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As filed with the Securities and Exchange Commission on January 5, 2018.

Registration No. 333-222233

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 1

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

ADT Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   7381   47-4116383

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(IRS Employer

Identification Number)

1501 Yamato Road

Boca Raton, Florida 33431

(561) 988-3600

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Timothy J. Whall

Chief Executive Officer

1501 Yamato Road

Boca Raton, Florida 33431

(561) 322-7235

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

With copies to:

 

Taurie M. Zeitzer, Esq.

Tracey A. Zaccone, Esq.

Paul, Weiss, Rifkind, Wharton &

Garrison LLP

1285 Avenue of the Americas

New York, NY 10019-6064

(212) 373-3000

 

P. Gray Finney, Esq.

Senior Vice President, Chief Legal Officer & Secretary

1501 Yamato Road

Boca Raton, Florida 33431

(561) 988-3600

 

Arthur D. Robinson, Esq.

David W. Azarkh, Esq.

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, NY 10017

(212) 455-2000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☒  (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act.   ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each Class of

Securities to be Registered

 

Proposed

Maximum
Aggregate
Offering Price(1)(2)

  Amount of
Registration Fee(3)

Common Stock, par value $0.01 per share

  $2,300,000,000   $286,350

 

 

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes additional shares that the underwriters have the option to purchase, if any. See “Underwriting (Conflict of Interest).”
(3) The Registrant previously paid $12,450 of the registration fee in connection with prior filings of this Registration Statement.

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated January 5, 2018

PROSPECTUS

111,111,111 Shares

 

 

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ADT Inc.

Common Stock

 

 

This is the initial public offering of ADT Inc., a Delaware corporation. We are offering 111,111,111 shares of common stock.

We expect the public offering price to be between $17.00 and $19.00 per share. Prior to this offering, no public market exists for the shares. We intend to apply to list our common stock on The New York Stock Exchange (“NYSE”) under the symbol “ADT.” Following the completion of this offering and related transactions, funds affiliated with or managed by Apollo Global Management, LLC will continue to own a majority of the voting power of our outstanding common stock. As a result, we expect to be a “controlled company” under the corporate governance rules for NYSE-listed companies and will be exempt from certain corporate governance requirements of such rules. See “Risk Factors—Risks Related to this Offering and Ownership of our Common Stock” and “Principal Stockholders.”

 

 

Investing in our common stock involves risks that are described in the “Risk Factors” section beginning on page 33 of this prospectus.

 

 

     Per Share      Total  

Public offering price

   $                   $                       

Underwriting discounts and commissions(1)

   $      $  

Proceeds to us, before expenses

   $      $  

 

(1) See “Underwriting (Conflict of Interest)” for additional information regarding the underwriters’ compensation.

The underwriters may also exercise their over-allotment option to purchase up to an additional 16,666,667 shares from us at the public offering price, less underwriting discounts and commissions, for 30 days after the date of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock against payment on or about                     , 2018.

 

Joint Book-Running Managers

Morgan Stanley   Goldman Sachs & Co. LLC

 

Barclays   Deutsche Bank Securities   RBC Capital Markets
Citigroup   BofA Merrill Lynch   Credit Suisse

Co-Managers

 

Imperial Capital  

Academy Securities

  Allen & Company LLC
Apollo Global Securities  

Citizens Capital Markets

  LionTree

SunTrust Robinson Humphrey

    The Williams Capital Group, L.P.

The date of this prospectus is                     , 2018.


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For investors outside the United States: neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus and any such free writing prospectus outside of the United States.

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PROSPECTUS SUMMARY

     1  

RISK FACTORS

     33  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     65  

USE OF PROCEEDS

     68  

DIVIDEND POLICY

     69  

CAPITALIZATION

     70  

DILUTION

     72  

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

     75  

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

     78  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     88  

SUPPLEMENTAL MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     121  

INDUSTRY

     141  

BUSINESS

     144  

MANAGEMENT

     162  

EXECUTIVE COMPENSATION

     170  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     202  

PRINCIPAL STOCKHOLDERS

     206  

DESCRIPTION OF CAPITAL STOCK

     208  

DESCRIPTION OF THE KOCH PREFERRED SECURITIES

     216  

DESCRIPTION OF MATERIAL INDEBTEDNESS

     218  

SHARES ELIGIBLE FOR FUTURE SALE

     222  

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

     225  

UNDERWRITING (CONFLICT OF INTEREST)

     229  

LEGAL MATTERS

     236  

EXPERTS

     236  

WHERE YOU CAN FIND MORE INFORMATION

     236  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

You should rely only on the information contained in this prospectus and any related free writing prospectus that we may provide to you in connection with this offering. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations, and prospects may have changed since that date.

 

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TRADEMARKS, TRADE NAMES, AND SERVICE MARKS

We use various trademarks, trade names and service marks in our business, including registered trademarks relating to the names “ASG SECURITY,” “PROTECTION ONE,” “ADT,” “ADT PULSE,” “CANOPY,” “ADT ALWAYS THERE,” “COMPANION SERVICE,” and “CREATING CUSTOMERS FOR LIFE,” as well as ADT’s (as defined herein) signature blue octagon logo. Pursuant to a Trademark Agreement between The ADT Corporation (as defined herein) and Tyco International Ltd., we may not use certain trademarks associated with ADT’s brand, including “ADT,” outside of the United States, Canada, Puerto Rico, and the U.S. Virgin Islands. This prospectus contains references to our trademarks and service marks. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

INDUSTRY AND MARKET DATA

We include in this prospectus statements regarding factors that have impacted our and our customers’ industries. Such statements are statements of belief and are based on industry data and forecasts that we have obtained from industry publications and surveys, including those published by Barnes Associates, as well as internal company sources. Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of such information. In addition, while we believe that the industry information included herein is generally reliable, such information is inherently imprecise. While we are not aware of any misstatements regarding the industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the caption “Risk Factors” in this prospectus.

BASIS OF PRESENTATION

In this prospectus, unless otherwise indicated or the context otherwise requires, references to the “Company,” the “Issuer,” “we,” “us,” “our,” and “ADT” refer to ADT Inc., a Delaware corporation (formerly named Prime Security Services Parent, Inc.), and its current and former consolidated subsidiaries, including Prime Security Services Borrower, LLC (“Prime Borrower”), The ADT Security Corporation (formerly named The ADT Corporation) (“The ADT Corporation”), Protection One, Inc. (“Protection One”), and ASG Intermediate Holding Corp. (“ASG”). References to our “Sponsor” refer to certain investment funds directly or indirectly affiliated with or managed by Apollo Global Management, LLC and its subsidiaries and its affiliates (“Apollo”) as described under “Prospectus Summary—Our Sponsor.”

On July 1, 2015, the Company’s indirect wholly owned subsidiary, Prime Protection One MS, Inc. (“Merger Sub”), was merged with and into Protection Holdings II, Inc. (the “Protection One Acquisition”). Upon consummation of the Protection One Acquisition, the separate corporate existence of Merger Sub ceased and Protection Holdings II, Inc. continued as an indirect wholly owned subsidiary of the Company. Prior to the Protection One Acquisition, Protection Holdings II, Inc. was owned by affiliates of GTCR Golder Rauner II, LLC (collectively, “GTCR”), management investors and certain co-investors.

On July 1, 2015, the Company acquired all of the outstanding stock of ASG (the “ASG Acquisition” and, together with the Protection One Acquisition, the “Formation Transactions”). Following the ASG Acquisition, ASG became an indirect wholly owned subsidiary of the Company.


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On May 2, 2016, Prime Security One MS, Inc., a Delaware corporation and an indirect wholly owned subsidiary of the Company (“Prime Merger Sub”), merged with and into The ADT Corporation (the “ADT Acquisition”). Upon consummation of the ADT Acquisition, the separate corporate existence of Prime Merger Sub ceased and The ADT Corporation survived as an indirect wholly owned subsidiary of the Company. Prior to the ADT Acquisition, The ADT Corporation was a publicly traded corporation listed on The New York Stock Exchange.

Protection One is the predecessor of ADT Inc. for accounting purposes. The period presented prior to the Protection One Acquisition (which occurred on July 1, 2015), is comprised solely of predecessor activity and is hereinafter referred to as the “Predecessor.” The period presented after the Successor’s (as defined below) inception on May 15, 2015 (“Inception”) is comprised of Company activity which is, prior to the ADT Acquisition on May 2, 2016, the collective activity of Protection One and ASG, and after the ADT Acquisition on May 2, 2016, the collective activity of The ADT Corporation, Protection One, and ASG, and is hereinafter referred to as the “Successor.”

This prospectus contains financial statements for the years ended December 31, 2016, 2015, and 2014 and for the nine months ended September 30, 2017 and 2016. The historical consolidated financial statements of the Company include (a) the consolidated results of ADT Inc. and its subsidiaries for the year ended December 31, 2016 and from Inception through December 31, 2015, and (b) Protection One and its subsidiaries for the period from January 1, 2015 through June 30, 2015 and for the year ended December 31, 2014.

This prospectus also contains the financial statements of Alarm Security Holdings LLC, the parent company of ASG, for the six months ended June 30, 2015 and the year ended December 31, 2014.

This prospectus further contains the financial statements of The ADT Corporation for the fiscal years ended September 25, 2015, September 26, 2014, and September 27, 2013 and the six months ended March 31, 2016 and March 31, 2015.

All financial statements presented in this prospectus supplement have been prepared in U.S. dollars in accordance with generally accepted accounting principles in the United States of America (“GAAP”).

The Company reports financial and operating information in one segment. The Company’s operating segment is also the Company’s reportable segment.

USE OF NON-GAAP FINANCIAL INFORMATION

We have provided Adjusted EBITDA, Covenant Adjusted EBITDA, Pro Forma Adjusted EBITDA, Supplemental Pro Forma Adjusted EBITDA, Historical Combined Free Cash Flow, and Free Cash Flow in this prospectus because we believe such measures provide investors with additional information to measure our performance.

We believe that the presentation of Adjusted EBITDA is appropriate to provide additional information to investors about certain material non-cash items and about unusual items that we do not expect to continue at the same level in the future, as well as other items. Further, we believe Adjusted EBITDA provides a meaningful measure of operating profitability because we use it for evaluating our business performance, making budgeting decisions, and comparing our performance against that of other peer companies using similar measures. We believe that the presentation of Covenant Adjusted EBITDA is appropriate to provide additional information to investors about our ability to operate our business in compliance with the restrictions set forth in our debt agreements and is a component of compensation measures for our executives by supplementing GAAP measures of performance in the evaluation of the effectiveness of our business strategies. We also believe that Pro Forma Adjusted EBITDA appropriately illustrates the effect that the ADT Acquisition had, and the completion of this


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offering will have, on our Adjusted EBITDA, assuming that such transactions took place on January 1, 2016, as required under Article 11 of Regulation S-X. We also believe that Supplemental Pro Forma Adjusted EBITDA is appropriate to illustrate the effect that the ADT Acquisition and the Formation Transactions had on our Adjusted EBITDA, assuming that such transactions took place on January 1, 2015.

Adjusted EBITDA, Covenant Adjusted EBITDA, Pro Forma Adjusted EBITDA, and Supplemental Pro Forma Adjusted EBITDA are not presentations made in accordance with GAAP. Our use of the terms Adjusted EBITDA, Covenant Adjusted EBITDA, Pro Forma Adjusted EBITDA, and Supplemental Pro Forma Adjusted EBITDA may vary from others in our industry. Adjusted EBITDA, Covenant Adjusted EBITDA, Pro Forma Adjusted EBITDA, and Supplemental Pro Forma Adjusted EBITDA should not be considered as alternatives to operating income or net income. Adjusted EBITDA, Covenant Adjusted EBITDA, Pro Forma Adjusted EBITDA, and Supplemental Pro Forma Adjusted EBITDA have important limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. For example, Adjusted EBITDA, Covenant Adjusted EBITDA, Pro Forma Adjusted EBITDA, and Supplemental Pro Forma Adjusted EBITDA:

 

    exclude certain tax payments that may represent a reduction in cash available to us;

 

    do not reflect any cash capital expenditure requirements for the assets being depreciated and amortized that may have to be replaced in the future;

 

    do not reflect changes in, or cash requirements for, our working capital needs;

 

    do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;

 

    exclude certain non-cash and non-recurring charges; and

 

    exclude charges and gains related to acquisitions, integrations, restructurings, impairments, and other income or charges.

Our definitions of Adjusted EBITDA, Covenant Adjusted EBITDA, Pro Forma Adjusted EBITDA, and Supplemental Pro Forma Adjusted EBITDA allow us to add back certain non-cash and non-recurring charges that are deducted in calculating net income and to deduct certain non-recurring gains that are included in calculating net income. However, these expenses and gains may recur in the future, vary greatly, and are difficult to predict. They can represent the effect of long-term strategies as opposed to short-term results. In addition, in the case of charges or expenses, these items can represent the reduction of cash that could be used for other corporate purposes.

Historical Combined Free Cash Flow is defined as cash from operating activities less cash outlays related to capital expenditures and reports, on a combined basis, the Historical Free Cash Flow results for the Company, The ADT Corporation, Protection One, and ASG Intermediate Holding Corp., where applicable, for the periods presented. Free Cash Flow is defined as cash from operating activities less cash outlays related to capital expenditures. We define capital expenditures to include purchases of property and equipment; capitalized costs associated with transactions in which we retain ownership of the security system; and accounts purchased through our network of authorized dealers or third parties outside of our authorized dealer network. In arriving at Historical Combined Free Cash Flow and Free Cash Flow, we subtract these items from cash from operating activities because they represent long-term investments that are required for normal business activities. As a result, subject to the limitations described below, Historical Combined Free Cash Flow and Free Cash Flow are useful measures of our cash available to repay debt, make other investments, and pay dividends.

Historical Combined Free Cash Flow and Free Cash Flow adjust for cash items that are ultimately within management’s discretion to direct and therefore may imply that there is less or more cash that is available than the most comparable GAAP measure. Historical Combined Free Cash Flow and Free Cash Flow are not intended


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to represent residual cash flow for discretionary expenditures since debt repayment requirements and other non-discretionary expenditures are not deducted. These limitations are best addressed by using Historical Combined Free Cash Flow and Free Cash Flow in combination with the GAAP cash flow measures.

Due to these limitations, we rely primarily on our GAAP results and use Adjusted EBITDA, Covenant Adjusted EBITDA, Pro Forma Adjusted EBITDA, Supplemental Pro Forma Adjusted EBITDA, Historical Combined Free Cash Flow, and Free Cash Flow only supplementally.

For more information on the use of non-GAAP financial information and reconciliations to the nearest GAAP measures, see “Prospectus Summary—Summary Historical and Pro Forma Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Covenant Adjusted EBITDA,” and “Supplemental Management’s Discussion and Analysis of Financial Condition and Results of Operations.”


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PROSPECTUS SUMMARY

The following summary contains selected information about us and about this offering. It does not contain all of the information that is important to you and your investment decision. Before you make an investment decision, you should review this prospectus in its entirety, including matters set forth under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” consolidated financial statements and the related notes thereto included elsewhere in this prospectus, and the Company’s historical financial statements and the related notes thereto included elsewhere in this prospectus. Some of the statements in the following summary constitute forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.”

Unless otherwise indicated or the context otherwise requires, references in this prospectus supplement to (i) ”we,” “our,” “us,” “ADT,” and the “Company” refer to ADT Inc. (the “Issuer”) (formerly named Prime Security Services Parent, Inc.) and each of its consolidated subsidiaries, (ii) “The ADT Corporation” refers to The ADT Security Corporation (formerly named The ADT Corporation) and each of its consolidated subsidiaries prior to the consummation of the ADT Acquisition described below under “—Our Formation,” (iii) “ASG” refers to ASG Intermediate Holding Corp and each of its consolidated subsidiaries prior to the consummation of the ASG Acquisition described below under “—Our Formation,” (iv) “Protection One” refers to Protection One, Inc. and each of its consolidated subsidiaries prior to the consummation of the Protection One Acquisition described below under “—Our Formation,” (v) “Holdings” refers to Prime Security Services Holdings, LLC, (vi) “Prime Borrower” refers to Prime Security Services Borrower, LLC, our operating company, (vii) “Ultimate Parent” refers to Prime Security Services TopCo Parent, LP, our direct parent company, and (viii) our “Sponsor” refers to certain investment funds directly or indirectly managed by Apollo Global Management, LLC, its subsidiaries and its affiliates (“Apollo”) as described under “—Our Sponsor.”

COMPANY OVERVIEW

We are the leading provider of monitored security, interactive home and business automation and related monitoring services in the United States and Canada. Our mission is to help our customers protect and connect to what matters most—their families, homes, and businesses. The ADT brand is synonymous with security and, as the most recognized and trusted brand in the industry, is a key driver of our success. A 2017 survey found that the ADT brand had approximately 95% brand awareness, and nearly half of ADT customers surveyed did not consider any other security alarm provider during their purchase process. We estimate that we are approximately five times larger than the next largest residential competitor, with an approximate 30% market share of the residential monitored security industry in the United States and Canada. Excluding contracts monitored but not owned, we currently serve approximately 7.2 million residential and business customers, making us the largest company of our kind in the United States and Canada. We are one of the largest full-service companies with a national footprint providing both residential and commercial monitored security. We deliver an integrated customer experience by maintaining the industry’s largest sales, installation, and service field force, as well as a 24/7 professional monitoring network, all supported by approximately 18,000 employees visiting approximately 10,000 homes and businesses daily. We handle approximately 15 million alarms annually. We provide support from over 200 sales and service locations and through our 12 monitoring centers listed by Underwriters Laboratories (“U.L.”).

 



 

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Largest Security Monitoring Companies by Monitoring and Related Services Revenue ($ amounts in millions)(1)

 

 

 

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(1) Information for companies other than ADT, Stanley, Comcast, and AT&T is based on monthly recurring monitoring and related services revenue as of December 31, 2016 published in SDM Magazine’s 2017 rankings, a publicly available report, which we annualized for the twelve-month period ended December 31, 2016. Information for Stanley is based on Stanley’s monthly recurring monitoring and related services revenue published in Stanley’s investor day presentation, dated May 16, 2017. Information for ADT is monitoring and related services revenue for the supplemental pro forma year ended December 31, 2016. We present monitoring and related services revenue as of the twelve-month period ended on December 31, 2016 because that is the latest period for which we have access to reliable information for other large security monitoring companies. We believe that ADT continues to have comparably larger monitoring and related services revenue than other security monitoring companies for the periods following December 31, 2016.
(2) Information for Comcast and AT&T is not available for the twelve-month period ended December 31, 2016. We have estimated the above figures assuming that Comcast and AT&T have 1,000,000 and 400,000 customers, respectively, which numbers are derived from public reports. Additionally, we have assumed revenues of $40 per month per customer for each company, which is the cost of the most affordable plan they offer.

Our brand, scale, and national footprint underpin our extremely attractive business model, which is characterized by significant and stable cash flow on recurring services and contractually committed revenue streams, attractive returns on new customer acquisition expenditures, and attractive growth opportunities for new complementary products and services.

Significant and Stable Operating Cash Flow Generation. More than 90% of our revenue is recurring from contractually-committed monthly payments under customer contract terms that are generally three to five years in length and where the average customer tenure exceeds the initial contract term. The stability of our revenues is further driven by our industry’s resilience to economic recessions, as demonstrated by the positive market growth in every year through the 2008-2010 economic crisis. As a result of our approximately $3.5 billion net operating loss position, we do not expect to be a material cash taxpayer until approximately 2022 to 2024. This estimate could be impacted by several factors as outlined in “Risk Factors—Risks Related to our Business—We have significant deferred tax assets, and any impairments of or valuation allowances against these deferred tax assets in the future could materially adversely affect our results of operations, financial condition, and cash flows.” Additionally, we have limited working capital needs and are able to reduce capitalized and expensed subscriber acquisition costs as attrition continues to decrease. As a result of our high margins, we are able to generate significant cash flow from operating activities.

 



 

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Highly Attractive Rate of Return on Customer Acquisition Expenditures. We generate attractive returns on new customer acquisition expenditures and believe we will be able to further increase these returns through several key initiatives, including our focus on improving attrition and reducing subscriber acquisition costs. The expansion of our offerings through new channels to market such as Do-it-Yourself (“DIY”) and retail, along with growth in commercial markets, where subscriber acquisition costs are lower, will also drive improvement in our internal rates of return.

Attractive Growth Opportunities. We are well-positioned to drive growth in our residential channel by leveraging ADT’s brand and scale and our renewed focus on the customer experience. We are also well-positioned to drive growth in our commercial and multi-site customer channels as a result of these factors coupled with Protection One’s strong existing commercial and multi-site customer base and expertise. In addition, we have attractive growth opportunities for complementary products and services, including through partnerships with leading technology firms such as Honeywell, Samsung, Amazon, Life 360, and Cisco Meraki. These partnerships collectively extend our presence to new channels (including DIY, retail, and e-commerce) and new and complementary offerings in automation, cyber security, and mobile on-the-go applications.

We offer our residential, commercial, and multi-site customers a comprehensive set of burglary, video, access control, fire and smoke alarm, and medical alert solutions. Our 24/7 monitoring capabilities are enabled by our 12 monitoring centers listed by U.L., which ensure that any detected threats are met with a rapid response by a trained ADT professional. Our core professional monitored security offering is complemented by a broad set of innovative products and services, including interactive home and business automation solutions that are designed to control access, react to movement, and sense carbon monoxide, flooding, and changes in temperature or other environmental conditions, as well as address personal emergencies, such as injuries, medical incidents or incapacitation. These products and services include interactive technologies to enhance our monitored solutions and to allow our customers to remotely manage their residential and commercial environments by adding increased automation through video, access control and other smart building functionality. Through ADT’s interactive platform, customers can use their smart phones, tablets, and laptops to arm and disarm their security systems, adjust lighting or thermostat levels, view real-time video of their premises, and program customizable schedules for the management of a range of smart home products. ADT customers can also arm their systems via Amazon Alexa-enabled devices, such as an Amazon Echo or Echo Dot. To further complement security beyond the home, ADT will soon offer a mobile security service available via a downloadable application, which provides family location technology, 24/7 crash detection, and roadside assistance with professional panic response monitoring via ADT. In addition, we offer professional monitoring of third party devices through our ADT Canopy platform. ADT Canopy enables other companies to integrate solutions into our monitoring and billing platform and allows us to provide monitoring solutions to customers who do not currently have an ADT security system or interactive automation platform installed on premise. The ADT platform easily integrates third-party hubs, DIY solutions, and Internet-of-Things (“IoT”) devices to our professional monitoring network on a contracted or per-month billing basis.

Our significant size and scale provide us several competitive advantages when compared to smaller local and regional companies. We achieve meaningful economies of scale in monitoring, customer service, and purchasing power, while significant density in major markets reduces our installation and service costs per customer. Our national footprint drives marketing efficiency, and our leading brand allows us to reduce new customer acquisition costs. Importantly, our scale, distribution platform, and brand strength make us the “partner of choice” for major technology companies, which has enabled us to leverage our service and monitoring expertise to expand our addressable market to include a wide range of technology-driven monitoring and service solutions.

In the nine months ended September 30, 2017 and the year ended December 31, 2016, we had total revenues of $3,210 million and $2,950 million, respectively, and net losses of $296 million and $537 million, respectively. In the twelve months ended September 30, 2017, we generated $4,007 million of monitoring and related services

 



 

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revenue and $2,308 million of Adjusted EBITDA, see footnote (k) under “—Summary Historical and Pro Forma Financial Information.” On a supplemental pro forma basis, for the year ended December 31, 2016, we generated $3,954 million of pro forma monitoring and related services revenue and $2,177 million of Supplemental Pro Forma Adjusted EBITDA. We use the non-GAAP measures Adjusted EBITDA and Supplemental Pro Forma Adjusted EBITDA as measures of our performance. Adjusted EBITDA and Supplemental Pro Forma Adjusted EBITDA are reconciled to net loss in the section titled “—Summary Historical and Pro Forma Financial Information” and “—Supplemental Information.”

OUR HISTORY AND TRANSFORMATION

 

 

LOGO

ADT has a long legacy as a trusted and innovative security service provider for homes and businesses. Now an iconic American brand, ADT’s history began in 1874, when it was established as The American District Telegraph Company, embracing the most advanced communications technology of the 1800s. A core aspect of ADT’s success over our more than 140-year history has been our culture of technological and service innovations that have allowed us to remain a market leader and to pursue our core mission of keeping our customers safe and their property protected.

Over the last 20 years we have continued to bring new products and services to market to meet changing customer needs and make use of newly emerging technologies. In 2001, we became the first security company to offer a web-enabled home security system, ADT Safewatch iCenter. We diversified our offerings further with the introduction of the ADT Companion Services System, designed to make sure people could live comfortably and safely in their own homes for as long as possible. In 2010, we launched ADT Pulse, making it possible to meet the expanding customer security, professional monitoring, and interactive automation needs for today’s increasingly active, mobile, and technology-centered lifestyles. ADT also continues to innovate through partnerships with leading technology providers.

Since the ADT Acquisition and our integration with Protection One, a new executive management team has driven a transformation that has resulted in a “New ADT” with a substantially improved customer experience and operating culture. As part of the ADT Acquisition, we combined the brand, history, and scale of legacy ADT with the customer service and operational excellence of Protection One to create an industry leader with the broadest portfolio, largest scale, and leading financial and operating metrics.

Our transformation has been led by our Chief Executive Officer Tim Whall, an industry veteran and former Protection One Chief Executive Officer with more than 35 years of industry experience, and a senior team comprised of both industry veterans and executives with deep functional expertise hired from outside the

 



 

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industry. This leadership team has coalesced to drive a culture centered on the customer, and one where all of our employees are fully aligned to the importance of our mission of helping our customers protect and connect to what matters most—their families, homes, and businesses. In addition to customer centricity, our internal cultural markers are characterized by a bias to act with urgency, high levels of teamwork and collaboration, individual accountability, and discretionary effort.

Through high levels of customer satisfaction and disciplined operating processes, the new management team has notably improved customer retention, reduced customer acquisition costs and improved profitability, thereby improving cash flow generation and increasing expected rates of return on new customer acquisition expenditures. Our strategy in this regard is organized around the following: (i) a strong focus on serving and satisfying our customer base to drive down attrition; (ii) disciplined and intelligent customer acquisition based on, among other factors, credit quality; (iii) improvements in the efficiency with which we acquire new customers; (iv) optimization of our cost structure including cost savings achieved through the combination of Protection One and The ADT Corporation; (v) expansion of our total addressable market through continued innovation and growth in technology-driven products and services, commercial security and other customer channels; and (vi) creation of a culture of engagement that breeds collaboration, accountability and discretionary effort among our employees.

We believe these strategies have already delivered significant improvements in operational and financial results. Importantly, we believe that we can drive further improvements that will create and capture additional value in the future. Our progress achieved since the ADT Acquisition includes:

 

    Improved Operational and Financial Metrics. Comparing pre-acquisition Legacy ADT (as defined below) for its fiscal year ended September 25, 2015 to post-acquisition Legacy ADT (as defined below) in the trailing twelve-month period ended September 30, 2017, we reduced gross customer revenue attrition from 16.5% to 13.9%. In addition, in comparing pre-acquisition Legacy ADT for its fiscal year ended September 25, 2015 to the post-acquisition Company in the trailing twelve-month period ended September 30, 2017, we increased Adjusted EBITDA margins as a percentage of monitoring and related services revenues from 54.1% to 57.6%, and we reduced the customer revenue payback period from 2.7 years to 2.5 years. We also reduced total net capital expenditures as a percentage of Adjusted EBITDA and improved our cash flow.

We present these comparisons of pre-acquisition Legacy ADT to the post-acquisition combined Company of Protection One, ASG, and ADT because we believe pre-acquisition Legacy ADT is a familiar and meaningful historical data point, with which users of our financial statements may be familiar as it was a public company until May 2, 2016. Additionally, we believe these are meaningful comparisons as the operations of pre-acquisition Legacy ADT comprise a significant portion of the combined Company. We use the non-GAAP measure Adjusted EBITDA to measure our operating performance. Adjusted EBITDA is reconciled to net loss in the section titled “—Summary Historical and Pro Forma Financial Information.” Customer revenue payback period measures the approximate time in years required to recover our initial investment through contractual monthly recurring fees.

 

    Strengthened Operating Discipline. We manage our business with a heavy reliance on data and daily operational measurements. We analyze specific and detailed reports, many of which go to transactional level detail, to evaluate performance across branches, teams, and individual employees. We place an emphasis on identifying variances and taking actions to improve outliers. This approach allows us to drive optimized performance across the business to improve customer service, operational execution, and financial performance.

 

   

Improved Customer Experience. Since the ADT Acquisition, we have made substantial progress in improving the experience of our customers through better processes, employee training, and the implementation of key initiatives at our call centers, across our sales teams, and at our local branch operations. We believe these improvements are demonstrated by some of the following key

 



 

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performance metrics: substantially reduced longest and average call wait times at our call centers, resulting in a significantly improved experience for customers calling for service on their accounts; reduced service backlog, enabling us to dispatch installation and service technicians to a customer’s premises far more quickly than before; lower call abandonment rates resulting from new processes at our call centers; and lower call center employee turnover. We believe these improvements create a virtuous cycle of more satisfied customers, leading to more engaged employees who, in turn, continue to improve service to our customers.

 

    Reduced Customer Revenue Attrition. As a result of a combination of (i) increased discipline related to the credit quality of the new customers we acquire, including the expansion of credit scoring metrics to substantially all new customers, (ii) improved customer service, especially in the speed of our responsiveness in our call centers and field operations, and (iii) a technology-driven product and service offering that increases customer contact and allows us to provide tailored offerings, we have improved annual customer revenue attrition at legacy ADT by more than two and a half percentage points since the consummation of the ADT Acquisition. Customer revenue attrition is one of the most important drivers of value creation in security monitoring businesses, and based on our estimates every one percentage point improvement in attrition frees up more than $100 million of cash flow we would otherwise need to spend to replace those lost customers. We believe that substantial additional opportunities remain to further reduce attrition.

The ADT Corporation Trailing Twelve Month Gross Customer Revenue Attrition(1)

 

 

 

LOGO

Note: Post-close and pre-close refer to the periods before and after the closing of the ADT Acquisition.

 

  (1) Gross Customer Revenue Attrition means recurring revenue lost as a result of customer attrition, net of dealer chargebacks and reinstatements, excluding contracts monitored but not owned. The information in this graph presents gross customer revenue attrition (a) prior to The ADT Acquisition, of The ADT Corporation (“pre-acquisition Legacy ADT”) and (b) following the consummation of the ADT Acquisition, of the Company excluding customers acquired under the Protection One and ASG brands (“post-acquisition Legacy ADT”).

 

    Progress in Growth Areas. We have made substantial progress in the development of numerous potential growth areas for our Company, including: leveraging Protection One’s history in the commercial market to continue building a world-class commercial security business; expanding our total addressable market by leveraging the ADT brand to bring security monitoring to innovative new customer experiences and offerings, evidenced by progress in developing cyber security and our new on-the-go mobile offerings; and continuing to take advantage of our status as a “partner of choice” to leading technology companies, evidenced by our recently announced partnership with Amazon.

 



 

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COMPETITIVE STRENGTHS

We believe the following competitive strengths position us to remain the leader in the markets we serve and to capture growth opportunities with complementary products and services:

Highest Brand Recognition

Trusted by customers since 1874, the ADT brand is synonymous with security. In an industry where customers rely on their security service provider to respond quickly in moments of detected threats, we have maintained that trust. In a 2017 survey, our scale, high-quality customer care, and service expertise have earned us the highest brand awareness among consumers (approximately 95%) and make us the “best brand,” according to approximately 54% of consumers surveyed (compared to the next highest competitor mention with approximately 6%). Additionally, nearly half of ADT’s customers surveyed do not consider other competitors during their monitored security purchase process. In combination with our scale and national footprint, our brand drives marketing efficiencies enabling us to optimize new customer acquisition costs. We also believe our iconic brand will continue to differentiate our business and provide us with the opportunity to grow our product and service offerings and enter new channels.

Clear Market Leader with Five Times the Market Share of the Next Largest Residential Competitor

We are the clear market leader in the large, fragmented, growing, and economically resilient residential, commercial, and multi-site monitored security industry. We serve approximately 7.2 million customers, excluding contracts monitored but not owned. We estimate that we are approximately five times larger than the next residential competitor, with an approximate 30% market share in the residential monitored security industry in the United States and Canada. Our significant size and scale provide us with several competitive advantages when compared to smaller and local regional companies, including meaningful economies of scale in monitoring, customer service, and purchasing power, and reduced installation and acquisition costs per customer.

Nationwide Presence with the Most Diverse Distribution and Support Network

We are one of the largest nationwide, multi-channel security monitoring companies. Our installed security system and professional monitoring customers include residences, commercial facilities, and multi-site locations. As of September 30, 2017, our customers were supported by more than 200 customer sales and service offices and a team of approximately 18,000 employees across the United States and Canada. Our team represents the industry’s largest sales, installation, and service field force, and includes over 2,800 field sales professionals, approximately 450 phone sales agents, a dedicated health sales team, an exclusive network of approximately 300 authorized dealer partners across the United States and Canada, and approximately 4,600 installation and service technicians. We also maintain the industry’s largest 24/7, professional monitoring network of 12 U.L.-listed monitoring centers in the United States and Canada. Combined with our leading brand and scale, we believe our national footprint makes us the “partner of choice” for major technology companies, which has enabled us to leverage our service and monitoring expertise to expand our addressable market to include a wide range of technology-driven monitoring and service solutions.

Comprehensive, Innovative Security Platform with Extensions Beyond the Home and Business

We believe we offer the most comprehensive and innovative suite of products and services that meet a range of customer security and professional monitoring needs for today’s increasingly active, mobile, and technology-centered lifestyles. Our principal service offerings involve the installation and professional monitoring of residential and commercial security systems designed to detect intrusion, control access, and react to movement, smoke, carbon monoxide, flooding, temperature, and other environmental conditions and hazards, as well as to address personal emergencies such as injuries, medical incidents, or incapacitation.

 



 

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We have complemented and extended these security and interactive automation solutions with a number of innovative offerings delivered through our platforms. Our ADT interactive platform enables our customers to integrate compatible devices and services into existing security systems to permit remote management and professional monitoring. ADT provides remote management and professional monitoring, as well as professional monitoring to owners and users of DIY solutions, IoT devices, and artificial intelligence hubs who do not currently have an installed ADT security system.

By integrating advanced and internet-based technologies into our installed security systems and professional monitoring network, we believe we represent an attractive collaboration partner for third-party technology companies and vendors, such as Honeywell, Samsung, Amazon, Cisco Meraki, Apple HomeKit, Life360, and the growing list of companies in smart home technologies who may seek to introduce their products and services to our customer base.

We will soon make commercially available ADT Go, a new family safety service and mobile application built in conjunction with trusted partner and family location market leader, Life360, offering customers peace of mind by combining Life360’s proprietary family location technology, 24/7 crash detection, and roadside assistance with professional beyond-premise and on-the-go panic response monitoring via ADT. This combination brings our professional monitoring capabilities to individuals and families when they are outside of their home or business.

Customer-First Culture Delivering an Exceptional Customer Experience

To complement our advanced security and monitoring solutions, we are committed to providing superior customer service with a focus on speed and quality of responsiveness. Our key customer service objectives include the following, which we believe provide significant differentiation relative to our industry competitors:

 

    target of under 60 seconds wait time for all calls,

 

    minimize call abandonment rate,

 

    live call answer with no or limited auto-attendant,

 

    minimize field service backlog with a pledge to provide same day or next day service, and

 

    low employee turnover.

We are also highly focused on offering a fully-integrated and seamless customer experience by fostering close collaboration between our sales representatives, customer service representatives, and installation and service technicians. We believe our commitment to delivering high-quality customer service will further enhance our brand, improve customer satisfaction, increase customer retention, and drive our internal rates of return and cash flow generation.

Attractive Financial Profile with Strong Rates of Return and Cash Flow Generation

We benefit from a stable revenue profile, with more than 90% of our revenue coming from recurring contractually-committed monthly payments under contracts with initial terms that are generally three to five years in length, and where the average customer tenure exceeds the initial contract term. The stability of our revenues is further driven by our industry’s resilience to economic recessions, as demonstrated by the positive market growth in every year through the 2008-2010 economic crisis. We are able to generate significant cash flow from operating activities as a result of our high margins, limited cash taxes and limited working capital needs. We also believe that our returns on new customer acquisition expenditures relating to new residential, commercial, and multi-site customers are attractive, as they generally achieve a revenue break-even point in less than three years.

 



 

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Significant Growth Opportunities in Commercial and Multi-Site Customer Channels

We believe the commercial and multi-site channels represent attractive opportunities for disciplined growth and are characterized by higher returns on new customer acquisition expenditures relative to the residential channel. The commercial and multi-site customer channels generally have higher customer retention, higher average revenue per customer, and lower costs to add new customers relative to the recurring revenue they generate. These characteristics provide further opportunity to optimize our key business drivers that focus on, and yield, strong cash flow generation. We believe that ADT’s combination with Protection One has enabled, and will continue to enable, us to combine Protection One’s expertise in the commercial and multi-site customer space with the strength of the ADT brand and customer network to capture additional commercial and multi-site customer market share.

Highly Experienced, Expert Management Team with Successful Track Record of Delivering Results

Our highly experienced management team shares a long and successful history of collaboration and accomplishments in the security monitoring industry. Led by Chief Executive Officer Tim Whall, a security industry veteran with over 35 years of industry experience, core members of our management team have decades of combined operating experience, and, prior to joining our Company, had driven operational success followed by profitable growth at five different companies: legacy ADT, SecurityLink, Honeywell Security Monitoring, Stanley Convergent Security, and Protection One. Since joining our Company, the management team has further enhanced our strong foundation with an integrated strategy based on productivity, customer selection, exceptional customer service, and delivery on financial commitments.

Strengthened Operating Discipline

We manage our business with a heavy reliance on data and daily operational measurements. We analyze specific and detailed reports, many of which go to transactional level detail, to evaluate performance across branches, teams, and individual employees. We focus especially on identifying variances and taking actions to improve outliers. This approach allows us to drive optimized performance across the business to improve customer service, operational execution, and financial performance.

BUSINESS STRATEGIES

We believe the following core business strategies will continue to position our Company as the leader in the markets we serve:

Optimize Key Business Drivers that Drive Returns and Cash Flow Generation

We intend to optimize returns on new customer acquisition expenditures and cash flow generation by continuing to focus on the following key drivers of our business: best-in-class customer service; disciplined, high-quality residential, commercial, and multi-site customer additions; efficient customer acquisition; reduced costs incurred to provide ongoing services to customers; and increased customer retention. We believe we have already demonstrated a track record under our new management team of successfully executing on these key business drivers and delivering optimized cash flow generation. By utilizing best-in-class industry practices, we believe we are well-positioned to further optimize financial returns and drive continued value creation.

Maintain Our Commitment to Best-in-Class Customer Service

We are focused on instilling a culture aimed at driving industry-leading customer service to our broad customer base. We believe our commitment to best-in-class customer service will drive increased customer

 



 

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retention, and as a result, greater cash flow generation. We serve our customer base from more than 200 locations throughout the United States and Canada, including 12 U.L.-listed monitoring centers. From these locations, our teams provide monitored security and interactive residential and commercial automation solutions including installation, field service and repair, and ongoing monitoring and customer support. Our installation and service technicians and customer service representatives deliver a high-quality customer service experience that enhances our brand, improves customer satisfaction, increases customer retention, and accelerates the adoption of additional interactive automation solutions, and therefore drives returns on new customer acquisition expenditures and greater cash flow generation. In the past year, we believe we have revitalized the customer service culture at ADT—our daily call abandonment rates are almost always less than 1% and more than 99% of our customer calls are answered within sixty seconds, and we pride ourselves on being responsive to our customers and providing same or next day service for the majority of our customers.

Maintain Our High-Quality Customer Base

In addition to customer service improvements, we believe customer retention is also strongly correlated with the credit quality of our customers. We plan to maintain our focus on strict underwriting standards, and have established processes to evaluate potential new customers’ creditworthiness to improve our customer selection or require upfront payments for higher risk customers. We expect our focus on generating high-quality customers will continue to result in a portfolio of customers with attractive credit scores, thereby improving retention, decreasing credit risk exposure, and generating a strong, long-term customer portfolio that generates robust returns on new customer acquisition expenditures and drives strong cash flow generation.

Partner with Leading Third Parties to Extend and Enhance Our Product Offering and Customer Base

ADT has a proven history of partnering with leading third-party vendors, and we intend to continue to leverage these relationships to expand and enhance our digital footprint to create a platform for further integration. In January 2016, we announced a new nationwide professional monitoring service via the ADT platform, which is positioned to provide on demand services to compatible DIY and IoT devices such as cameras, sensors, and wearables. Compatible devices and platforms include those manufactured by Samsung, Honeywell, NETGEAR, and Apple’s HomeKit. In January 2017, we announced integration with Amazon Alexa to aid ADT customers in facilitating home security through voice commands via our ADT interactive platform. In January 2017, we announced a partnership with Life360, to develop a family safety service and mobile application we expect to launch later this year. We also announced in June 2017 that we will feature advanced managed and monitored network security and location analytics capabilities for retailers, such as foot traffic, heat mapping, dwell time, and new versus repeat customer visit analysis, using Cisco Meraki Access Points (AP). In August 2017, we also launched the ADT Panic Response service with the Samsung Gear S2 and S3 smartwatches, which are the first wearable devices to include this new level of personal protection. Together with Samsung, in October 2017, we introduced the Samsung SmartThings ADT home security system, which is a safe, easy, and flexible DIY security and smart home solution that gives consumers the ability to create a safe and secure home and grow their connected home ecosystem as their needs evolve. We expect a growing opportunity to expand from our core business to drive growth in adjacent markets, capitalizing on our core expertise and monitoring and service capabilities—along with our brand strength and high degree of customer trust—to expand our addressable market. We intend to pursue additional opportunities in adjacent markets, including through potential selective acquisitions.

Disciplined Expansion of Our Commercial and Multi-Site Account Customer Base

We intend to continue building the industry’s leading nationwide platform that leverages the complementary characteristics of each of our three key customer channels: residential, commercial, and multi-site customers. By leveraging ADT’s scale and leading brand recognition and Protection One’s leading customer care, service expertise, and existing commercial and multi-site customer base and platform, we will continue to seek disciplined growth in our commercial and multi-site channels. While the economics of our residential channels remain attractive, we believe disciplined growth in the commercial and multi-site customer channels will provide

 



 

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further opportunity to optimize our key business drivers that focus on, and yield, strong cash flow generation. We believe returns on new customer acquisition expenditures in these channels are attractive relative to our residential channels, as they have traditionally produced higher average revenues per customer and have lower customer acquisition costs as a multiple of recurring revenues. In fact, many multi-site customers often seek customized solutions with little-to-no upfront net customer acquisition costs. Commercial and multi-site customers also generally have stronger retention rates than residential customers as a result of higher vendor switching costs, longer contract terms, and a more limited set of competitors in the commercial market.

OUR MARKET OPPORTUNITY

Overview of U.S. Monitored Security Market

According to Barnes Associates, the U.S. monitored security market is a $55 billion industry as of 2016 and includes all companies that design, sell, install, monitor, and service alarm systems for residential, commercial, and multi-site customers. Monitoring and service revenue, estimated at $27 billion in 2016, has grown every year for the past 15 years, and we believe is well-positioned to benefit from additional growth generated by value-added services and additional market penetration. The recurring revenue portion of the industry is highly predictable and economically resilient, as evidenced by its continued growth during the recent economic downturn. From 2000 to 2016, monitoring and service revenue increased every year from $8 billion to $27 billion, representing a compound annual growth rate (“CAGR”) of approximately 7.7%. We believe that the historical rates of growth will continue going forward, with potential upside from the evolution and advancement of industry products and services which could grow the total addressable market and may result in increases in penetration.

Historical Industry Monitoring and Service Revenue

 

 

 

LOGO

 

Source: Barnes Associates, Security Alarm Industry Overview, February 2017.

Residential Market

The residential monitored security market in the United States and Canada is highly fragmented, with a small number of major firms and thousands of smaller regional and local companies. We are the clear market leader, based on our estimates that we are approximately five times larger than the next largest residential competitor, with an approximate 30% market share of the residential monitored security industry in the United States and Canada.

Professionally monitored home security alarm systems have been proven to be very effective at not only preventing intruders from entering homes, but also reducing the amount of loss. According to a study by the

 



 

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UNC Charlotte Department of Criminal Justice and Criminology, approximately 83% of burglars said they would try to determine if an alarm were present before attempting a burglary, and approximately 60% said they would seek an alternative target if there was an alarm on-site. Among those who discovered the presence of an alarm while attempting a burglary, half reported they would discontinue the attempt. Additionally, the Rutgers University School of Criminal Justice conducted a four-year study of the relationship between break-ins and the presence of home security systems in New Jersey. It found that a security system not only deters burglars from breaking into a home, but also acts as a protection for nearby homes, indicating the presence of several homes with security systems in the same neighborhood deterred burglars from the entire area. Moreover, according to the Alarm Industry Research and Educational Foundation, average losses on homes without an alarm are over 60% higher than homes equipped with alarms. We believe the effectiveness of professionally monitored alarms will continue to be recognized by the market. In addition, we believe many of our customers purchase monitored security and automation services as a result of their insurance carriers, who may offer lower insurance premium rates if a security system is installed or may require that a system be installed as a condition of coverage.

The residential security and smart home industry has the following key characteristics:

 

    Stable, Growing Core Security Market. Customer demand for monitored security services has grown every year since 2000. Customers demand a trusted brand, a high level of ongoing customer service, and rapid response in the event of a detected threat. Because of how ingrained the security providers are within the home, we believe that security is one of the key anchors in the broader smart home offering.

 

    Economically-Resilient Industry that Grew During Recession. The monitored security market demonstrates a high degree of economic resilience, and grew approximately 3% annually during the 2008-2010 recession. The economic resilience of the industry is driven by several key factors including: (i) the contractual, recurring nature of industry revenues; (ii) reduced attrition during economic downturns, due to a decline in home moves which is typically among the biggest drivers of system disconnects; and (iii) a perceived increase in the threat of crime that historically accompanies economic downturns.

 

    Low Current Penetration Rates Expanding with the Smart Home. According to a 2017 Parks Associates Industry Report, the residential monitored security industry in the United States has an estimated penetration rate of only approximately 20% and remains underpenetrated relative to other subscription-based services such as pay-TV and the Internet with greater than 80% penetration rates. Many industry observers expect that the increased awareness and emergence of smart home applications, such as interactive security and energy management, will drive increased penetration for home services from approximately 20% as of 2017 to approximately 40% by 2020. The value proposition for customers offered by a broader range of technology and applications seeking to automate the home will continue to be attractive, and as the technology and systems become more integrated, the increased ease of use will enhance this attractive value proposition.

 

    Evolving Smart Home Ecosystem. According to industry analysts, the global connected home market, including services, is expected to grow from approximately $24 billion in 2015 to approximately $112 billion by 2020, representing approximately 36% CAGR over that period. Smart home devices worldwide are expected to grow from 0.3 billion units in 2015 to 5.3 billion units in 2020, representing approximately 75% annual growth. While manufacturers of a range of products in the home, from thermostats to home appliances, will strive for increased connectivity and automation, the smart home ecosystem will likely develop around hubs to manage the breadth of connected products and related services and software. For any smart home services or technology provider, integration with these smart home hubs will be critically important, as will the continued collaboration with technology partners within the evolving landscape.

 



 

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    Fragmented Competitive Landscape. While the top five industry players represent roughly half of the market, with our Company maintaining approximately 30% estimated residential market share in the United States and Canada, there are more than 10,000 players comprising the remainder of the industry. Scale is a significant advantage for security monitoring businesses, providing the ability to monitor and service a national subscriber base, to develop technology for next generation applications, and to attract technology partners.

Commercial and Multi-Site Market

The commercial and multi-site monitored security industry is less fragmented than the residential monitored security industry, with only a handful of principal competitors, including Johnson Controls (formerly named Tyco) and Stanley Security Solutions, as well as local and regional providers. The commercial and multi-site monitored security market is also, unlike the residential market and as a result of fire code regulations and insurance requirements, almost fully penetrated.

Commercial and multi-site customers often utilize fully-integrated solutions that combine multiple products and technologies, including video surveillance, alarm monitoring, biometrics, access control, fire alarm systems, identity management, and perimeter intrusion detection. Some participants in the space, such as our Company, Johnson Controls, and Stanley Security Solutions, are full-service providers who sell, install, service, and provide monitoring services for these customers. Other participants are integration-only companies, typically receiving project-based revenue for the design and installation of security systems and arranging for the provision of outsourced monitoring services.

Commercial and multi-site security solutions are comprised of complex systems that are often integrated with other critical systems, including HVAC, building automation controls, and other more standardized solutions frequently utilized by customers that require multi-site deployments. Multi-site customer accounts are particularly attractive in that they offer the opportunity for service providers to complete a single sale at the corporate level followed by large, multi-site deployments. These customers also tend to be large, stable companies with low attrition rates.

Multi-site customers place substantial emphasis on the importance of a single point of contact from the service provider and require coverage for installation, service, and monitoring across all the geographies in which they operate. Accordingly, incumbent service providers are well-positioned to grow with existing customers as they open new locations. Very few national platforms exist today. Due to limited competition and strong demand for comprehensive solutions, customers are often willing to pay for installation costs and design capabilities, resulting in lower upfront costs to acquire new customers or new sites. Customer service and client responsiveness are the primary market share drivers for multi-site account customers.

OUR FORMATION

On July 1, 2015, we consummated two acquisitions that were instrumental in the formation of our company. First, we acquired Protection One for total consideration of $1,526 million (the “Protection One Acquisition”). Protection One is the predecessor of the Company for accounting purposes, and is hereinafter referred to as the “Predecessor.” Second, on July 1, 2015, we acquired ASG for total consideration of $509 million (the “ASG Acquisition”).

The Protection One Acquisition and the ASG Acquisition were funded by a combination of equity invested by our Sponsor and the Predecessor’s management of $755 million, as well as borrowings under (i) first lien credit facilities, which included a $1,095 million term loan facility and a $95 million revolving credit facility, and (ii) a $260 million second lien term loan facility.

 



 

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On May 2, 2016, we acquired The ADT Corporation (the “ADT Acquisition” and, together with the Protection One Acquisition and the ASG Acquisition, the “Transactions”). The ADT Acquisition significantly increased our market share in the security industry, making us the largest monitored security company in the United States and Canada.

Total consideration in connection with the ADT Acquisition was $12,114 million, which includes the assumption, on the acquisition date, of The ADT Corporation’s outstanding debt (inclusive of capital lease obligations) at a fair value of $3,551 million and cash of approximately $54 million.

We funded the ADT Acquisition, as well as amounts due for merger costs, using the net proceeds from a combination of the following:

 

  (i) equity proceeds of $3,571 million, net of issuance costs, which resulted from equity issuances by the Company and Ultimate Parent to our Sponsor and certain other investors;

 

  (ii) incremental first lien term loan borrowings of $1,555 million and the issuance of $3,140 million second priority senior secured notes (the “Prime Notes”); and

 

  (iii) issuance by the Company of 750,000 shares of preferred securities (the “Koch Preferred Securities”) and issuance by Ultimate Parent of detachable warrants for the purchase of 7,620,730 Class A-1 Units in Ultimate Parent (the “Warrants”) to an affiliate of Koch Industries, Inc. (the “Koch Investor”) for an aggregate amount of $750 million. The Company allocated $659 million to the Koch Preferred Securities, which is reflected net of issuance costs of $27 million as a liability in the Company’s historical consolidated balance sheet. The Company allocated the remaining $91 million in proceeds to the Warrants, which was contributed by Ultimate Parent in the form of common equity to the Company, net of $4 million in issuance costs.

RECENT DEVELOPMENTS

Our audited consolidated financial statements for the year ended December 31, 2017 are not yet available. We have presented preliminary estimated ranges of certain of our financial results below for the year ended December 31, 2017 based on information currently available to management. Our financial closing procedures for the three months and year ended December 31, 2017 are not yet complete. As a result, our actual results for the year ended December 31, 2017 may differ materially from the preliminary estimated financial results set forth below upon the completion of our financial closing procedures, final adjustments, and other developments that may arise prior to the time our financial results are finalized. You should not place undue reliance on these estimates. The preliminary estimated financial results set forth below have been prepared by, and are the responsibility of, management and are based on a number of assumptions. Our independent registered certified public accounting firm, PricewaterhouseCoopers LLP, has not audited, reviewed, compiled, or performed any procedures with respect to the preliminary estimated financial results. Accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect thereto. See “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Cautionary Note Regarding Forward-Looking Statements” for additional information regarding factors that could result in differences between the preliminary estimated ranges of certain of our financial results that are presented below and the actual financial results we will report for the year ended December 31, 2017.

The preliminary estimated financial results set forth below should not be viewed as a substitute for full financial statements prepared in accordance with GAAP. We will not publicly file our actual audited consolidated financial statements and related notes for the year ended December 31, 2017 with the U.S. Securities and Exchange Commission (the “SEC”) until after the consummation of this offering. In addition, the preliminary estimated financial results set forth below are not necessarily indicative of results we may achieve in

 



 

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any future period. While we currently expect that our actual results will be within the ranges described below, it is possible that our actual results may not be within the ranges we currently estimate. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Supplemental Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information regarding our historical financial results.

We have presented the following preliminary estimated ranges of certain of our financial results for the year ended December 31, 2017:

 

     For the Year Ended
December 31, 2017
 
     Low      High  
     (in thousands)  

Statement of Operations Data:

     

Total revenue

   $                       $                   

Net loss

   $      $  

Key Performance Indicators:

     

Gross customer revenue attrition (percent)(a)

     %        %  

Adjusted EBITDA(b)

   $      $  

 

(a) See footnote (h) under “—Summary Historical and Pro Forma Financial Information.”
(b) Adjusted EBITDA is a non-GAAP measure and is defined in the section “Use of Non-GAAP Financial Information.” The table below presents a reconciliation of Adjusted EBITDA to net loss.

 

     For the Year Ended
December 31, 2017
 
     Low      High  
     (in thousands)  

Reconciliation of Adjusted EBITDA to net loss

     

Net loss

   $               $           

Interest expense, net

     

Income tax benefit(1)

     

Depreciation and intangible asset amortization

     

Merger, restructuring, integration, and other costs(2)

     

Financing and consent fees(3)

     

Foreign currency gains(4)

     

Loss on extinguishment of debt(5)

     

Other non-cash items(6)

     

Radio conversion costs(7)

     

Amortization of deferred subscriber acquisition costs and revenue, net(8)

     

Share-based compensation expense(9)

     

Management fees and other charges(10)

     
  

 

 

    

 

 

 

Adjusted EBITDA

   $      $  
  

 

 

    

 

 

 

 

  (1) This estimate could be impacted by several factors as outlined in “Risk Factors—U.S. federal income tax reform could adversely affect us” and “Risk Factors—We have significant deferred tax assets, and any impairments of or valuation allowances against these deferred tax assets in the future could materially adversely affect our results of operations, financial conditions, and cash flows.”
  (2) Includes certain direct and incremental costs resulting from acquisitions and certain related integration efforts as a result of those acquisitions, as well as costs related to our restructuring efforts.
  (3) Includes fees incurred in connection with the Special Dividend (as defined herein), and fees incurred in connection with the 2017 First Lien Credit Agreement Amendments and the 2017 Incremental First Lien Term B-1 Loan, each (as defined herein).
  (4) Foreign currency gains relate to the translation of monetary assets and liabilities that are denominated in Canadian dollars, primarily due to intercompany loans.
  (5) Loss on extinguishment of debt primarily relates to the write-off of debt discount and issuance costs associated with amendments to the First Lien Credit Facilities (as defined herein).
  (6) Primarily includes certain asset write-downs as well as other non-cash items.
  (7) Represents costs associated with our program that began in 2015 to upgrade cellular technology used in many of our security systems.
  (8) Represents non-cash amortization expense associated with deferred subscriber acquisition costs, net of non-cash amortization of deferred installation revenue.
  (9) Share based compensation expense represents compensation expense associated with our equity compensation plans. Refer to Note 12 to the Company’s audited consolidated financial statements for additional information.

 



 

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  (10) Primarily includes fees paid under the Management Consulting Agreement (as defined herein). This agreement will terminate in accordance with its terms upon the consummation of this offering (See “Certain Relationships and Related Party Transactions—Management Consulting Agreement”).

 

     As of
December 31, 2017
 
     (in thousands)  

Other Information:

  

Aggregate principal amount of debt outstanding(a)

   $               

Aggregate liquidation preference of Koch Preferred Securities(b)

   $               

 

(a) Excludes capital leases.
(b) Excludes accumulated dividends associated with the Koch Preferred Securities of $            .

 



 

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CORPORATE STRUCTURE

The following diagram sets forth our corporate structure and our principal indebtedness (excluding capital leases) as of September 30, 2017 after the consummation of the offering and after giving effect to the use of proceeds therefrom; see “Use of Proceeds.” This chart is for illustrative purposes only and does not represent all legal entities affiliated with, or all obligations of, the entities depicted(1):

 

 

LOGO

 

(1) Unless otherwise indicated, subsidiaries are 100% owned by their immediate parent company. Certain of our subsidiaries are omitted.
(2) Parent GP owns 100% of the general partner interests, but none of the economic interests, in Ultimate Parent. Our Sponsor, certain other investors, members of management and certain of our employees, directly or indirectly, as applicable, own 100% of the economic interests in Ultimate Parent. See “Principal Stockholders” and “Executive Compensation.”
(3) We intend to deposit a portion of the proceeds from this offering into a separate account, which amount will be used to redeem the Koch Preferred Securities following the consummation of this offering; the Koch Investor will continue to own the Warrants following the consummation of this offering. See “Use of Proceeds.”
(4) The Issuer was formerly named Prime Security Services Parent, Inc.
(5) Prior to this offering, there was $3,140 million aggregate principal amount of Prime Notes outstanding as of September 30, 2017. Following the consummation of this offering and the use of proceeds therefrom, including the redemption of $1,057 million aggregate principal amount of Prime Notes, there will be $2,083 million aggregate principal amount of Prime Notes outstanding. See “Use of Proceeds.”
(6) The ADT Corporation, issuer of the ADT Notes, is one of our operating subsidiaries.
(7) Simultaneously with this offering, each holder of Class B Units will have all of his or her Class B interests in Ultimate Parent redeemed in full for a combination of common stock and options in the Issuer. See “Executive Compensation—Looking Ahead—Post-IPO Compensation—Redemption of Class B Units.”

 



 

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RISK FACTORS

Participating in this offering involves substantial risk. Our ability to execute our strategy also is subject to certain risks. The risks described under the heading “Risk Factors” immediately following this summary may cause us not to realize the full benefits of our competitive strengths or may cause us to be unable to successfully execute all or part of our strategy. Some of the more significant challenges and risks we face include the following:

 

    changing economic conditions, changing regulations, new interpretations of existing laws, and difficulties and delays in obtaining or maintaining required licenses or approvals;

 

    our ability to successfully offer, develop, enhance, and/or introduce products that keep pace with evolving technology related to our business;

 

    our ability to retain customers for a long period of time;

 

    our ability to comply with evolving laws, regulations, and industry standards addressing information and technology networks, privacy, and data security;

 

    our ability to protect our products and services from potential vulnerabilities of wireless and IoT devices; and

 

    our ability to operate within the restrictions set by, and service the obligations under, our substantial indebtedness.

OUR SPONSOR

Founded in 1990, Apollo is a leading global alternative investment manager with offices in New York, Los Angeles, Houston, Bethesda, Chicago, St. Louis, Toronto, London, Frankfurt, Madrid, Luxembourg, Mumbai, Delhi, Singapore, Hong Kong, and Shanghai. Apollo had assets under management of approximately $242 billion, as of September 30, 2017, in its affiliated private equity, credit, and real estate funds invested across a core group of nine industries where Apollo has considerable knowledge and resources. In 2017, we distributed a Special Dividend (as defined herein) of $750 million to certain of our investors, which primarily included distributions to our Sponsor. An affiliate of our Sponsor, Apollo Global Securities, LLC, is acting as an underwriter in connection with this offering and will receive customary underwriting commissions and discounts in connection with the offering. Except as set forth in the preceding sentence, our Sponsor will not receive any fees or proceeds from this offering.

CORPORATE INFORMATION

We were incorporated under the laws of the state of Delaware, on May 15, 2015, under the name Apollo Security Services Parent, Inc. and changed our name to Prime Security Services Parent, Inc., on April 29, 2016. We changed our name to ADT Inc., on September 27, 2017. Our principal executive offices are located at 1501 Yamato Road, Boca Raton, FL 33431. Our telephone number is (561) 988-3600. Our website is located at https://investor.adt.com. Our website and the information contained on, or that can be accessed through, our website will not be deemed to be incorporated by reference in, and are not considered part of, this prospectus. You should not rely on our website or any such information in making your decision whether to purchase shares of our common stock.

 



 

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The Offering

 

Issuer

ADT Inc.

 

Common stock offered by us

111,111,111 shares (or 127,777,778 shares, if the underwriters exercise in full their over-allotment option as described below).

 

Over-allotment option

We have granted the underwriters an option to purchase up to an additional 16,666,667 shares. The underwriters may exercise this option at any time within 30 days from the date of this prospectus. See “Underwriting (Conflict of Interest).”

 

Common stock outstanding after giving effect to this offering

755,388,851 shares (or 772,055,518 shares if the underwriters exercise their over-allotment option in full) (which includes 3,163,371 vested shares of common stock distributed in redemption of Class B Units of Ultimate Parent in connection with this offering, which is described below).

 

Use of proceeds

We estimate that our net proceeds before expenses from this offering will be approximately $1,915 million (or approximately $2,202 million if the underwriters exercise their over-allotment option), after deducting underwriting discounts and commissions, based on an assumed initial offering price of $18.00 per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus).

 

  We currently expect to use (i) an amount equal to approximately $1,155 million of the proceeds of this offering to redeem $1,057 million aggregate principal amount of the Prime Notes and pay the related call premium, and (ii) approximately $15 million of the proceeds from this offering to pay related fees and expenses. In addition, we intend to deposit approximately $750 million of the net proceeds from this offering into a separate account, which amount will be used to redeem the Koch Preferred Securities on a date to be determined following the consummation of this offering. If the net proceeds from this offering are not sufficient to fund these amounts in entirety, we will use cash on hand to fund the balance of the separate account or, we will reduce the principal amount of Prime Notes that will be redeemed. See “Use of Proceeds” and “Description of Koch Preferred Securities.” We intend to use remaining proceeds, if any, for general corporate purposes. See “Use of Proceeds.”

 

Directed Share Program

At our request, the underwriters have reserved three percent of the shares of common stock to be issued by the Company and offered by this prospectus for sale, at the initial public offering price, to certain employees and dealers. If purchased by these persons, these shares will be subject to a lock-up restrictions for a period of 180 days. The number of shares of common stock available for sale to the general public will be reduced to the extent these individuals purchase such reserved shares. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus.


 

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Controlled company

Upon completion of this offering, funds affiliated with or managed by Apollo will continue to beneficially own more than 50% of our outstanding common stock. As a result, we intend to avail ourselves of the “controlled company” exemptions under the rules of the NYSE, including exemptions from certain of the corporate governance listing requirements. See “Management—Controlled Company.”

 

Dividend policy

We intend to initiate the payment of dividends after the consummation of this offering, although any declaration and payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earning levels, cash flows, capital requirements, levels of indebtedness, restrictions imposed by applicable law, our overall financial condition, restrictions in our debt agreements and the restrictions in the Koch Preferred Securities, and any other factors deemed relevant by our board of directors. See “Description of the Koch Preferred Securities” and “Description of Material Indebtedness.”

 

Listing

We have applied to list our common stock on the NYSE under the symbol “ADT.”

 

Risk Factors

You should read the section titled “Risk Factors” beginning on page 35 of, and the other information included in, this prospectus for a discussion of some of the risks and uncertainties you should carefully consider before deciding to invest in our common stock.

 

Conflict of Interest

Apollo Global Securities, LLC, an affiliate of Apollo, is an underwriter in this offering. Affiliates of Apollo beneficially own, through their ownership of Class A-1 Units in Ultimate Parent (which owns 100% of shares of our common stock), in excess of 10% of our issued and outstanding common stock. As a result, Apollo Global Securities, LLC is deemed to have a “conflict of interest” under FINRA Rule 5121, and this offering will be conducted in compliance with the requirements of Rule 5121. Pursuant to that rule, the appointment of a “qualified independent underwriter” is not required in connection with this offering as the members primarily responsible for managing the public offering do not have a conflict of interest, are not affiliates of any member that has a conflict of interest and meet the requirements of paragraph (f)(12)(E) of Rule 5121. Apollo Global Securities, LLC will not confirm sales of the securities to any account over which it exercises discretionary authority without the specific written approval of the account holder.

Except as otherwise indicated, all of the information in this prospectus assumes:

 

    an initial public offering price of $18.00 per share of common stock, the midpoint of the price range set forth on the cover page of this prospectus;

 

    no exercise of the underwriters’ over-allotment option to purchase up to 16,666,667 additional shares of common stock in this offering;

 

    our restated certificate of incorporation and our restated bylaws in connection with this offering are in effect, pursuant to which the provisions described under “Description of Capital Stock” would become operative; and

 



 

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    the completion of a 1.681-for-1 split of our common stock on January 4, 2018. We will have 644,277,740 shares of common stock outstanding following the stock split (including the vested shares, but not the unvested shares, of common stock distributed in redemption of Class B Units of Ultimate Parent in connection with this offering).

The number of shares of common stock to be outstanding after consummation of this offering is based on 111,111,111 shares of our common stock to be sold by us in this offering and, except where we state otherwise, the information with respect to our common stock we present in this prospectus:

 

    does not reflect 4,844,228 shares of common stock that may be issued upon the exercise of options outstanding as of the consummation of this offering issued under our 2016 Equity Incentive Plan (the “Equity Incentive Plan”). See “Shares Eligible for Future Sales”. No further issuances of securities shall take place under the Equity Incentive Plan. The following table sets forth the outstanding stock options under the Equity Incentive Plan as of December 19, 2017:

 

       Number of
Options(1)
       Weighted-Average
Exercise Price

Per Share
 

Vested stock options (service-based vesting)

       288,105        $ 6.59  

Unvested stock options (service-based vesting)

       2,115,565        $ 6.81  

Unvested stock options (performance-based vesting)

       2,440,558        $ 6.78  

 

 

  (1)  Upon a holder’s exercise of one option, the Company shall issue to such holder one share of common stock.

 

    does not reflect an additional 37,545,456 shares of our common stock reserved for future grants under our new equity incentive plan before giving effect to the redemption of the Class B Units as described below. See “Executive Compensation—2018 Omnibus Incentive Plan” and “Shares Eligible for Future Sales”; and

 

    does not reflect 20,330,014 unvested shares of common stock and 9,985,075 shares of common stock that may be issued upon exercise of stock options issued under our new equity incentive plan in connection with the redemption of Class B Units of Ultimate Parent in connection with this offering. See “Executive Compensation—Looking Ahead—Post-IPO Compensation—Redemption of Class B Units.” The table below sets forth the number of shares of vested and unvested common stock (subject to certain transfer restrictions), in the aggregate, that would be distributed in connection with the redemption of Class B Units of Ultimate Parent, and the number of stock options, in the aggregate, that would be granted in connection with the redemption of Class B Units of Ultimate Parent in connection with this offering, assuming, in each case an initial public offering price of $18.00 per share of common stock, the midpoint of the price range set forth on the cover page of this prospectus. See “Executive Compensation—Looking Ahead—Post-IPO Compensation” for additional details:

 

       Number of
Shares or
Options(3)
       Weighted-Average
Exercise Price

Per Share

Vested distributed shares of common stock(1) (service-based vesting)

       3,163,371        n/a

Unvested distributed shares of common stock(1) (service-based vesting)

       8,583,321        n/a

Unvested distributed shares of common stock(1) (performance-based vesting)

       11,746,693        n/a

Vested stock options(2) (service-based vesting)

       1,267,921        $18.00

Unvested stock options(2) (service-based vesting)

       3,724,617        $18.00

Unvested stock options(2) (performance-based vesting)

       4,992,537        $18.00

 

  (1) Distributed shares of common stock (whether vested or unvested) are subject to certain transfer restrictions set forth in our Amended and Restated Management Investor Rights Agreement.
  (2) Upon a holder’s exercise of one option, the Company will issue to such holder one share of common stock.

 



 

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  (3) The calculations below assume an initial public offering price of $18.00 per share (the midpoint of the price range set forth on the cover page of this prospectus). A $1.00 increase in the assumed initial public offering price would (a) increase the number of shares of common stock that would be distributed to our employees in connection with the redemption of the Class B Units by 525,530 shares of common stock and (b) decrease the stock options granted to our employees by 525,530 stock options. A $1.00 decrease in the assumed initial public offering price would (a) decrease the number of shares of common stock that would be distributed to our employees in connection with redemption of the Class B Units by 587,357 shares of common stock and (b) increase the stock options granted to our employees by 587,357 stock options. The distributed shares of common stock (whether vested or unvested) reflect an in-kind distribution of the common stock held by Ultimate Parent, while the granted options preserve the intended percentage of the future appreciation of Ultimate Parent that the Class B Units would have been allocated had such Class B Units not been redeemed in connection with this offering. As a result, and as indicated above, a change in the initial public offering price creates an opposite effect on the number of common stock and the number of stock options to be distributed.

 



 

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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION

The following tables present our summary historical and pro forma financial data for the periods presented.

The summary historical consolidated statements of operations for the nine months ended September 30, 2017 and September 30, 2016 and the summary historical consolidated balance sheet information as of September 30, 2017 have been derived from our unaudited interim condensed consolidated financial statements, included elsewhere in this prospectus.

The summary historical consolidated statements of operations for the year ended December 31, 2016, for the periods from May 15, 2015 (“Inception”) through December 31, 2015 (Successor) and from January 1, 2015 through June 30, 2015 (Predecessor), and for the year ended December 31, 2014 (Predecessor), and the summary historical consolidated balance sheet information as of December 31, 2016 and December 31, 2015 (Successor) have been derived from our audited consolidated financial statements, included elsewhere in this prospectus.

Prior to the Formation Transactions on July 1, 2015, ADT Inc. was a holding company with no assets or liabilities, and Protection One is the predecessor of ADT Inc. for accounting purposes. The summary historical consolidated statement of operations for the period from January 1, 2015 through June 30, 2015 and the year ended December 31, 2014 have been derived from the audited consolidated financial statements of Protection One, included elsewhere in this prospectus. The summary historical consolidated balance sheet information as of December 31, 2014 has been derived from the audited consolidated financial statements of Protection One, not included elsewhere in this prospectus. Our historical financial data through June 30, 2015 consists solely of Protection One’s historical financial data. From July 1, 2015, which was also the date of the ASG Acquisition, our historical financial data includes ASG’s financial data in addition to the financial data of Protection One. On May 2, 2016, we acquired The ADT Corporation. Our historical financial data beginning May 2, 2016 also includes The ADT Corporation’s financial data.

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the Successor audited consolidated financial statements and, in the opinion of our management, consist only of normal and recurring adjustments necessary for a fair presentation of the information set forth herein.

The summary pro forma condensed combined statement of operations for the nine months ended September 30, 2017, and the summary pro forma condensed combined balance sheet information as of September 30, 2017 have been derived from our unaudited interim condensed consolidated financial statements, included elsewhere in this prospectus and have been adjusted to reflect the completion of this offering, including the issuance of common stock and the use of proceeds therefrom, as described under “Use of Proceeds,” to the extent they have not been fully reflected in our historical consolidated financial statements. These pro forma financial statements have been prepared pursuant to Article 11 of Regulation S-X.

The summary pro forma condensed combined statement of operations for the year ended December 31, 2016 has been derived from our audited consolidated financial statements, included elsewhere in this prospectus, and the unaudited condensed consolidated financial statements of The ADT Corporation for the period from January 1, 2016 to May 2, 2016 (the date of the ADT Acquisition), which are not included in this prospectus, and gives effect to the ADT Acquisition and the completion of this offering, including the issuance of common stock and the use of proceeds therefrom, as described under “Use of Proceeds,” to the extent they have not been fully reflected in our historical consolidated financial statements. The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2017 and for the year ended December 31, 2016 give effect to this offering and the ADT Acquisition as if they had occurred on January 1, 2016. The summary pro forma condensed combined balance sheet gives effect to this offering as if it had occurred on September 30, 2017. These pro forma financial statements have been prepared pursuant to Article 11 of Regulation S-X.

 



 

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The following financial information should be read in conjunction with “Selected Historical Consolidated Financial Data,” “Unaudited Pro Forma Condensed Combined Financial Information,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our historical consolidated financial statements and the related notes included elsewhere in this prospectus. Historical results are not necessarily indicative of the results to be expected in the future, and interim financial results are not necessarily indicative of results that may be expected for the full fiscal year.

 

    Successor           Predecessor     Pro Forma
(ADT Acquisition
and Completion
of Offering)(b)
 
    Nine
Months
Ended
Septem-
ber 30,

2017(k)
    Nine
Months
Ended
Septem-

ber 30,
2016(a)(k)
    Year
Ended
Decem-

ber 31,
2016(a)(k)
    From
Inception
through
Decem-

ber 31,
2015(a)
          Period
from
January 1,
2015

through
June 30,

2015
    Year
Ended
Decem-

ber 31,
2014
    Nine
Months
Ended
Septem-

ber 30,
2017
    Year
Ended
Decem-

ber 31,
2016
 
    (in thousands, except per share data)  

Statement of Operations Data:

                 

Monitoring and related services

  $ 3,017,026     $ 1,757,923     $ 2,748,222     $ 238,257       $ 189,028     $ 358,439     $ 3,017,026       $3,954,424  

Installation and other

    192,944       140,691       201,544       73,310         48,681       108,118       192,944       212,492  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    3,209,970       1,898,614       2,949,766       311,567         237,709       466,557       3,209,970       4,166,916  

Cost of revenue

    658,095       465,357       693,430       148,521         100,591       200,054       658,095       869,689  

Selling, general and administrative expenses

    923,048       561,337       858,896       84,134         74,977       134,299       908,048       1,218,923  

Depreciation and intangible asset amortization

    1,387,245       805,389       1,232,967       83,650         41,548       79,650       1,387,245       1,689,164  

Merger, restructuring, integration, and other
costs(c)

    54,170       370,860       393,788       35,036         9,361       10,252       54,170       86,186  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    187,412       (304,329     (229,315     (39,774       11,232       42,302       202,412       302,954  

Interest expense, net(e)

    (553,529     (337,441     (521,491     (45,169       (29,129     (59,329     (478,601     (650,371

Other income (expense)

    31,634       (39,567     (51,932     325         331       1,087       31,634       (51,688
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (334,483     (681,337     (802,738     (84,618       (17,566     (15,940     (244,555     (399,105

Income tax benefit (expense)

    38,922       229,695       266,151       30,365         (1,025     (2,548     4,390       117,054  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (295,561   $ (451,642   $ (536,587   $ (54,253     $ (18,591   $ (18,488   $ (240,165   $ (282,051
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share:

                 

Basic and diluted(1)

  $ (0.46   $ (0.70   $ (0.84   $ (0.08     $ (185,910   $ (184,880   $ (0.32   $ (0.38

Weighted average shares used to compute net loss per share(1)

    641,061       640,723       640,725       640,723         0.1       0.1       752,172       751,836  

Cash dividends per share(1)

  $ 1.17       —         —         —           —         —         —         —    

Balance Sheet Data (at period end):

                 

Cash and cash equivalents

  $ 170,657     $ 163,027     $ 75,891     $ 15,759         $ 89,834     $ 133,294    

Total assets(d)

  $ 17,086,997     $ 17,333,976     $ 17,176,481     $ 2,319,515         $ 1,099,531     $ 17,798,039    

Total debt(d)

  $ 10,174,465     $ 9,489,221     $ 9,509,970     $ 1,346,958         $ 872,904     $ 9,129,373    

Mandatorily redeemable preferred securities(e)

  $ 658,402     $ 633,277     $ 633,691     $ —           $ —       $ 658,402    

Total liabilities(d)

  $ 14,290,295     $ 13,455,292     $ 13,371,505     $ 1,616,618         $ 1,057,639     $ 13,170,495    

Total stockholders’ equity(e)(f)

  $ 2,796,702     $ 3,878,684     $ 3,804,976     $ 702,897         $ 41,892     $ 4,627,544    

Statement of cash flows data:

                 

Net cash provided by operating activities

  $ 1,262,340     $ 381,813     $ 617,523     $ 1,754       $ 34,556     $ 60,825      

Net cash used in investing activities

  $ (1,038,049   $ (9,062,956   $ (9,384,869   $ (2,062,022     $ (39,638   $ (58,219    

Net cash (used in) provided by financing activities

  $ (129,586   $ 8,829,270     $ 8,828,775     $ 2,076,027       $ (6,212   $ 83,863      

Other historical and pro forma data:

                 

RMR(g)

  $ 333,814     $ 327,228     $ 327,948     $ 40,142       $ 30,598     $ 29,722      

Gross customer revenue attrition (percent)(h)

    13.8     15.2     14.8     15.9       N/A       16.0    

Adjusted EBITDA(i)

  $ 1,754,383     $ 979,758     $ 1,532,889     $ 104,828       $ 72,326     $ 146,532     $ 1,754,383     $ 2,176,943  

Free Cash Flow(j)

  $ 228,431     $ (249,511   $ (336,672   $ (32,292     $ 3,934     $ 2,913      

 

N/A—Not applicable or not meaningful.

(a) During the third quarter of 2015, the Company acquired Protection One, our Predecessor. The operating results of our Predecessor have been included for the year ended December 31, 2014 and the period from January 1, 2015 through June 30, 2015. During the third quarter of 2015 and second quarter of 2016, we completed the Formation Transactions and the ADT Acquisition, respectively. The impact of these transactions on our operating results has been included from the dates of these acquisitions. See the notes to the consolidated financial statements included elsewhere in this prospectus for details on these acquisitions.

 



 

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(b) In accordance with Article 11 of Regulation S-X, these pro forma financial statements give effect to the ADT Acquisition and the completion of this offering, including the issuance of common stock and the use of proceeds therefrom, as described under “Use of Proceeds.” In connection with this offering, the Company will deposit into a separate account an amount equal to at least $750 million, which amounts may only be used by the Company to redeem the Koch Preferred Securities. Such amounts will be restricted cash on our balance sheet.
(c) Includes certain direct and incremental costs resulting from acquisitions and certain related integration efforts as a result of those acquisitions, as well as costs related to our restructuring efforts. For the nine months ended September 30, 2017, these costs primarily include restructuring and integration efforts incurred in connection with the ADT Acquisition and certain asset impairment charges. For the nine months ended September 30, 2016 and year ended December 31, 2016, these costs are primarily related to transaction costs and restructuring efforts incurred in connection with the ADT Acquisition. Costs incurred during the Successor and Predecessor 2015 periods primarily relate to charges associated with the Formation Transactions. Costs incurred during the Predecessor year ended December 31, 2014 were not material.
(d) Total assets and total liabilities for 2015 and 2014 were adjusted to reflect the impact of the accounting standards adopted in 2016 related to the presentation of debt issuance costs and income tax. Total debt for these years was also adjusted to reflect the impact from the accounting standard adoption related to the presentation of debt issuance costs.
(e) On May 2, 2016, the Company issued the Koch Preferred Securities and Ultimate Parent issued the Warrants to the Koch Investor for aggregate consideration of $750 million. Of this amount, $659 million, net of issuance costs of $27 million, was allocated to the Koch Preferred Securities and reflected as a liability in the Company’s consolidated balance sheet. The remaining $91 million, in proceeds, was allocated to the Warrants and such proceeds were contributed by Ultimate Parent in the form of common equity to the Company, net of $4 million in issuance costs. Refer to Note 6 to the Company’s audited consolidated financial statements for additional information. The proceeds from these issuances were used to fund a portion of the ADT Acquisition and to pay related fees and expenses. Dividends of $41 million, $32 million, and $53 million were paid during the nine months ended September 30, 2017 and 2016, and year ended December 31, 2016, respectively. Such dividends are recorded in interest expense, net in the consolidated statements of operations.
(f) During the nine months ended September 30, 2017, we paid $750 million of dividends to certain investors of the Company and Ultimate Parent, which primarily include distributions to our Sponsor. Such dividends are presented on the unaudited interim condensed consolidated statement of stockholders’ equity for the nine months ended September 30, 2017 included elsewhere in this prospectus.
(g) Recurring Monthly Revenue (“RMR”) is defined as contractual monthly recurring fees for monitoring and other recurring services provided to our customers, including contracts monitored but not owned at the end of each respective period.
(h) Gross customer revenue attrition is defined as the recurring revenue lost as a result of customer attrition, net of dealer charge-backs and reinstatements, excluding contracts monitored but not owned. Customer sites are considered canceled when all services are terminated. Dealer charge-backs represent customer cancellations charged back to the dealers because the customer canceled service during the charge-back period, generally twelve to fifteen months.

Gross customer revenue attrition is calculated on a trailing twelve month basis, the numerator of which is the annualized recurring revenue lost during the period due to attrition, net of dealer charge-backs and reinstatements, and the denominator of which is total annualized recurring revenue based on an average of recurring revenue under contract at the beginning of each month during the period. Recurring revenue is generated by contractual monthly recurring fees for monitoring and other recurring services provided to our customers. Gross customer revenue attrition (percent) is presented on a pro forma basis for The ADT Corporation business and ASG, as applicable.

 



 

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(i) Adjusted EBITDA is a non-GAAP measure and is defined above in the section “Use of Non-GAAP Financial Information.” The following table presents a reconciliation of Adjusted EBITDA to net loss.

 

    Successor     Predecessor     Pro Forma
(ADT Acquisition
and Completion of
Offering)(11)
 
    Nine Months
Ended
September 30,
2017
    Nine Months
Ended
September 30,
2016
    Year Ended
December 31,
2016
    From
Inception
through
December 31,
2015
    Period from
January 1,
2015
through
June 30,
2015
    Year Ended
December 31,
2014
    Nine Months
Ended
September 30,
2017
    Year Ended
December 31,
2016
 
    (in thousands)  

Net loss

  $ (295,561   $ (451,642   $ (536,587   $ (54,253   $ (18,591   $ (18,488   $ (240,165   $ (282,051

Interest expense, net

    553,529       337,441       521,491       45,169       29,129       59,329       478,601       650,371  

Income tax (benefit) expense

    (38,922     (229,695     (266,151     (30,365     1,025       2,548       (4,390     (117,054

Depreciation and intangible asset amortization

    1,387,245       805,389       1,232,967       83,650       41,548       79,650       1,387,245       1,689,164  

Merger, restructuring, integration, and other costs(1)

    54,170       370,860       393,788       35,036       9,361       10,252       54,170       86,186  

Financing and consent fees(2)

    63,593       2,878       5,302       —         —         —         63,593       5,302  

Foreign currency (gains) / losses(3)

    (26,773     16,336       16,042       —         —         —         (26,773     16,042  

Loss on extinguishment of debt(4)

    4,331       16,051       28,293       —         —         377       4,331       28,293  

Purchase accounting deferred revenue fair value adjustment(5)

    —         59,348       62,845       18,574       —         —         —         —    

Other non-cash items(6)

    10,122       12,146       16,276       —         —         209       10,122       16,276  

Radio conversion costs(7)

    9,597       26,668       34,405       4,312       1,014       —         9,597       67,816  

Amortization of deferred subscriber acquisition costs and revenue,
net(8)

    3,987       3,169       6,052       770       7,578       10,656       3,987       6,052  

Share-based compensation
expense(9)

    8,498       2,763       4,625       2,259       781       1,913       8,498       10,108  

Management fees and other
charges(10)

    20,567       8,046       13,541       (324     481       86       5,567       438  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 1,754,383     $ 979,758     $ 1,532,889     $ 104,828     $ 72,326     $ 146,532     $ 1,754,383     $ 2,176,943  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) Includes certain direct and incremental costs resulting from acquisitions and certain related integration efforts as a result of those acquisitions, as well as costs related to our restructuring efforts. For the nine months ended September 30, 2017, these costs primarily include restructuring and integration efforts incurred in connection with the ADT Acquisition and certain asset impairment charges. For the nine months ended September 30, 2016 and year ended December 31, 2016, these costs are primarily related to transaction costs and restructuring efforts incurred in connection with the ADT Acquisition. Costs incurred during the Successor and Predecessor 2015 periods primarily relate to charges associated with the Formation Transactions. Costs incurred during the Predecessor year ended December 31, 2014 were not material.
  (2) Nine months ended September 30, 2017 includes fees incurred in connection with the Special Dividend, and fees incurred in connection with the 2017 First Lien Credit Agreement Amendments and the 2017 Incremental First Lien Term B-1 Loan.
  (3) Foreign currency (gains) / losses relate to the translation of monetary assets and liabilities that are denominated in Canadian dollars, primarily due to intercompany loans.
  (4) Loss on extinguishment of debt for the nine months ended September 30, 2017 and nine months ended September 30, 2016 primarily relates to the write-off of debt discount and issuance costs associated with amendments to the First Lien Credit Facilities. Loss on extinguishment of debt for the year ended December 31, 2016 includes $14 million relating to the write-off of debt discount and issuance costs associated with the voluntary paydown of $260 million of the second lien term loans, and $14 million relating to the write-off of debt discount and issuance costs associated with amendments to the First Lien Credit Facilities.
  (5) Includes purchase accounting adjustments related to fair value of deferred revenue under GAAP.
  (6) Primarily includes a net loss on the settlement of derivative contracts that were executed to hedge future cash flows associated with the ADT Acquisition during the nine months ended September 30, 2016 and year ended December 31, 2016, and primarily certain asset write-downs during the nine months ended September 30, 2017, and in each case, as well as other non-cash items.
  (7) Represents costs associated with our program that began in 2015 to upgrade cellular technology used in many of our security systems.
  (8) Represents non-cash amortization expense associated with deferred direct and incremental selling expenses (“deferred subscriber acquisition costs”), net of non-cash amortization of revenue associated with deferred non-refundable fees received in connection with the initiation of a monitoring contract (“deferred installation revenue”).
  (9) Share based compensation expense represents compensation expense associated with our equity compensation plans. Refer to Note 12 to the Company’s audited consolidated financial statements for additional information.
  (10) The nine months ended September 30, 2017 and year ended December 31, 2016 primarily include $15 million and $13 million, respectively, of fees paid under the Management Consulting Agreement (as defined herein). This agreement will terminate in accordance with its terms upon the consummation of this offering (See “Certain Relationships and Related Party Transactions—Management Consulting Agreement”).
  (11) In accordance with Article 11 of Regulation S-X, these pro forma financial statements give effect to the ADT Acquisition and the completion of this offering, including the issuance of common stock and the use of proceeds therefrom, as described in “Use of Proceeds.”

 

(j) Free Cash Flow is a non-GAAP measure and is defined above in the section “Use of Non-GAAP Financial Information.” The following table presents a reconciliation of Free Cash Flow to net cash provided by (used in) operating activities.

 

    Successor     Predecessor  
    Nine Months
Ended
September 30,
2017
    Nine Months
Ended
September 30,
2016
    Year Ended
December 31,
2016
    From
Inception
through
December 31,
2015
    Period from
January 1,
2015
through
June 30,
2015
    Year Ended
December 31,
2014
 
    (in thousands)              

Net cash provided by operating activities

  $ 1,262,340     $ 381,813     $ 617,523     $ 1,754     $ 34,556     $ 60,825  

Dealer generated customer accounts and bulk account purchases

    (486,037     (259,330     (407,102     —         —         —    

Subscriber system assets and deferred subscriber installation costs

    (445,201     (320,906     (468,594     (29,556     (24,527     (48,996

Capital expenditures

    (102,671     (51,088     (78,499     (4,490     (6,095     (8,916
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free Cash Flow

  $ 228,431     $ (249,511   $ (336,672   $ (32,292   $ 3,934     $ 2,913  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(k) Monitoring and related services revenue of $4,007 million and Adjusted EBITDA of $2,308 million for the twelve months ended September 30, 2017 are derived by deducting the historical unaudited consolidated statement of operations data for the nine months ended September 30, 2016 from the historical audited statement of operations data for the year ended December 31, 2016, and then adding thereto the historical unaudited consolidated statement of operations data for the nine months ended September 30, 2017.

 



 

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SUPPLEMENTAL INFORMATION

We believe that presenting supplemental pro forma financial information and Historical Combined Free Cash Flow promotes the overall usefulness of information presented herein and is consistent with how our management team evaluates our performance. This approach may yield results that are not strictly comparable on a period to period basis. These results are not necessarily indicative of results that may be expected for any future period and interim financial results are not necessarily indicative of results that may be expected for the full fiscal year. This information is for illustrative and informational purposes only and is not intended to represent or be indicative of what our financial condition or results of operations would have been had the underlying transactions occurred on the dates indicated.

Supplemental Pro Forma Financial Information

We have presented unaudited supplemental pro forma financial information for the periods presented below, which includes pro forma adjustments necessary to reflect the ADT Acquisition and the Formation Transactions as if they had occurred on January 1, 2015. The unaudited supplemental pro forma financial information does not give effect to the completion of this offering, including the issuance of common stock and the use of proceeds therefrom and related adjustments. We refer investors to the Supplemental Management’s Discussion and Analysis of Financial Condition and Results of Operations section, included elsewhere in this prospectus, which provides additional information to investors about our financial performance in a manner consistent with how management views our performance and reflects the Formation Transactions and the ADT Acquisition as if they had occurred on January 1, 2015.

 



 

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The information below has been prepared on a basis consistent with Article 11 of Regulation S-X, but does not constitute Article 11 pro forma information since it reflects the ADT Acquisition and the Formation Transactions as if they occurred on January 1, 2015. The information contained below should therefore be read in conjunction with our historical consolidated financial statements and the related notes included elsewhere in this prospectus.

 

     Supplemental
Pro Forma
Nine Months
Ended
September 30,
2016
    Supplemental
Pro Forma
December 31,
2016
    Supplemental
Pro Forma
December 31,
2015
 
     (in thousands, except as otherwise indicated)  

Results of Operations:

      

Monitoring and related services

   $ 2,960,628     $ 3,954,424     $ 3,897,107  

Installation and other

     151,639       212,492       160,135  
  

 

 

   

 

 

   

 

 

 

Total revenue

     3,112,267       4,166,916       4,057,242  

Cost of revenue

     641,616       869,689       807,536  

Selling, general and administrative expenses

     941,364       1,238,923       1,331,326  

Depreciation and intangible asset amortization

     1,155,145       1,574,219       1,591,410  

Merger, restructuring, integration, and other costs

     65,403       86,186       33,224  
  

 

 

   

 

 

   

 

 

 

Operating income

     308,739       397,899       293,746  

Interest expense, net

     (565,956     (750,006     (768,789

Other income (expense)

     (39,323     (51,688     4,422  
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (296,540     (403,795     (470,621

Income tax benefit

     87,830       118,854       189,251  
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (208,710   $ (284,941   $ (281,370
  

 

 

   

 

 

   

 

 

 

Key Performance Indicators:

      

RMR

   $ 327,228     $ 327,948     $ 322,106  

Gross customer revenue attrition (percent)

     15.2     14.8     15.9

Supplemental Pro Forma Adjusted EBITDA(1)

   $ 1,623,812     $ 2,176,943     $ 2,031,281  

 



 

28


Table of Contents

 

(1) Supplemental Pro Forma Adjusted EBITDA is a non-GAAP measure. Refer to “Supplemental Management’s Discussion and Analysis of Financial Condition and Results of Operations—Notes to the Unaudited Supplemental Pro Forma Supplemental Financial Information Presented in the Supplemental Management’s Discussion and Analysis of Financial Conditions and Results of Operations” for further information on the components of Supplemental Pro Forma Adjusted EBITDA. The following table presents a reconciliation of Supplemental Pro Forma Adjusted EBITDA to net loss for the periods presented.

 

     Supplemental
Pro Forma
Nine Months
Ended
September 30,
2016
    Supplemental
Pro Forma
December 31,
2016
    Supplemental
Pro Forma
December 31,
2015
 
     (in thousands)  

Net loss

   $ (208,710   $ (284,941   $ (281,370

Interest expense, net

     565,956       750,006       768,789  

Income tax benefit

     (87,830     (118,854     (189,251

Depreciation and intangible asset amortization

     1,155,145       1,574,219       1,591,410  

Merger, restructuring, integration, and other costs(1)

     65,403       86,186       33,224  

Financing and consent fees(2)

     2,878       5,302       —    

Foreign currency losses(3)

     16,336       16,042       —    

Loss on extinguishment of debt(4)

     16,051       28,293       —    

Other non-cash items(5)

     12,146       16,276       —    

Radio conversion costs(6)

     60,079       67,816       60,410  

Amortization of deferred subscriber acquisition costs and revenue, net(7)

     3,169       6,052       1,063  

Share-based compensation expense(8)

     8,246       10,108       28,103  

Management fees and other charges(9)

     14,943       20,438       18,903  
  

 

 

   

 

 

   

 

 

 

Supplemental Pro Forma Adjusted EBITDA

   $ 1,623,812     $ 2,176,943     $ 2,031,281  
  

 

 

   

 

 

   

 

 

 

 

  (1) Includes certain direct and incremental costs resulting from acquisitions and certain related integration efforts as a result of those acquisitions, as well as costs related to our restructuring efforts. For the supplemental pro forma nine months ended September 30, 2016 and supplemental pro forma year ended December 31, 2016, these costs are primarily related to restructuring charges incurred in connection with the ADT Acquisition.
  (2) Financing and consent fees represents fees associated with amendments and restatements to our First Lien Credit Agreement.
  (3) Foreign currency losses relates to the translation of monetary assets and liabilities that are denominated in Canadian dollars, primarily due to intercompany loans.
  (4) Loss on extinguishment of debt primarily relates to the write-off of debt discount and issuance costs associated with amendments to the First Lien Credit Agreement on June 23, 2016 in the amount of $9 million for both the supplemental pro forma nine months ended September 30, 2016 and supplemental pro forma year ended December 31, 2016. In addition, loss on extinguishment of debt for the supplemental pro forma year ended December 31, 2016 also includes the write-off of debt discount and issuance costs associated with the voluntary paydown of $260 million of the second lien term loans in July and October 2016 in the amount of $14 million, as well as $5 million related to the amendment to the First Lien Credit Agreement on December 28, 2016.
  (5) Represents items including a net loss on the settlement of derivative contracts that were executed to hedge future cash flows associated with the ADT Acquisition during the supplemental pro forma nine months ended September 30, 2016 and supplemental pro forma year ended December 31, 2016, as well as other non-cash items including certain asset write-downs.
  (6) Represents costs associated with our program that began in 2015 to upgrade cellular technology used in many of our security systems.
  (7) Represents non-cash amortization expense associated with deferred subscriber acquisition costs, net of non-cash amortization of deferred installation revenue.
  (8) Share based compensation expense represents compensation expense associated with our equity compensation plans. Refer to Note 12 to the Company’s audited consolidated financial statements for additional information.
  (9) Primarily includes management fees to our Sponsor for certain management consulting and advisory services under the Management Consulting Agreement. This agreement will terminate in accordance with its terms upon the consummation of this offering (See “Certain Relationships and Related Party Transactions—Management Consulting Agreement”).

 



 

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Historical Combined Free Cash Flow

Historical Combined Free Cash Flow is defined as cash from operating activities less cash outlays related to capital expenditures, and represents the mathematical additions of Free Cash Flow of the Company, The ADT Corporation, Protection One, and ASG, where applicable, for the periods presented. Investors should be aware that Free Cash Flow of the respective companies may not be comparable to the Company’s measures of Free Cash Flow included elsewhere in this prospectus. Historical Combined Free Cash Flow has not been prepared in accordance with the requirements of Regulation S-X or any other securities laws relating to the presentation of pro forma financial information, and has not been prepared in accordance with Article 11. In addition, the financial results for the Successor period include the impact of applying purchase accounting. Historical Combined Free Cash Flow and Free Cash Flow are non-GAAP measures and are defined above in the section “Use of Non-GAAP Financial Information.”

The table below is an illustration of our Historical Combined Free Cash Flow for the periods presented.

 

     Nine Months Ended
September 30,

2016(a)
     Year Ended
December 31,
2016(b)
     Year Ended
December 31,
2015(c)
 
            (in thousands)         

Successor Free Cash Flow(d)

   $ (249,511    $ (336,672    $ (32,292

Predecessor Free Cash Flow(d)

     N/A        N/A        3,934  

The ADT Corporation Free Cash Flow(e)

     105,587        105,587        256,623  

ASG Free Cash Flow(f)

     N/A        N/A        (7,232
  

 

 

    

 

 

    

 

 

 

Historical Combined Free Cash Flow

   $ (143,924    $ (231,085    $ 221,033  
  

 

 

    

 

 

    

 

 

 

 

N/A—Not applicable for the period as Free Cash Flow results are included in Successor from the date of the Formation Transactions.

(a) The Historical Combined Free Cash Flow for the nine months ended September 30, 2016 includes cash interest paid by Successor, The ADT Corporation for the three months ended March 31, 2016, and The ADT Corporation for the period from April 1, 2016 to May 1, 2016 of approximately $174 million, $59 million, and $21 million, respectively; cash paid for merger costs primarily related to the ADT Acquisition by Successor, The ADT Corporation for the three months ended March 31, 2016, and The ADT Corporation for the period from April 1, 2016 to May 1, 2016 of approximately $347 million, $4 million, and $3 million, respectively; cash paid for radio conversion costs by Successor, The ADT Corporation for the three months ended March 31, 2016, and The ADT Corporation for the period from April 1, 2016 to May 1, 2016 of approximately $33 million, $27 million, and $8 million, respectively; cash paid by Successor in connection with certain fees associated with amendments and restatements to the First Lien Credit Facilities and management fees and other of approximately $26 million and $9 million, respectively; and cash paid for restructuring and integration activities primarily associated with the ADT Acquisition by Successor, The ADT Corporation for the three months ended March 31, 2016, and The ADT Corporation for the period from April 1, 2016 to May 1, 2016 of approximately $46 million, $2 million, and $1 million, respectively. In addition, capital expenditures include cash payments for integration related capital expenditures by Successor, The ADT Corporation for the three months ended March 31, 2016, and The ADT Corporation for the period from April 1, 2016 to May 1, 2016 of approximately $7 million, $1 million, and $1 million, respectively.
(b)

The Historical Combined Free Cash Flow for the year ended December 31, 2016 includes cash interest paid by Successor, The ADT Corporation for the three months ended March 31, 2016, and The ADT Corporation for the period from April 1, 2016 to May 1, 2016 of approximately $431 million, $59 million, and $21 million, respectively; cash paid for merger costs primarily related to the ADT Acquisition by Successor, The ADT Corporation for the three months ended March 31, 2016, and The ADT Corporation for the period from April 1, 2016 to May 1, 2016 of approximately $347 million, $4 million, and $3 million, respectively; cash paid for radio conversion costs by Successor, The ADT Corporation for the three months ended March 31, 2016, and The ADT Corporation for the period from April 1, 2016 to May 1, 2016 of approximately $43 million, $27 million, and $8 million, respectively; cash paid by Successor in connection with certain fees associated with amendments and restatements to the First Lien Credit Facilities and management fees and other of approximately $29 million and $14 million, respectively; and cash paid for restructuring

 



 

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  and integration activities primarily associated with the ADT Acquisition by Successor, The ADT Corporation for the three months ended March 31, 2016, and The ADT Corporation for the period from April 1, 2016 to May 1, 2016 of approximately $67 million, $2 million, and $1 million, respectively. In addition, capital expenditures include cash payments for integration related capital expenditures by Successor, The ADT Corporation for the three months ended March 31, 2016, and The ADT Corporation for the period from April 1, 2016 to May 1, 2016 of approximately $15 million, $1 million, and $1 million, respectively.
(c) The Historical Combined Free Cash Flow for the year ended December 31, 2015 includes cash interest paid by Successor and Predecessor combined, The ADT Corporation for the twelve months ended December 31, 2015, and ASG for the six months ended June 30, 2015 of approximately $69 million, $205 million, and $6 million, respectively; cash paid for merger costs primarily related to the Formation Transactions by Successor and Predecessor of approximately $34 million and $7 million, respectively; cash paid for radio conversion costs by Successor, Predecessor, and The ADT Corporation of approximately $4 million, $1 million, and $54 million, respectively; cash paid for management fees and other by Predecessor of approximately $1 million; and cash paid for restructuring and integration activities by Successor, Predecessor, and The ADT Corporation of approximately $1 million, $3 million, and $10 million, respectively.
(d) Refer to the table shown in footnote (j) under “—Summary Historical and Pro Forma Financial Information” above for the reconciliation of Free Cash Flow for the Successor and Predecessor periods to net cash provided by (used in) operating activities.
(e) Refer to the table below for the reconciliation of Free Cash Flow for the ADT Corporation for the respective periods to net cash provided by (used in) operating activities.
(f) Refer to the table below for the reconciliation of Free Cash Flow for ASG for the year ended December 31, 2015 to net cash provided by operating activities.

The ADT Corporation Free Cash Flow for the nine months ended September 30, 2016, and for the year ended December 31, 2016 reflects Free Cash Flow for the period from January 1, 2016 to May 1, 2016, which has been derived by adding the historical Free Cash Flow for the three months ended March 31, 2016 and the historical Free Cash Flow from the period from April 1, 2016 to May 1, 2016, as illustrated in the table below:

 

     The ADT Corporation  
     For the period from January 1, 2016 to
May 1, 2016
 
           Add:        
     Three Months
Ended
March 31,
2016
    Period
from
April 1,
2016 to
May 1,
2016
    The ADT
Corporation
 
     (in thousands)  

Net cash provided by operating activities

   $ 413,918     $ 111,483     $ 525,401  

Dealer generated customer accounts and bulk account purchases

     (133,080     (42,538     (175,618

Subscriber system assets and deferred subscriber installation costs

     (165,462     (56,050     (221,512

Capital expenditures

     (18,570     (4,114     (22,684
  

 

 

   

 

 

   

 

 

 

The ADT Corporation Free Cash Flow

   $ 96,806     $ 8,781     $ 105,587  
  

 

 

   

 

 

   

 

 

 

 



 

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The ADT Corporation Free Cash Flow for the three months ended March 31, 2016 has been derived by deducting the historical Free Cash Flow for the three months ended December 31, 2015 from the historical Free Cash Flow for the six months ended March 31, 2016, as illustrated in the table below:

 

     The ADT Corporation  
     For the Three Months Ended March 31, 2016  
     Less:  
     Six Months
Ended
March 31,
2016
    Three Months
Ended
December 31,
2015
    Three Months
Ended
March 31,
2016
 
     (in thousands)  

Net cash provided by operating activities

   $ 789,103     $ 375,185     $ 413,918  

Dealer generated customer accounts and bulk account purchases

     (282,369     (149,289     (133,080

Subscriber system assets and deferred subscriber installation costs

     (340,034     (174,572     (165,462

Capital expenditures

     (43,417     (24,847     (18,570
  

 

 

   

 

 

   

 

 

 

The ADT Corporation Free Cash Flow

   $ 123,283     $ 26,477     $ 96,806  
  

 

 

   

 

 

   

 

 

 

The ADT Corporation Free Cash Flow for the year ended December 31, 2015 includes Free Cash Flow for the twelve months ended December 31, 2015, which has been derived by deducting the historical Free Cash Flow for the three months ended December 26, 2014 from the historical Free Cash Flow for the fiscal year ended September 25, 2015, and then adding thereto the historical Free Cash Flow from the three months ended December 31, 2015, as illustrated in the table below:

 

     The ADT Corporation  
     For the Twelve Months Ended December 31, 2015  
           Less:     Add:        
     Fiscal Year
Ended
September 25,
2015
    Three Months
Ended
December 26,
2014
    Three Months
Ended
December 31,
2015
    Twelve Months
Ended
December 31,
2015
 
     (in thousands)  

Net cash provided by operating activities

   $ 1,604,809     $ 369,104     $ 375,185     $ 1,610,890  

Dealer generated customer accounts and bulk account purchases

     (559,290     (145,948     (149,289     (562,631

Subscriber system assets and deferred subscriber installation costs

     (699,344     (177,163     (174,572     (696,753

Capital expenditures

     (102,398     (32,362     (24,847     (94,883
  

 

 

   

 

 

   

 

 

   

 

 

 

The ADT Corporation Free Cash Flow

   $ 243,777     $ 13,631     $ 26,477     $ 256,623  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(f) Refer to the table below for the reconciliation of Free Cash Flow for ASG for the six months ended June 30, 2015 to net cash provided by operating activities. ASG Free Cash Flow for the year ended December 31, 2015 includes historical Free Cash Flow for the six months ended June 30, 2015, as illustrated in the table below:

 

     Six Months
Ended

June 30,
2015
 
     (in thousands)  

Net cash provided by operating activities

   $ 11,665  

Payments for acquisitions of purchased accounts

     (9,726

Deferred customer acquisition costs

     (15,399

Deferred customer acquisition revenue

     6,964  

Purchases of property and equipment

     (736
  

 

 

 

ASG Free Cash Flow

   $ (7,232
  

 

 

 

 



 

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RISK FACTORS

You should carefully consider the risks and uncertainties described below, as well as the other information contained in this prospectus, including our consolidated financial statements and the related notes thereto included elsewhere in this prospectus, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding to invest in our common stock. In addition, past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. Any of the following risks could materially adversely affect our business, financial condition and results of operations, in which case the trading price of our common stock could decline and you could lose all or part of your investment.

Risks Related to Our Business

Our future growth is dependent upon our ability to keep pace with rapid technological and industry changes in order to develop or acquire new technologies for our products and service introductions that achieve market acceptance with acceptable margins.

Our business operates in markets that are characterized by rapidly changing technologies, evolving industry standards, potential new entrants, and changes in customer needs and expectations. For example, a number of cable and other telecommunications companies and large technology companies with home automation solutions offer interactive security services that are competitive with our products and services. If these services gain greater market acceptance and traction, our ability to grow our business, in particular our ADT Pulse and other interactive service offerings, could be materially and adversely affected. Accordingly, our future success depends in part on our ability to accomplish the following: identify emerging technological trends in our target end-markets; develop, acquire, and maintain competitive products and services that capitalize on existing and emerging trends; enhance our existing products and services by adding innovative features on a timely and cost-effective basis that differentiates us from our competitors; sufficiently capture intellectual property rights in new inventions and other innovations; and develop or acquire and bring products and services, including enhancements, to market quickly and cost-effectively. Our ability to develop or acquire new products and services that are technologically innovative requires the investment of significant resources and can affect our competitive position. These acquisition and development efforts divert resources from other potential investments in our businesses, and they may not lead to the development of new commercially successful technologies, products, or services on a timely basis. Moreover, as we introduce new products and services, we may be unable to detect and correct defects in the product or in its installation, which could result in loss of sales or delays in market acceptance. New or enhanced products and services may not satisfy customer preferences and potential product failures may cause customers to reject our products. As a result, these products and services may not achieve market acceptance and our brand image could suffer. In addition, our competitors may introduce superior products or business strategies, impairing our brand and the desirability of our products and services, which may cause customers to defer or forego purchases of our products and services, and impacting our ability to charge monthly service fees. If our competitors implement new technologies before we are able to implement them, those competitors may be able to provide more effective products than ours, possibly at lower prices. Any delay or failure in the introduction of new or enhanced solutions could harm our business, results of operations and financial condition. In addition, the markets for our products and services may not develop or grow as we anticipate. The failure of our technology, products, or services to gain market acceptance, the potential for product defects, or the obsolescence of our products and services could significantly reduce our revenue, increase our operating costs, or otherwise materially adversely affect our business, financial condition, results of operations and cash flows.

In addition to developing and acquiring new technologies and introducing new offerings, we may need, from time to time, to phase out outdated and unsuitable technologies and services. See “—Shifts in our customers’ choice of, or telecommunications providers’ support for, telecommunications services and equipment could materially adversely affect our business and require significant capital expenditures.” If we are unable to do so on a cost-effective basis, we could experience reduced profits.

 

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We sell our products and services in highly competitive markets, including the home automation market, which may result in pressure on our profit margins and limit our ability to maintain or increase the market share of our products and services.

The monitored security industry is highly fragmented and subject to significant competition and pricing pressures. We experience significant competitive pricing pressures on installation, monitoring, and service fees. Several competitors offer installation fees that match or are lower than ours. Other competitors charge significantly more for installation, but in many cases, less for monitoring. In addition, cable and telecommunications companies have expanded into the monitored security industry and are bundling their existing offerings with monitored security services.

In many cases, we face competition for direct sales from our independent, third-party authorized dealers, who may offer installation for considerably less than we do in particular markets. We believe that the monitoring and service fees we offer are generally competitive with rates offered by other security service providers. We face competition from other providers such as cable and telecommunications companies that may have existing access to and relationship with subscribers and highly recognized brands, which may drive increased awareness of their security/automation offerings relative to ours, have access to greater capital and resources than us, and may spend significantly more on advertising, marketing, and promotional resources, any of which could have a material adverse effect on our ability to drive awareness and demand for our products and services. In particular, these companies may be able to offer subscribers a lower price by bundling their services. We also face potential competition from DIY products, which enable customers to self-monitor and control their environments without third-party involvement through the Internet, text messages, emails, or similar communications, but with the disadvantage that alarm events may go unnoticed. Some DIY providers may also offer professional monitoring with the purchase of their systems and equipment without a contractual commitment, which may be attractive to some customers and put us at a competitive disadvantage. Other DIY providers may offer new IoT devices and services with automated features and capabilities that may be appealing to customers. Shifts in customer preferences towards DIY systems could increase our attrition rates over time and the risk of accelerated amortization of customer contracts resulting from a declining customer base. It is possible that one or more of our competitors could develop a significant technological advantage over us that allows them to provide additional service or better quality service or to lower their price, which could put us at a competitive disadvantage. Continued pricing pressure, improvements in technology, and shifts in customer preferences towards self-monitoring or DIY could adversely impact our customer base and/or pricing structure and have a material adverse effect on our business, financial condition, results of operations, and cash flows.

We rely on a significant number of our customers remaining with us as customers for long periods of time.

We operate our business with the goal of retaining customers for long periods of time in order to recoup our initial investment in new customers, and we generally achieve cash flow break-even in less than three years. Accordingly, our long-term profitability is dependent on long customer tenure. This requires that we minimize our rate of customer disconnects, or attrition. One reason for disconnects is when customers relocate and do not reconnect. Customer relocations are impacted by changes in the housing market. See “General economic conditions can affect our business, and we are susceptible to changes in the business economy, housing market, and business and consumer discretionary income, which may inhibit our ability to sustain customer base growth rates and impact our results of operations.” Other factors that can increase disconnects include problems experienced with our product or service quality, customer service, customer non-pay, unfavorable general economic conditions, and the preference for lower pricing of competitors’ products and services over ours. If we fail to keep our customers for a sufficiently long period of time, our profitability, business, financial condition, results of operations and cash flows could be materially adversely affected.

 

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If we experience significantly higher rates of customer revenue attrition than we anticipate, we may be required to change the estimated useful lives and/or the accelerated method of depreciation and amortization related to accounts associated with our security monitoring customers, increasing our depreciation and amortization expense or causing asset impairment.

We amortize the costs of our acquired and dealer-generated contracts and related customer relationships based on the estimated life of the customer relationships. We similarly depreciate the cost of our direct channel subscriber system assets and deferred subscriber acquisition costs. If attrition rates rise significantly, we may be required to accelerate the amortization of expenses related to such contracts and the depreciation/amortization of our subscriber system assets/deferred subscriber acquisition costs or to impair such assets, which could cause a material adverse effect on our business, financial condition and results of operations.

Our reputation as a service provider of high quality security offerings may be materially adversely affected by product defects or shortfalls in customer service.

Our business depends on our reputation and ability to maintain good relationships with our subscribers, dealers and local regulators, among others. Our reputation may be harmed either through product defects, such as the failure of one or more of our subscribers’ alarm systems, or shortfalls in customer service. Subscribers generally judge our performance through their interactions with the staff at the monitoring and customer care centers, dealers, and technicians who perform on-site maintenance services. Any failure to meet subscribers’ expectations in such customer service areas could cause an increase in attrition rates or make it difficult to recruit new subscribers. Any harm to our reputation or subscriber relationships caused by the actions of our dealers, personnel, or third-party service providers or any other factors could have a material adverse effect on our business, financial condition, and results of operations.

General economic conditions can affect our business, and we are susceptible to changes in the business economy, housing market, and business and consumer discretionary income, which may inhibit our ability to sustain customer base growth rates and impact our results of operations.

Demand for alarm monitoring services and home automation systems is affected by the general economy, the business environment, and the turnover in the housing market, among other things. Downturns in the rate of the sale of new and existing homes, which we believe drives a substantial portion of our new customer volume in any given year, would reduce opportunities to make sales of new security and home automation systems and services and reduce opportunities to take over existing security and home automation systems. Recoveries in the housing market increase the occurrence of relocations, which may lead to customers disconnecting service and not contracting with us in their new homes.

Further, the alarm monitoring business is dependent, in part, on national, regional, and local economic conditions. In particular, where disposable income available for discretionary spending is reduced (such as by higher housing, energy, interest or other costs, or where the actual or perceived wealth of customers has decreased because of circumstances such as lower residential real estate values, increased foreclosure rates, inflation, increased tax rates or other economic disruptions), the alarm monitoring business could experience increased attrition rates and reduced customer demand. No assurance can be given that we will be able to continue acquiring quality alarm monitoring contracts or that we will not experience higher attrition rates. Changes in individualized economic circumstances could cause current security alarm and home automation customers to disconnect our services in an effort to reduce their monthly spending, or such customers could default on their remaining contractual obligations to us.

Our long-term revenue growth rate depends on installations and new contracts exceeding disconnects. If customer disconnects and defaults increase, our business, financial condition, results of operations, and cash flows could be materially adversely affected. See “We rely on a significant number of our customers remaining with us as customers for long periods of time.”

 

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We are subject to credit risk and other risks associated with our subscribers.

A substantial part of our revenues is derived from the recurring monthly revenue due from subscribers under the alarm monitoring contracts. Therefore, we are dependent on the ability and willingness of subscribers to pay amounts due under the alarm monitoring contracts on a monthly basis in a timely manner. Although subscribers are contractually obligated to pay amounts due under an alarm monitoring contract, and are generally contractually obligated to pay early cancellation fees if they prematurely cancel the alarm monitoring contract during the initial term of the alarm monitoring contract (typically between three and five years), subscribers’ payment obligations are unsecured, which could impair our ability to collect any unpaid amounts from our subscribers. To the extent payment defaults by subscribers under the alarm monitoring contracts are greater than anticipated, our business, financial condition and results of operations could be materially adversely affected.

We are also exploring different pricing plans for our products and services, including larger up-front payments and consumer financing options for residential equipment purchases. We currently have arrangements with a third-party financing company to provide financing to small business and commercial customers who wish to finance their equipment purchases from us. We also recently launched a pilot program in a small number of markets for residential customers to pay for equipment purchases through installments to the Company under a consumer financing arrangement. These lending services could increase the credit risks associated with our subscribers. While we intend to manage such credit risk by monitoring the credit quality of our financing portfolios, our efforts to mitigate risk may not be sufficient to prevent an adverse effect on our business, financial condition and results of operations.

If the insurance industry changes its practice of providing incentives to homeowners for the use of alarm monitoring services, we may experience a reduction in new customer growth or an increase in our subscriber attrition rate.

It has been common practice in the insurance industry to provide a reduction in rates for policies written on homes that have monitored alarm systems. There can be no assurance that insurance companies will continue to offer these rate reductions. If these incentives were reduced or eliminated, new homeowners who otherwise might not feel the need for alarm monitoring services would be removed from our potential customer pool, which could hinder the growth of our business, and existing subscribers may choose to disconnect or not renew their service contracts, which could increase our attrition rates. In either case, our results of operations and growth prospects could be materially adversely affected.

We have and will continue to invest in new businesses, services, and technologies outside the traditional security and interactive services market, which is inherently risky, and could disrupt our current operations.

We have invested and will continue to invest in new businesses, products, services, and technologies beyond traditional security and interactive services. Our investments may involve significant risks and uncertainties, including capital loss on some or all of our investments, insufficient revenues from such investments to offset any new liabilities assumed and expenses associated with these new investments, distraction of management from current operations, and issues not identified during pre-investment planning and due diligence that could cause us to fail to realize the anticipated benefits of such investments and incur unanticipated liabilities. Since these investments are inherently risky, these new businesses, products, services, and technologies may not be successful and as a result, may materially adversely affect our reputation, financial condition, and results of operations.

Failure to successfully upgrade and maintain the security of our information and technology networks, including personally identifiable information and other data, could materially adversely affect us.

We are dependent on information technology networks and systems, including Internet and Internet-based or “cloud” computing services, to collect, process, transmit, and store electronic information. We are currently

 

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implementing modifications and upgrades to these information technology systems, including making changes to legacy systems, replacing legacy systems with successor systems with new functionality, and implementing new systems. There are inherent costs and risks associated with replacing and changing these systems and implementing new systems, including potential disruption of our sales, operations and customer service functions, potential disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, retention of sufficiently skilled personnel to implement and operate the new systems, demands on management time, and other risks and costs of delays or difficulties in transitioning to new systems or of integrating new systems into our current systems. In addition, our information technology system implementations may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. The implementation of new information technology systems may also cause disruptions in our business operations and have a material adverse effect on our business, cash flows, and results of operations.

If we fail to comply with constantly evolving laws, regulations, and industry standards addressing information and technology networks, privacy and data security, we could face substantial penalties, liability, and reputational harm, and our business, operations, and financial condition could be materially adversely affected.

Along with our own confidential data and information in the normal course of our business, we or our partners collect and retain significant volumes of certain types of data, some of which are subject to certain laws and regulations. Our ability to analyze this data to present the subscriber with improved user experience is a valuable component of our services, but we cannot assure you that the data we require will be available from these sources in the future or that the cost of such data will not increase. If the data that we require is not available to us on commercially reasonable terms or at all, we may not be able to provide certain parts of our current or planned products and services, and our business and financial condition could be materially adversely affected.

For example, the data that we collect and retain includes personally identifiable information related to our consumers and employees and may be protected health information subject to certain requirements under the Health Insurance Portability Accountability Act (“HIPAA”) and its implementing regulations, which regulate the use, storage, and disclosure of personally identifiable health information. We may change our processes or modify our product and service offerings in a manner that requires us to adopt additional or different policies and procedures to meet our obligations under HIPAA. Becoming fully HIPAA compliant involves adopting and implementing privacy and security policies and procedures as well as administrative, physical, and technical safeguards. Additionally, HIPAA compliance requires certain agreements with contracting partners to be in place. Endeavoring to become fully HIPAA compliant may be costly both financially and in terms of administrative resources. It may take substantial time and require the assistance of external resources, such as attorneys, information technology, and/or other consultants. We would have to be HIPAA compliant to provide services pursuant to which we are required to collect or manage patient information for or on behalf of a health care provider or health plan. Thus, if we do not become fully HIPAA compliant, our expansion opportunities may be limited. Furthermore, it is possible that HIPAA may be expanded in the future to apply to certain of our current products or services.

In addition, we may also collect and retain other sensitive types of data, including audio recordings of telephone calls and video images of customer sites. We must comply with applicable federal and state laws and regulations governing the collection, retention, processing, storage, disclosure, access, use, security, and privacy of such information in addition to our own posted information security and privacy policies and applicable industry standards. The legal, regulatory, and contractual environment surrounding the foregoing continues to evolve, and there has been an increasing amount of focus on privacy and data security issues with the potential to affect our business. These privacy and data security laws and regulations, as well as contractual requirements, could increase our cost of doing business, and failure to comply with these laws, regulations and contractual requirements could result in government enforcement actions (which could include civil or criminal penalties), private litigation, and/or adverse publicity.

 

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In the event of a breach of personal information that we hold, we may be subject to governmental fines, individual and class action claims, remediation expenses, and/or harm to our reputation. Further, if we fail to comply with applicable privacy and security laws, regulations, policies and standards, properly protect the integrity and security of our facilities and systems and the data located within them, or defend against cybersecurity attacks, or if our third-party service providers, partners, or vendors fail to do any of the foregoing with respect to data and information assessed, used, stored, or collected on our behalf, our business, reputation, results of operations, and cash flows could be materially adversely affected.

Due to the ever-changing threat landscape, our products may be subject to potential vulnerabilities of wireless and IoT devices and our services may be subject to certain risks, including hacking or other unauthorized access to control or view systems and obtain private information.

Companies that collect and retain sensitive and confidential information are under increasing attack by cyber-criminals around the world. While we implement security measures within our products, services, operations and systems, those measures may not prevent cybersecurity breaches, the access, capture or alteration of information by criminals, the exposure or exploitation of potential security vulnerabilities, distributed denial of service attacks, the installation of malware or ransomware, acts of vandalism, computer viruses, misplaced data or data loss that could be detrimental to our reputation, business, financial condition, and results of operations. Third parties, including our partners and vendors, could also be a source of security risk to us in the event of a failure of their own products, components, networks, security systems, and infrastructure. In addition, we cannot be certain that advances in criminal capabilities, new discoveries in the field of cryptography, or other developments will not compromise or breach the technology protecting the networks that access our products and services.

A significant actual or perceived (whether or not valid) theft, loss, fraudulent use or misuse of customer, employee, or other personally identifiable data, whether by us, our partners and vendors, or other third parties, or as a result of employee error or malfeasance or otherwise, non-compliance with applicable industry standards or our contractual or other legal obligations regarding such data, or a violation of our privacy and information security policies with respect to such data, could result in costs, fines, litigation, or regulatory actions against us. Such an event could additionally result in unfavorable publicity and therefore materially and adversely affect the market’s perception of the security and reliability of our services and our credibility and reputation with our customers, which may lead to customer dissatisfaction and could result in lost sales and increased customer revenue attrition.

In addition, we depend on our information technology infrastructure for business-to-business and business-to-consumer electronic commerce. Security breaches of, or sustained attacks against, this infrastructure could create system disruptions and shutdowns that could negatively impact our operations. Increasingly, our products and services are accessed through the Internet, and security breaches in connection with the delivery of our services via the Internet may affect us and could be detrimental to our reputation, business, operating results, and financial condition. We continue to invest in new and emerging technology and other solutions to protect our network and information systems, but there can be no assurance that these investments and solutions will prevent any of the risks described above. While we maintain cyber liability insurance that provides both third-party liability and first-party insurance coverages, our insurance may not be sufficient to protect against all of our losses from any future disruptions or breaches of our systems or other event as described above.

We depend on third-party providers and suppliers for components of our security and automation systems, third-party software licenses for our products and services, and third-party providers to transmit signals to our monitoring facilities and provide other services to our subscribers. Any failure or interruption in products or services provided by these third parties could harm our ability to operate our business.

The components for the security and automation systems that we install are manufactured by third parties. We are therefore susceptible to interruptions in supply and to the receipt of components that do not meet our

 

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standards. Any financial or other difficulties our providers face may have negative effects on our business. We exercise little control over our suppliers, which increases our vulnerability to problems with the products and services they provide. While we strive to utilize dual-sourcing methods to allow similar hardware components for our security systems to be interchangeable in order to minimize the risk of a disruption from a single supplier, any interruption in supply could cause delays in installations and repairs and the loss of current and potential customers. Also, if a previously installed component were found to be defective, we might not be able to recover the costs associated with its repair or replacement across our installed customer base, and the diversion of technical personnel to address the defect could materially adversely affect our business, financial condition, results of operations, and cash flows.

We rely on third-party software for key automation features in certain of our offerings, and on the interoperation of that software with our own, such as our mobile applications and related platform. We could experience service disruptions if customer usage patterns for such offerings exceed, or are otherwise outside of, design parameters for the system and the ability for us or our third-party provider to make corrections. Such interruptions in the provision of services could result in our inability to meet customer demand, damage our reputation and customer relationships, and materially and adversely affect our business. We also rely on certain software technology that we license from third parties and use in our products and services to perform key functions and provide critical functionality. For example, we license the software platform for our monitoring operations from third parties. Because a number of our products and services incorporate technology developed and maintained by third parties, we are, to a certain extent, dependent upon such third parties’ ability to update, maintain, or enhance their current products and services, to ensure that their products are free of defects or security vulnerabilities, to develop new products and services on a timely and cost-effective basis, and to respond to emerging industry standards, customer preferences, and other technological changes. Further, these third-party technology licenses may not always be available to us on commercially reasonable terms, or at all. If our agreements with third-party vendors are not renewed or the third-party software becomes obsolete, is incompatible with future versions of our products or services, or otherwise fails to address our needs, we cannot provide assurance that we would be able to replace the functionality provided by the third-party software with technology from alternative providers. Furthermore, even if we obtain licenses to alternative software products or services that provide the functionality we need, we may be required to replace hardware installed at our monitoring centers and at our customers’ sites, including security system control panels and peripherals, in order to execute our integration of or migration to alternative software products. Any of these factors could materially adversely affect our business, financial condition, results of operations, and cash flows.

We also rely on various third-party telecommunications providers and signal processing centers to transmit and communicate signals to our monitoring facility in a timely and consistent manner. These telecommunications providers and signal processing centers could fail to transmit or communicate these signals to the monitoring facility for many reasons, including disruptions from fire, natural disasters, weather, transmission interruption, malicious acts, or terrorism. The failure of one or more of these telecommunications providers or signal processing centers to transmit and communicate signals to the monitoring facility in a timely manner could affect our ability to provide alarm monitoring, home automation, and interactive services to our subscribers. We also rely on third-party technology companies to provide home automation and interactive services to our subscribers. These technology companies could fail to provide these services consistently, or at all, which could result in our inability to meet customer demand and damage our reputation. There can be no assurance that third-party telecommunications providers, signal processing centers, and other technology companies will continue to transmit and communicate signals to the monitoring facility or provide home automation and interactive services to subscribers without disruption. Any such disruption, particularly one of a prolonged duration, could have a material adverse effect on our business. See also “—Shifts in our customers’ choice of, or telecommunications providers’ support for, telecommunications services and equipment could materially adversely affect our business and require significant capital expenditures” with respect to risks associated with changes in signal transmissions.

 

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An event causing a disruption in the ability of our monitoring facilities to operate could materially adversely affect our business.

A disruption in our ability to provide security monitoring services and otherwise serve our customers could have a material adverse effect on our business. A disruption could occur for many reasons, including fire, natural disasters, weather, health epidemics or pandemics, transportation interruption, extended power outages, human or other error, war, terrorism, sabotage, or other conflicts, or as a result of disruptions to internal and external networks or third-party transmission lines. Monitoring could also be disrupted by information systems and network-related events or cyber security attacks, such as computer hacking, computer viruses, worms or other malicious software, distributed denial of service attacks, malicious social engineering, or other destructive or disruptive activities that could also cause damage to our properties, equipment, and data. While our monitoring systems are redundant, a failure of our back-up procedures or a disruption affecting multiple monitoring facilities could disrupt our ability to provide security monitoring services to our customers. These events could also make it difficult or impossible to receive equipment from suppliers or impair our ability to deliver products and services to customers on a timely basis. If we experience such disruptions, we may experience customer dissatisfaction and potential loss of confidence, and liabilities to customers or other third parties, each of which could harm our reputation and impact future revenues from these customers. We could also be subject to claims or litigation with respect to losses caused by such disruptions. Our property and business interruption insurance and our cyber liability insurance may not be sufficient to fully cover our losses or may not cover a particular event at all. Any of these outcomes could have a material adverse effect on our business, results of operations, and financial condition.

Our independent, third-party authorized dealers may not be able to mitigate certain risks such as information technology breaches, data security breaches, product liability, errors and omissions, and marketing compliance.

We generate a portion of our new customers through our authorized dealer network. We rely on independent, third-party authorized dealers to implement mitigation plans for certain risks they may experience, including but not limited to, information technology breaches, data security breaches, product liability, errors and omissions, and marketing compliance. If our authorized dealers experience any of these risks, or fail to implement mitigation plans for their risks, or if such implemented mitigation plans are inadequate or fail, we may be susceptible to risks associated with our authorized dealers on which we rely to generate customers. Any interruption or permanent disruption in the generation of customer accounts or services provided by our authorized dealers could materially adversely affect our business, financial condition, results of operations, and cash flows.

We may pursue business opportunities that diverge from our current business model, which may materially adversely affect our business results.

We may pursue business opportunities that diverge from our current business model, including expanding our products or service offerings, investing in new and unproven technologies, adding customer acquisition

channels, and forming new alliances with companies to market our services. We can provide no assurance that any such business opportunities will prove to be successful. Among other negative effects, our pursuit of such business opportunities could cause our cost of investment in new customers to grow at a faster rate than our recurring revenue and fees collected at the time of installation. We recently acquired DataShield, LLC, a provider of cybersecurity services for mid-sized companies, which expands our suite of services. We are also currently exploring the option of offering certain of our monitoring and cybersecurity services under non-ADT brands to international markets outside of the United States and Canada. Additionally, any new alliances or customer acquisition channels could require developmental investments or have higher cost structures than our current arrangements, which could reduce operating margins and require more working capital. In the event that working capital requirements exceed operating cash flow, we could be required to draw on our Revolving Credit Facilities (as defined herein), which are described in Note 5 to our audited consolidated financial statements included

 

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elsewhere in this prospectus and “Description of Material Indebtedness,” or pursue other external financing, which may not be readily available. Any of these factors could materially adversely affect our business, financial condition, results of operations and cash flows.

We continue to integrate the acquisition of The ADT Corporation with our business, which may divert management’s attention from our ongoing operations. We may not achieve all of the anticipated benefits, synergies, and cost savings from the acquisition.

Our acquisition of The ADT Corporation in May 2016 involves the integration of two companies that have previously operated independently. While the integration of The ADT Corporation with our business is ongoing, the anticipated financial and operational benefits, including increased revenues, synergies, and cost savings from the acquisition of The ADT Corporation, depends in part on our ability to successfully continue to combine and integrate The ADT Corporation with our other business. Since the integration is not yet complete, there can be no assurance regarding the extent to which we will be able to realize these increased revenues, synergies, cost savings, or other benefits. These benefits may not be achieved within the anticipated time frame and we may not realize all of these anticipated benefits.

The continued integration of The ADT Corporation’s operations, products, and personnel will continue to require the attention of our management and place demands on other internal resources. The diversion of management’s attention, and any difficulties encountered in the transition and integration process, could materially adversely affect our business, financial condition and results of operations.

In addition, the overall continued integration of the businesses may result in material unanticipated problems, expenses, liabilities, competitive responses, and loss of customer relationships. The difficulties of combining the operations of the companies may generally include, among others:

 

    difficulties in achieving anticipated cost savings, synergies, business opportunities, and growth prospects from the combination;

 

    difficulties in the integration of operations and systems;

 

    difficulties in replacing numerous systems, including those involving management information, purchasing, accounting and finance, sales, billing, employee benefits, payroll, data privacy, and security and regulatory compliance, many of which may be dissimilar;

 

    conforming standards, controls, procedures, accounting and other policies, business cultures, and compensation structures between the two companies;

 

    difficulties in the assimilation of employees, including possible culture conflicts and different opinions on technical decisions and product roadmaps;

 

    difficulties in managing the expanded operations of a significantly larger and more complex company;

 

    challenges in keeping existing customers and obtaining new customers;

 

    challenges in attracting and retaining key personnel; and

 

    coordinating a geographically dispersed organization.

While we have not experienced any material difficulties to date in connection with the integration, many of these factors are outside our control and any one of them could result in increased costs, decreases in the amount of expected revenues, and further diversion of management’s time and energy, which could materially adversely affect our business, financial condition, and results of operations.

Our customer generation strategies through third parties, including our authorized dealer and affinity marketing programs, and the competitive market for customer accounts may affect our future profitability.

An element of our business strategy is the generation of new customer accounts through third parties, including our authorized dealers, which accounted for over 40% of our new customer accounts for 2016 and for

 

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the nine months ended September 30, 2017. Our future operating results will depend in large part on our ability to continue to manage this business generation strategy effectively. Although we currently generate accounts through hundreds of independent third parties, including authorized dealers, a significant portion of our accounts originate from a smaller number of such third parties, including an authorized premier provider that signed a nine-year renewal agreement with us in December 2017 and accounted for approximately 19% of all our new accounts in 2016. We experience loss of third-party sales partnerships, including authorized dealers from our authorized dealer program, due to various factors, such as dealers and third parties becoming inactive or discontinuing their electronic security business, non-renewal of our dealer and sales generation contracts, and competition from other alarm monitoring companies. If we experience a loss of authorized dealers or third-party sellers representing a significant portion of our customer account generation, or if we are unable to replace or recruit authorized dealers, other third-party sellers, or alternate distribution channel partners in accordance with our business strategy, our business, financial condition, results of operations, and cash flows could be materially adversely affected.

In addition, successful promotion of our brands depends on the effectiveness of our marketing efforts and on our ability to offer member discounts and special offers for our products and services to our partners. We have actively pursued affinity marketing programs, which provide members of participating organizations with special offers on our products and services. The organizations with which we have affinity marketing programs typically closely monitor their relationships with us, as well as their members’ satisfaction with our products and services. These organizations may require us to pay higher fees to them, decrease our pricing for their members, introduce additional competitive options, or otherwise alter the terms of our participation in their marketing programs in ways that are unfavorable to us. These organizations may also terminate their relationships with us if we fail to meet member satisfaction standards, among other things. If any of our affinity or marketing relationships is terminated or altered in an unfavorable manner, we may lose a source of sales leads, and our business, financial condition, results of operations, and cash flows could be materially adversely affected.

We may not be able to continue to develop and execute a competitive yet profitable pricing structure.

We face competition from cable and telecommunications companies that are actively targeting the home automation and monitored security market, as well as from large technology companies that are expanding into the connected home market either through the development of their own solutions or the acquisition of other companies with home automation solution offerings. This increased competition could result in pricing pressure, a shift in customer preferences towards the services of these companies, reduce our market share and make it more difficult for us to compete on brand-name recognition and reputation. Continued pricing pressure from these competitors or failure to achieve pricing based on the competitive advantages previously identified above could prevent us from maintaining competitive price points for our products and services resulting in lost customers or in our inability to attract new customers and have a material adverse effect on our business, financial condition, results of operations, and cash flows.

We face risks in acquiring and integrating customer accounts.

An element of our business strategy may involve the bulk acquisition of customer accounts. Acquisitions of customer accounts involve a number of special risks, including the possibility of unexpectedly high rates of attrition and unanticipated deficiencies in the accounts and systems acquired despite our investigations prior to acquisition. We face competition from other alarm monitoring companies, including companies that may offer higher prices and more favorable terms for customer accounts purchased, and/or lower minimum financial or operational qualification or requirements for purchased accounts. This competition could reduce the acquisition opportunities available to us, slowing our rate of growth, and/or increase the price we pay for such account acquisitions, thus reducing our return on investment and negatively impacting our revenue and results of operations. We can provide no assurance that we will be able to purchase customer accounts on favorable terms in the future.

 

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The purchase price we pay for customer accounts is affected by the recurring revenue historically generated by such accounts, as well as several other factors, including the level of competition, our prior experience with accounts purchased in bulk from specific sellers, the geographic location of accounts, the number of accounts purchased, the customers’ credit scores, and the type of security or automation equipment or platform used by the customers. In purchasing accounts, we have relied on management’s knowledge of the industry, due diligence procedures, and representations and warranties of bulk account sellers. We can provide no assurance that in all instances the representations and warranties made by bulk account sellers are true and complete or, if the representations and warranties are inaccurate, that we will be able to recover damages from bulk account sellers in an amount sufficient to fully compensate us for any resulting losses. If any of these risks materialize, our business, financial condition, results of operations, and cash flows could be materially adversely affected.

Shifts in our customers’ choice of, or telecommunications providers’ support for, telecommunications services and equipment could materially adversely affect our business and require significant capital expenditures.

Certain elements of our operating model have historically relied on our customers’ continued selection and use of traditional land-line telecommunications to transmit alarm signals to our monitoring centers. There is a growing trend for customers to switch to the exclusive use of cellular, satellite, or Internet communication technology in their homes and businesses, and telecommunication providers may discontinue their land-line services in the future. Some older installed security systems use technology that is not compatible with the newer cellular, satellite or Internet communication technology, such as 3G and 4G networks, and will not be able to transmit alarm signals on these networks. The discontinuation of land-line, older cellular technologies, and any other services by telecommunications providers, and the switch by customers to the exclusive use of cellular, satellite, or Internet communication technology, may require system upgrades to alternative, and potentially more expensive, technologies to transmit alarm signals and for systems to function properly. This could increase our customer revenue attrition and slow new customer generation. In January 2017, most major wireless network providers had fully retired their 2G networks. In order to maintain our customer base that uses security and automation system components that communicate over 2G networks, we substantially completed a conversion program to replace 2G cellular technology used in many of our security systems at little or no additional cost to our customers. Certain existing subscribers chose not to replace their 2G cellular technology, thereby increasing our attrition rates. We continue to incur additional costs associated with upgrades and modifications to subscribers’ cellular technology resulting from the retirement of 2G networks. In December 2017, as part of the Federal Communication Commission’s (the “FCC”) efforts to facilitate the transition from traditional copper-based wireline networks to IP-based fiber broadband networks, the FCC repealed its rules requiring telecommunications carriers to provide direct advanced public notice to consumers of the retirement of copper-based wireline networks used for traditional land-line telecommunications. Many of our customers rely solely on copper-based telephone networks to transmit alarm signals from their premises to our monitoring stations. In response to changes to existing network technology such as the eventual retirement of 3G and copper-based wireline networks, we will be required to upgrade or implement other new technologies in the future, including offering to subsidize the replacement of customers’ outdated systems at our expense. The FCC’s changes to copper-based wireline network retirement rules could lead to customer confusion and impede our ability to timely transfer customers to new network technologies. Any technology upgrades or implementations could require significant capital expenditures, may increase our attrition rates, and may also divert management’s attention and other important resources away from our customer service and sales efforts for new customers. In the future, we may not be able to successfully implement new technologies or adapt existing technologies to changing market demands. If we are unable to adapt timely to changing technologies, market conditions or customer preferences, our business, financial condition, results of operations, and cash flows could be materially adversely affected.

In addition, we use broadband Internet access service, including video streaming services, to support our product offerings, and we may choose to implement broadband Internet access in our intrusion panels as a communications option for our services. Video streaming services use significantly more bandwidth than non-video Internet activity. As utilization rates and penetration of these services increases, our high-speed

 

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customers may use more bandwidth than in the past. If this occurs, we could be required to make significant capital expenditures to increase network capacity in order to avoid service disruptions or reduced capacity for customers and potentially increase our cost for the corresponding network usage. See “Our future growth is dependent upon our ability to keep pace with rapid technological and industry changes in order to develop or acquire new technologies for our products and service introductions that achieve market acceptance with acceptable margins.”

Unauthorized use of our brand names by third parties, and the expenses incurred in developing and preserving the value of our brand names, may materially adversely affect our business.

Our brand names are critical to our success. Unauthorized use of our brand names by third parties may materially adversely affect our business and reputation, including the perceived quality and reliability of our products and services. We rely on trademark law, company brand name protection policies, and agreements with our employees, customers, business partners, and others to protect the value of our brand names. Despite our precautions, we cannot provide assurance that those procedures are sufficiently effective to protect against unauthorized third-party use of our brand names. In particular, in recent years, various third parties have used our brand names to engage in fraudulent activities, including unauthorized telemarketing conducted in our names to induce our existing customers to switch to competing monitoring service providers, lead generation activities for competitors, and obtaining personally identifiable or personal financial information. Third parties sometimes use our names and trademarks, or other confusingly similar variances thereof, in other contexts that may impact our brands. We may not be successful in detecting, investigating, preventing, or prosecuting all unauthorized third-party use of our brand names. Future litigation with respect to such unauthorized use could also result in substantial costs and diversion of our resources. These factors could materially adversely affect our reputation, business, financial condition, results of operations and cash flows.

Third parties hold rights to certain key brand names outside of the United States and Canada.

Our success depends in part on our continued ability to use trademarks in order to capitalize on our brands’ name-recognition and to further develop our brands in U.S. and Canadian markets, as well as in other international markets should we choose to expand our business in the future. Not all of the trademarks that are used by our brands have been registered in all of the countries in which we may do business in the future, and some trademarks may never be registered in any or all of these countries. Rights in trademarks are generally territorial in nature and are obtained on a country-by-country basis by the first person to obtain protection through use or registration in that country in connection with specified products and services. Some countries’ laws do not protect unregistered trademarks at all, or make them more difficult to enforce, and third parties may have filed for “ADT,” “ASG SECURITY,” “PROTECTION ONE,” or similar marks in countries where we have not registered these brands as trademarks. Accordingly, we may not be able to adequately protect our brands everywhere in the world, and use of such brands may result in liability for trademark infringement, trademark dilution, or unfair competition.

In particular, certain trademarks associated with the ADT brand, including “ADT” and the blue octagon, are owned in all territories outside of the United States and Canada by Johnson Controls International plc, which recently acquired and merged with and into Tyco International plc (“Johnson Controls” or “Tyco”). In certain instances, such trademarks are licensed in certain territories outside the United States and Canada by Johnson Controls to third parties. Pursuant to a trademark agreement entered into between The ADT Corporation and Tyco (the “Tyco Trademark Agreement”) in connection with the separation of The ADT Corporation from Tyco in 2012, which endures in perpetuity, The ADT Corporation and its affiliates are prohibited from ever registering, attempting to register or using such trademarks outside the United States (including Puerto Rico and the US Virgin Islands) and Canada, and The ADT Corporation may not challenge Tyco’s rights in such trademarks outside the United States and Canada. Additionally, under the Tyco Trademark Agreement, each of The ADT Corporation and Tyco has the right to propose new secondary source indicators (e.g., ‘Pulse’) to become designated source indicators of such party. To qualify as a designated source indicator, certain specified criteria

 

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must be met, including that the indicator has not been used as a material indicator by the non-proposing party or its affiliates over the previous seven years. If The ADT Corporation were unable to object to Tyco’s proposal for a new designated source indicator by successfully asserting that the new indicator did not meet the requisite criteria, The ADT Corporation would subsequently be precluded from using, registering, or attempting to register such indicator in any jurisdiction, including the United States and Canada, whether alone or in connection with an ADT brand. While The ADT Corporation and Tyco are each required to (i) adhere to specified quality control standards with respect to the use of the subject trademarks in their respective jurisdictions, (ii) cooperate with respect to enforcement in their respective territories, and (iii) cooperate to avoid and correct any potential or actual customer confusion over the proper ownership of the ADT brand in any particular territory, it is nonetheless possible that dilution, infringement, or customer confusion may result from the arrangement.

Infringement of our intellectual property rights could negatively affect us.

We rely on a combination of patents, copyrights, trademarks, trade secrets, confidentiality provisions, and licensing arrangements to establish and protect our proprietary rights. We cannot guarantee, however, that the steps we have taken to protect our intellectual property rights will be adequate to prevent infringement of our rights or misappropriation of our intellectual property or technology. Adverse events affecting the use of our trademarks could affect our use of those trademarks and negatively impact our brands. In addition, if we expand our business outside of the United States and Canada in the future, effective patent, trademark, copyright, and trade secret protection may be unavailable or limited in some jurisdictions. Furthermore, while we enter into confidentiality agreements with certain of our employees and third parties to protect our intellectual property, such confidentiality agreements could be breached or otherwise may not provide meaningful protection for our confidential information, trade secrets and know-how related to the design, manufacture, or operation of our products and services. If it becomes necessary for us to resort to litigation to protect our intellectual property rights, any proceedings could be burdensome and costly, and we may not prevail. Further, adequate remedies may not be available in the event of an unauthorized use or disclosure of our confidential information, trade secrets, or know-how. If we fail to successfully enforce our intellectual property rights, our competitive position could suffer, which could materially adversely affect our business, financial condition, results of operations, and cash flows.

Allegations that we have infringed the intellectual property rights of third parties could negatively affect us.

We may be subject to claims of intellectual property infringement by third parties. In particular, as our services have expanded, we have become subject to claims alleging infringement of intellectual property, including litigation brought by special purpose or so-called “non-practicing” entities that focus solely on extracting royalties and settlements by alleging infringement and threatening enforcement of patent rights. These companies typically have little or no business or operations, and there are few effective deterrents available to prevent such companies from filing patent infringement lawsuits against us. In addition, we rely on licenses and other arrangements with third parties covering intellectual property related to the products and services that we market. Notwithstanding these arrangements, we could be at risk for infringement claims from third parties. Additionally, while The ADT Corporation is party to a patent agreement with Tyco, which generally includes a covenant by Tyco not to bring an action against The ADT Corporation alleging that the manufacture, use, or sale of any products or services in existence as of the date of The ADT Corporation’s separation from Tyco infringes any patents owned or controlled by Tyco and used by The ADT Corporation on or prior to such date, such agreement does not protect the Company, including The ADT Corporation, from infringement claims for future product or service expansions. In general, if a court determines that one or more of our services infringes on intellectual property rights owned by others, we may be required to cease marketing those services, to obtain licenses from the holders of the intellectual property at a material cost or on unfavorable terms, or to take other potentially costly or burdensome actions to avoid infringing third-party intellectual property rights. The litigation process is costly and subject to inherent uncertainties, and we may not prevail in litigation matters regardless of the merits of our position. Intellectual property lawsuits or claims may become extremely disruptive if the plaintiffs succeed in blocking the trade of our products and services and may have a material adverse effect on our business, financial condition, results of operations, and cash flows.

 

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We are subject to credit risk and other risks associated with our dealers.

Under the standard alarm monitoring contract acquisition agreements that we enter into with our dealers, if a subscriber terminates their service with us during the first twelve months after the alarm monitoring contract has been acquired, the dealer is typically required to elect between substituting another alarm monitoring contract for the terminating alarm monitoring contract or compensating us in an amount based on the original acquisition cost of the terminating alarm monitoring contract. We are subject to the risk that dealers will breach their obligation to provide a comparable substitute alarm monitoring contract for a terminating alarm monitoring contract or compensate us in an amount based on the original acquisition cost of the terminating alarm monitoring contract. Although we withhold specified amounts from the acquisition cost paid to dealers for alarm monitoring contracts (“holdback”), which may be used to satisfy or offset these and other applicable dealer obligations under the alarm monitoring contract acquisition agreements, there can be no guarantee that these amounts will be sufficient to satisfy or offset the full extent of the default by a dealer of its obligations under its agreement. If the holdback does prove insufficient to cover dealer obligations, we are also subject to the credit risk that the dealers may not have sufficient funds to compensate us or that any such dealer will otherwise breach its obligation to compensate us for a terminating alarm monitoring contract. To the extent defaults by dealers of the obligations under their agreements are greater than anticipated, our business, financial condition, and results of operations could be materially adversely affected.

Our dealers may expose us to additional risks.

We are subject to reputational risks that may arise from the actions of our dealers and their employees, independent contractors, and other agents that are wholly or partially beyond our control, such as violations of our marketing policies and procedures as well as any failure to comply with applicable laws and regulations. If our dealers engage in marketing practices that are not in compliance with local laws and regulations, we may be in breach of such laws and regulations, which may result in regulatory proceedings and potential penalties that could materially impact our financial results, and results of operations. In addition, unauthorized activities in connection with sales efforts by employees, independent contractors, and other agents of our dealers, including calling consumers in violation of the Telephone Consumer Protection Act and predatory door-to-door sales tactics and fraudulent misrepresentations, could subject us to governmental investigations and class action lawsuits for, among others, false advertising and deceptive trade practice damage claims, against which we will be required to defend. Such defense efforts will be costly and time-consuming, there can be no assurance that such defense efforts will be successful, and could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

We may be subject to securities class actions which may harm our business and results of operations.

We have previously been subject to securities class actions in connection with issues that arose prior to the ADT Acquisition while The ADT Corporation was still a publicly traded company. Following certain periods of volatility in the market price of The ADT Corporation’s securities, The ADT Corporation became the subject of securities litigation as described in The ADT Corporation’s filings with the SEC. We may be subject to additional suits in the future in connection with issues that may have arisen prior to the ADT Acquisition while The ADT Corporation was still a publicly traded company. This type of litigation may be lengthy, and may result in substantial costs and a diversion of management’s attention and resources. Results cannot be predicted with certainty and an adverse outcome in such litigation could result in monetary damages or injunctive relief that could materially adversely affect our business, results of operations, financial condition and cash flows.

In addition, we are currently and may in the future become subject to legal proceedings and commercial or contractual disputes. These are typically claims that arise in the normal course of business including, without limitation, commercial or contractual disputes with our suppliers, intellectual property matters, third party liability, including product liability claims and employment claims. There is a possibility that such claims may have a material adverse effect on our results of operations that is greater than we anticipate and/or negatively affect our reputation.

 

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Increasing government regulation of telemarketing, email marketing, door-to-door sales and other marketing methods may increase our costs and restrict the operation and growth of our business.

We rely on telemarketing, email marketing, door-to-door sales, and other marketing methods conducted internally and through third parties to generate a substantial number of leads for our business. The telemarketing and email marketing services industries are subject to an increasing amount of regulation in the United States and Canada. Regulations have been issued in the United States by the Federal Trade Commission (“FTC”) and the FCC and in Canada by the Canada Radio-television and Telecommunications Commission (“CRTC”) that place restrictions on unsolicited telephone calls to residential and wireless telephone subscribers, whether direct dial or by means of automatic telephone dialing systems, prerecorded, or artificial voice messages and telephone fax machines, and require us to maintain a “do not call” list and to train our personnel to comply with these restrictions. In the United States, the FTC regulates sales practices generally and email marketing and telemarketing specifically and has broad authority to prohibit a variety of advertising or marketing practices that may constitute “unfair or deceptive acts or practices.” Most of the statutes and regulations in the United States applicable to telemarketing and email marketing allow a private right of action for the recovery of damages or provide for enforcement by the FTC and FCC, state attorneys general, or state agencies permitting the recovery of significant civil or criminal penalties, costs and attorneys’ fees in the event that regulations are violated. In Canada, the CRTC enforces the Unsolicited Telecommunications Rules restricting unsolicited communications from telemarketers using direct dial, automatic dialing and announcing devices and fax. The CRTC also enforces the Canadian Anti-Spam Law (“CASL”), which prohibits the sending of commercial emails without prior consent of the consumer or an existing business relationship and sets forth rules governing the sending of commercial emails. Rules have been approved under CASL to allow private rights of action for the recovery of damages, which rules may come into force at any time. CASL also allows the CRTC to recover significant civil penalties, costs, and legal fees in the event that email or telemarketing regulations are violated. We strive to comply with all such applicable regulations, but provide no assurance that we, our authorized dealers or third parties that we rely on for telemarketing, email marketing, and other lead generation activities will be in compliance with all applicable regulations at all times. Although our contractual arrangements with our authorized dealers, affinity marketing partners, and other third parties generally require them to comply with all such regulations and to indemnify us for damages arising from their failure to do so, we can provide no assurance that the FTC, FCC, CRTC, private litigants, or others will not attempt to hold us responsible for any unlawful acts conducted by our authorized dealers, affinity marketing partners and other third parties or that we could successfully enforce or collect upon any indemnities. Additionally, certain FCC rulings and FTC enforcement actions may support the legal position that we may be held vicariously liable for the actions of third parties, including any telemarketing violations by our independent, third-party authorized dealers that are performed without our authorization or that are otherwise prohibited by our policies. The FCC, the FTC, and the CRTC have relied on certain actions to support the notion of vicarious liability, including but not limited to the use of the company brand or trademark, the authorization or approval of telemarketing scripts, or the sharing of consumer prospect lists. Changes in such regulations or the interpretation thereof that further restrict such activities could result in a material reduction in the number of leads for our business and could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Our business operates in a regulated industry.

Our operations and employees are subject to various federal, state, provincial, and local laws and regulations in the United States and Canada in such areas as consumer protection, occupational licensing, environmental protection, labor and employment, tax and other laws and regulations. Most states and provinces in which we operate have licensing laws directed specifically toward the security services industry. Our business relies heavily upon the use of both wireline and wireless telecommunications to communicate signals, and telecommunications companies are regulated by federal, state, provincial, and local governments.

In certain jurisdictions, we are required to obtain licenses or permits in order to comply with standards governing employee selection and training and to meet certain standards in the conduct of our business. The loss

 

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of such licenses or permits or the imposition of conditions to the granting or retention of such licenses or permits could have a material adverse effect on us. Furthermore, in certain jurisdictions, certain security systems must meet fire and building codes in order to be installed, and it is possible that our current or future products and service offerings will fail to meet such codes, which could require us to make costly modifications to our products and services or to forego marketing in certain jurisdictions.

We must also comply with numerous federal, state, provincial, and local laws and regulations that govern matters relating to our interactions with residential customers, including those pertaining to privacy and data security, consumer financial and credit transactions, home improvement contracts, warranties, and door-to-door solicitation. These laws and regulations are dynamic and subject to potentially differing interpretations, and various federal, state, provincial, and local legislative and regulatory bodies may initiate investigations, expand current laws or regulations, or enact new laws and regulations, regarding these matters. As we expand our product and service offerings and enter into new jurisdictions, we may be subject to more expansive regulation and oversight. For example, as a result of our acquisition of DataShield, we are expanding our cybersecurity services and exploring markets outside of United States and Canada, and we will need to identify and comply with laws and regulations that apply to such services in the relevant jurisdictions. In addition, any financing or lending activity will subject us to various rules and regulations, such as the U.S. federal Truth in Lending Act and analogous U.S. state and Canadian federal and provincial legislation.

Changes in these laws or regulations or their interpretation could dramatically affect how we do business, acquire customers, and manage and use information we collect from and about current and prospective customers and the costs associated therewith. We strive to comply with all applicable laws and regulations relating to our interactions with all customers. It is possible, however, that these requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices.

Changes in laws or regulations could require us to change the way we operate or to utilize resources to maintain compliance, which could increase costs or otherwise disrupt operations. In addition, failure to comply with any applicable laws or regulations could result in substantial fines or revocation of our operating permits and licenses. If laws and regulations were to change or if we or our products failed to comply with them, our business, financial condition, results of operations, and cash flows could be materially adversely affected.

We could be assessed penalties for false alarms.

Some local governments impose assessments, fines, penalties, and limitations on either customers or the alarm companies for false alarms. Certain municipalities have adopted ordinances under which both permit and alarm dispatch fees are charged directly to the alarm companies. Our alarm service contracts generally allow us to pass these charges on to customers, but we may not be able to collect these charges if customers are unwilling or unable to pay them and such outcome may materially and adversely affect our operating results. Furthermore, our customers may elect to terminate or not renew our services if assessments, fines, or penalties for false alarms become significant. If more local governments were to impose assessments, fines, or penalties, our customer base, financial condition, results of operations, and cash flows could be materially adversely affected.

Police departments could refuse to respond to calls from monitored security service companies.

Police departments in certain U.S. and Canadian jurisdictions do not respond to calls from monitored security service companies unless certain conditions are met, such as video or other verification or eyewitness accounts of suspicious activities, either as a matter of policy or by local ordinance. We offer video verification in certain jurisdictions which increases costs of some security systems, which may increase costs to customers. As an alternative to video cameras in some jurisdictions, we have offered affected customers the option of receiving response from private guard companies, at least as an initial means to verify suspicious activities. In most cases this is accomplished through contracts with private guard companies, which increases the overall cost to customers. If more police departments were to refuse to respond or be prohibited from responding to calls from

 

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monitored security service companies unless certain conditions are met, such as video or other verification or eyewitness accounts of suspicious activities, our ability to attract and retain customers could be negatively impacted and our business, financial condition, results of operations, and cash flows could be materially adversely affected.

Adoption of statutes and governmental policies purporting to characterize certain of our charges as unlawful may adversely affect our business.

Generally, if a customer cancels their contract with us prior to the end of the initial contract term, other than in accordance with the contract, we may charge the customer an early cancellation fee. Consumer protection policies or legal precedents could be proposed or adopted to restrict the charges we can impose upon contract cancellation. Such initiatives could compel us to increase our prices during the initial term of our contracts and consequently lead to less demand for our services and increased attrition. Adverse judicial determinations regarding these matters could cause us to incur legal exposure to customers against whom such charges have been imposed and expose us to the risk that certain of our customers may seek to recover such charges through litigation, including class action lawsuits. In addition, the costs of defending such litigation and enforcement actions could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

In the absence of regulation, certain providers of Internet access may block our services or charge their customers more for using our services, or government regulations relating to the Internet could change, which could materially adversely affect our revenue and growth.

Our interactive and home automation services are primarily accessed through the Internet and our security monitoring services, including those utilizing video streaming, are increasingly delivered using Internet technologies. Users who access our services through mobile devices, such as smart phones, laptops, and tablet computers must have a high-speed Internet connection, such as Wi-Fi, 3G, or 4G, to use our services. Currently, this access is provided by telecommunications companies and Internet access service providers that have significant and increasing market power in the broadband and Internet access marketplace. In the absence of government regulation, these providers could take measures that affect their customers’ ability to use our products and services, such as degrading the quality of the data packets we transmit over their lines, giving our packets low priority, giving other packets higher priority than ours, blocking our packets entirely, or attempting to charge their customers more for using our products and services. To the extent that Internet service providers implement usage-based pricing, including meaningful bandwidth caps, or otherwise try to monetize access to their networks, we could incur greater operating expenses and customer acquisition and retention could be negatively impacted. Furthermore, to the extent network operators were to create tiers of Internet access service and either charge us for or prohibit our services from being available to our customers through these tiers, our business could be negatively impacted. Some of these providers also offer products and services that directly compete with our own offerings, which could potentially give them a competitive advantage. While actions like these by Canadian providers would violate the net neutrality rules adopted by the CRTC described below, the FCC recently rolled back net neutrality protections in the United States as described below and most other countries have not adopted formal net neutrality or open Internet rules.

In 2009, the CRTC adopted Internet traffic management practices aimed at providing stronger net neutrality protections, and preventing Canadian Internet service providers from engaging in traffic shaping that are “unjustly discriminatory” or “unduly preferential.” On February 26, 2015, the FCC reclassified broadband Internet access services in the United States as a telecommunications service subject to some elements of common carrier regulation, including the obligation to provide service on just and reasonable terms, and adopted specific net neutrality rules prohibiting the blocking, throttling or “paid prioritization” of content or services. However, in May 2017, the FCC issued a notice of proposed rulemaking to roll back net neutrality rules and return to a “light touch” regulatory framework. Consistent with this notice, on December 14, 2017, the FCC once again classified broadband Internet access service as an unregulated information service and repealed the specific

 

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rules against blocking, throttling or “paid prioritization” of content or services. It retained a rule requiring Internet service providers to disclose their practices to consumers, entrepreneurs and the FCC. A number of parties have already stated they would appeal this order and it is possible Congress may adopt legislation restoring some net neutrality requirements. The elimination of net neutrality rules and any changes to the rules could affect the market for broadband Internet access service in a way that impacts our business, for example, if Internet access providers provide better Internet access for their own alarm monitoring or interactive services that compete with ADT’s services or limit the bandwidth and speed for the transmission of data from ADT equipment, thereby depressing demand for our services or increasing the costs of services we provide.

Goodwill and other identifiable intangible assets represent a significant portion of our total assets, and we may never realize the full value of our intangible assets.

As of September 30, 2017, we had approximately $13 billion of goodwill and identifiable intangible assets, excluding deferred financing costs. Goodwill and other identifiable intangible assets are recorded at fair value on the date of acquisition. We review such assets for impairment at least annually. Impairment may result from, among other things, deterioration in performance, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of or affect the products and services we offer, challenges to the validity of certain registered intellectual property, reduced sales of certain products or services incorporating registered intellectual property, increased attrition, and a variety of other factors. The amount of any quantified impairment must be expensed immediately as a charge to results of operations. Depending on future circumstances, it is possible that we may never realize the full value of our intangible assets. Any future determination of impairment of goodwill or other identifiable intangible assets could have a material adverse effect on our financial condition and results of operations.

We have significant deferred tax assets, and any impairments of or valuation allowances against these deferred tax assets in the future could materially adversely affect our results of operations, financial condition, and cash flows.

We are subject to income taxes in the United States and Canada and in various state, territorial, provincial, and local jurisdictions. The amount of income taxes we pay is subject to our interpretation and application of tax laws in jurisdictions in which we file. Changes in current or future laws or regulations, the imposition of new or changed tax laws or regulations or new related interpretations by taxing authorities in the jurisdictions in which we file could materially adversely affect our financial condition results of operations, and cash flows.

Our future consolidated federal and state income tax liability may be significantly reduced by tax credits and tax net operating loss (“NOL”) carryforwards available to us under the applicable tax codes. Each of ASG, Protection One, and The ADT Corporation had material NOL carryforwards prior to our acquisition of such entity. Our ability to fully utilize these deferred tax assets, however, may be limited for various reasons, such as if projected future taxable income becomes insufficient to recognize the full benefit of our NOL carryforwards prior to their expirations. If a corporation experiences an “ownership change,” Sections 382 and 383 of the Code (as defined herein) provide annual limitations with respect to the ability of a corporation to utilize its NOL (as well as certain built-in losses) and tax credit carryforwards against future U.S. taxable income. In general, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of the corporation by more than 50 percentage points over a three-year testing period.

Our acquisitions of The ADT Corporation, ASG, and Protection One resulted in an ownership change of each of those entities. Our ability to fully utilize the NOL carryforwards of those entities is subject to the limitations under Section 382 of the Code. We do not expect that this limitation will impact our ability to utilize these tax attributes (NOLs). However, it is possible that future changes in the direct or indirect ownership in our equity might result in additional ownership changes that may trigger the imposition of limitations under Section 382 of the Code with respect to these tax attributes.

 

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In addition, audits by the U.S. Internal Revenue Service (“IRS”) as well as state, territorial, provincial, and local tax authorities could reduce our tax attributes and/or subject us to tax liabilities if tax authorities make adverse determinations with respect to our NOL or tax credits carryforwards. The ADT Corporation is currently subject to federal income tax audits covering the 2010-2012 tax years (not including a post-Tyco separation IRS audit for 2013). During the third quarter of 2017, Tyco was notified by the IRS of its intent to disallow amortization deductions claimed on the Company’s $987 million trademark. Tyco intends to challenge this decision before the Appeals Division of the IRS. If Tyco were to lose the dispute, it would result in minimal cash tax liabilities to ADT, no impact to the Company’s income statement, but material loss to the Company’s NOL deferred tax asset. The Company strongly disagrees with the IRS’s position and maintains that the deductions claimed are appropriate. Tyco has advised the Company that they intend to vigorously defend its originally filed tax return position. There can be no assurance that adjustments that would reduce The ADT Corporation’s tax attributes or otherwise affect The ADT Corporation’s tax liability will not be proposed by the IRS with respect to these tax years. Further, any future disallowance of some or all of our tax credits or NOL carryforwards as a result of legislative change could materially adversely affect our tax obligations. Accordingly, there can be no assurance that in the future we will not be subject to increased taxation or experience limitations with respect to recognizing the benefits of our NOL carryforwards and other tax attributes. Any such increase in taxation or limitation of benefits could have a material adverse effect on our financial condition, results of operations, or cash flows. Finally, in 2016, the IRS commenced an audit of The ADT Corporation related to the 2013 tax year. The issue discussed above related to the amortization of the Company’s trademark being disputed by the IRS and Tyco would have a carryforward impact into ADT’s 2013 tax year and forward. As of the date of this prospectus, the Company does not believe this audit will impair The ADT Corporation tax attributes.

U.S. federal income tax reform could adversely affect us.

On December 22, 2017, President Trump signed into law H.R. 1, originally known as the “Tax Cuts and Jobs Act,” which legislation significantly reforms the Internal Revenue Code of 1986, as amended. The new legislation, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest, allows for the expensing of capital expenditures, and puts into effect the migration from a “worldwide” system of taxation to a territorial system. We do not expect tax reform to have a material impact to our projection of minimal cash taxes or to our NOLs. Our net deferred tax assets and liabilities will be revalued at the newly enacted U.S. corporate rate, and the impact will be recognized in our tax expense in the year of enactment. We continue to examine the impact this tax reform legislation may have on our business. The impact of this tax reform on holders of our common shares is uncertain and could be adverse. This prospectus does not discuss any such tax legislation or the manner in which it might affect purchasers of our common stock. We urge our stockholders to consult with their legal and tax advisors with respect to any such legislation and the potential tax consequences of investing in our common stock.

We are exposed to greater risks of liability for employee acts or omissions or system failures than may be inherent in other businesses.

If a customer or third party believes that it has suffered harm to person or property due to an actual or alleged act or omission of one of our authorized dealers, employees, independent contractors, or other agents, or a security or interactive system failure, they (or their insurers) may pursue legal action against us, and the cost of defending the legal action and of any judgment against us could be substantial. In particular, because our products and services are intended to help protect lives and real and personal property, we may have greater exposure to litigation risks than businesses that provide other commercial, consumer, and small business products and services. Our standard customer contracts contain a series of risk-mitigation provisions that serve to limit our liability and/or limit a claimant’s ability to pursue legal action; however, in the event of litigation with respect to such matters, it is possible that these risk-mitigation provisions may be deemed not applicable or unenforceable and, regardless of the ultimate outcome, we may incur significant costs of defense that could materially adversely affect our business, financial condition, results of operations, and cash flows, and there can be no assurance that any such defense efforts will be successful.

 

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If we are unable to recruit and retain key personnel, including an effective sales force, our ability to manage our business could be materially and adversely affected.

Our success will depend in part upon the continued services of our management team and sales representatives. Our ability to recruit and retain key personnel for management positions and effective sales representatives could be impacted adversely by the competitive environment for management and sales talent. The loss, incapacity, or unavailability for any reason of key members of our management team and the inability or delay in hiring new key employees, including sales force personnel, could materially adversely affect our ability to manage our business and our future operational and financial results.

The loss of our senior management could disrupt our business.

Our senior management is important to the success of our business because there is significant competition for executive personnel with experience in the security and home automation industry. As a result of this need and the competition for a limited pool of industry-based executive experience, we may not be able to retain our existing senior management. In addition, we may not be able to fill new positions or vacancies created by expansion or turnover. Moreover, we do not currently have and do not expect to have in the future “key person” insurance on the lives of any member of our senior management. The loss of any member of our senior management team without retaining a suitable replacement (either from inside or outside our existing management team) could have a material adverse effect on our business, financial condition, and results of operations.

Adverse developments in our relationship with our employees could materially and adversely affect our business, results of operations, and financial condition.

As of September 30, 2017, approximately 1,700 of our employees at various sites, or approximately 10% of our total workforce, were represented by unions and covered by collective bargaining agreements. We are currently party to approximately 39 collective bargaining agreements in the United States and Canada. Almost one-third of these agreements are up for renewal in any given year. We cannot predict the outcome of negotiations of the collective bargaining agreements covering our employees. If we are unable to reach new agreements or renew existing agreements, employees subject to collective bargaining agreements may engage in strikes, work slowdowns, or other labor actions, which could materially disrupt our ability to provide services. New labor agreements or the renewal of existing agreements may impose significant new costs on us, which could materially adversely affect our financial condition and results of operations in the future.

We may be required to make indemnification payments relating to The ADT Corporation’s separation from Tyco.

In connection with its separation from Tyco, The ADT Corporation entered into a tax sharing agreement (the “2012 Tax Sharing Agreement”) with Tyco and Pentair Ltd., formerly Tyco Flow Control International, Ltd. (“Pentair”), which governs the rights and obligations of The ADT Corporation, Tyco, and Pentair for certain pre-separation tax liabilities. The 2012 Tax Sharing Agreement provides that The ADT Corporation, Tyco, and Pentair will share (i) certain pre-separation income tax liabilities that arise from adjustments made by tax authorities to The ADT Corporation’s, Tyco’s, and Pentair’s U.S. and certain non-U.S. income tax returns, and (ii) payments required to be made by Tyco in respect of a tax sharing agreement it entered into in connection with a 2007 spinoff transaction (collectively, “Shared Tax Liabilities”). Tyco is responsible for the first $500 million of Shared Tax Liabilities. The ADT Corporation and Pentair share 58% and 42%, respectively, of the next $225 million of Shared Tax Liabilities. The ADT Corporation, Tyco, and Pentair share 27.5%, 52.5%, and 20.0%, respectively, of Shared Tax Liabilities above $725 million. In addition, The ADT Corporation retained sole liability for certain specified U.S. and non-U.S. income and non-income tax items. In 2010, The ADT Corporation acquired Broadview Security, a business formerly owned by The Brink’s Company. In connection with Broadview Security’s separation from The Brink’s Company, in 2008 it entered into a tax sharing agreement, which allocates historical and separation related tax liabilities between Broadview Security

 

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and The Brink’s Company (the “2008 Tax Sharing Agreement”). Under the 2012 Tax Sharing Agreement, The ADT Corporation bears 100% of all tax liabilities related to Broadview Security, including any tax liability that may be asserted under the 2008 Tax Sharing Agreement. To our knowledge, no such tax liability has been asserted to date.

Under the terms of the 2012 Tax Sharing Agreement, Tyco controls all U.S. income tax audits relating to the pre-separation taxable period (including the separation itself). Tyco has been subject to federal income tax audits for the 1997—2009 tax years, and has resolved all aspects of its disputes before the U.S. Tax Court and before the Appeals Division of the IRS for audit cycles 1997 through 2009. The resolution had an immaterial impact on the Company’s financial position, results of operations, and cash flows. The 2010 through 2012 tax years are still under review with the IRS.

In addition, under the terms of the 2012 Tax Sharing Agreement, in the event the distribution of The ADT Corporation’s common shares to the Tyco stockholders, the distribution of Pentair common shares to the Tyco stockholders, or certain internal transactions undertaken in connection therewith were determined to be taxable as a result of actions taken by The ADT Corporation, Pentair, or Tyco after the distributions, the party responsible for such failure would be responsible for all taxes imposed on The ADT Corporation, Pentair, or Tyco as a result thereof. If such failure is not the result of actions taken after the distributions by The ADT Corporation, Pentair, or Tyco, then The ADT Corporation, Pentair, and Tyco would be responsible for any distribution taxes imposed on The ADT Corporation, Pentair, or Tyco as a result of such determination in the same manner and in the same proportions as the Shared Tax Liabilities.

See the Notes to the financial statements included elsewhere in this prospectus for additional discussion of the Tax Sharing Agreement and the status of the Company’s income tax audits.

We may be subject to liability for obligations of The Brink’s Company under the Coal Act or other coal-related liabilities of The Brink’s Company.

On May 14, 2010, The ADT Corporation acquired Broadview Security, a business formerly owned by The Brink’s Company. Under the Coal Industry Retiree Health Benefit Act of 1992, as amended (the “Coal Act”), The Brink’s Company and its majority-owned subsidiaries as of July 20, 1992 (including certain legal entities acquired in the Broadview Security acquisition) are jointly and severally liable with certain of The Brink’s Company’s other current and former subsidiaries for health care coverage obligations provided for by the Coal Act. A Voluntary Employees’ Beneficiary Association (“VEBA”) trust has been established by The Brink’s Company to pay for these liabilities, although the trust may have insufficient funds to satisfy all future obligations. We cannot rule out the possibility that certain legal entities acquired in the Broadview Security acquisition may also be liable for other liabilities in connection with The Brink’s Company’s former coal operations. At the time of the separation of Broadview Security from The Brink’s Company in 2008, Broadview Security entered into an agreement pursuant to which The Brink’s Company agreed to indemnify it for any and all liabilities and expenses related to The Brink’s Company’s former coal operations, including any health care coverage obligations. The Brink’s Company has agreed that this indemnification survives The ADT Corporation’s acquisition of Broadview Security. We in turn agreed to indemnify Tyco for such liabilities in our separation from it. We have evaluated Broadview Security’s potential liability under the Coal Act and otherwise with respect to The Brink’s Company’s former coal operations as a contingency in light of all known facts, including the funding of the VEBA, indemnification provided by The Brink’s Company and the absence of any such claims against us to date. We have concluded that no accrual is necessary due to the existence of the indemnification and our belief that The Brink’s Company and VEBA will be able to satisfy all future obligations under the Coal Act and any other coal-related liabilities of The Brink’s Company. However, if The Brink’s Company and the VEBA are unable to satisfy all such obligations, we could be held liable, which could have a material adverse effect on our financial condition, results of operations and cash flows.

 

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Risks Related to our Indebtedness

Our substantial indebtedness could materially adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, and prevent us from making debt service payments.

As of September 30, 2017, on a consolidated basis, we had $10.4 billion face value of outstanding indebtedness (excluding capital leases), and our estimated debt service (including interest and non-discretionary principal repayments) is $650 million for 2017. Additionally, we had $772 million accumulated stated value of the Koch Preferred Securities and our estimated dividend obligation is $84 million for 2017.

During the nine months ended September 30, 2017, excluding borrowings and payments under our Revolving Credit Facilities, our cash flow used for debt service totaled $447 million, which includes scheduled quarterly principal payments of the First Lien Term B-1 Loan of $18 million, interest payments on our debt of $388 million, and dividend payments of $41 million on the Koch Preferred Securities. Also during the nine months ended September 30, 2017, our cash flows from operating activities totaled $1,262 million, which includes interest paid of $429 million. As such, our cash flows from operating activities (before giving effect to the payment of interest) amounted to $1,691 million. Cash payments used to service our debt represented approximately 26% of our net cash flows from operating activities (before giving effect to the payment of interest). Furthermore, we repaid $140 million of borrowings under our Revolving Credit Facilities and made $4 million of interest payment thereunder during the nine months ended September 30, 2017.

During 2016, excluding borrowings and payments under our Revolving Credit Facilities, our cash flow used for debt service totaled $698 million, which includes voluntary prepayments of our then outstanding Second Lien Term B Loan of $260 million, scheduled quarterly principal payments of the First Lien Term B-1 Loan of $10 million, interest payments on our debt of $375 million, and dividend payments of $53 million on the Koch Preferred Securities. Also during 2016, our cash flows from operating activities totaled $618 million, which includes interest paid of $428 million. As such, our cash flows from operating activities (before giving effect to the payment of interest) amounted to $1,046 million. Cash payments used to service our debt represented approximately 67% of our cash flows from operating activities (before giving effect to the payment of interest). Furthermore, we borrowed $210 million and repaid $92 million of borrowings under our Revolving Credit Facilities and made $3 million of interest payment thereunder during the year ended December 31, 2016. Refer to Note 4 and Note 5 to our unaudited and audited consolidated financial statements, respectively, included elsewhere in this prospectus and “Description of Material Indebtedness” for details of our debt outstanding and related restrictive covenants.

Our substantial indebtedness and the restrictive covenants under the agreements governing such indebtedness could:

 

    limit our ability to borrow money for our working capital, capital expenditures, debt service requirements, strategic initiatives, or other purposes;

 

    make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the agreements governing our indebtedness;

 

    require us to dedicate a substantial portion of our cash flow from operations to the repayment of our indebtedness, thereby reducing funds available to us for other purposes;

 

    limit our flexibility in planning for, or reacting to, changes in our operations or business;

 

    make us more highly leveraged than some of our competitors, which may place us at a competitive disadvantage;

 

    make us more vulnerable to downturns in our business or the economy;

 

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    restrict us from making strategic acquisitions, engaging in development activities, introducing new technologies, or exploiting business opportunities;

 

    cause us to make non-strategic divestitures;

 

    limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds or dispose of assets; or

 

    expose us to the risk of increased interest rates, as certain of our borrowings are at variable rates of interest.

In addition, the agreements governing our indebtedness contain restrictive covenants that may limit our ability to engage in activities that may be in our long-term best interest. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of substantially all of our indebtedness.

Despite our substantial indebtedness, we may still be able to incur significantly more debt, which could intensify the risks associated with our substantial indebtedness.

We and our subsidiaries may be able to incur substantial indebtedness in the future. Although the terms of the agreements governing our indebtedness contain certain restrictions on our and our subsidiaries’ ability to incur additional indebtedness, these restrictions are subject to a number of important qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also will not prevent us from incurring obligations that do not constitute indebtedness. Additionally, the covenants under any future debt instruments could allow us to incur a significant amount of additional indebtedness. The more leveraged we become, the more we, and in turn our security holders, will be exposed to certain risks described above under “—Our substantial indebtedness could materially adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, and prevent us from making debt service payments.”

We may not be able to generate sufficient cash to service all of our indebtedness and to fund our working capital and capital expenditures, and may be forced to take other actions to satisfy our obligations under our indebtedness that may not be successful.

Our ability to satisfy our debt obligations depends upon, among other things:

 

    our future financial and operating performance (including the realization of any cost savings described herein), which will be affected by prevailing economic, industry, and competitive conditions and financial, business, legislative, regulatory and other factors, many of which are beyond our control; and

 

    our future ability to borrow under our Revolving Credit Facilities, the availability of which depends on, among other things, our complying with the covenants in the credit agreement governing such facilities.

We can provide no assurance that our business will generate cash flow from operations, or that we will be able to draw under our Revolving Credit Facilities or otherwise, in an amount sufficient to fund our liquidity needs.

If our cash flows and capital resources are insufficient to service our indebtedness, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital, or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business

 

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operations. In addition, the terms of existing or future debt agreements may restrict us from adopting some of these alternatives. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions for fair market value or at all. Furthermore, any proceeds that we could realize from any such dispositions may not be adequate to meet our debt service obligations then due. Our Sponsor and its affiliates have no continuing obligation to provide us with debt or equity financing. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, could result in a material adverse effect on our business, financial condition and results of operations and could negatively impact our ability to satisfy our obligations under our indebtedness.

If we cannot make scheduled payments on our indebtedness, we will be in default and holders of the Prime Notes and the ADT Notes could declare all outstanding principal and interest to be due and payable, the lenders under our Revolving Credit Facilities could terminate their commitments to loan money, our secured lenders (including the lenders under our First Lien Credit Facilities (as defined herein) and the holders of the Notes) could foreclose against the assets securing the indebtedness owing to them, and we could be forced into bankruptcy or liquidation.

If our indebtedness is accelerated, we may need to repay or refinance all or a portion of our indebtedness before maturity. There can be no assurance that we will be able to obtain sufficient funds to enable us to repay or refinance our debt obligations on commercially reasonable terms, or at all.

Our debt agreements contain restrictions that limit our flexibility.

Our debt agreements contain, and any future indebtedness of ours would likely contain, a number of covenants that impose significant operating and financial restrictions on us, including restrictions on our and our subsidiaries’ ability to, among other things:

 

    incur additional debt, guarantee indebtedness, or issue certain preferred equity interests;

 

    pay dividends on or make distributions in respect of, or repurchase or redeem, our capital stock, or make other restricted payments;

 

    prepay, redeem, or repurchase certain debt;

 

    make loans or certain investments;

 

    sell certain assets;

 

    create liens on certain assets;

 

    consolidate, merge, sell, or otherwise dispose of all or substantially all of our assets;

 

    enter into certain transactions with our affiliates;

 

    alter the businesses we conduct;

 

    enter into agreements restricting our subsidiaries’ ability to pay dividends; and

 

    designate our subsidiaries as unrestricted subsidiaries.

As a result of these covenants, we will be limited in the manner in which we conduct our business, and we may be unable to engage in favorable business activities or finance future operations or capital needs.

 

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We have pledged a significant portion of our assets as collateral under our debt agreements. If any of the holders of our indebtedness accelerate the repayment of such indebtedness, there can be no assurance that we will have sufficient assets to repay our indebtedness.

A failure to comply with the covenants under our debt agreements or any future indebtedness could result in an event of default, which, if not cured or waived, could have a material adverse effect on our business, financial condition, and results of operations. In the event of any such default, the lenders thereunder:

 

    will not be required to lend any additional amounts to us;

 

    could elect to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable; or

 

    could require us to apply all of our available cash to repay these borrowings.

Such actions by the lenders could cause cross-defaults under our other indebtedness. If we are unable to repay those amounts, our secured lenders (including the lenders under our Credit Facilities and the holders of the Prime Notes and the ADT Notes) could proceed against the collateral granted to them to secure that indebtedness.

If any of our outstanding indebtedness were to be accelerated, there can be no assurance that our assets would be sufficient to repay such indebtedness in full.

Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

Borrowings under our Credit Facilities are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on certain of our variable rate indebtedness will increase even though the amount borrowed remains the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. Assuming our Revolving Credit Facilities are fully drawn, each 0.125% change in assumed blended interest rates under the Credit Facilities would result in a $4 million change in annual interest expense on indebtedness under our Credit Facilities. We currently have entered into, and in the future we may continue to enter into, interest rate swaps that involve the exchange of floating for fixed rate interest payments in order to reduce interest rate volatility. However, we may not maintain interest rate swaps with respect to all of our variable rate indebtedness, and any such swaps may not fully mitigate our interest rate risk, may prove disadvantageous, or may create additional risks.

The certificate of designation and other definitive agreements governing the Koch Preferred Securities contain certain designations, rights, preferences, powers, restrictions and limitations that could materially and adversely affect our business, results of operations, and financial condition.

Under the certificate of designation and other definitive agreements governing the Koch Preferred Securities, the Koch Preferred Securities are required to be redeemed on May 2, 2030. Although we intend to redeem the Koch Preferred Securities in full prior to that time, if the Koch Preferred Securities remain outstanding, we will be required to redeem all remaining Koch Preferred Securities on May 2, 2030. There can be no assurance that we will have sufficient funds available to redeem in full the Koch Preferred Securities at such time.

In connection with this offering, the Company is required to deposit into a separate account (the “Segregated Account”) an amount in cash equal to at least $750 million, which may only be used by the Company to redeem the Koch Preferred Securities (in whole or in part, from time to time). In the event that the Company consummates an underwritten public offering of common stock following this offering, but prior to the date that all Koch Preferred Securities have been redeemed in full, the Company is required to increase the cash amount deposited in the Segregated Account to an amount sufficient to redeem the Koch Preferred Securities as of

 

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certain dates. The Company has agreed with the Koch Investor to maintain at all times the balance of the Segregated Account in an amount equal to at least the Minimum Segregated Account Amount (as defined in the section entitled “Description of the Koch Preferred Securities”) until the Koch Preferred Securities have been redeemed in full. In the event the Company does not maintain the Minimum Segregated Account Amount at any time, the Company will be required to redeem the Koch Preferred Securities in full. There can be no assurance that we will have sufficient funds available to redeem in full the Koch Preferred Securities at such time.

The certificate of designation and other definitive agreements governing the Koch Preferred Securities also contain certain other designations, rights, preferences, powers, restrictions, and limitations that could require us to redeem all or a portion of the Koch Preferred Securities or require that we obtain the consent of the holders of a majority of the Koch Preferred Securities before taking certain actions or entering into certain transactions. Such designations, rights, preferences, powers, restrictions, and limitations could hinder or delay our operations and materially and adversely affect our business, results of operations, and financial condition. For example, prior to the redemption of the Koch Preferred Securities in full, the Company and its subsidiaries are subject to certain affirmative and negative covenants, such as engaging in transactions with affiliates and paying dividends on our common stock, among other things, under the certificate of designation and other definitive agreements governing the Koch Preferred Securities. See “Description of the Koch Preferred Securities.”

Risks Related to this Offering and Ownership of our Common Stock

Our stock price may fluctuate significantly.

The market price of our common stock could vary significantly as a result of a number of factors, some of which are beyond our control. In the event of a drop in the market price of our common stock, you could lose a substantial part or all of your investment in our common stock. The following factors could affect our stock price:

 

    our operating and financial performance and prospects;

 

    quarterly variations in the rate of growth (if any) of our financial indicators, such as net income per share, net income and revenues;

 

    the public reaction to our press releases, our other public announcements and our filings with the SEC;

 

    strategic actions by our competitors;

 

    changes in operating performance and the stock market valuations of other companies;

 

    announcements related to litigation;

 

    our failure to meet revenue or earnings estimates made by research analysts or other investors;

 

    changes in revenue or earnings estimates, or changes in recommendations or withdrawal of research coverage, by equity research analysts;

 

    speculation in the press or investment community;

 

    sales of our common stock by us or our stockholders, or the perception that such sales may occur;

 

    changes in accounting principles, policies, guidance, interpretations, or standards;

 

    additions or departures of key management personnel;

 

    actions by our stockholders;

 

    general market conditions;

 

    domestic and international economic, legal and regulatory factors unrelated to our performance;

 

    material weakness in our internal controls over financial reporting; and

 

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    the realization of any risks described under this “Risk Factors” section, or other risks that may materialize in the future.

The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. Such litigation, if instituted against us, could result in very substantial costs, divert our management’s attention and resources and harm our business, financial condition, and results of operations.

We will incur significant costs and devote substantial management time as a result of operating as a public company.

As a public company, we will continue to incur significant legal, accounting, and other expenses. For example, we will be required to comply with certain of the requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC, and the rules of the NYSE, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. We expect that compliance with these requirements will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. In addition, we expect that our management and other personnel will need to divert attention from operational and other business matters to devote substantial time to these public company requirements. In particular, we expect to continue incurring significant expenses and to devote substantial management effort toward ensuring compliance with the requirements of the Sarbanes-Oxley Act. In that regard, we may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.

In addition, we are becoming a public company while continuing to integrate the financial reporting systems of the Successor and The ADT Corporation. Successfully implementing our business plan and complying with the Sarbanes-Oxley Act and other regulations described above requires us to be able to prepare timely and accurate financial statements. Any delay in this implementation of, or disruption in, the transition to new or enhanced systems, procedures or controls, may cause us, as we did in the third quarter of 2016, to present restatements, or cause our operations to suffer and we may be unable to conclude that our internal controls over financial reporting are effective and to obtain an unqualified report on internal controls from our auditors.

We continue to be controlled by Apollo, and Apollo’s interests may conflict with our interests and the interests of other stockholders.

Following this offering, Apollo will own     % of our common equity (or     % if the underwriters exercise their over-allotment option in full). As a result, Apollo will have the power to elect a majority of our directors. Therefore, individuals affiliated with Apollo will have effective control over the outcome of votes on all matters requiring approval by our stockholders, including entering into significant corporate transactions such as mergers, tender offers, and the sale of all or substantially all of our assets and issuance of additional debt or equity. The interests of Apollo and its affiliates, including funds affiliated with Apollo, could conflict with or differ from our interests or the interests of our other stockholders. For example, the concentration of ownership held by funds affiliated with Apollo could delay, defer, or prevent a change in control of our company or impede a merger, takeover, or other business combination which may otherwise be favorable for us. Additionally, Apollo and its affiliates are in the business of making investments in companies and may, from time to time, acquire and hold interests in or provide advice to businesses that compete directly or indirectly with us, or are suppliers or customers of ours. Apollo and its affiliates may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. Any such investment may increase the potential for the conflicts of interest discussed in this risk factor. So long as funds affiliated with

 

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Apollo continue to directly or indirectly own a significant amount of our equity, even if such amount is less than 50%, Apollo and its affiliates will continue to be able to substantially influence or effectively control our ability to enter into corporate transactions. In addition, we have an executive committee that serves at the discretion of our Board and is composed of two Apollo designees and our CEO, who are authorized to take actions (subject to certain exceptions) that it reasonably determines are appropriate. See “Management—Board Committees—Executive Committee” for a further discussion.

We are a “controlled company” within the meaning of the NYSE rules and, as a result, qualify for and intend to rely on exemptions from certain corporate governance requirements.

Following this offering, Apollo will continue to control a majority of the voting power of our outstanding voting stock, and as a result we will be a controlled company within the meaning of the NYSE corporate governance standards. Under the NYSE rules, a company of which more than 50% of the voting power is held by another person or group of persons acting together is a controlled company and may elect not to comply with certain corporate governance requirements, including the requirements that:

 

    a majority of the board of directors consist of independent directors;

 

    the nominating and corporate governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

    the compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

    there be an annual performance evaluation of the nominating and corporate governance and compensation committees.

We intend to utilize these exemptions as long as we remain a controlled company. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the              .

Our organizational documents may impede or discourage a takeover, which could deprive our investors of the opportunity to receive a premium of their shares.

Provisions of our amended and restated certificate of incorporation and amended and restated bylaws may make it more difficult for, or prevent a third party from, acquiring control of us without the approval of our board of directors. These provisions include:

 

    providing that our board of directors will be divided into three classes, with each class of directors serving staggered three-year terms;

 

    providing for the removal of directors only for cause and only upon the affirmative vote of the holders of at least 66 2/3% in voting power of all the then-outstanding shares of stock of the Company entitled to vote thereon, voting together as a single class, if less than 50.1% of our outstanding common stock is beneficially owned by funds affiliated with Apollo;

 

    empowering only the board to fill any vacancy on our board of directors (other than in respect of a Sponsor Director (as defined below)), whether such vacancy occurs as a result of an increase in the number of directors or otherwise;

 

    authorizing the issuance of “blank check” preferred stock without any need for action by stockholders;

 

    prohibiting stockholders from acting by written consent if less than 50.1% of our outstanding common stock is beneficially owned by funds affiliated with Apollo;

 

    to the extent permitted by law, prohibiting stockholders from calling a special meeting of stockholders if less than 50.1% of our outstanding common stock is beneficially owned by funds affiliated with Apollo; and

 

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    establishing advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

Additionally, Section 203 of the Delaware General Corporation Law (the “DGCL”) prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, unless the business combination is approved in a prescribed manner. An interested stockholder includes a person, individually or together with any other interested stockholder, who within the last three years has owned 15% of our voting stock. However, our amended and restated certificate of incorporation, which will become effective on the consummation of this offering, will include a provision that restricts us from engaging in any business combination with an interested stockholder for three years following the date that person becomes an interested stockholder. Such restrictions shall not apply to any business combination between our Sponsor and any affiliate thereof or their direct and indirect transferees, on the one hand, and us, on the other.

Our issuance of shares of preferred stock could delay or prevent a change in control of us. Following the expected redemption of the Koch Preferred Securities, our board of directors shall have the authority to cause us to issue, without any further vote or action by the stockholders, shares of preferred stock, par value $0.01 per share, in one or more series, to designate the number of shares constituting any series, and to fix the rights, preferences, privileges, and restrictions thereof, including dividend rights, voting rights, rights and terms of redemption, redemption price or prices, and liquidation preferences of such series. The issuance of shares of our preferred stock may have the effect of delaying, deferring, or preventing a change in control without further action by the stockholders, even where stockholders are offered a premium for their shares.

In addition, as long as funds affiliated with or managed by Apollo beneficially own a majority of our outstanding common stock, Apollo will be able to control all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation, and certain corporate transactions. Together, these charter, bylaw and statutory provisions could make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock. Furthermore, the existence of the foregoing provisions, as well as the significant common stock beneficially owned by funds affiliated with Apollo and its right to nominate a specified number of directors in certain circumstances, could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of us, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition. For a further discussion of these and other such anti-takeover provisions, see “Description of Capital Stock—Certain Corporate Anti-takeover Provisions.”

Our amended and restated certificate of incorporation will provide that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our amended and restated certificate of incorporation will provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware is the sole and exclusive forum for (a) any derivative action or proceeding brought on our behalf; (b) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders; (c) any action asserting a claim arising pursuant to any provision of the DGCL or of our amended and restated certificate of incorporation or our amended and restated bylaws; or (d) any action asserting a claim related to or involving the Company that is governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could materially adversely affect our business, financial condition and results of operations.

 

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Our amended and restated certificate of incorporation will contain a provision renouncing our interest and expectancy in certain corporate opportunities.

Under our amended and restated certificate of incorporation, none of Apollo, the one Co-Investor that maintains a right to appoint a Co-Investor designee, the Koch Investor, or any of their respective portfolio companies, funds, or other affiliates, or any of their officers, directors, agents, stockholders, members, or partners will have any duty to refrain from engaging, directly or indirectly, in the same business activities, similar business activities, or lines of business in which we operate. In addition, our amended and restated certificate of incorporation provides that, to the fullest extent permitted by law, no officer or director of ours who is also an officer, director, employee, managing director, or other affiliate of Apollo, the Co-Investor, or the Koch Investor will be liable to us or our stockholders for breach of any fiduciary duty by reason of the fact that any such individual directs a corporate opportunity to Apollo, the Co-Investor, or the Koch Investor, as applicable, instead of us, or does not communicate information regarding a corporate opportunity to us that the officer, director, employee, managing director, or other affiliate has directed to Apollo, the Co-Investor, or the Koch Investor, as applicable. For instance, a director of our company who also serves as a director, officer, or employee of Apollo, the Co-Investor, the Koch Investor, or any of their respective portfolio companies, funds, or other affiliates may pursue certain acquisitions or other opportunities that may be complementary to our business and, as a result, such acquisition or other opportunities may not be available to us. As of the date of this prospectus, this provision of our amended and restated certificate of incorporation relates only to the Apollo Designees, the Co-Investor Designee, and the Koch Investor Designee. There are currently ten directors of the Company, six of whom are Apollo Designees, one of which is a Co-Investor Designee and one of which is a Koch Investor Designee. These potential conflicts of interest could have a material adverse effect on our business, financial condition, results of operations, or prospects if attractive corporate opportunities are allocated by Apollo, the Co-Investor, or the Koch Investor to itself or their respective portfolio companies, funds, or other affiliates instead of to us. A description of our obligations related to corporate opportunities under our amended and restated certificate of incorporation are more fully described in “Description of Capital Stock—Corporate Opportunity.”

We are a holding company and rely on dividends, distributions, and other payments, advances, and transfers of funds from our subsidiaries to meet our obligations.

We are a holding company that does not conduct any business operations of our own. As a result, we are largely dependent upon cash dividends and distributions and other transfers, including for payments in respect of our indebtedness, from our subsidiaries to meet our obligations. The agreements governing the indebtedness of our subsidiaries impose restrictions on our subsidiaries’ ability to pay dividends or other distributions to us. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Each of our subsidiaries is a distinct legal entity, and under certain circumstances legal and contractual restrictions may limit our ability to obtain cash from them and we may be limited in our ability to cause any future joint ventures to distribute their earnings to us. The deterioration of the earnings from, or other available assets of, our subsidiaries for any reason could also limit or impair their ability to pay dividends or other distributions to us.

Investors in this offering will experience immediate and substantial dilution.

Based on our pro forma net tangible book value per share as of September 30, 2017 and an assumed initial public offering price of $18.00 per share (the midpoint of the range set forth on the cover of this prospectus), purchasers of our common stock in this offering will experience an immediate and substantial dilution of $29.15 per share, representing the difference between our pro forma net tangible book value per share and the assumed initial public offering price. This dilution is due in large part to earlier investors having paid substantially less than the initial public offering price when they purchased their shares. See “Dilution.”

 

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You may be diluted by the future issuance of additional common stock or convertible securities in connection with our incentive plans, acquisitions or otherwise, which could adversely affect our stock price.

After the completion of this offering, we will have 3,243,611,149 shares of common stock authorized but unissued (assuming no exercise of the underwriters’ over-allotment option). Our amended and restated certificate of incorporation will authorize us to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for the consideration and on the terms and conditions established by our Board of Directors in its sole discretion, whether in connection with acquisitions or otherwise. At the closing of this offering, we will have approximately 14,829,303 options outstanding, which are exercisable into approximately 14,829,303 shares of common stock. We have reserved approximately 14,829,303 shares for issuance upon exercise of outstanding stock options (9,985,075 of which are issuable under our new equity incentive plan) and an additional approximately 27,560,381 shares for issuances under our new equity incentive plan. See “Executive Compensation—2018 Omnibus Incentive Plan.” Any common stock that we issue, including under our new equity incentive plan or other equity incentive plans that we may adopt in the future, as well as under outstanding options would dilute the percentage ownership held by the investors who purchase common stock in this offering.

From time to time in the future, we may also issue additional shares of our common stock or securities convertible into common stock pursuant to a variety of transactions, including acquisitions. Our issuance of additional shares of our common stock or securities convertible into our common stock would dilute your ownership of us and the sale of a significant amount of such shares in the public market could adversely affect prevailing market prices of our common stock.

Future sales of our common stock in the public market, or the perception in the public market that such sales may occur, could reduce our stock price.

After the completion of this offering and the use of proceeds therefrom, we will have 755,388,851 shares of common stock outstanding (including vested shares of common stock, and excluding unvested shares of common stock, issued in connection with the redemption of Class B Units of Ultimate Parent in connection with this offering). The number of outstanding shares of common stock includes 644,277,740 shares beneficially owned by Apollo and certain of our employees, that are “restricted securities,” as defined under Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), and eligible for sale in the public market subject to the requirements of Rule 144 (including vested shares of common stock, and excluding unvested shares of common stock, issued in connection with the redemption of Class B Units of Ultimate Parent in connection with this offering). We, each of our officers and directors, Apollo and substantially all of our existing stockholders have agreed that (subject to certain exceptions), for a period of 180 days after the date of this prospectus, we and they will not, without the prior written consent of certain underwriters dispose of any shares of common stock or any securities convertible into or exchangeable for our common stock. See “Underwriting (Conflict of Interest).” Following the expiration of the applicable lock-up period, all of the issued and outstanding shares of our common stock will be eligible for future sale, subject to the applicable volume, manner of sale, holding periods, and other limitations of Rule 144. Certain underwriters may, in their sole discretion, release all or any portion of the shares subject to lock-up agreements at any time and for any reason. In addition, Apollo has certain rights to require us to register the sale of common stock held by Apollo including in connection with underwritten offerings. Sales of significant amounts of stock in the public market upon expiration of lock-up agreements, the perception that such sales may occur, or early release of any lock-up agreements, could adversely affect prevailing market prices of our common stock or make it more difficult for you to sell your shares of common stock at a time and price that you deem appropriate. See “Shares Eligible for Future Sale” for a discussion of the shares of common stock that may be sold into the public market in the future.

There can be no assurances that a viable public market for our common stock will develop.

Prior to this offering, our common stock was not traded on any market. An active, liquid, and orderly trading market for our common stock may not develop or be maintained after this offering. Active, liquid, and orderly trading markets usually result in less price volatility and more efficiency in carrying out investors’

 

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purchase and sale orders. We cannot predict the extent to which investor interest in our common stock will lead to the development of an active trading market on the NYSE or otherwise or how liquid that market might become. The initial public offering price for the common stock will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. See “Underwriting (Conflict of Interest).” If an active public market for our common stock does not develop, or is not sustained, it may be difficult for you to sell your shares at a price that is attractive to you or at all.

The initial public offering price of our common stock may not be indicative of the market price of our common stock after this offering.

The initial public offering price was determined by negotiations between us and representatives of the underwriters, based on numerous factors which we discuss in “Underwriting (Conflict of Interest),” and may not be indicative of the market price of our common stock after this offering. If you purchase our common stock, you may not be able to resell those shares at or above the initial public offering price.

If securities or industry analysts do not publish research or reports about our business or publish negative reports, our stock price could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover our company downgrades our common stock or if our operating results do not meet their expectations, our stock price could decline.

We may issue preferred securities, the terms of which could adversely affect the voting power or value of our common stock.

Our amended and restated certificate of incorporation will authorize us to issue, without the approval of our stockholders, one or more classes or series of preferred securities having such designations, preferences, limitations, and relative rights, including preferences over our common stock respecting dividends and distributions, as our board of directors may determine. The terms of one or more classes or series of preferred securities could adversely impact the voting power or value of our common stock. For example, we might grant holders of preferred securities the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred securities could affect the residual value of the common stock.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, which involve risks and uncertainties. These forward-looking statements are generally identified by the use of forward-looking terminology, including the terms “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” and, in each case, their negative or other various or comparable terminology. All statements other than statements of historical facts contained in this prospectus, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management, and expected market growth are forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business” and include, among other things, statements relating to:

 

    our strategy, outlook and growth prospects;

 

    our operational and financial targets and dividend policy;

 

    general economic trends and trends in the industry and markets; and

 

    the competitive environment in which we operate.

These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Important factors that could cause our results to vary from expectations include, but are not limited to:

 

    our ability to keep pace with the rapid technological and industry changes in order to develop or acquire new technologies for our products and services that achieve market acceptance with acceptable margins;

 

    competition in the markets we serve, including the home automation market, which may result in pressure on our profit margins and limit our ability to maintain the market share of our products and services;

 

    our reliance on retaining customers for long periods of time;

 

    an increase in the rate of customer revenue attrition;

 

    our reputation as a service provider of high quality security offerings may be materially adversely affected by product defects or shortfalls in customer service;

 

    our susceptibility to general economic conditions, changes in the housing market, and consumer discretionary income;

 

    credit risk associated with our subscribers;

 

    any change to the insurance industry practice of providing incentives to homeowners for the use of alarm monitoring services;

 

    risks associated with investing in new business, services and technologies outside the traditional security and interactive services market, which could disrupt our operations;

 

    failure to successfully upgrade and maintain the security of our information and technology networks;

 

    failure to comply with laws, regulations and industry standards addressing information and technology networks, privacy, and data security could lead to penalties, liability, and reputational harm;

 

    our products may be subject to potential vulnerabilities of wireless and IoT devices and our services may be subject to risks including hacking or other unauthorized access to control or view systems and obtain private information;

 

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    our dependence on third-party providers and suppliers;

 

    disruptions in our ability to provide security monitoring services and otherwise serve our customers;

 

    risks associated with our independent, third-party authorized dealers, who may not be able to mitigate risks associated with information technology breaches, data security breaches, product liability, errors and omissions, and marketing compliance;

 

    risks associated with pursuing business opportunities that diverge from our current business model;

 

    risks associated with the continuing integration of The ADT Corporation with our business;

 

    any failure of our customer generation strategies;

 

    failure to continue to develop and execute a competitive yet profitable pricing structure;

 

    risks associated with acquiring and integrating customer accounts;

 

    shifts in customers’ choice of, or telecommunication providers’ support for, telecommunication services and equipment;

 

    unauthorized use of our brand names by third parties;

 

    third parties hold rights to certain key brand names outside of the United States and Canada;

 

    infringement of our intellectual property rights and allegations that we have infringed the intellectual property rights of third parties;

 

    failure of our independent, third-party authorized dealers to mitigate certain risks;

 

    credit risk and other risks associated with our dealers;

 

    current and potential securities litigation;

 

    increasing government regulation of telemarketing, email marketing, door-to-door sales, and other marketing methods;

 

    we operate in a regulated industry;

 

    penalties for false alarms;

 

    police departments could refuse to respond to calls from monitored security service companies;

 

    adoption of statutes and governmental policies purporting to characterize certain of our charges as unlawful may materially adversely affect our business;

 

    providers of Internet access may block our services or charge their customers more for using our services;

 

    goodwill and other identifiable intangible assets represent a significant portion of our total assets, and we may never realize the full value of our intangible assets;

 

    potential that the benefit of our deferred tax assets may not be realized;

 

    we are exposed to greater risks of liability for employee acts or omissions or system failures than may be inherent in other businesses;

 

    any inability to hire and retain key personnel, including an effective sales force and our senior management;

 

    loss of senior management could cause disruption in our business;

 

    any adverse developments in our relationship with our employees;

 

    we may be required to make indemnification payments relating to The ADT Corporation’s separation from Tyco;

 

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    we may be subject to liability for obligations of The Brink’s Company under the Coal Act;

 

    we may not be able to raise additional capital due to our substantial indebtedness;

 

    we may incur more debt, which could increase the risks associated with our substantial indebtedness;

 

    we may not be able to generate sufficient cash to service all of our indebtedness and to fund our working capital and capital expenditures;

 

    restrictions in our debt agreements limiting our flexibility in operating our business;

 

    a significant portion of our assets is pledged as collateral under our debt agreements;

 

    risks associated with the interest rate due to our variable rate indebtedness;

 

    fluctuations in our stock price;

 

    the significant costs and time associated with operating as a public company;

 

    risks associated with being controlled by Apollo and a “controlled company” within the meaning of the NYSE rules, including that Apollo’s interests may conflict with our own and the interests of our stockholders;

 

    our organizational documents may impede or discourage a takeover;

 

    we are a holding company and rely on dividends, distributions and other payments, advances and transfers of funds from our subsidiaries;

 

    investors will experience immediate and substantial dilution in this offering and future dilution due to future issuances of common stock or convertible securities in connection with our incentive plans, acquisitions, or otherwise;

 

    future sales of our common stock could lead to stock price reductions;

 

    there are no assurances that a public market will develop for our stock;

 

    the initial public offering price may not be indicative of the market price of our common stock;

 

    stock price declines if securities or industry analysts do not publish research or reports about our business or publish negative reports;

 

    we may issue preferred securities, which could adversely affect the voting power and value of our common stock; and

 

    other risks, uncertainties, and factors set forth in this prospectus, including those set forth under “Risk Factors.”

These forward-looking statements reflect our views with respect to future events as of the date of this prospectus and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements represent our estimates and assumptions only as of the date of this prospectus and, except as required by law, we undertake no obligation to update or review publicly any forward-looking statements, whether as a result of new information, future events, or otherwise after the date of this prospectus. We anticipate that subsequent events and developments will cause our views to change. You should read this prospectus and the documents filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. Our forward-looking statements do not reflect the potential impact of any future acquisitions, merger, dispositions, joint ventures, or investments we may undertake. We qualify all of our forward-looking statements by these cautionary statements.

 

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USE OF PROCEEDS

We expect to receive approximately $1,915 million of net proceeds (based upon the assumed initial public offering price of $18.00 per share, the midpoint of the range set forth on the cover page of this prospectus and assuming no exercise of the underwriters’ over-allotment option) from the sale of the common stock offered by us, after deducting underwriting discounts and commissions. Assuming no exercise of the underwriters’ over-allotment option, each $1.00 increase (decrease) in the public offering would increase (decrease) our net proceeds by approximately $106 million. We estimate that the net proceeds to us, if the underwriters exercise their right to purchase the maximum of additional shares of common stock from us, will be approximately $2,202 million, after deducting underwriting discounts and commissions in connection with this offering (based upon the assumed initial public offering price of $18.00 per share, the midpoint of the range set forth on the cover page of this prospectus).

We currently expect to use (i) an amount equal to approximately $1,155 million of the proceeds from this offering to redeem $1,057 million aggregate principal amount of Prime Notes and pay the related call premium and (ii) approximately $15 million of the proceeds from this offering to pay fees and expenses in connection with this offering, which include legal and accounting fees, SEC and FINRA registration fees, printing expenses, and other similar fees and expenses. Following this offering, there will be $2,083 million aggregate principal amount of Prime Notes outstanding. In addition, we intend to deposit approximately $750 million of the net proceeds from this offering into a separate account, which amount will be used to redeem the Koch Preferred Securities on a date to be determined following the consummation of this offering. If the net proceeds from this offering are not sufficient to fund these amounts in entirety, we will use cash on hand to fund the balance of the separate account or we will reduce the principal amount of Prime Notes that will be redeemed. See “Description of Koch Preferred Securities.”

The Prime Notes, issued on May 2, 2016, mature on May 15, 2023 and bear interest at a rate of 9.250% per annum, payable semi-annually in arrears on May 15 and November 15 of each year, and commenced on November 15, 2016. See “Description of Material Indebtedness—Prime Notes.”

Any remaining net proceeds will be used for general corporate purposes. While we currently have no specific plan for the use of the remaining net proceeds of this offering, we anticipate using a significant portion of these proceeds to implement our growth strategies, generate funds for working capital, and opportunistically repay outstanding indebtedness. Our management team will retain broad discretion to allocate the net proceeds of this offering. The precise amounts and timing of our use of any remaining net proceeds will depend upon market conditions, among other factors.

 

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DIVIDEND POLICY

On February 16, 2017, we paid a dividend in an aggregate amount of $550 million to equity holders of the Company and Ultimate Parent, which included distributions to our Sponsor. On April 18, 2017, we paid an additional dividend of $200 million to equity holders of the Company and Ultimate Parent, which included distributions to our Sponsor. We did not declare any dividend in the years ended December 31, 2016, 2015 and 2014.

We intend to initiate the payment of dividends after the consummation of this offering, although any declaration and payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earning levels, cash flows, capital requirements, levels of indebtedness, restrictions imposed by applicable law, our overall financial condition, restrictions in our debt agreements and the restrictions in the Koch Preferred Securities, and any other factors deemed relevant by our board of directors. See “Description of the Koch Preferred Securities” and “Description of Material Indebtedness.”

While the certificate of designation of the Koch Preferred Securities restricts the Company from paying dividends on its common stock, the Koch Investor has consented to a one-time distribution in an aggregate amount not to exceed $50 million, in the event the Company elects to declare and pay a dividend on its common stock prior to June 30, 2018. See “Description of Koch Preferred Securities.”

As a holding company, our ability to pay dividends depends on our receipt of cash dividends from our operating subsidiaries. Our ability to pay dividends will therefore be restricted as a result of restrictions on their ability to pay dividends to us under the Credit Facilities, the Prime Notes and the ADT Notes and under future indebtedness that we or they may incur. See “Risk Factors—Risks Related to this Offering and Ownership of our Common Stock,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and “Description of Material Indebtedness.”

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents, non-current restricted cash and cash equivalents, and our capitalization as of September 30, 2017, on:

 

    an actual basis, giving effect to the 1.681-for-1 stock split of our common stock that was effected on January 4, 2018;

 

    a pro forma basis to give effect to this offering and the application of the net proceeds of this offering as described under “Use of Proceeds;” and

 

    a pro forma as adjusted basis to give effect to the redemption of the Koch Preferred Securities in full including payment of the related redemption premium and other related amounts following the closing of this offering, assuming a redemption date of July 1, 2018 and assuming a five-year Treasury Rate of 2.07%. See “Description of the Koch Preferred Securities.”

You should read this table together with the information included elsewhere in this prospectus, including “Prospectus Summary—Summary Historical and Pro Forma Financial Information,” “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes thereto.

 

    As of September 30, 2017  
    Actual     Pro forma     Pro forma
as adjusted(5)
 
    (in thousands, except per share data)  

Cash and cash equivalents(1)

  $ 170,657     $ 133,294     $ 3,203  

Non-current restricted cash and cash equivalents

    —         750,000 (1)       —    
 

 

 

   

 

 

   

 

 

 

Total

  $ 170,657     $ 883,294     $ 3,203  
 

 

 

   

 

 

   

 

 

 

Total debt(2)

  $ 10,174,465     $ 9,129,373 (4)    $ 9,129,373  
 

 

 

   

 

 

   

 

 

 

Mandatorily redeemable preferred securities—authorized 1,000,000 shares Series A of $0.01 par value; issued and outstanding 750,000 shares of $0.01 par value as of September 30, 2017(3)

    658,402       658,402       —    
 

 

 

   

 

 

   

 

 

 

Stockholders’ Equity:

     

Common stock—$0.01 par value; 3,999,000,000 shares authorized, 641,087,675 shares issued and outstanding (actual); 752,198,786 shares issued and outstanding (Pro forma and Pro forma as adjusted);

    2       1,113       1,113  

Additional paid-in capital(3)

    4,432,599       6,329,893       6,329,893  

Accumulated deficit(3)

    (1,636,400     (1,703,963     (1,925,652

Accumulated other comprehensive income

    501       501       501  
 

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

    2,796,702       4,627,544       4,405,855  
 

 

 

   

 

 

   

 

 

 

Total capitalization

  $ 13,629,569     $ 14,415,319     $ 13,535,228  
 

 

 

   

 

 

   

 

 

 

 

 

(1) In connection with this offering, the Company will deposit into a separate account an amount in cash equal to at least $750 million, which amount may only be used by the Company to redeem the Koch Preferred Securities at a date to be determined following the consummation of this offering. See “Description of Koch Preferred Securities.”

 

(2) The Company’s total debt as of September 30, 2017 primarily includes the following:

 

    a first lien term loan facility, in an aggregate principal amount of $3,545 million, with a maturity date of May 2, 2022 (the “First Lien Term Loan Facility”);

 

    a first lien revolving credit facility, in an aggregate principal amount of up to $95 million, maturing on July 1, 2020, including a letter of credit sub-facility (the “2020 Revolving Credit Facility”);

 

    a first lien revolving credit facility, in an aggregate principal amount of up to $255 million, maturing on May 2, 2021, including a letter of credit sub-facility and a swingline loan sub-facility (the “2021 Revolving Credit Facility”);

 

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    $3,140 million aggregate principal amount of 9.250% second-priority senior secured notes due 2023 (the “Prime Notes”), $2,083 million aggregate principal amount of which will remain outstanding after the completion of this offering after giving effect to the application of the net proceeds therefrom. See “Use of Proceeds”; and

 

    $3,519 million aggregate principal amount in six series of senior secured notes issued by The ADT Corporation (the “ADT Notes”).

As of September 30, 2017, the Company had $47 million of letters of credit issued but undrawn under the First Lien Credit Facilities. All of the material wholly owned domestic subsidiaries of the Company, subject to certain exceptions, guarantee the Credit Facilities, the Prime Notes and the ADT Notes. Prime Borrower has pledged its capital stock and substantially all of its assets and those of each subsidiary guarantor, including capital stock of the subsidiary guarantors and 65% of the capital stock of the first-tier foreign subsidiaries that are not subsidiary guarantors, in each case subject to exceptions. See “Description of Material Indebtedness” for a description of the Credit Facilities, the Prime Notes and the ADT Notes. Actual total debt, as of September 30, 2017, in the capitalization table above reflects net reduction in the aggregate of approximately $87 million from unamortized discount and debt issuance costs, partially offset by $13 million from accretion of purchase accounting fair value adjustments.

 

(3) On May 2, 2016, the Company issued the Koch Preferred Securities and Ultimate Parent issued the Warrants to the Koch Investor for aggregate consideration of $750 million. Of this amount, $659 million, net of issuance costs of $27 million, was allocated to the Koch Preferred Securities and reflected as a liability in the Company’s consolidated balance sheet. The remaining $91 million in proceeds was allocated to the Warrants and was contributed by Ultimate Parent in the form of common equity to the Company, net of $4 million in issuance costs. Refer to Note 6 to the Company’s audited consolidated financial statements for additional information. In accordance with the definitive agreements governing the Koch Preferred Securities, following the consummation of this offering, the Company is required to maintain cash in an amount equal to at least $750 million in a separate account until the Koch Preferred Securities have been redeemed in full. The Company intends to fund this separate account with the proceeds of this offering. Amounts held in the separate account will be used to redeem the Koch Preferred Securities. The Company expects that additional amounts necessary to redeem the Koch Preferred Securities in full, including the payment of the related redemption premium and other related amounts, will be funded with cash on hand at the time of redemption. The Company is required to increase the amounts held in this separate account in certain circumstances, such as the completion of a public equity offering of our common stock. The Company expects that upon the redemption of the Koch Preferred Securities, the Company’s interest expense (dividends on the Koch Preferred Securities are recorded as interest expense) will be reduced by approximately $88 million on an annual basis, assuming the Koch Preferred Securities are redeemed on July 1, 2018 and assuming a five-year Treasury Rate of 2.07%. See “Use of Proceeds” and “Description of Koch Preferred Securities.”

 

(4) The Company intends to use approximately $1,155 million of the proceeds from this offering to redeem $1,057 million aggregate principal amount of Prime Notes and pay the related call premium. Following this offering, there will be $2,083 million aggregate principal amount of Prime Notes outstanding. See “Use of Proceeds.” The Company expects that upon the redemption of the Prime Notes, the Company’s interest expense will be reduced by approximately $100 million on an annual basis.

 

(5) Assuming the Company redeems the Koch Preferred Securities in full, and pays the related redemption premium and other related amounts on July 1, 2018 and the calculation of all such amounts is based on a fixed daily five-year treasury rate of 2.07%. The pro forma adjustment in accumulated deficit related to the estimated loss associated with the redemption of the Koch Preferred Securities has not been tax effected.

 

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DILUTION

Purchasers of the common stock in this offering will experience immediate and substantial dilution to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of our common stock as of September 30, 2017.

Our historical net tangible book deficit as of September 30, 2017 was $10,219 million, or $15.94 per share. Our historical net tangible book deficit represents the amount of our total tangible assets (total assets less goodwill and total intangible assets) less total liabilities. Historical net tangible book deficit per share represents historical net tangible book value divided by the number of shares of common stock issued and outstanding as of September 30, 2017.

Our pro forma net tangible book deficit as of September 30, 2017 was $8,389 million, or $11.15 per share of our common stock. Pro forma net tangible book deficit per share represents our pro forma net tangible book deficit divided by the total number of shares outstanding as of September 30, 2017, after giving effect to the sale of 111,111,111 shares of common stock in this offering at the assumed initial public offering price of $18.00 per share (the midpoint of the estimated price range on the cover page of this prospectus) and the application of the net proceeds from this offering.

The following table illustrates the dilution per share of our common stock, assuming the underwriters do not exercise their over-allotment option:

 

Assumed initial public offering price per share

      $ 18.00  

Historical net tangible book deficit per share as of September 30, 2017

   $ (15.94   

Increase per share attributable to the pro forma adjustments described above

     4.79     
  

 

 

    

Pro forma net tangible book deficit per share after this offering

        (11.15

Dilution in net tangible book deficit per share

      $ (29.15
     

 

 

 

Dilution is determined by subtracting pro forma net tangible book deficit per share after this offering from the initial public offering price per share of common stock.

The following table summarizes, as of December 19, 2017 (including shares of common stock issued in redemption of Class B Units of Ultimate Parent in connection with this offering), the total number of shares of common stock owned by existing stockholders and to be owned by new investors, the total consideration paid, and the average price per share paid by our existing stockholders and to be paid by new investors in this offering at the assumed initial public offering price of $18.00 per share, calculated before deduction of estimated underwriting discounts and commissions.

 

     Shares Purchased     Total Consideration     Average
Price per

Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     644,277,740        85.29   $ 4,426,212,571        68.88   $ 6.87  

Investors in the offering

     111,111,111        14.71     2,000,000,000        31.12     18.00  

Total

     755,388,851        100   $ 6,426,212,571        100   $ 8.50  

To the extent the underwriters’ over-allotment option is exercised, there will be further dilution to new investors.

A $1.00 increase (decrease) in the assumed initial public offering price of $18.00 per share would increase (decrease) total consideration paid by new investors, total consideration paid by all stockholders and average price per share of the midpoint of the range (as set forth on the cover page of this prospectus) by approximately $106 million, approximately $106 million and $0.03 per share, respectively, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and without deducting estimated expenses payable by us.

 

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If the underwriters were to fully exercise their over-allotment option, the percentage of common stock held by existing investors would be 83.45%, and the percentage of shares of common stock held by new investors would be 16.55%.

Except as otherwise indicated, all of the information in this prospectus assumes:

 

    an initial public offering price of $18.00 per share of common stock, the midpoint of the price range set forth on the cover page of this prospectus;

 

    no exercise of the underwriters’ over-allotment option to purchase up to 16,666,667 additional shares of common stock in this offering;

 

    our restated certificate of incorporation and our restated bylaws in connection with this offering are in effect, pursuant to which the provisions described under “Description of Capital Stock” would become operative; and

 

    the completion of a 1.681-for-1 split of our common stock on January 4, 2018. We will have 644,277,740 shares of common stock outstanding following the stock split (including the vested shares of common stock distributed in redemption of Class B Units of Ultimate Parent in connection with this offering, which is described below).

The number of shares of common stock to be outstanding after consummation of this offering is based on 111,111,111 shares of our common stock to be sold by us in this offering and, except where we state otherwise, the information with respect to our common stock we present in this prospectus:

 

    does not reflect 4,844,228 shares of common stock that may be issued upon the exercise of options outstanding as of the consummation of this offering issued under our 2016 Equity Incentive Plan. See “Shares Eligible for Future Sales”. No further issuances of securities shall take place under the Equity Incentive Plan. The following table sets forth the outstanding stock options under the Equity Incentive Plan as of December 19, 2017;

 

     Number of
Options(1)
     Weighted-Average
Exercise Price

Per Share
 

Vested stock options (service-based vesting)

     288,105      $ 6.59  

Unvested stock options (service-based vesting)

     2,115,565      $ 6.81  

Unvested stock options (performance-based vesting)

     2,440,558      $ 6.78  

 

  (1) Upon a holder’s exercise of one option, the Company shall issue to such holder one share of common stock.

 

    does not reflect an additional 37,545,456 shares of our common stock reserved for future grants under our new equity incentive plan before giving effect to the redemption of the Class B Units as described below. See “Executive Compensation—2018 Omnibus Incentive Plan” and “Shares Eligible for Future Sales”; and

 

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    does not reflect 20,330,014 unvested shares of common stock and 9,985,075 shares of common stock that may be issued upon exercise of stock options issued under the ADT Inc. 2018 Omnibus Incentive Plan in connection with the redemption of Class B Units of Ultimate Parent in connection with this offering. See “Executive Compensation—Looking Ahead—Post-IPO Compensation—Redemption of Class B Units.” The table below sets forth the number of shares of vested and unvested common stock (subject to certain transfer restrictions), in the aggregate, that would be distributed in connection with redemption of Class B Units of Ultimate Parent, and the number of stock options, in the aggregate, that would be granted in connection with redemption of Class B Units of Ultimate Parent in connection with this offering, assuming, in each case an initial public offering price of $18.00 per share of common stock, the midpoint of the price range set forth on the cover page of this prospectus.

 

     Number of
Shares or
Options(3)
     Weighted-Average
Exercise Price

Per Share
 

Vested distributed shares of common stock(1) (service-based vesting)

     3,163,371        n/a  

Unvested distributed shares of common stock(1) (service-based vesting)

     8,583,321        n/a  

Unvested distributed shares of common stock(1) (performance-based vesting)

     11,746,693        n/a  

Vested stock options(2) (service-based vesting)

         1,267,921      $ 18.00  

Unvested stock options(2) (service-based vesting)

         3,724,617      $ 18.00  

Unvested stock options(2) (performance-based vesting)

         4,992,537      $ 18.00  

 

  (1) Distributed shares of common stock (whether vested or unvested) are subject to certain transfer restrictions set forth in our Amended and Restated Management Investor Rights Agreement.
  (2) Upon a holder’s exercise of one option, the Company will issue to such holder one share of common stock.
  (3) The calculations below assume an initial public offering price of $18.00 per share of common stock (the midpoint of the price range set forth on the cover page of this prospectus). A $1.00 increase in the assumed initial public offering price would (a) increase the number of shares of common stock that would be distributed to our employees in connection with the redemption of the Class B Units by 525,530 shares of common stock and (b) decrease the stock options granted to our employees by 525,530 stock options. A $1.00 decrease in the assumed initial public offering price would (a) decrease the number of shares of common stock that would be distributed to our employees in connection with redemption of the Class B Units by 587,357 shares of common stock and (b) increase the stock options granted to our employees by 587,357 stock options. The distributed shares of common stock (whether vested or unvested) reflect an in-kind distribution of the common stock held by Ultimate Parent, while the granted options preserve the intended percentage of the future appreciation of Ultimate Parent that the Class B Units would have been allocated had such Class B Units not been redeemed in connection with this offering. As a result, and as indicated above, a change in the initial public offering price creates an opposite effect on the number of common stock and the number of stock options to be distributed.

We may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in further dilution to our stockholders.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The selected financial data presented in the table below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus. The selected historical consolidated statements of operations data for the nine months ended September 30, 2017 and September 30, 2016 has been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus and which, in the opinion of management, contain all normal recurring adjustments necessary for a fair statement of the results for the unaudited interim periods and have been prepared on the same basis as the Successor audited consolidated financial statements. The selected historical consolidated balance sheet data as of December 31, 2016 and December 31, 2015 (Successor) and the selected historical consolidated statements of operations data for the year ended December 31, 2016, for the periods from May 15, 2015 through December 31, 2015 (Successor) and January 1, 2015 through June 30, 2015 (Predecessor), and for the year ended December 31, 2014 (Predecessor), have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected historical consolidated balance sheet data as of December 31, 2014, December 31, 2013, and December 31, 2012 and the selected historical consolidated statements of operations data for the years ended December 31, 2013, and December 31, 2012, have been derived from our audited consolidated financial statements not included in this prospectus. The selected historical consolidated balance sheet data as of September 30, 2016 has been derived from our unaudited condensed consolidated financial statements not included in this prospectus.

Prior to the Formation Transactions on July 1, 2015, ADT Inc. was a holding company with no assets or liabilities, and Protection One is the predecessor of ADT Inc. for accounting purposes. Our historical financial data through June 30, 2015 consists solely of Protection One’s historical financial data. From July 1, 2015, which was also the date of the ASG Acquisition, our selected financial data includes ASG’s financial data in addition to the financial data of Protection One. Additionally, on May 2, 2016, we acquired The ADT Corporation. Our selected financial data beginning May 2, 2016 also includes The ADT Corporation’s selected financial data.

 

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You should read the following information together with “Risk Factors,” “Use of Proceeds,” “Capitalization,” “Unaudited Pro Forma Condensed Combined Financial Information,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical consolidated financial statements and related notes included elsewhere in this prospectus. Historical results are not necessarily indicative of the results to be expected in the future, and interim financial results are not necessarily indicative of results that may be expected for the full fiscal year.

 

    Successor         Predecessor  
    Nine Months
Ended
September 30,
2017
    Nine Months
Ended
September 30,
2016(a)
    Year Ended
December 31,
2016(a)
    From
Inception
through
December 31,
2015(a)
        Period
from
January 1,
2015
through
June 30,
2015
    Year Ended
December 31,
2014
    Year Ended
December 31,
2013
    Year Ended
December 31,
2012
 
   

(in thousands, except per share data)

 

 

Statement of Operations Data:

                 

Total revenue

  $ 3,209,970     $ 1,898,614     $ 2,949,766     $ 311,567       $ 237,709     $ 466,557     $ 429,277     $ 373,283  

Operating income (loss)

    187,412       (304,329     (229,315     (39,774       11,232       42,302       26,138       61,302  

Net loss

    (295,561     (451,642     (536,587     (54,253       (18,591     (18,488     (38,585     (12,175

Net loss per share:

                 

Basic and diluted

  $ (0.78   $ (1.18   $ (1.41   $ (0.14     $ (185,910   $ (184,880   $ (385,850   $ (121,750

Weighted average shares used to compute net loss per share

    381,357       381,156       381,157       381,156         0.1       0.1       0.1       0.1  

Cash dividends per share

  $ 1.97       —         —         —           —         —         —         —    

Balance Sheet Data (at period end):

                 

Cash and cash equivalents

  $ 170,657     $ 163,027     $ 75,891     $ 15,759         $ 89,834     $ 3,365     $ 5,634  

Total assets(b)

    17,086,997       17,333,976       17,176,481       2,319,515           1,099,531       1,011,930       969,500  

Total debt(b)

    10,174,465       9,489,221       9,509,970       1,346,958           872,904       775,910       722,353  

Mandatorily redeemable preferred securities(c)

    658,402       633,277       633,691       —             —         —         —    

Total liabilities(b)

    14,290,295       13,455,292       13,371,505       1,616,618           1,057,639       955,882       877,887  

Total stockholders’ equity(c)(d)

    2,796,702       3,878,684       3,804,976       702,897           41,892       56,048       91,613  

 

(a) During the third quarter of 2015 and second quarter of 2016, we completed the Formation Transactions and the ADT Acquisition, respectively. The impact of these transactions on our operating results has been included from the dates of these acquisitions. See the notes to the consolidated financial statements included elsewhere in this prospectus for details of these acquisitions.
(b)

Total assets and total liabilities for 2015, 2014, 2013, and 2012 were adjusted to reflect the impact of the accounting standards adopted in 2016 related to the presentation of debt issuance costs and income tax. Total debt for these years

 

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  was also adjusted to reflect the impact from the accounting standard adoption related to the presentation of debt issuance costs.
(c) On May 2, 2016, the Company issued the Koch Preferred Securities and Ultimate Parent issued the Warrants to the Koch Investor for aggregate consideration of $750 million. Of this amount, $659 million, net of issuance costs of $27 million, was allocated to the Koch Preferred Securities and reflected as a liability in the Company’s consolidated balance sheet. The remaining $91 million in proceeds was allocated to the Warrants and such proceeds were contributed by Ultimate Parent in the form of common equity to the Company, net of $4 million in issuance costs. Refer to Note 6 to the Company’s audited consolidated financial statements for additional information. The proceeds from these issuances were used to fund a portion of the ADT Acquisition and to pay related fees and expenses. Dividends of $41 million, $32 million, and $53 million were paid during the nine months ended September 30, 2017 and 2016, and year ended December 31, 2016, respectively. Such dividends are recorded in interest expense, net in the consolidated statements of operations.
(d) During the nine months ended September 30, 2017, we paid $750 million of dividends to certain investors of the Company and Ultimate Parent, which primarily includes distributions to our Sponsor. Such dividends are presented on the condensed consolidated statement of stockholders’ equity for the nine months ended September 30, 2017.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following unaudited pro forma condensed combined financial information and explanatory notes, which have been prepared pursuant to Article 11 of Regulation S-X, give effect to the following transactions:

 

    the ADT Acquisition, which we completed on May 2, 2016; and

 

    the completion of this offering (assuming the issuance and sale by the Company of 111,111,111 shares of common stock at an offering price of $18.00 per share, which represents the midpoint of the price range set forth on the cover page of this prospectus, generating estimated net proceeds of $1,900 million after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us), and the use of the proceeds from this offering as described in the section entitled “Use of Proceeds.”

The historical condensed consolidated financial information of the Company as of and for the nine months ended September 30, 2017 has been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. The historical consolidated financial information of the Company for the year ended December 31, 2016 has been derived from our audited consolidated financial statements included elsewhere in this prospectus. The ADT Corporation’s historical consolidated statement of operations data for the period from January 1, 2016 through May 1, 2016 has been derived from (a) The ADT Corporation’s historical unaudited consolidated statement of operations for the three months ended March 31, 2016 included elsewhere in this prospectus, and (b) The ADT Corporation’s historical unaudited consolidated statement of operations for the period April 1, 2016 to May 1, 2016 not included in the prospectus. The table in Note 1 to the “Notes to the Unaudited Pro Forma Financial Information” illustrates this derivation. The historical financial information of the Company and The ADT Corporation is presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) with all amounts stated in United States dollars. The impact of the ADT Acquisition has been fully reflected in the Company’s historical condensed consolidated financial statements as of and for the nine-month period ended September 30, 2017.

The unaudited pro forma condensed combined balance sheet gives effect to the transactions described above as if they had occurred on September 30, 2017 to the extent they have not been fully reflected in the historical consolidated financial statements. The unaudited pro forma statements of operations for the nine months ended September 30, 2017 and for the year ended December 31, 2016 give effect to the transactions described above as if they occurred on January 1, 2016.

The unaudited condensed combined pro forma financial information set forth below is based upon available information and assumptions that we believe are reasonable. The historical financial information has been adjusted to give effect to pro forma events that are (1) directly attributable to the transactions, (2) factually supportable, and (3) with respect to the statements of operations, expected to have a continuing impact on the combined results. The unaudited pro forma condensed combined financial information is for illustrative and informational purposes only and is not intended to represent or be indicative of what our financial condition or results of operations would have been had the above transactions occurred on the dates indicated. The unaudited pro forma condensed combined financial information also should not be considered representative of our future financial condition or results of operations. The unaudited pro forma statements of operations do not reflect projected realization of revenue synergies and cost savings. In addition, the pro forma financial information does not reflect the impact this offering may have on our stock-based compensation awards. As of September 30, 2017, total unrecognized compensation costs related to profit unit awards and option awards were $62 million and $8 million, respectively.

In addition, the pro forma condensed consolidated financial information should be read in conjunction with:

 

    the accompanying notes, referred to herein as the notes to the unaudited condensed combined pro forma financial information;

 

    the Company’s historical audited and unaudited consolidated financial statements and the related notes included elsewhere in this prospectus;

 

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    The ADT Corporation’s unaudited consolidated financial statements and the related notes included in this prospectus; and

 

    the sections of this prospectus titled “Prospectus Summary—Summary Historical and Pro Forma Financial Information,” “Selected Historical Consolidated Financial and Other Data,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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ADT Inc.

Unaudited Pro Forma Condensed Combined Balance Sheet

As of September 30, 2017

(in thousands, except for share and per share data)

 

    ADT Inc.
Historical
    Offering
Adjustments
(Note 3)
          Pro Forma
(ADT
Acquisition and
Completion
of Offering)
 

Assets

       

Current Assets:

       

Cash and cash equivalents

  $ 170,657     $ (37,363     (3a)     $ 133,294  

Current portion of restricted cash and cash equivalents

    3,881       —           3,881  

Accounts receivable trade, less allowance for doubtful accounts

    134,243       —           134,243  

Inventories

    86,311       —           86,311  

Work-in-progress

    23,796       —           23,796  

Prepaid expenses and other current assets

    73,855       (1,595     (3b)       72,260  
 

 

 

   

 

 

     

 

 

 

Total current assets

    492,743       (38,958       453,785  

Property and equipment, net

    342,513       —           342,513  

Subscriber system assets, net

    2,891,939       —           2,891,939  

Intangible assets, net

    7,974,823       —           7,974,823  

Goodwill

    5,041,262       —           5,041,262  

Deferred subscriber acquisition costs, net

    258,192       —           258,192  

Non-current restricted cash and cash equivalents

    —         750,000       (3c)       750,000  

Other assets

    85,525       —           85,525  
 

 

 

   

 

 

     

 

 

 

Total Assets

  $ 17,086,997       711,042         17,798,039  
 

 

 

   

 

 

     

 

 

 

Liabilities and Stockholders’ Equity

       

Current Liabilities:

       

Current maturities of long-term debt

  $ 44,456     $ —         $ 44,456  

Accounts payable

    199,774       —           199,774  

Deferred revenue

    315,483       —           315,483  

Accrued expenses and other current liabilities

    398,750       (32,591     (3d)       366,159  
 

 

 

   

 

 

     

 

 

 

Total current liabilities

    958,463       (32,591       925,872  

Long-term debt

    10,130,009       (1,045,092     (3e)       9,084,917  

Mandatorily redeemable preferred securities—authorized 1,000,000 shares Series A of $0.01 par value; issued and outstanding 750,000 shares of $0.01 par value as of September 30, 2017

    658,402       —           658,402  

Deferred subscriber acquisition revenue

    324,340       —           324,340  

Deferred tax liabilities

    2,077,656       (42,117     (3f)       2,035,539  

Other liabilities

    141,425       —           141,425  
 

 

 

   

 

 

     

 

 

 

Total Liabilities

    14,290,295       (1,119,800       13,170,495  
 

 

 

   

 

 

     

 

 

 

Stockholders’ Equity:

       

Common stock—authorized 3,999,000,000 shares of $0.01 par value; issued and outstanding shares—641,087,675 (historical); 752,198,786 shares issued and outstanding (pro forma)

    2       1,111    

 

(3g)

 

    1,113  

Additional paid-in capital

    4,432,599       1,897,294       (3g)       6,329,893  

Accumulated deficit

    (1,636,400     (67,563     (3h)       (1,703,963

Accumulated other comprehensive income

    501       —           501  
 

 

 

   

 

 

     

 

 

 

Total Stockholders’ Equity

    2,796,702       1,830,842         4,627,544  
 

 

 

   

 

 

     

 

 

 

Total Liabilities and Stockholders’ Equity

  $ 17,086,997       711,042         17,798,039  
 

 

 

   

 

 

     

 

 

 

 

(a) In accordance with Article 11 of Regulation S-X, these pro forma financial statements give effect to the ADT Acquisition and the completion of this offering, including the issuance of common stock and the use of proceeds therefrom, as described under “Use of Proceeds.”

The accompanying notes are an integral part of this Unaudited Pro Forma Condensed Combined Balance

Sheet.

 

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ADT Inc.

Unaudited Pro Forma Condensed Combined Statement of Operations

Nine Months Ended September 30, 2017

(in thousands, except per share data)

 

     ADT Inc.
Historical
    Offering
Adjustments
(Note 3)
           Pro Forma
(ADT
Acquisition and
Completion of
Offering)(a)
       

Monitoring and related services

   $ 3,017,026     $ —          $ 3,017,026    

Installation and other

     192,944       —            192,944    
  

 

 

   

 

 

      

 

 

   

Total Revenue

     3,209,970       —            3,209,970    

Cost of revenue

     658,095       —            658,095    

Selling, general and administrative expenses

     923,048       (15,000     3(i)        908,048    

Depreciation and intangible asset amortization

     1,387,245       —            1,387,245    

Merger, restructuring, integration, and other costs

     54,170       —            54,170    
  

 

 

   

 

 

      

 

 

   

Operating income

     187,412       15,000          202,412    

Interest expense, net

     (553,529     74,928       3(j)        (478,601  

Other income

     31,634       —            31,634    
  

 

 

   

 

 

      

 

 

   

Loss before income taxes

     (334,483     89,928          (244,555  

Income tax benefit

     38,922       (34,532     3(k)        4,390    
  

 

 

   

 

 

      

 

 

   

Net loss

   $ (295,561   $ 55,396        $ (240,165  
  

 

 

   

 

 

      

 

 

   

Loss per share:

           

Basic and diluted

   $ (0.46        $ (0.32  

 

3(l)

 

Weighted average shares:

           

Basic and diluted

     641,061            752,172    

 

3(l)

 

 

(a) In accordance with Article 11 of Regulation S-X, these pro forma financial statements give effect to the ADT Acquisition and the completion of this offering, including the issuance of common stock and the use of proceeds therefrom, as described under “Use of Proceeds.”

The accompanying notes are an integral part of this Unaudited Pro Forma Condensed Combined Statement of Operations.

 

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ADT Inc.

Unaudited Pro Forma Condensed Combined Statement of Operations

Year Ended December 31, 2016

(in thousands, except per share data)

 

    ADT Inc.
Historical
    The ADT
Corporation
Historical
(Note 1)
    Acquisition
Adjustments
(Note 2)
          Subtotal     Offering
Adjustments
(Note 3)
          Pro Forma
(ADT
Acquisition and
Completion of
Offering)(a)
       

Monitoring and related services

  $ 2,748,222     $ 1,143,357     $ 62,845       2(a)     $ 3,954,424     $ —         $ 3,954,424    

Installation and other

    201,544       69,352       (58,404     2(a)       212,492       —           212,492    
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

Total Revenue

  $ 2,949,766     $ 1,212,709     $ 4,441       2(a)     $ 4,166,916     $ —         $ 4,166,916    

Cost of revenue

    693,430       176,259       —           869,689       —           869,689    

Selling, general and administrative expenses

    858,896       425,315       (45,288     2(b)       1,238,923       (20,000     3(i)       1,218,923    

Depreciation and intangible asset amortization

    1,232,967       394,827       61,370       2(c)       1,689,164       —           1,689,164    

Merger, restructuring, integration, and other costs

    393,788       46,595       (354,197     2(d)       86,186       —           86,186    
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

Operating (loss) income

    (229,315     169,713       342,556         282,954       20,000         302,954    

Interest expense, net

    (521,491     (71,605     (157,174     2(e)       (750,270     99,899       3(j)       (650,371  

Other (expense) income

    (51,932     244       —           (51,688     —           (51,688  
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

(Loss) income before income taxes

    (802,738     98,352       185,382         (519,004     119,899         (399,105  

Income tax benefit (expense)

    266,151       (31,869     (71,187     2(f)       163,095       (46,041     3(k)       117,054    
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

Net (loss) income

  $ (536,587   $ 66,483     $ 114,195       $ (355,909   $ 73,858       $ (282,051  
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

Loss per share:

                 

Basic and diluted

  $ (0.84               $
(0.38

 

 

3(l)

 

Weighted average shares:

                 

Basic and diluted

    640,725                   751,836       3(l)  

 

(a) In accordance with Article 11 of Regulation S-X, these pro forma financial statements give effect to the ADT Acquisition and the completion of this offering, including the issuance of common stock and the use of proceeds therefrom, as described under “Use of Proceeds.”

The accompanying notes are an integral part of this Unaudited Pro Forma Condensed Combined Statement of Operations.

 

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NOTES TO THE UNAUDITED PRO FORMA FINANCIAL INFORMATION

1. The ADT Corporation Historical

The ADT Corporation Historical information presented in the table above presents The ADT Corporation Historical results for the period ended May 1, 2016, after Reclassification, as set forth below.

The ADT Corporation Acquisition

On May 2, 2016, the Company completed its acquisition of The ADT Corporation. Total consideration in connection with the ADT Acquisition was $12,114 million, which includes the assumption of The ADT Corporation’s outstanding debt (inclusive of capital lease obligations) at fair value of $3,551 million, and cash of $54 million on the acquisition date.

The Company funded the ADT Acquisition, as well as amounts due for merger costs, using the net proceeds from a combination of the following:

 

  (i) equity proceeds of $3,571 million, net of issuance costs, which resulted from equity issuances by the Company and Ultimate Parent to our Sponsor and certain other investors;

 

  (ii) incremental first lien term loan borrowings of $1,555 million and the issuance of $3,140 million of Prime Notes; and

 

  (iii) issuance by the Company of 750,000 shares of Series A preferred securities (the “Koch Preferred Securities”) and issuance by Ultimate Parent of the Warrants to the Koch Investor for an aggregate amount of $750 million. The Company allocated $659 million to the Koch Preferred Securities, which is reflected net of issuance costs of $27 million as a liability in the Company’s historical consolidated balance sheet. The Company allocated the remaining $91 million in proceeds to the Warrants, which proceeds were contributed by Ultimate Parent in the form of common equity to the Company, net of $4 million in issuance costs.

Accounting Policies

The Company reviewed the accounting policies of The ADT Corporation and is not aware of any accounting policy differences between the Company and The ADT Corporation that would have a material impact on the Company’s consolidated financial statements. The unaudited pro forma financial information, therefore, assumes there are no differences in accounting policies between the two companies.

 

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The ADT Corporation Historical Presentation

The ADT Corporation’s historical condensed combined statement of operations data for the period January 1, 2016 to May 1, 2016 has been derived by adding the historical unaudited condensed consolidated statement of operations for the three months ended March 31, 2016 and the historical unaudited condensed consolidated statement of operations for the period April 1, 2016 to May 1, 2016, as illustrated in the table below:

The ADT Corporation

Condensed Combined Statements of Operations

(unaudited)

(in thousands)

 

     Three Months
Ended
March 31,
2016
     Period from
April 1, 2016
to May 1,
2016
     The ADT
Corporation
Historical
for the
period ended
May 1, 2016
 

Monitoring and related services

   $ 848,322      $ 295,035      $ 1,143,357  

Installation and other

     51,347        18,005        69,352  
  

 

 

    

 

 

    

 

 

 

Total revenue

   $ 899,669      $ 313,040      $ 1,212,709  

Cost of revenue

     404,181        139,193        543,374  

Selling, general and administrative expenses

     325,682        140,529        466,211  

Radio conversion costs

     26,179        7,232        33,411  
  

 

 

    

 

 

    

 

 

 

Operating income

     143,627        26,086        169,713  

Interest expense, net

     (53,380      (18,225      (71,605

Other income

     4        240        244  
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     90,251        8,101        98,352  

Income tax expense

     (27,859      (4,010      (31,869
  

 

 

    

 

 

    

 

 

 

Net income

   $ 62,392      $ 4,091      $ 66,483  
  

 

 

    

 

 

    

 

 

 

Reclassifications

The ADT Corporation’s historical presentation of certain expenses has been reclassified to conform to the Company’s presentation as follows:

 

     Before
Reclassification
     Reclassification     Note     After
Reclassification
 
     (in thousands)  

Cost of revenue

   $ 543,374      $ (367,115     (i   $ 176,259  

Selling, general and administrative expenses

     466,211        (40,896     (i), (ii), (iii     425,315  

Radio conversion costs

     33,411        (33,411     (ii     —    

Depreciation and intangible asset amortization

     —          394,827       (i     394,827  

Merger, restructuring, integration, and other costs

     —          46,595       (iii     46,595  

 

(i) To reclassify amortization on dealer and customer intangible assets and depreciation on subscriber system assets historically recorded to cost of revenue, and depreciation on property and equipment and other intangible assets historically recorded to selling, general and administrative expenses, to conform to the Company’s presentation as depreciation and intangible asset amortization.
(ii) To reclassify radio conversion costs to conform to the Company’s presentation as selling, general and administrative expenses.
(iii) To reclassify certain merger, restructuring, integration, and other costs historically recorded to selling, general and administrative expenses, to conform to the Company’s presentation as merger, restructuring, integration and other costs.

 

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2. Acquisition Adjustments

Pro Forma Adjustments

Unaudited Pro Forma Condensed Combined Statements of Operations—Year Ended December 31, 2016

 

(a) Reflects the impact of:

 

  (i) the reversal of a purchase accounting adjustment related to the write-down to fair value of deferred revenue associated with services not yet rendered of $63 million that is directly related to the ADT Acquisition, but does not have a continuing impact on the Company; and

 

  (ii) the elimination of The ADT Corporation historical amortization of deferred installation revenue of $58 million as a result of the purchase price allocation for the ADT Acquisition as if the acquisition had occurred on January 1, 2016 because the application of this purchase accounting adjustment has a continuing impact on the Company.

 

(b) Reflects the impact of:

 

  (i) the elimination of The ADT Corporation historical amortization of deferred subscriber acquisition costs of $52 million as a result of the purchase price allocation for the ADT Acquisition as if the acquisition had occurred on January 1, 2016 because the application of this purchase accounting adjustment has a continuing impact on the Company; and

 

  (ii) an increase in management fees of $7 million associated with the Management Consulting Agreement directly related to the ADT Acquisition as if the acquisition had occurred on January 1, 2016 because it has a continuing impact on the Company due to the term of the agreement (see “Certain Relationships and Related Party Transactions—Management Consulting Agreement”).

 

(c) To record the following net increase in depreciation and intangible asset amortization as a result of the purchase price allocation associated with the ADT Acquisition:

 

    Year Ended
  December 31,  
2016
 
    (in thousands)  

Amortization of intangible assets(i)

  $ 281,133  

Subscriber system assets and property and equipment depreciation(ii)

    175,064  

Elimination of historical The ADT Corporation depreciation and intangible asset amortization expense

    (394,827
 

 

 

 

Net pro forma adjustment

  $ 61,370  
 

 

 

 

 

   (i) Primarily consists of amortization of customer relationships and dealer relationships under the ADT Authorized Dealer Program (as defined herein). As of the date of the ADT Acquisition, customer relationships have a weighted average remaining useful life of approximately 6 years, and are amortized on an accelerated basis. The following table summarizes the amortization expense associated with the $4,676 million related to customer relationships acquired as part of the ADT Acquisition:

 

Pro forma amortization of customer relationships (in thousands):

  

Year 1

   $ 750,043  

Year 2

     750,043  

Year 3

     750,043  

Year 4

     726,621  

Year 5

     638,818  

The Company maintains agreements with a network of third-party independent alarm dealers who sell alarm equipment and ADT Authorized Dealer-branded monitoring and interactive services to end users (the “ADT Authorized Dealer Program”). The dealers of this program generate new end user contracts with customers which

 

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the Company has the right, but not the obligation, to purchase from the dealer. The Company may charge back the acquisition cost of any end user contract if the end user contract is cancelled during the charge-back period, generally twelve to fifteen months from acquisition by the Company. Dealer relationships have a remaining life of 19 years and are amortized on a straight-line basis.

 

  (ii) As of The ADT Corporation acquisition date, subscriber system assets have a weighted average remaining useful life of approximately 7 years, and are depreciated on an accelerated basis. Property and equipment has a remaining average life of 3 years and are depreciated on a straight-line basis.

 

(d) To remove transaction costs associated with the ADT Acquisition of $354 million included in the historical results, as these costs will not have a continuing impact on the Company’s results.

 

(e) To record incremental interest expense (including related amortization of debt issuance costs and discount) of $168 million associated with borrowings to fund the ADT Acquisition as a result of: (1) the incremental first lien term loan of $1,555 million; (2) the issuance of $3,140 million of Prime Notes; (3) the amortization of issuance costs and fees associated with the $255 million 2021 Revolving Credit Facility; (4) the Koch Preferred Securities, which have an aggregate stated value of $750 million (dividends for the Koch Preferred Securities are recorded as interest expense); and (5) the amortization of the fair value adjustment made to the ADT Notes assumed as a result of the acquisition. These increases are net of the removal of interest expense of $11 million on The ADT Corporation debt repaid (including related amortization of capitalized debt acquisition costs) in connection with the consummation of the acquisition.

A 1/8% increase or decrease in variable interest rates would result in a change in interest expense on our variable rate debt of approximately $1 million for the year ended December 31, 2016.

 

(f) To record the income tax impact of the pro forma adjustments at the blended statutory rate of 38.4%. The ADT Corporation operated in multiple jurisdictions, and as such the statutory rate may not reflect the actual impact of the tax effects of the adjustments.

3. Offering Adjustments

Unaudited Pro Forma Condensed Combined Balance Sheet

 

(a) Reflects the pro forma net adjustment of a $37 million decrease to cash and cash equivalents to reflect estimated net proceeds of approximately $1,900 million from this offering, and the pro forma net adjustment of $1,937 million decrease to cash and cash equivalents to reflect the use of proceeds from this offering and cash on hand for the redemption of $1,057 million aggregate principal amount of Prime Notes and the payment of the related call premium and interest, and the payment of related fees and expenses. The Company intends to place approximately $750 million of the net proceeds from this offering in restricted cash, see (c) below.

 

(b) Reflects the pro forma adjustment of approximately $2 million to reclassify prepaid fees and expenses directly related to this offering into additional paid-in capital as a reduction against offering proceeds.

 

(c) Reflects the pro forma net adjustment of a $750 million increase to restricted cash to reflect the establishment of the restricted cash balance relating to the redemption of the Koch Preferred Securities, which the Company is required to deposit into a separate account pursuant to the terms of the certificate of designation and the other definitive documents governing the Koch Preferred Securities. The cash amount in this account may only be used by the Company to redeem the Koch Preferred Securities and pay the related redemption premium and other related amounts. The pro forma effect of the redemption of the Koch Preferred Securities and the related reduction in interest expense (dividends on the Koch Preferred Securities are recorded as interest expense) are not presented in the unaudited pro forma condensed combined balance sheet and statement of operations, respectively, because the redemption is not factually supportable as the actual redemption date is currently unknown.

 

(d) Reflects the pro forma adjustment to reflect the payment of accrued interest under indebtedness, repurchased, repaid or redeemed upon consummation of this offering.

 

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(e) Reflects the pro forma net adjustment of $1,045 million to long-term debt to reflect (i) the redemption of $1,057 million aggregate principal amount of Prime Notes and the payment of the related call premium, and (ii) the write-off of unamortized debt issuance costs associated with the repayment of the principal amount of Prime Notes.

 

(f) Reflects the pro forma adjustment to deferred tax liabilities attributable to pro forma adjustments at the blended statutory rate assumed in effect at September 30, 2017 of 38.4%.

 

(g) Reflects the pro forma net adjustments of $1,111 million to common stock and $1,897 million to additional paid-in capital (net of the estimated underwriting discounts and commissions, and estimated offering expenses) to reflect the issuance of 111,111,111 shares of common stock in this offering.

 

(h) Reflects the pro forma net adjustment of a $68 million to accumulated deficit to reflect the write-off of issuance costs and extinguishment of debt resulting from the redemption of $1,057 million aggregate principal amount of Prime Notes using the net proceeds of this offering, and to reflect the pro forma adjustment to income tax benefit attributable to pro forma adjustments using the Company’s blended statutory federal and state income tax rates in effect at September 30, 2017 of 38.4%. The Company expects its effective tax rate to vary from these estimated statutory tax rates in future years.

Any decrease in net proceeds from the amount set forth in 3(a) above would decrease the amount of cash and cash equivalents on the Company’s balance sheet. An increase in net proceeds from the amount set forth in 3(a) above would increase the amount of cash and cash equivalents on the Company’s balance sheet.

Unaudited Pro Forma Condensed Combined Statements of Operations

 

(i) Reflects the pro forma adjustment to eliminate management fees to our Sponsor under the Management Consulting Agreement. This agreement will terminate in accordance with its terms upon the consummation of this offering.

 

(j) Reflects the pro forma adjustment to eliminate interest expense associated with the repayment of the Prime Notes using the net proceeds from this offering.

 

(k) Reflects the income tax expense impact of the pro forma adjustments at the blended statutory rate assumed to be in effect during this period of 38.4%. The Company operates in multiple jurisdictions, and as such the statutory rate may not reflect the actual impact of the tax effects of the adjustments.

 

(l) Reflects the adjustment of the weighted average shares outstanding used to compute basic and diluted loss per share to give effect to the issuance of shares of common stock in this offering, based on an assumed initial public offering price of $18.00 per share, which is the midpoint of the price range set forth on the cover page of the prospectus.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this prospectus, as well as the information presented under “Selected Historical Consolidated Financial Data” and “Unaudited Pro Forma Condensed Combined Financial Information.” The following discussion and analysis contains forward-looking statements about our business, operations and financial performance based on current plans and estimates that involve risks, uncertainties, and assumptions. Actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause such differences are discussed in the sections of this prospectus titled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”

OVERVIEW

We are the leading provider of monitored security, interactive home and business automation and related monitoring services in the United States and Canada. We offer our residential, commercial, and multi-site customers a comprehensive set of burglary, video, access control, fire and smoke alarm, and medical alert solutions. Our core professional monitored security offering is complemented by a broad set of innovative products and services, including interactive home and business automation solutions that are designed to control access, react to movement, and sense carbon monoxide, flooding, and changes in temperature or other environmental conditions, as well as address personal emergencies, such as injuries, medical emergencies, or incapacitation. These products and services include interactive technologies to enhance our monitored solutions and to allow our customers to remotely manage their residential and commercial environments by adding increased automation through video, access control, and other smart building functionality. Through ADT Pulse, customers can use their smart phones, tablets, and laptops to arm and disarm their security systems, adjust lighting or thermostat levels, view real-time video of their premises, and program customizable schedules for the management of a range of smart home products. ADT Pulse customers can also arm their systems via Amazon Alexa-enabled devices, such as an Amazon Echo or Echo Dot.

In addition, we offer professional monitoring of third party devices through our ADT Canopy platform. ADT Canopy enables other companies to integrate solutions into our monitoring and billing platform and allows us to provide monitoring solutions to customers who do not currently have an ADT security system or interactive automation platform installed on premise.

As of September 30, 2017, we serve approximately 7.2 million customers, excluding contracts monitored but not owned. We believe we are approximately five times larger than the next residential competitor, with an approximate 30% market share in the residential monitored security industry in the United States and Canada. We are one of the largest full-service companies with a national footprint providing both residential and commercial monitored security. We deliver an integrated customer experience by maintaining the industry’s largest sales, installation, and service field force, as well as a 24/7 professional monitoring network, all supported by approximately 18,000 employees visiting approximately 10,000 homes and businesses daily.

BASIS OF PRESENTATION

On July 1, 2015, we acquired Protection One (the “Protection One Acquisition”). Additionally, on July 1, 2015, we acquired ASG (the “ASG Acquisition” and, together with the Protection One Acquisition, the “Formation Transactions”).

On May 2, 2016, we acquired The ADT Corporation (the “ADT Acquisition”). Prior to the ADT Acquisition, The ADT Corporation was a publicly traded corporation listed on The New York Stock Exchange.

Protection One is the predecessor of ADT Inc. for accounting purposes. The period presented prior to the Protection One Acquisition, on July 1, 2015, is comprised solely of Predecessor activity and is hereinafter

 

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referred to as the “Predecessor.” The period presented after the Successor’s (as defined herein) inception on May 15, 2015 (“Inception”) is comprised of our activity which is, prior to the ADT Acquisition on May 2, 2016, the collective activity of Protection One and ASG, and after the ADT Acquisition on May 2, 2016, the collective activity of The ADT Corporation, Protection One and ASG and is hereinafter referred to as the “Successor.”

All financial information presented in this prospectus supplement have been prepared in U.S. dollars in accordance with generally accepted accounting principles in the United States of America (“GAAP”).

We report financial and operating information in one segment. Our operating segment is also our reportable segment.

We have presented results of operations, including the related discussion and analysis, for the following periods:

 

    nine months ended September 30, 2017 compared to nine months ended September 30, 2016;

 

    year ended December 31, 2016 compared to the period from Inception through December 31, 2015 (Successor) and the period from January 1, 2015 through June 30, 2015 (Predecessor); and

 

    the period from Inception through December 31, 2015 (Successor) and the period from January 1, 2015 through June 30, 2015 (Predecessor) compared to the year ended December 31, 2014 (Predecessor).

FACTORS AFFECTING OPERATING RESULTS

Our subscriber-based business requires significant upfront investment to generate new customers, which in turn provides predictable contractual recurring revenue generated from our monitoring fees and additional services. We focus on the following key drivers of our business with the intent of optimizing returns on new customer acquisition expenditures and cash flow generation: best-in-class customer service; disciplined, high-quality residential, commercial, and multi-site customer additions; efficient customer acquisition; reduced costs incurred to provide ongoing services to customers; and increased customer retention.

Our ability to add new subscribers depends on the overall demand for our products and solutions, which is driven by a number of external factors. The overall economic condition in the geographies in which we operate can impact our ability to attract new customers and grow our business in all customer channels. Growth in our residential customer base can be influenced by the overall state of the housing market. Growth in our commercial and multi-site customer base can be influenced by the rate at which new businesses begin operating or existing businesses grow. The demand for our products and solutions is also impacted by the perceived threat of crime as well as the quality of the service of our competitors.

The monthly fees that we generate from any individual customer depend primarily on the customer’s level of service. We offer a wide range of services at various price points, from basic burglar alarm monitoring to our full suite of interactive services. Our ability to increase monthly fees at the individual customer level depends on a number of factors, including our ability to effectively introduce and market additional features and services that increase the value of our offerings to customers, which we believe drives customers to purchase higher levels of service and supports our ability to make periodic adjustments to pricing.

Attrition has a direct impact on the number of customers we monitor and service, as well as our financial results, including revenues, operating income, and cash flows. A portion of our customer base can be expected to cancel its service every year. Customers may choose not to renew or may terminate their contracts for a variety of reasons including, but not limited to, relocation, cost, loss to competition, or service issues.

In the third quarter of 2017, there were three hurricanes impacting certain areas in which we operate that resulted in power outages and service disruptions to certain of our customers. The financial impact from these hurricanes to the third quarter 2017 results was not material. We are currently in the process of estimating the potential financial and business impacts these hurricanes may have on future periods.

 

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SIGNIFICANT EVENTS

The comparability of our results of operations have been significantly impacted by the following:

On July 1, 2015, we consummated the Formation Transactions. The Formation Transactions were funded by a combination of equity invested by our Sponsor and the Predecessor’s management of $755 million, as well as borrowings under (i) the first lien credit facilities, which included a $1,095 million term loan facility and a $95 million revolving credit facility, and (ii) a $260 million second lien term loan facility.

On May 2, 2016, we consummated the ADT Acquisition which significantly increased our market share in the security industry, making us the largest monitored security company in the United States and Canada. Total consideration in connection with the ADT Acquisition was $12,114 million, which included the assumption, on the acquisition date, of The ADT Corporation’s outstanding debt (inclusive of capital lease obligations) at a fair value of $3,551 million and cash of approximately $54 million.

We funded the ADT Acquisition as well as related transaction costs, using the net proceeds from a combination of the following:

 

  (i) equity proceeds of $3,571 million, net of issuance costs, which resulted from equity issuances by the Company and Ultimate Parent to our Sponsor and certain other investors;

 

  (ii) incremental first lien term loan borrowings of $1,555 million and the issuance of $3,140 million of Prime Notes; and

 

  (iii) issuance by the Company of 750,000 shares of Series A preferred securities (the “Koch Preferred Securities”) and issuance by Ultimate Parent of the Warrants to the Koch Investor for an aggregate amount of $750 million. The Company allocated $659 million to the Koch Preferred Securities, which is reflected net of issuance costs of $27 million as a liability in the Company’s historical consolidated balance sheet. The Company allocated the remaining $91 million in proceeds to the Warrants, which was contributed by Ultimate Parent in the form of common equity to the Company, net of $4 million in issuance costs.

Refer to Notes to the consolidated financial statements included elsewhere in this prospectus for additional information regarding these acquisitions and our debt, respectively.

KEY PERFORMANCE INDICATORS

In evaluating our financial results, we review the following key performance indicators.

Recurring Monthly Revenue (“RMR”). RMR is generated by contractual monthly recurring fees for monitoring and other recurring services provided to our customers, including contracts monitored but not owned. Our computation of RMR may not be comparable to other similarly titled measures reported by other companies. We believe the presentation of RMR is useful because it measures the volume of revenue under contract at a given point in time. Management monitors RMR, among other things, to evaluate our ongoing performance.

Gross Customer Revenue Attrition. Gross customer revenue attrition is defined as the recurring revenue lost as a result of customer attrition, net of dealer charge-backs and reinstated customers, excluding contracts monitored but not owned. Customer sites are considered canceled when all services are terminated. Dealer charge-backs represent customer cancellations charged back to the dealers because the customer canceled service during the charge-back period, generally twelve to fifteen months.

Gross customer revenue attrition is calculated on a trailing twelve month basis, the numerator of which is the annualized recurring revenue lost during the period due to attrition, net of dealer charge-backs and

 

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reinstatements, and the denominator of which is total annualized recurring revenue based on an average of recurring revenue under contract at the beginning of each month during the period. Recurring revenue is generated by contractual monthly recurring fees for monitoring and other recurring services provided to our customers.

Adjusted EBITDA. Adjusted EBITDA is a non-GAAP measure that we believe is useful to investors and lenders to measure the operational strength and performance of our business. Our definition of Adjusted EBITDA, a reconciliation of Adjusted EBITDA to net loss (the most comparable GAAP measure) and additional information, including a description of the limitations relating to the use of Adjusted EBITDA, are provided under “—Non-GAAP Measures.”

Free Cash Flow. Free Cash Flow is a non-GAAP measure that our management employs to measure cash that is available to repay debt, make other investments, and pay dividends. Our definition of Free Cash Flow, a reconciliation of Free Cash Flow to net cash provided by operating activities and additional information, including a description of the limitations relating to the use of Free Cash Flow, are provided under “—Non-GAAP Measures.”

RESULTS OF OPERATIONS

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

The following table sets forth our consolidated results of operations, summary cash flow data, and key performance indicators for the periods presented:

 

     For the Nine Months Ended              
     September 30,
2017
    September 30,
2016
    Change     % Change  
     (in thousands)  

Results of Operations:

        

Monitoring and related services

   $ 3,017,026     $ 1,757,923     $ 1,259,103       72

Installation and other

     192,944       140,691       52,253       37
  

 

 

   

 

 

   

 

 

   

Total revenue

     3,209,970       1,898,614       1,311,356       69

Cost of revenue

     658,095       465,357       192,738       41

Selling, general and administrative expenses

     923,048       561,337       361,711       64

Depreciation and intangible asset amortization

     1,387,245       805,389       581,856       72

Merger, restructuring, integration, and other costs

     54,170       370,860       (316,690     (85 )% 
  

 

 

   

 

 

   

 

 

   

Operating income (loss)

     187,412       (304,329     491,741       (162 )% 

Interest expense, net

     (553,529     (337,441     (216,088     64

Other income (expense)

     31,634       (39,567     71,201       (180 )% 
  

 

 

   

 

 

   

 

 

   

Loss before income taxes

     (334,483     (681,337     346,854       (51 )% 

Income tax benefit

     38,922       229,695       (190,773     (83 )% 
  

 

 

   

 

 

   

 

 

   

Net loss

   $ (295,561   $ (451,642   $ 156,081       (35 )% 
  

 

 

   

 

 

   

 

 

   

Summary Cash Flow Data:

        

Net cash provided by operating activities

   $ 1,262,340     $ 381,813     $ 880,527       231

Net cash used in investing activities

   $ (1,038,049   $ (9,062,956   $ 8,024,907       (89 )% 

Net cash (used in) provided by financing activities

   $ (129,586   $ 8,829,270     $ (8,958,856     (101 )% 

Key Performance Indicators:(1)

        

RMR

   $ 333,814     $ 327,228     $ 6,586       2

Gross customer revenue attrition (percent)(2)

     13.8     15.2     (1.4) % points       N/M  

Adjusted EBITDA(3)

   $ 1,754,383     $ 979,758     $ 774,625       79

Free Cash Flow(3)

 &