customer contracts to provide electronic security monitoring and $6.1 million relating to the acquisition of an electronic security services business in the United States. These were principally offset by the receipt of $77.5 million of litigation settlement proceeds. Net cash provided by financing activities of $274.7 million was principally due to proceeds of $141.8 million from long-term debt and $303.1 million of proceeds from the issue of common shares, including $300.0 million relating to the Republic warrant, which was principally offset by net repayments of $168.3 million of short-term debt. The Company believes that the working capital at March 31, 1997, its available credit facilities and the current cash flows from operations are adequate for the Company's normal growth and operating needs, the funding of its capital expenditures budget and the current servicing of its debt requirements. Forward looking information Certain statements in this Form 10-Q constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In particular any statements contained herein regarding the consummation and benefits of future acquisitions, as well as expectations with respect to future sales, operating efficiencies and product expansion, are subject to known and unknown risks, uncertainties and contingencies, many of which are beyond the control of the Company, which may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. Factors that might affect such forward looking statements included, among others, overall economic and business conditions, the demand for the Company's services, competitive factors in the industry, regulatory approvals and the uncertainty of consummation of future acquisitions. 16
PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Reference is made to Item 3, Legal Proceedings, in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, for a description of existing litigation against the Company. The following description supplements the information contained in the Form 10-K: As of this date, the Court has not rendered any decision with respect to Westar Capital, Inc.'s ("WCI") March 24, 1997 motion for a preliminary injunction. The return date for both Chase Manhattan Bank, N.A.'s motion for dismissal of ADT Operations, Inc.'s ("ADT Operations") complaint or, alternatively for summary judgment, and ADT Operations' February 7, 1997 motion for a preliminary injunction is currently scheduled for May 21, 1997. On April 16, 1997, WCI filed a petition with the Supreme Court of Bermuda (the "Bermuda Court"). In this petition, WCI alleges that the proposed merger between the Company and Tyco International Ltd. ("Tyco") has been structured in order to deprive WCI and the Company's other shareholders of their appraisal rights under Section 106 of the Bermuda Companies Act (the "Act"). Although the Company is acquiring Tyco in the merger, WCI maintains that in actuality Tyco is acquiring the Company and that the transaction should be treated as an amalgamation between the Company and Tyco which would trigger appraisal rights under Bermuda law. WCI also alleges that the Company's actions are oppressive and prejudicial to it in violation of Section 111 of the Act. WCI asks the Bermuda Court to order that the merger be enjoined unless the Company's shareholders are permitted to exercise all rights they would be entitled to, including appraisal rights, if the transaction between the Company and Tyco were an amalgamation under Bermuda law. On April 24, 1997, the Company petitioned the Court to strike the Bermuda action on the grounds that it is frivolous and has no basis in law. The Company's motion to strike is scheduled to be heard on June 12 and 13, 1997. The Company and the Board believe that the allegations in the Bermuda petition are without merit and intend to vigorously defend against them. 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 US$250,000,000 Amended And Restated Credit Agreement, dated as of April 14, 1997 (amending and restating the Credit Agreement dated as of January 9, 1997), among ADT Operations, Inc., as the Borrower, and Certain Commercial Lending Institutions as the Lenders, and the Bank of Nova Scotia as the Agent for the Lenders. 10.2 Amendment and Assignment Agreement, dated as of April 14, 1997, among ADT Operations, Inc., as the Borrower, and Certain Commercial Lending Institutions as the Lenders, and the Bank of Nova Scotia as the Agent for the Lenders. 11.1 Statement regarding the computation of earnings per common share. 27 Financial Data Schedule (for SEC use only). (b) A Current Report on Form 8-K was filed by ADT Limited on March 25, 1997 regarding the Agreement and Plan of Merger with Tyco International Ltd. SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ADT LIMITED /s/ Stephen J. Ruzika May 8, 1997 ________________________________________ Stephen J. Ruzika Chief Financial Officer, Executive Vice President and Director (Principal Financial Officer and Principal Accounting Officer) 18
INDEX TO EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997 Exhibit 10.1 US$250,000,000 Amended And Restated Credit Agreement, dated as of April 14, 1997 (amending and restating the Credit Agreement dated as of January 9, 1997), among ADT Operations, Inc., as the Borrower, and Certain Commercial Lending Institutions as the Lenders, and the Bank of Nova Scotia as the Agent for the Lenders. 10.2 Amendment and Assignment Agreement, dated as of April 14, 1997, among ADT Operations, Inc., as the Borrower, and Certain Commercial Lending Institutions as the Lenders, and the Bank of Nova Scotia as the Agent for the Lenders. 11.1 Statement regarding the computation of earnings per common share. 27 Financial Data Schedule (for SEC use only).