ADT defends dealer program

Wednesday, January 1, 2003

BOCA RATON, Fla. -A stinging article alleging a series of unethical business practices by ADT Authorized dealers was published in The Wall Street Journal in November, four months after corporate officials announced significant changes to the program.

The story comes as ADT’s internal evaluation of its Authorized Dealer program continues as Tyco International, the corporate parent of ADT, struggles to climb back into investor’s confidence after revelations that some former executives bilked about $600 million from the company. One former director of the company pleaded guilty in mid-December to fraud charges. Two others, including Dennis Kozlowksi, the company’s former chairman and chief executive officer, are awaiting trial.

According to the Journal, ADT dealers often went into poor, crime-ridden neighborhoods to sell security systems without regard for the credit worthiness or quality of the customer. Dealers would also be provided scripts and sales pointers to use in making a sale, which included tactics like leafleting neighborhoods with statistics of rising crime or telling homeowners they had “won” a free system, according to the Journal.

ADT officials vigorously defend the program and its viability as a valid growth vehicle and profit center for both participating dealers and ADT.

“We do not now and never have condoned business practices and marketing practices that were unethical,” said Jay Stuck, vice president of residential marketing and corporate communications. “We clearly took a very close look at the business ethics of the dealer program as a result of some criticisms in The Wall Street Journal article. ADT has redoubled its efforts to make sure that the people who participated in the program do so on a high ethical basis.”

As a result of an investigation by the Journal, at least two ADT dealers were let go from the program after the company discovered the owners of both businesses were convicted felons. According to the Journal, the company contracts out its background checks to a third party firm.

“We felt very badly that the actions of a very, very small percentage of the entire dealer network reflected badly on the entire program,” Stuck said. “But if any changes to the program resulted as a result of the article, that’s a very positive thing.”

In August, ADT officials notified its network of more than 700 dealers that it was cutting back on account acquisitions, tightening end-user credit requirements and eliminating some 200 dealers with high attrition rates or low production from the program. Together with high-profile criminal and accounting investigations being conducted into Tyco’s operations, including an Ernst & Young investigation as well as Tyco’s own internal review, ADT’s external dealer program has been a high profile part of the company’s operations, both from within the industry and from the financial community.

Over the past year, ADT has purchased nearly 700,000 accounts from its dealer network, one factor that contributed to the company’s restatement of its third quarter 2002 earnings. Through an internal review of its operations, the company determined that the growth in accounts made it possible to lower the company’s costs of acquiring an account from the dealer, beyond the actual purchase price. That connection fee, which takes into account due diligence performed by ADT as well as the costs of allowing the dealer to leverage ADT’s advertising and marketing programs, began to exceed the company’s direct expenses, said Scott MacArthur, ADT’s chief financial officer. The company decided to recognize the amount of the fee in the current period only to the extent of the direct expenses and amortize to income the balance of the fee over the life of the 10-year customer contract.

“We wanted to get a better match of revenue and expenses,” MacArthur said. “That was the reason behind the restatement.”

Tyco expected to release another analysis’ results by Dec. 30.