<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(X) QUARTERLY REPORT ( ) TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly
Period Ended December 31, 1995 Commission File No. 1-10739
----------------- -------
SENSORMATIC ELECTRONICS CORPORATION
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 34-1024665
- ------------------------------------------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification Number)
organization)
</TABLE>
951 Yamato Road, Boca Raton, Florida 33431-0700
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(407) 989-7000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
500 N.W. 12th Avenue, Deerfield Beach, Florida 33442-1795
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X . No .
----- ------
The Registrant had outstanding 73,792,539 shares of Common Stock (par value
$.01 per share) as of February 5, 1996.
<PAGE> 2
SENSORMATIC ELECTRONICS CORPORATION
INDEX
FORM 10-Q
THREE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets. . . . . . . . . . . . . . . . . . . . . 1
Consolidated Condensed Statements of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Condensed Statements of
Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Notes to Consolidated Condensed
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 4. Submission of Matters to a
Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 19
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SENSORMATIC ELECTRONICS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions, except par value amounts)
<TABLE>
<CAPTION>
December 31, 1995 June 30, 1995
(Unaudited) (See Note)
----------- ----------
<S> <C> <C>
ASSETS
Cash and marketable securities (including
marketable securities of $28 and $27
at December 31 and June 30, respectively) $ 84 $ 70
Accounts receivable, net 248 222
Deferred and installment receivables, net 64 68
Net investment in sales-type leases 103 111
Inventories, net 204 241
Revenue equipment, net 56 50
Other property, plant and equipment, net 151 151
Deferred income taxes, patents and other assets, net 207 161
Costs in excess of net assets acquired, net 484 497
------ ------
$1,601 $1,571
------ ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 69 $ 63
Accrued liabilities and income taxes payable 216 228
Debt 422 327
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value
Common stock, $.01 par value, 74 and
73 shares outstanding at December
31 and June 30, respectively 726 714
Retained earnings 239 296
Treasury stock, at cost and other (14) (13)
Currency translation adjustments (57) (44)
------ ------
Total stockholders' equity 894 953
------ ------
$1,601 $1,571
====== ======
</TABLE>
Note: The balance sheet at June 30, 1995 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
The notes to consolidated condensed financial statements on pages 4-11 are
an integral part of these statements.
1
<PAGE> 4
SENSORMATIC ELECTRONICS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months ended Six Months ended
December 31, December 31,
---------------------- ---------------------
1995 1994 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Sales $ 203 $ 190 $ 438 $ 355
Rentals 13 12 26 23
Other 29 16 48 31
-------- ----- ----- -----
Total revenues 245 218 512 409
Operating costs and expenses:
Costs of sales 116 87 229 162
Depreciation on revenue
equipment 7 3 11 7
Selling, customer service and
administrative 167 85 277 160
Restructuring charges 43 - 43 -
Research, development and
engineering 7 5 14 10
Amortization of intangible
assets 4 3 8 6
-------- ----- ----- -----
Total operating costs
and expenses 344 183 582 345
-------- ----- ----- -----
Operating income (loss) (99) 35 (70) 64
Other expenses, net (6) (1) (12) (4)
-------- ----- ----- -----
Income (loss) before income taxes (105) 34 (82) 60
Provision for (benefit from) income taxes (40) 9 (34) 15
-------- ----- ----- -----
Net income (loss) $ (65) $ 25 $ (48) $ 45
-------- ----- ----- -----
Earnings (loss) per common share $ (.88) $ .36 $(.65) $ .65
-------- ----- ----- -----
Cash dividends per common
share $ .055 $.055 $ .11 $ .11
-------- ----- ----- -----
Common shares used in
computation of
earnings (loss) per share: 74 71 74 70
-------- ----- ----- -----
</TABLE>
The notes to consolidated condensed financial statements on pages 4-11
are an integral part of these statements.
2
<PAGE> 5
SENSORMATIC ELECTRONICS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1995 AND 1994
(In millions)
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(48) $ 45
Adjustments to reconcile net income (loss)
to net cash used in
operating activities:
Depreciation and amortization 24 18
Restructuring charges 43 -
Other net non-cash charges and benefits to operations 22 6
Net changes in operating assets and
liabilities, net of effect of acquisitions (69) (97)
---- ----
Net cash used in operating activities (28) (28)
---- ----
Cash flows from investing activities:
Capital expenditures (35) (23)
Cash acquired from (paid for) acquisitions
and other investments (7) 6
Maturities of marketable securities 1 2
Increase in revenue equipment
and inventory available for lease (20) (2)
Purchases of marketable securities (1) -
Other, net - 1
---- ----
Net cash used in investing activities (62) (16)
---- ----
Cash flows from financing activities:
Bank borrowings (net of effect of acquisitions) 101 68
Cash dividends (8) (8)
Proceeds from issuances of common stock
under employee benefit plans, net 10 6
Other, net (1) 1
---- ----
Net cash provided by financing activities 102 67
---- ----
Net increase in cash 12 23
Cash at beginning of period 44 21
---- ----
Cash at end of period 56 44
Marketable securities at end of period 28 32
---- ----
Cash and marketable securities at end of period $ 84 $ 76
==== ====
</TABLE>
The notes to consolidated condensed financial statements on pages 4-11 are an
integral part of these statements.
3
<PAGE> 6
SENSORMATIC ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
a) Basis of Presentation
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-and-six-month periods
ended December 31, 1995 are not necessarily indicative of the results
that may be expected for the year ended June 30, 1996. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form
10-K/A for the year ended June 30, 1995.
b) Restructuring and other special charges
In the second quarter of fiscal 1996, the Company initiated an
extensive and systematic review of its operations, cost structure and
balance sheet aimed at reducing its operating expenses and
manufacturing costs, increasing its efficiencies and generally
strengthening its position as the world leader in electronic security.
This review of the Company's global operations focused primarily on
operational and organization structures and systems, product
rationalization and inventory valuation, receivable balances and
related collection efforts and certain other matters. This review and
resulting reorganization will result in charges totaling $138.6
million before taxes with an after-tax impact of $87.6 million. Of
the total charges before taxes, $69.5 million relate to restructuring
and $69.1 million are considered special charges. During the second
quarter, the Company recorded $111.9 million before taxes ($69.6
million after taxes) representing $42.8 million and $69.1 million of
restructuring and special charges, respectively. The remaining $26.7
million ($18.0 million after taxes) will be recorded as a
restructuring charge in the third quarter of fiscal 1996. It is
anticipated that approximately $25 million of these costs (all
relating to restructuring charges) will result in cash outlays.
Restructuring charges
Operational and organization structures and systems. In
connection with its review of operational and organization structures
and systems, management adopted a plan to consolidate certain
sales and manufacturing facilities, reorganize certain business units
and corporate functions, and eliminate redundant positions. The
Company anticipates recognizing charges of $22.2 million during the
second and third quarters primarily related to the closure of certain
facilities. $2.7 million was recorded in the second quarter and it is
anticipated that the remaining $19.5 million will be recorded during
the third quarter of fiscal 1996.
Employee termination and related personnel reorganization charges
aggregating $5.9 million were recognized in the second quarter of
fiscal 1996. These charges are largely severance costs related to the
termination of approximately 325 employees, primarily manufacturing
and administrative personnel in North America and Europe. Certain
terminated employees are
4
<PAGE> 7
receiving severance payments over time. The remaining liability for
the second quarter severance benefits aggregated approximately $3.2
million at December 31, 1995.
During the third quarter of fiscal 1996, the Company expects to
terminate an additional 450 employees consisting primarily of
manufacturing and administrative personnel in North America and
Europe. The Company anticipates that this action and related
personnel costs will result in additional restructuring charges of
$7.2 million during the third quarter of fiscal 1996.
Product rationalization. During the second quarter of fiscal
1996, the Company implemented and completed a review of its existing
products including the sourcing of such products. The purpose of this
review was to reduce the number of existing products, reduce inventory
carrying costs and to improve gross margins on continued products. As
a result of this review, the Company recorded a charge of $23.4 million
related to assets, primarily equipment, used in the manufacture of
certain products which will be manufactured under an entirely new
process or purchased from third party suppliers (rather than
manufactured internally). The equipment impairment charge represents
the difference between the carrying value of the equipment and its
fair value, which is assumed to be nominal due to its unique nature
and the fact that there is no alternative use for the equipment.
In addition, as a result of the Company's decision to reduce the
number of products, management assessed the net realizable value of
its existing supply of such products. Based upon this assessment, an
inventory provision of $10.8 million was recorded in the second
quarter.
Other special charges
Receivable balances and related collection efforts. The Company's
management conducted an extensive evaluation and review of the
collectibility of its receivable balances (including off-balance sheet
receivables) and related collection efforts during the second quarter
of fiscal 1996. This initiative was primarily the result of the
overall weakening of the retail sector and other factors. These
factors include the fact that, during the second quarter, several
commercial/industrial and retail customers filed for bankruptcy and
several other major retail customers experienced worsening financial
difficulties. Additionally, the retail sector suffered one of the
worst holiday shopping seasons in the last decade.
As a result of such evaluation and review of receivable
balances, taking into consideration the above factors, among other
things, management recorded an addition to the allowance for doubtful
accounts and accrued liabilities of approximately $45.3 million in the
second quarter which is recorded in "Selling, customer service and
administrative" expense.
Other items. The Company recorded a special charge of $23.8
million related to other items, primarily inventory. During the
second quarter of fiscal 1996, the Company completed a review of slow
moving and obsolete inventory and revenue equipment balances in light
of softening market demand for certain EAS products. The majority of
the inventory special charge relates to quantities (including parts
and work-in-process inventory) in excess of current sales forecasts,
and inventory no longer targeted for sale in the ordinary course of
business. $15.1 million, $7.1 million and $1.6 million are recorded
in "Costs of sales" "Selling, customer service and administrative"
expenses, and "Depreciation on revenue equipment", respectively.
5
<PAGE> 8
c) Receivables and net investment in sales-type leases
Amounts due to the Company in the form of accounts receivable (which
are due within 90 days), deferred receivables (which are generally due
within one year), installment receivables (which generally have
periodic payments over a term of five years) and net investment in
sales-type leases (sales-type leases) (which have periodic payments
over lease terms from five to six years) at December 31 and June 30,
1995 are summarized as follows (in millions):
<TABLE>
<CAPTION>
December 31 June 30
------------- ---------
<S> <C> <C>
Accounts receivable $284 $237
Deferred and installment receivables 103 98
Sales-type leases 167 168
---- ----
Gross receivables and sales-type leases 554 503
Less allowance for doubtful accounts (67) (27)
Unearned interest and maintenance (72) (75)
---- ----
Net receivables and leases $415 $401
==== ====
</TABLE>
The increase in the allowance for doubtful accounts is discussed in
footnote b above.
The Company received net proceeds of $211 million and $201 million
from the sale or assignment of certain of its receivables and
sales-type leases in the six months ended December 31, 1995 and 1994,
respectively. The uncollected principal balance of receivables and
sales-type leases sold which was subject to varying amounts of
recourse totaled $278 million and $254 million at December 31, 1995
and 1994, respectively. Adequate reserves have been provided for
receivables and leases sold and are included in accrued liabilities.
In December 1995, the Company entered into a 364-day, 58 million
European Currency Unit (approximately $73 million at December 31,
1995) committed facility with a group of European financial
institutions. The facility will allow certain of the Company's
European subsidiaries to sell sales-type leases on a limited
recourse basis.
6
<PAGE> 9
d) Inventory
Inventories are summarized as follows (in millions):
<TABLE>
<CAPTION>
December 31 June 30
----------- -------
<S> <C> <C>
Available for sale or lease $169 $183
Parts 44 45
Work-in-process 24 23
---- ----
237 251
Less allowance for inventory losses (33) (10)
---- ----
$204 $241
==== ====
</TABLE>
The increase in the allowance for inventory losses is discussed in
footnote b above.
e) Deferred income taxes, patents and other assets
At December 31 and June 30, 1995, deferred income taxes, patents and
other assets are comprised of the following (in millions):
<TABLE>
<CAPTION>
December 31 June 30
----------- -------
<S> <C> <C>
Deferred income taxes $ 86 $ 53
Patents and other intangibles 39 36
Prepaid expenses and deposits 24 24
Receivables from financing
institutions (due within one year) 11 8
Deferred charges 13 17
Other 34 23
---- ----
$207 $161
==== ====
</TABLE>
(See discussion of restructuring and other special charges in
footnote b).
f) Debt
Debt at December 31 and June 30, 1995 is summarized as follows (in
millions):
<TABLE>
<CAPTION>
December 31 June 30
----------- -------
<S> <C> <C>
Senior Notes $135 $135
Unsecured revolving credit notes
payable 279 182
Capital lease obligations and other,
net 8 10
---- ----
$422 $327
==== ====
</TABLE>
7
<PAGE> 10
Interest expense for the six months ended December 31, 1995 and 1994
was $17 million and $13 million, respectively. The Company made
interest payments of $18 million and $12 million for the six months
ended December 31, 1995 and 1994, respectively.
In December 1995, the Company entered into a 364-day, $320
million-equivalent committed multi-currency credit facility with a
group of U.S. and international financial institutions. The facility
replaced the Company's pre-existing $100 million committed facility
and certain other U.S. and European uncommitted facilities.
g) Income taxes
The estimated fiscal 1996 annual effective tax rate has been revised
from a 28% provision estimated in the first quarter to a 41% benefit
to reflect the impact of certain restructuring and special charges
(see footnote b) are related to jurisdictions with tax rates higher
than the effective tax rate calculated for the three months ended
September 30, 1995 (28%).
A reconciliation between the statutory U.S. Federal income tax rate of
35 percent and the estimated annual effective tax rate on income from
continuing operations before income taxes is as follows:
<TABLE>
<S> <C>
Statutory rate-U.S. Federal (35.0)%
Benefits due to tax exempt earnings
and investment income from the Puerto Rico
operations (11.1)
Amortization of costs in excess of net
assets acquired 5.2
State income tax benefit (2.7)
Research and development tax credit (2.0)
Effect of change in valuation allowance
for deferred taxes 6.5
Other (1.9)
-----
(41.0)%
-----
</TABLE>
h) Acquisitions
On December 29, 1994, the Company acquired the operations outside of
the United States, Puerto Rico and Canada of Knogo Corporation
("Knogo") for approximately 3.1 million shares of the Company's Common
Stock.
The Company's unaudited pro forma consolidated condensed statement of
income for the six months ended December 31, 1994, assuming the
acquisition of Knogo was effected at the beginning of such period, is
summarized as follows (in millions, except per share amounts):
<TABLE>
<S> <C>
Total revenues $ 441
Net income $ 46
Earnings per share $ .62
</TABLE>
8
<PAGE> 11
This pro forma information does not purport to be indicative of the
results which may have been obtained had the acquisition been
consummated at the date assumed.
In connection with acquisitions, the market value of the assets
acquired for the six months ended December 31, 1995 and 1994 was as
follows (in millions):
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash paid (net of cash acquired) $ 7 $ (6)
Liabilities assumed and/or incurred - 66
Common stock issued - 137
---- ------
Market value of assets acquired $ 7 $ 197
==== ======
</TABLE>
i) Financial Instruments
(i) Currency hedging instruments
The Company has purchased forward exchange contracts and options
designated to hedge certain intercompany transactions and identifiable
anticipatory intercompany commitments which are denominated in foreign
currencies. The Company is reevaluating this policy as a result of
recently enacted accounting principles. At December 31, 1995, the
Company owned forward exchange contracts which allowed it to sell
currencies for the indicated U.S. dollar amounts with respect to
fiscal 1996 and 1997 intercompany transactions and commitments, as
follows (in millions):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Currencies
----------
French Francs $28.0 $38.5
Deutschemarks 17.8 19.8
British Pounds 18.3 13.9
Spanish Pesetas 8.8 10.8
-
Other - 9.4
----- -----
$72.9 $92.4
===== =====
</TABLE>
(ii) Interest rate instruments
The Company has entered into interest rate swap and cap agreements
with financial institution counterparties in order to manage its
exposure to interest rate fluctuations associated with certain
transactions and debt. (See notes 2., 6. and 12. of Notes to
Consolidated Financial Statements in the Company's 1995 Annual Report
on Form 10-K/A for additional discussion).
9
<PAGE> 12
At December 31, 1995, the Company was a party to the following
agreements (in millions):
FIXED TO FLOATING SWAP AGREEMENTS
<TABLE>
<CAPTION>
Notional Expiration Floating Rate Fixed Rate
Amount Date to be Paid to be Received
-------- ---------- ------------- --------------
<S> <C> <C> <C>
$50 February 1996 6 Month LIBOR 5.45%
50 February 1996 6 Month LIBOR 5.40%
35 June 1996 6 Month LIBOR 5.01%
</TABLE>
The weighted average interest rate paid and received under all such
Fixed to Floating Swap Agreements at December 31, 1995 was 5.6% and
5.3%, respectively.
FLOATING TO FIXED SWAP AGREEMENTS
<TABLE>
<CAPTION>
Notional Expiration Fixed Rate Floating Rate
Amount Date to be Paid to be Received
-------- ---------- ---------- --------------
<S> <C> <C> <C>
$11 May 1999 7.75% 1 Month LIBOR
10 May 2000 5.84% 1 Month LIBOR
9 May 2000 6.16% 1 Month LIBOR
4 April 2000 6.58% 1 Month LIBOR
3 April 1999 4.60% 1 Month LIBOR
3 August 1998 4.80% 1 Month LIBOR
3 May 1998 4.94% 1 Month LIBOR
2 March 1999 4.65% 1 Month LIBOR
</TABLE>
The weighted average interest rate paid and received under all such
Floating to Fixed Swap Agreements at December 31, 1995 was 6.2% and
6.0%, respectively.
j) Prospective Accounting Changes
In October 1995, FASB Statement No. 123 "Accounting for Stock-based
Compensation" was issued. FASB 123 allows companies to adopt either
significant new fair value-based accounting rules or increased
disclosure requirements for stock-based compensation plans. It is
anticipated that the Company will adopt the disclosure requirements
rather than the fair value accounting rules beginning with the first
quarter of fiscal 1997 with no charge to earnings.
k) Reclassifications
Certain amounts in the prior period's consolidated condensed financial
statements have been reclassified to conform to the current period's
condensed presentation.
10
<PAGE> 13
l) Litigation and other matters
During the first six months of fiscal 1996, a number of actions were
filed in federal court by alleged shareholders of the Company
following announcements by the Company that, among other things, its
earnings for the quarter and year ended June 30, 1995, would be
substantially below expectations and that the scope of the Company's
year-end audit had been expanded. These actions have been
consolidated. The consolidated complaint alleges, among other things,
that the Company and certain of its current and former directors and
officers, as well as the Company's auditors, violated certain Federal
securities laws and, additionally, that the Company's auditors
negligently misrepresented certain information regarding the Company
and failed to exercise reasonable care. The claims recited in the
consolidated complaint relate to the same events and occurrences as
those alleged in the various actions referred to above, updated to
incorporate more recent events and occurrences and to reflect certain
information furnished to plaintiffs during pre-trial discovery. The
consolidated complaint requests certification of the action as a class
action on behalf of all purchasers of the common stock of the Company
and certain stock options from August 10, 1994 through October 2,
1995, including those shareholders who received common stock of the
Company in connection with the Company's merger with Knogo. The
consolidated complaint also seeks rescissory and/or compensatory
damages, pre-judgment and post-judgment interest, costs, attorneys'
fees, and other relief, and further provides that the shareholders of
the Company who received common stock of the Company in connection
with the merger with Knogo are tendering back to the Company such
shares of common stock. The consolidated complaint supersedes all
prior complaints in the consolidated actions.
Also in September 1995, three derivative actions were filed against
the Company and its directors for breach of fiduciary duties,
mismanagement and waste of corporate assets. Those claimants are
seeking, among other relief, restitution and/or damages in favor of
the Company and imposition of a constructive trust. These actions
have been consolidated.
The Company intends to vigorously defend against these actions. The
ultimate outcome of these actions cannot presently be determined.
Accordingly, no provision for any liability that may result has been
made in the consolidated financial statements.
11
<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The Company's consolidated condensed financial statements
present a consolidation of its worldwide operations. This discussion
supplements the detailed information presented in the Consolidated
Condensed Financial Statements and Notes thereto (which should be read
in conjunction with the financial statements and related notes
contained in the Company's 1995 Annual Report on Form 10-K/A and is
intended to assist the reader in understanding the financial results
and condition of the Company.
Financial Condition
Cash and marketable securities increased $14 million primarily due to
net short-term borrowings ($101 million); offset in part by: (a) net
cash used in operations ($28 million) due primarily to increases in
receivables and net investment in sales-type leases and (b) net
capital expenditures ($35 million); including approximately $21
million related to the purchases of a corporate and a business unit
headquarters. Total stockholders' equity at December 31 decreased $59
million to $894 million. The decrease in stockholders' equity is
primarily attributable to the recording of restructuring and special
charges (see "Restructuring and other special charges" under "Results
of Operations" below). The debt-to-total capitalization ratio was
0.32 to 1 at December 31, 1995, compared to 0.26 to 1 at June 30,
1995.
Total receivables and net investment in sales-type leases increased to
$415 million at December 31, 1995 from $401 million at June 30, 1995.
The increase primarily resulted from lower than anticipated sales of
receivables and leases to financing institutions during the quarter
ended December 31, 1995. The increase was partly offset by additional
allowances for doubtful accounts recorded in the second quarter of
fiscal 1996 (see "Results of Operations" below).
In December 1995, the Company entered into a 364-day, 58 million
European Currency Unit (approximately $73 million at December 31,
1995) committed facility with a group of European financial
institutions. The facility will allow certain of the Company's
European subsidiaries to sell sales-type leases on a limited recourse
basis.
Inventories at December 31, 1995 decreased $37 million from their June
30, 1995 levels primarily as a result of sales occurring during the
six months ended December 31, 1995 and additional allowances for
inventory losses recorded in conjunction with a review of existing
products (see "Results of operations" below).
Total debt increased $95 million over the June 30, 1995 balance, to
$422 million, primarily as a result of additional borrowings under
short-term credit lines.
In December 1995, the Company entered into a 364-day, $320
million-equivalent committed multi-currency credit facility with a
group of U.S. and international financial institutions. The facility
replaced the Company's pre-existing $100 million committed facility
and certain other U.S. and European uncommitted facilities.
The Company is pursuing a plan to issue medium to long-term senior
notes for $150 million to $200 million to pay down its short-term debt
outstanding under its credit facilities.
12
<PAGE> 15
The Company believes it is well positioned to meet anticipated future
capital requirements through the use of funds to be generated by
future operating activities (including the sale and assignment of
receivables and sales-type leases to financing institutions), existing
cash and marketable securities and funds available from existing
worldwide credit lines ($130 million unused at December 31, 1995).
The Company maintains a shelf registration statement filed with the
Securities and Exchange Commission under which the Company is able to
issue up to 4.5 million shares of its Common Stock (approximately 2.5
million shares remain available). These securities are available for
use in connection with acquisitions of other businesses or assets.
Results of Operations
In the second quarter of fiscal 1996, the Company initiated an
extensive and systematic review of its operations, cost structure and
balance sheet aimed at reducing its operating expenses and
manufacturing costs, increasing its efficiencies and generally
strengthening its position as the world leader in electronic security.
This review of the Company's global operations focused primarily on
operational and organization structures and systems, product
rationalization and inventory valuation, receivable balances and
related collection efforts and certain other matters. This review
and resulting reorganization will result in charges totaling $138.6
million before taxes with an after-tax impact of $87.6 million. Of
the total charges before taxes, $69.5 million relate to restructuring
and $69.1 million are considered special charges. During the second
quarter, the Company recorded $111.9 million before taxes ($69.6
million after taxes) representing $42.8 million and $60.1 million of
restructuring and special charges, respectively. The remaining $26.7
million ($18.0 million after taxes) will be recorded as a
restructuring charge in the third quarter of fiscal 1996. It is
anticipated that approximately $25 million of these costs (all
relating to restructuring charges) will result in cash outlays. Upon
completion of the restructuring activities, the Company expects to
realize an annual savings in operating expenses and manufacturing
costs of approximately $40 million. In addition, the Company
anticipates reducing other variable operating expenses exclusive of
payroll and related costs by approximately $10 million annually.
Restructuring charges
Operational and organization structures and systems. In connection
with its review of operational and organization structures and
systems, management adopted a plan to consolidate certain sales
and manufacturing facilities, reorganize certain business units and
corporate functions, and eliminate redundant positions. The Company
anticipates recognizing charges of $22.2 million during the second and
third quarters primarily related to the closure of certain facilities.
$2.7 million was recorded in the second quarter and it is anticipated
that the remaining $19.5 million will be recorded during the third
quarter of fiscal 1996.
Employee termination and related personnel reorganization charges
aggregating $5.9 million were recognized in the second quarter of
fiscal 1996. These charges are largely severance costs related to the
termination of approximately 325 employees, primarily manufacturing
and administrative personnel in North America and Europe.
Severance payments made during the second quarter aggregated $1.2
million. Certain terminated employees are receiving severance
payments over time. The remaining liability for
13
<PAGE> 16
the second quarter severance benefits aggregated approximately $3.2
million at December 31, 1995.
During the third quarter of fiscal 1996, the Company expects to
terminate an additional 450 employees consisting primarily of
manufacturing and administrative personnel in North America and
Europe. The Company anticipates that this action and related
personnel costs will result in additional restructuring charges and
payments of $7.2 million during the third quarter of fiscal 1996.
Product rationalization. During the second quarter of fiscal 1996, the
Company implemented and completed a review of its existing products
including the sourcing of such products. The purpose of this review
was to reduce the number of existing products, reduce inventory
carrying costs and to improve gross margins on continued products. As
a result, the Company recorded a charge of $23.4 million
related to assets, primarily equipment, used in the manufacture of
certain products which will be manufactured, under an entirely new
process or purchased from third party suppliers (rather than
manufactured internally). The equipment impairment charge represents
the difference between the carrying value of the equipment and its
fair value, which is assumed to be nominal due to its unique nature
and the fact that there is no alternative use for the equipment.
In addition, as a result of the Company's decision to reduce the
number of products, management assessed the net realizable value of
its existing supply of such products. Based upon this assessment, an
inventory provision of $10.8 million was recorded in the second
quarter.
Other special charges
Receivable balances and related collection efforts. The Company's
management conducted an extensive evaluation and review of the
collectibility of its receivable balances (including off-balance sheet
receivables) and related collection efforts during the second quarter
of fiscal 1996. This initiative was primarily the result of the
overall weakening of the retail sector and other factors. These
factors include the fact that, during the second quarter, several
commercial/industrial and retail customers filed for bankruptcy and
several other major retail customers experienced worsening financial
difficulties. Additionally, the retail sector suffered one of the
worst holiday shopping seasons in the last decade.
As a result of such evaluation and review of receivable balances,
taking into consideration the above factors, among other things,
management recorded an addition to the allowance for doubtful accounts
and accrued liabilities of approximately $45.3 million in the second
quarter which is recorded in 'Selling, customer service and
administrative" expense.
Other items. The Company recorded a special charge of $23.8
million related to other items, primarily inventory. During the
second quarter of fiscal 1996, the Company completed a review of slow
moving and obsolete inventory and revenue equipment balances in light
of softening market demand for certain EAS products. The majority of
the inventory special charge relates to quantities (including parts
and work-in-process inventory) in excess of current sales forecasts,
and inventory no longer targeted for sale in the ordinary course of
business. $15.1 million, $7.1 million and $1.6 million are recorded
in "Costs of sales" "Selling, customer service and administrative"
expense, and "Depreciation on revenue equipment", respectively.
14
<PAGE> 17
As a result of certain of these factors, the Company's provisions for
bad debts in future periods may be at a higher rate than historical
levels.
Three Months and Six Months Ended December 31, 1995 Compared to Three
Months and Six Months Ended December 31, 1994
Revenues for the three months and six months ended December 31, 1995
increased 12% and 25%, respectively, over the three months and six
months ended December 31, 1994. The revenue growth during the first
six months of fiscal 1996 resulted principally from increased EAS
revenues particularly from the Ultra-Max(R) product line, which is
used primarily by hard goods retail customers and is used in the
Company's Universal Product Protection (UPPsm) program for source
tagging; increased revenues from magnetic product lines; increased
sales of CCTV products used by retailers; and increased revenues from
the Commercial/Industrial Group.
The revenue growth during the second quarter resulted primarily from
increased revenues from the Commercial/Industrial Group and increased
revenues from magnetic product lines. Revenues for the second quarter
were negatively affected by a soft retail economy in the United States
and the United Kingdom, a major strike in France which adversely
affected the French economy and the reorganization of the sales and
service organization. Additionally, the second quarter fiscal 1995
revenues included certain unusually large roll-out orders from large
U.S. retailers which did not occur in fiscal 1996.
Revenues from retail customers for the EAS product lines increased 3%
to $131 million in the second quarter of fiscal 1996 and 22% to $291
million in the first six months of fiscal 1996 from the comparable
periods of fiscal 1995. These increases resulted principally from
growth of 31% in revenues in the first six months of fiscal 1996
(compared to last year) from the Ultra-Max product line, and growth of
45% and 60% in magnetic product lines in the second quarter and the
first six months of fiscal 1996, respectively.
Revenues from the CCTV product lines for retailers decreased 3% to $28
million and increased 24% to $62 million for the second quarter and
the first six months of fiscal 1996, respectively, from the comparable
periods of fiscal 1995. Revenues from the Commercial/Industrial Group
increased 53% to $50 million and 53% to $96 million (including
installation revenues) in the second quarter and the first six months
of fiscal 1996 compared to fiscal 1995, respectively, due primarily to
increased sales of CCTV and access control products to non-retail
customers, and revenue from recent acquisitions.
Gross margins were 42% and 48% for the three and six month periods
ended December 31, 1995, respectively, compared to 55% and 54% for the
comparable periods of the prior year. The decrease in margins is
primarily attributable to a change in product mix and the effects of
certain special charges aggregating $15.1 million included in costs of
sales during the second quarter (see "Restructuring and other special
charges" above). Exclusive of the effects of certain special charges
included in costs of sales, gross margins would have been 50% and 51%
for the three and six month periods ended December 31, 1995,
respectively.
15
<PAGE> 18
Total selling, customer service and administrative, and research,
development and engineering expenses, as a percentage of total
revenues, was 71% and 57% for the second quarter and the first six
months of fiscal 1996, compared to 41% and 42%, respectively, for the
comparable periods in fiscal 1995. The aggregate amount of these
operating expenses increased by 71% in the current year's first six
months over last year's comparable period primarily as a result of
certain special charges aggregating $52.4 million (see discussion
above under "Restructuring and other special charges").
Operating expenses for the three and six months ended December 31,
1995 included approximately $2 million and $4 million, respectively,
in legal expenses incurred primarily in relation to certain actions
which have been brought against the Company (see footnote l of Notes
to Consolidated Condensed Financial Statements) and a formal order of
private investigation of the Company by the Securities and Exchange
Commission (SEC) (see footnote j of Notes to Consolidated Condensed
Financial Statements in the Company's September 30, 1995 Form 10Q/A).
It is anticipated that legal expenses and related cash expenditures
will remain at an elevated level until these matters are concluded.
The Company intends to vigorously defend against the above-referenced
actions and to cooperate fully with the SEC investigation. The
ultimate outcome of these actions cannot presently be determined.
Accordingly, no provision for any liability that may result has been
made as of December 31, 1995.
Operating income for the three and six months ended December 31, 1995
decreased significantly from last year's comparable periods primarily
due to the higher level of operating costs and expenses incurred in
both periods of fiscal 1996 and the restructuring and other special
charges aggregating $111.9 million recorded in the second quarter of
fiscal 1996. Exclusive of the effects of the restructuring and other
special charges included in costs of sales and operating expenses (see
"Restructuring and other special charges" above), operating income
would have been $13.1 million and $41.8 million for the three and six
month periods ended December 31, 1995, respectively.
Total net other non-operating expenses in the second quarter and the
first six months of fiscal 1996 increased by $5 million and $8
million, respectively, compared to the comparable periods of fiscal
1995. The increase is principally due to an increase in interest
expense resulting from the higher level of short-term borrowings
outstanding during the first six months of fiscal 1996.
The Company utilizes interest rate swap agreements and currency
forward contracts and options (derivatives) to hedge certain of its
currency and interest rate risks. The Company does not enter into
speculative derivative transactions. The derivative instruments it
does purchase are not held as investments, and it is the Company's
intent to hold such instruments for their respective terms.
Therefore, changes in their fair values will have no effect on the
Company's operations, cash flows or financial position (see
Management's Discussion and Analysis of Financial Condition and
Results of Operations and Notes 1., 2., 6. and 12. of Notes to
Consolidated Financial Statements in the Company's fiscal 1995 Annual
Report on Form 10-K/A for further discussion of the Company's currency
and interest rate risks and use of derivatives).
The estimated annual effective tax rate has been revised in the second
quarter to reflect the impact of certain restructuring and special
charges (see "Restructuring and other special charges" above). The
restructuring and special charges are related to jurisdictions with
tax rates higher than the effective tax rates calculated for the three
and six months ended December 31, 1994 (25%) and for the three months
ended September 30, 1995 (28%). These deductions in higher tax
jurisdictions increase the projected tax benefit for the fiscal year.
The estimated annual effective tax rate before the restructuring and
special charges reflects an increase from the prior year resulting
primarily from the following: an increase in the relative proportion
of the Company's profits earned from international subsidiaries, which
are subject to statutory tax rates generally higher than those in the
U.S.; increases
16
<PAGE> 19
in U.S. earnings not qualifying for the U.S./Puerto Rico "Section 936"
tax benefits; and increases in amortization of costs in excess of net
assets acquired.
Consolidated net income (including the after tax charges for
restructuring and other special items of $69.6 million) for the second
quarter and first six months of fiscal 1996 decreased $90 million and
$94 million, respectively, when compared to the prior year's
comparable periods due primarily to the factors discussed above.
17
<PAGE> 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The purported shareholder class actions filed against the Company,
certain of its current and former officers and directors, and the
Company's auditors in the United States District Court for the
Southern District of Florida during the first six months of fiscal
1996, have been consolidated pursuant to an order entered November 29,
1995. The Company has been served with a Consolidated Amended Class
Action Complaint (the "Consolidated Complaint"), dated January 22,
1996, in these consolidated class actions. The Consolidated Complaint
alleges, among other things, that each of the defendants has violated
the Federal securities laws and, additionally, that the Company's
auditors negligently misrepresented certain information regarding the
Company and failed to exercise reasonable care.
The claims recited in the Consolidated Complaint relate to the same
events and occurrences as those alleged in the various class actions
referred to above, updated to incorporate more recent events and
occurrences and to reflect certain information furnished to plaintiffs
during pre-trial discovery. The Consolidated Complaint requests
certification of the action as a class action on behalf of all
purchasers of the common stock of the Company and certain stock
options from August 10, 1994 through October 2, 1995, including those
shareholders who received common stock of the Company in connection
with the Company's merger with Knogo Corporation ("Knogo"). The
Consolidated Complaint also seeks rescissory and/or compensatory
damages, pre-judgment and post-judgment interest, costs, attorneys'
fees, and other relief, and further provides that the shareholders of
the Company who received common stock of the Company in connection
with the merger with Knogo are tendering back to the Company such
shares of common stock.
The Consolidated Complaint superseded all prior complaints in the
consolidated actions, including the action originally brought by
Steven Fradin in the United States District Court for the Southern
District of New York, which was transferred to the United States
District Court for the Southern District of Florida by order entered
on December 1, 1995, and the action filed by Ernest M. Wallis on
November 17, 1995.
In addition to the Company and its auditors, the Consolidated
Complaint names as defendants the following current and former
officers and directors of the Company: Ronald G. Assaf, Chairman of
the Board and Chief Executive Officer; James E. Lineberger, a
director; Michael E. Pardue, formerly Executive Vice President, Chief
Operating Officer, Chief Financial Officer and a director; Dennis C.
Gillette, Senior Vice President; Lawrence J. Simmons, formerly Vice
President of Finance and Chief Accounting Officer; John T. Ray, Jr., a
director; Arthur Milnes, a director; Jerome M. LeWine, a director; and
Gerd Witter, Senior Vice President and President of Sensormatic
Europe.
The three derivative actions filed against the Company and
directors in September 1995 for breach of fiduciary duties,
mismanagement and waste of corporate assets have been consolidated.
The Company intends to vigorously defend against these litigations.
The Company has been notified, by receipt of a document subpoena on
February 6, 1996, that the U.S. Federal Trade Commission (FTC) has
authorized a non-public investigation to determine whether the
Company, certain other U.S. manufacturers of electronic article
surveillance (EAS) systems and unspecified others agreed to refrain
from truthful comparative advertising relating to EAS systems, or
agreed to boycott the EAS standard-setting process of the National
Association of Chain Drug Stores.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of stockholders of the Company was held on December
14, 1995. The following business was transacted:
Re-elected as directors of the Company were Thomas V. Buffett, James
E. Lineberger and John T. Ray, Jr. to serve for three-year terms.
The terms of office of the following, as directors, continued after
the meeting: Ronald G. Assaf, Timothy P. Hartman, Jerome M. LeWine,
James E. Lineberger, Dr. Arthur G. Milnes and Robert A. Vanourek.
18
<PAGE> 21
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
11) Computation of Earnings Per Common Share.
27) Financial Data Schedule (for SEC use only).
b) Reports on Form 8-K:
On November 2, 1995, the Company filed a Current
Report on Form 8-K with respect to a formal
order of private investigation entered by the
Securities and Exchange Commission In the Matter
of Sensormatic Electronics Corporation.
19
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
SENSORMATIC ELECTRONICS CORPORATION
By /S/ Garrett E. Pierce
-------------------------------
Garrett E. Pierce
Senior Vice President and
Chief Financial Officer
Date: February 20, 1996
20
<PAGE> 1
EXHIBIT 11
SENSORMATIC ELECTRONICS CORPORATION
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(IN MILLIONS)
<TABLE>
<CAPTION>
Three Months ended Six Months ended
December 31, December 31,
---------------------- ------------------------
1995 1994 1995 1994
------ ------ -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $(65) $25 $(48) $45
Common shares:
Weighted average shares
outstanding during the period 74 69 73 69
Potential dilutive exercise
of stock options
and warrants - 2 1 1
---- --- ---- ---
Shares included in computation
of earnings (loss) per share 74 71 74 70
==== === ==== ===
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SENSORMATIC ELECTRONICS FOR THE SIX MONTHS ENDED
DECEMBER 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 56
<SECURITIES> 27
<RECEIVABLES> 484
<ALLOWANCES> 69
<INVENTORY> 204
<CURRENT-ASSETS> 0
<PP&E> 242
<DEPRECIATION> 90
<TOTAL-ASSETS> 1601
<CURRENT-LIABILITIES> 0
<BONDS> 143
0
0
<COMMON> 726
<OTHER-SE> 168
<TOTAL-LIABILITY-AND-EQUITY> 1601
<SALES> 438
<TOTAL-REVENUES> 512
<CGS> 229
<TOTAL-COSTS> 240
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 50
<INTEREST-EXPENSE> 17
<INCOME-PRETAX> (82)
<INCOME-TAX> (34)
<INCOME-CONTINUING> (48)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (48)
<EPS-PRIMARY> (.65)
<EPS-DILUTED> (.65)
</TABLE>
