<PAGE> 1
UNITED STATES
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, 1997 Commission File No. 1-10739
---------------------- --------
SENSORMATIC ELECTRONICS CORPORATION
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 34-1024665
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
951 YAMATO ROAD, BOCA RATON, FLORIDA 33431-0700
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(561) 989-7000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
SAME
- --------------------------------------------------------------------------------
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 74,363,735 shares of Common Stock (par value $.01
per share) as of January 31, 1998.
<PAGE> 2
SENSORMATIC ELECTRONICS CORPORATION
INDEX
FORM 10-Q
SIX MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets................................................. 2
Consolidated Condensed Statements of
Operations ......................................................................... 3
Consolidated Condensed Statements of
Cash Flows............................................................................ 4
Notes to Consolidated Condensed
Financial Statements................................................................ 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations......................................................................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders....................................... 19
Item 5. Other Information......................................................................... 20
Item 6. Exhibits and Reports on Form 8-K.......................................................... 21
Signatures .......................................................................................... 22
</TABLE>
<PAGE> 3
SENSORMATIC ELECTRONICS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions, except par value amounts)
<TABLE>
<CAPTION>
(Unaudited)
December 31, June 30,
1997 1997
------------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 15.8 $ 21.7
Customer receivables 324.6 291.6
Inventories, net 206.3 199.6
Current portion of deferred income taxes 44.6 42.9
Other current assets 61.8 54.4
-------- --------
TOTAL CURRENT ASSETS 653.1 610.2
Customer receivales - noncurrent 141.0 138.5
Revenue equipment, net 71.5 66.8
Property, plant and equipment, net 138.5 145.5
Costs in excess of net assets acquired, net 471.4 482.7
Deferred income taxes 150.4 111.5
Patents and other assets, net 103.9 88.4
-------- --------
TOTAL ASSETS $1,729.8 $1,643.6
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 89.5 $ 21.8
Accounts payable and accured liabilities 109.5 126.1
Other current liabilities and deferred income taxes 269.1 181.5
-------- --------
TOTAL CURRENT LIABILITIES 468.1 329.4
Long-term debt 510.5 501.5
Other noncurrent liabilities and deferred income taxes 48.6 39.8
-------- ---------
1,027.2 870.7
TOTAL LIABILITIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10.0 shares authorized, none issued - -
Common stock, $.01 par value, 125.0 shares authorized, 74.3 shares
outstanding at December 31, 1997 and June 30, 1997 731.2 730.5
Retained earnings 83.1 143.7
Treasury stock at cost and other, 1.7 shares at December 31, 1997
and June 30, 1997 (13.3) (14.0)
Currency translation adjustments (98.4) (87.3)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 702.6 772.9
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,729.8 $1,643.6
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
SENSORMATIC ELECTRONICS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
December 31, December 31,
------------------------------- -------------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Sales $206.4 $212.2 $410.9 $417.2
Rentals 12.7 14.6 25.2 27.1
Installation, maintenance and other 24.6 29.8 53.0 58.3
------------- ------------- ------------- -------------
Total revenues 243.7 256.6 489.1 502.6
------------- ------------- ------------- -------------
Cost of Sales:
Costs of sales 125.3 132.1 254.2 262.2
Depreciaiton on revenue equipment 4.9 5.7 9.8 10.3
------------- ------------- ------------- -------------
Total cost of sales 130.2 137.8 264.0 272.5
------------- ------------- ------------- -------------
Gross margin 113.5 118.8 225.1 230.1
Operating expenses:
82.0 90.7 169.0 181.1
Selling, general and administrative
Restructuring charges - - 43.0 -
Research, development and engineering 6.9 6.1 13.4 11.5
Amortization of intangible assets 5.4 4.7 10.6 9.3
------------- ------------- ------------- -------------
Total operating costs and expenses 94.3 101.5 236.0 201.9
------------- ------------- ------------- -------------
Operating income (loss) 19.2 17.3 (10.9) 28.2
------------- ------------- ------------- -------------
Other (expenses) income:
Interest income 3.4 4.3 7.0 8.6
Interst expense (13.4) (12.0) (25.7) (23.6)
Litigation settlement - - (53.0) -
Other, net (1.2) (1.1) (3.1) (1.8)
------------- ------------- ------------- -------------
Total other (expenses) income (11.2) (8.8) (74.8) (16.8)
------------- ------------- ------------- -------------
Income (Loss) before income taxes 8.0 8.5 (85.7) 11.4
Provision (Benefit) for income taxes 2.6 2.4 (25.2) 3.2
------------- ------------- ------------- -------------
Net income (loss) $5.4 $6.1 $(60.5) $8.2
============= ============= ============= =============
Basic and Diluted earnings (loss)
per common share $0.07 $ 0.08 $(0.82) $0.11
============= ============= ============= =============
Cash dividends per common share $ - $0.055 $ - $0.110
============= ============= ============= =============
Number of shares used in computation
of Basic earnings (loss) per share 74.2 73.9 74.1 73.9
============= ============= ============= =============
Number of shares used in computation
of Diluted earnings (loss) per share 74.4 74.2 74.3 74.1
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
SENSORMATIC ELECTRONICS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
(Unaudited)
Six Months
Ended December 31,
----------------------
1997 1996
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(60.5) $ 8.2
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation and amortization 33.7 32.4
Restructuring charges, net 35.6 (3.6)
Litigation settlement charge 53.0 -
Net changes in operating assets and liabilities,
net of effects of acquisitions and divestitures:
Increase in receivables and sales-type leases (39.4) (35.3)
Increase in investories (10.4) (10.3)
Increase in current and deferred income taxes
relating to restructuring and litigation charges (28.8) -
Other opeating assets and liabilities, net (32.5) (3.3)
------ ------
Net cash used in operating activites (49.3) (11.9)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (12.7) (20.8)
Proceeds from sale of business, net 7.4 -
Increase in revenue equipment, net of deletions (16.4) (18.8)
Cash paid for acquisitions, net of cash acquired - (14.8)
Additional investment in acquisitions (10.2) (8.6)
Other, net (3.6) 0.7
------ ------
Net cash used in investing activities (35.5) (62.3)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank borrowings and other debt 77.3 37.1
Proceeds from issuance of common stock under employee
benefit plans and for acquisitions - 3.5
Dividends paid - (8.3)
Other, net 1.6 (0.4)
------ ------
Net cash provided by financing activities 78.9 31.9
------ ------
Net decrease in cash (5.9) (42.3)
Cash and cash equivalents at beginning of the year 21.7 113.7
------ ------
Cash and cash equivalents at end of period $ 15.8 $ 71.4
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
SENSORMATIC ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in Millions)
a) BASIS OF PRESENTATION
The consolidated condensed financial statements include the accounts of
Sensormatic Electronics Corporation and all of its subsidiaries (the
"Company"). The accompanying unaudited 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 notes 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 period ended
December 31, 1997 are not necessarily indicative of the results that
may be expected for the year ending June 30, 1998. For further
information, refer to the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the
year ended June 30, 1997.
b) RESTRUCTURING AND SPECIAL CHARGES
During the fourth quarter of fiscal 1997, the Company announced
additional restructuring activities principally pertaining to workforce
reductions in the Company's European operations and the divestment of
non-core businesses which included the U.S. commercial/industrial
direct sales and service business sold in September 1997. As a result
of these activities, the Company recorded restructuring and special
charges totaling $48.6 pretax in the fourth quarter of fiscal 1997 and
restructuring charges of $43.0 pretax in the first quarter of fiscal
1998.
The following table sets forth the details and the activity of the
Company's restructuring charge reserves from June 30, 1997 through
December 31, 1997:
<TABLE>
<CAPTION>
Reserve Reserve
Balance Balance at
at June 1998 December
30, 1997 Additions Cash Non-cash 31, 1997
------------------------------------------ ----------- ---------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Product rationalization, related
equipment charges and other $ 4.4 $ 3.0 $ - $(2.5) $ 4.9
Closure of facilities and related costs 12.2 10.6 (0.4) (2.5) 19.9
Employee termination and related costs 3.8 29.4 (7.0) - 26.2
Non-core business divestments, net 16.9 - 7.4 (3.7) 20.6
------------------------------------------ ----------- ---------- ------------- ---------- ------------
Total $ 37.3 $ 43.0 $ - $(8.7) $ 71.6
------------------------------------------ ----------- ---------- ------------- ---------- ------------
</TABLE>
The Company's restructuring plans are expected to be substantially
completed prior to the end of fiscal 1998 and the Company believes the
provisions recorded are adequate to cover the costs associated with
these plans.
5
<PAGE> 7
c) CUSTOMER RECEIVABLES
Amounts due to the Company in the form of accounts receivable (which
are generally 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 (which principally have periodic
payments over lease terms of five to six years) at December 31, 1997
and June 30, 1997 are summarized as follows :
<TABLE>
<CAPTION>
December 31 June 30
----------- --------
<S> <C> <C>
Accounts receivable $ 319.1 $ 291.2
Allowance for doubtful accounts (48.6) (51.6)
--------- --------
Total accounts receivable, net $ 270.5 $ 239.6
Less: Amounts due in 1 year, net (270.5) (239.6)
--------- --------
Total noncurrent accounts receivables, net $ - $ -
========= ========
Deferred receivables $ 5.0 $ 7.3
Installment receivables 44.1 46.0
Allowance for doubtful accounts (9.1) (7.8)
Unearned interest and maintenance (15.3) (18.0)
--------- --------
Total deferred and installment receivables, net 24.7 27.5
--------- --------
Less: Amounts due in 1 year, net (17.1) (17.6)
--------- --------
Total noncurrent deferred and
installment receivables, net $ 7.6 $ 9.9
========= ========
Sales-type leases-minimum lease payments receivable $ 224.5 $ 215.5
Allowance for uncollectible minimum lease payments (17.9) (16.4)
Unearned interest and maintenance (36.2) (36.1)
--------- --------
Total sales-type leases, net 170.4 163.0
--------- --------
Less: Amounts due in 1 year, net (37.0) (34.4)
--------- --------
Total noncurrent sales-type leases, net $ 133.4 $ 128.6
========= ========
Total customer receivables $ 465.6 $ 430.1
Less: Amounts due in 1 year, net 324.6 291.6
--------- --------
Total noncurrent customer receivables $ 141.0 $ 138.5
========= ========
</TABLE>
d) ACCOUNTS RECEIVABLE FINANCING
Effective January 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", for
the transfer of receivables that occurred subsequent to January 1,
1997. Only receivables sold or transferred under financing agreements
which meet the criteria for off-balance sheet treatment as defined by
SFAS No. 125 are recognized as receivable sales. All other transfers of
receivables are treated as a financing transaction. See Note 4 of Notes
to Consolidated Financial Statements in the Company's 1997 Annual
Report on Form 10-K for additional discussion on the Company's various
receivable financing programs.
6
<PAGE> 8
The uncollected principal balance of receivables and sales-type leases
sold prior to January 1, 1997, under then existing agreements, which
are subject to varying amounts of recourse totaled $161.9 at December
31, 1997. Loss reserves have been provided for receivables and
sales-type lease receivables sold, as deemed necessary, and are
included in accrued liabilities.
e) EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share". SFAS No. 128 supersedes Accounting
Principles Board Opinion ("APB") No. 15, "Earnings Per Share" and
various other authoritative pronouncements regarding earnings per share
("EPS"). SFAS No. 128 became effective for periods ending after
December 15, 1997. Accordingly, the Company adopted SFAS No. 128
effective December 31, 1997.
Under SFAS No. 128, primary earnings per share in accordance with APB
No. 15 is replaced with a simpler calculation called basic earnings per
share, which excludes the dilutive effect of options, warrants and
convertible securities. Diluted earnings per share under SFAS No. 128
has not changed significantly as compared to fully diluted earnings per
share under APB No. 15, but has been renamed "diluted earnings per
share".
All earnings per share amounts for all periods have been presented in
accordance with the requirements of SFAS No. 128. There was no material
change to the Company's previously reported calculation of primary and
fully diluted earnings per share under APB No. 15 as a result of the
adoption of SFAS No. 128. The following table sets forth the
computation of basic and diluted earnings per share as per SFAS No.
128:
<TABLE>
<CAPTION>
Three Months ended Six Months ended
DECEMBER 31, DECEMBER 31,
------------------- ----------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
NUMERATOR:
Net Income $ 5.4 $ 6.1 $ (60.5) $ 8.2
======== ======== ======== ========
DENOMINATOR:
Basic EPS - weighted average shares 74.2 73.9 74.1 73.9
Dilutive effect: Stock options .2 .3 .2 .2
-------- -------- -------- --------
Diluted EPS - weighted average shares 74.4 74.2 74.3 74.1
======== ======== ======== ========
Basic earnings per share $ 0.07 $ 0.08 $ (0.82) $ .11
======= ======= ======== ========
Diluted earnings per share $ 0.07 $ 0.08 - (a) $ .11
======= ======= ======== ========
</TABLE>
(a) Excluded as result is anti-dilutive.
7
<PAGE> 9
f) INVENTORY
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1997
----------------- -------------
<S> <C> <C>
Finished goods $ 160.3 $ 145.0
Raw materials and parts 54.9 58.8
Work-in-process 21.4 24.9
--------- -----------
236.6 228.7
Less allowance for inventory losses (30.3) (29.1)
--------- -----------
Total inventories, net $206.3 $ 199.6
======= =========
</TABLE>
g) DIVESTITURES
In September 1997, the Company sold its U.S. Commercial/Industrial
systems integration business. The Company also agreed, in such
transaction, to sell its monitoring business, the sale of which was
consummated in October 1997. The Company will receive total proceeds of
approximately $10.5 from the sale of these operations, of which $9.4
was paid as of December 31, 1997 and the remainder was paid in February
1998. The Company has retained ownership of all of the net accounts
receivable related to these operations totaling approximately $30.7.
The revenues of these operations prior to the divestiture date and
included in the Company's Consolidated Condensed Statement of
Operations for the six months ended December 31, 1997 and 1996 were
$10.8 and $43.1, respectively.
h) FINANCIAL INSTRUMENTS
INTEREST RATE AGREEMENTS
The Company enters into interest rate agreements, principally to manage
interest rate exposure associated with its sale of certain U.S.
receivables. See Note 14 of Notes to Consolidated Financial Statements
in the Company's 1997 Annual Report on Form 10-K for additional
discussion.
At December 31, 1997, the Company was a party to the following
significant interest rate agreements:
(1) 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>
$5.0 May 1999 7.75% 1 Month LIBOR
4.5 September 1999 5.84% 1 Month LIBOR
4.5 May 2000 6.16% 1 Month LIBOR
1.5 April 2000 6.58% 1 Month LIBOR
0.7 April 1999 4.60% 1 Month LIBOR
0.6 August 1998 4.80% 1 Month LIBOR
0.4 May 1998 4.94% 1 Month LIBOR
0.4 March 1999 4.65% 1 Month LIBOR
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average interest rates paid and received under all such
Floating to Fixed Swap Agreements at December 31, 1997 were 5.8% and
6.5%, respectively.
8
<PAGE> 10
In fiscal 1997, the Company entered into an interest rate swap
agreement with a party to its U.K. receivable financing program. The
effect of the interest rate swap agreement is to revert to the Company
the differential between the fixed rate to be received on the
receivables sold under this program and the floating rate to be paid to
the purchasers of the receivables. As of December 31, 1997 the notional
amount of this interest rate swap agreement was 55.8 million British
Pounds. The interest rate agreement will expire when the underlying
receivables are paid down. At December 31, 1997 the floating rate to be
paid by the Company is the one month Fed AA CP Composite rate and the
fixed rate to be received is approximately 10.5%.
(2) INTEREST RATE CAP AGREEMENT
In fiscal 1995, the Company entered into an interest rate cap agreement
expiring in September 1999, with a notional amount at December 31, 1997
of $2.0. Under the agreement the Company will be paid an amount equal
to the excess, if any, of the 1 month LIBOR over 7% multiplied by the
notional amount. At December 31, 1997 there was no such excess.
FOREIGN CURRENCY CONTRACTS
The Company conducts business in a wide variety of currencies and
consequently enters into foreign exchange forward and option contracts
to manage exposure to fluctuations in foreign currency exchange rates.
These contracts generally involve the exchange of one currency for
another at a future date and are used to hedge substantially all of the
Company's anticipatory intercompany commitments.
At December 31, 1997, the Company owned forward contracts and options
which allow it to sell currencies for the indicated U.S. dollar
amounts, in fiscal year 1998 and 1999, as follows:
<TABLE>
<CAPTION>
1998 1999
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
French Francs $ 34.2 $ 33.5
British Pounds 12.1 9.4
German Marks 50.1 33.7
Italian Lire 35.3 12.0
Spanish Pesetas - 14.4
Other 11.2 (10.2)
- ------------------------------------------------------------------------------------------------------------
Total $ 142.9 $ 92.8
- ------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 11
i) LITIGATION AND OTHER MATTERS
During the first six months of fiscal 1996, a number of class 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, in the later actions or complaint
amendments, that the scope of the Company's year-end audit for the
fiscal year ended 1995 had been expanded and that results for the third
quarter of fiscal 1995 were being restated. These actions have been
consolidated. The consolidated complaint alleges, among other things,
that the Company and certain of its current and former directors,
officers and employees, as well as the Company's auditors, violated
certain Federal securities laws.
One of the claims against the Company's auditors, asserted under state
law, originally included in the consolidated complaint, has been
dismissed by the Court. That claim alleged 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 requested certification of the action as a class
action on behalf of all purchasers of the common stock of the Company
and certain stock option traders 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. By stipulation, dated September 12, 1996, the
parties to the consolidated class actions agreed to limit the proposed
class to all persons who purchased, or received through the exercise of
options, shares of common stock of the Company during the period from
August 10, 1994 through and including August 31, 1995, provided that
shares purchased on August 31, 1995 were purchased at a price of $25.25
per share or higher. The stipulated class excludes persons who acquired
common stock pursuant to the Company's merger with Knogo approved by
its shareholders in December 1994. The stipulation was approved by the
court in an order entered on September 30, 1996.
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. Subsequent to the class action settlement referred to
below, plaintiffs advised the Company they intend to seek leave from
the Court to file an amended consolidated complaint, including
allegations arising from such settlement.
10
<PAGE> 12
Further, in May and July 1997, actions were filed in federal court
against the Company and certain of its current and former officers and
certain of its current and former directors by two of the Company's
three directors and officers liability insurance carriers during the
period December 15, 1994 to December 15, 1995. The insurance contracts
at issue in the suits provide $10.0 each in policy limits and are in
excess to $10.0 in primary directors and officers liability insurance
for the period. The complaints seek, among other things, (i) rescission
of the above-referenced insurance contracts; (ii) reformation of the
insurance contracts to exclude the hazards raised by the pending
securities class actions and derivative actions referred to above, the
GILFORD action and the SEC proceeding, all of which are described in
the Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1997; and (iii) a declaratory judgment that the above-referenced
insurance contracts do not afford coverage for defendants for any loss
arising out of such actions and proceeding. The complaints allege,
among other things, that in the Company's applications for these
insurance contracts and attachments thereto contained material
misrepresentations, omissions, concealment of facts and incorrect
statements relating principally to the Company's revenue recognition
practices which are also a subject of the actions and proceeding
referred to above.
The Company has reached an agreement to settle the above-referenced
class actions. The agreement provides, among other things, for the
payment by the Company of approximately $53.0. The agreement has been
submitted to the Court for approval. The Company expects to recover a
portion of the settlement fund and related expenses from its primary
directors and officers liability insurance policy, which has a policy
limit of $10.0. In addition, the Company is seeking payment from its
excess insurance carriers having combined policy limits of $20.0. As
noted above, the Company is currently in litigation with such excess
carriers. A pretax charge of $53.0, with an after-tax effect of $37.1,
has been recorded by the Company for payments to be made in connection
with this settlement.
The Company intends to vigorously defend against the derivative actions
and insurance carrier actions referred to above, and to vigorously
pursue the recovery of insurance proceeds from such excess directors
and officers insurance carriers. In light of the uncertainty as to the
outcome of these actions, the Company has not recorded a provision for
any liability or recovery that may result from those actions.
11
<PAGE> 13
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 1997 Annual Report on Form 10-K) and is intended to
assist the reader in understanding the financial results and condition
of the Company.
RESULTS OF OPERATIONS - THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31,
1997 COMPARED TO THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1996
The following discussion of operating results excludes the effects of
restructuring and litigation charges recorded in fiscal 1998, which are
discussed in the section "Restructuring and Special Charges" below and
the "Litigation and other matters" footnote included in the Notes to
Consolidated Condensed Financial Statements included herein.
REVENUES
Revenues of $243.7 for the second quarter of fiscal 1998 decreased
5.0%, as compared to revenues of $256.6 for the same period in fiscal
1997. Revenues of $489.1 for the six months ended December 31, 1997
decreased 2.7%, as compared to revenues of $502.6 for the six months
ended December 31, 1996. Fiscal 1998 results were negatively affected
by the strengthening of the U.S. dollar and the related impact of
foreign currency translation, resulting in a reduction in revenues of
approximately $9.7 for the second quarter and $22.9 for the first six
months. Fiscal 1998 revenues also reflect the decline in revenues of
certain non-core businesses, principally the U.S. commercial/industrial
direct sales and service business which was sold in September 1997.
Excluding the effects of the strengthening U.S. dollar and the
divestiture of non-core businesses, fiscal 1998 revenues increased
approximately 7.5% for the second quarter and 9.3% for the first six
months, as compared with the same periods in fiscal 1997.
Consolidated Electronic Article Surveillance ("EAS") systems revenues
remained relatively unchanged from the second quarter of fiscal 1997
with $124.6 of revenues in the second quarter of fiscal 1998, as
compared to $126.4 in the year ago quarter, and increased 3.7% to
$251.2 in the first six months of fiscal 1998 from the comparable
period of fiscal 1997. The increase in EAS revenues for the first six
months of fiscal 1998 over the comparable period in the prior year
resulted principally from Ultra * Max product line revenues, which
increased 25.8% as compared to the year ago period. These increases
were offset by decreases of 18.0%, when compared to the prior year
period, in revenues from the Company's SensorStrip Checkout technology,
which is sold principally in Europe.
Integrated Security Systems ("ISS"), which includes CCTV, Access
Control and Intelligent Tagging and Tracking systems, revenues
decreased 5.2% to $81.7 and 9.0% to $159.6 for the second quarter and
the first six months of fiscal 1998, respectively, as compared with the
same periods of fiscal 1997. The decreases were principally due to a
decline in revenues as a result of divested non-core businesses.
12
<PAGE> 14
Revenues generated by the Commercial/Industrial Worldwide Operations
("C/I Worldwide") decreased 22.7% and 18.2% in the second quarter and
first six months of fiscal 1998, respectively, as compared to fiscal
1997. The decrease in revenues is principally due to the divestiture in
September 1997 of the U.S. commercial/industrial direct sales and
systems integration business. Excluding the effect on revenues of
non-core businesses and foreign exchange, C/I Worldwide indirect
revenues increased 12.2% and 14.4% in the second quarter and the first
six months of fiscal 1998, respectively, as compared with the same
periods of fiscal 1997.
In September 1997, the Company sold its U.S. commercial/industrial
systems integration business which had annual fiscal year 1997 sales of
approximately $80.0, to Securities Technologies Group, Inc. ("STG").
The Company also agreed in such transaction to sell to STG the
Company's monitoring business, the sale of which was consummated in
October 1997.
For the second quarter and first six months of fiscal 1998, North
America Retail revenues increased 3.0% and 7.8%, respectively, as
compared to the same periods for fiscal 1997. Market penetration
continues to increase in the following market segments: hardware,
music, sporting goods, cosmetics, fragrances, discounters, mass
merchants and hypermarkets. Excluding the effect on revenues of
non-core businesses, North America Retail revenues increased 5.5% and
10.8% in the second quarter and first six months of fiscal 1998,
respectively, as compared with the same periods from fiscal 1997. In
addition, source tagging unit label volume increased 58.7% for the
first six months of fiscal 1998 as compared to the same periods of
fiscal 1997.
Europe Retail revenues decreased 5.2% and 10.4% for the second quarter
and first six months of fiscal 1998, respectively, as compared to the
same periods for fiscal 1997. Excluding the effect of exchange due to
foreign currency translation, Europe Retail revenues for fiscal 1998
increased approximately 1.0% for the quarter and decreased 1.8% on a
year to date basis. The Company expects Europe Retail revenues will
continue to remain flat. Market conditions as well as a high overhead
structure reflect the challenges that precipitated the profit
improvement actions the Company announced in August 1997.
International Retail revenues, which includes Latin America, Asia
Pacific and the Middle East, increased 11.5% and 25.8% for the second
quarter and first six months of fiscal 1998, respectively, as compared
to the same periods of fiscal 1997. The increase in International
Retail was largely due to Latin America revenues which increased by
21.5% and 46.2% in the second quarter and first six months of fiscal
1998, respectively, as compared to the same periods of fiscal 1997, as
a result of the acquisition of the Company's Argentina distributor in
October 1997 and increased revenues in Brazil. Excluding the effect of
acquisitions, Latin America revenues for the second quarter and first
six months of fiscal 1998 increased 6.3% and 19.7%, respectively, as
compared to the same periods in fiscal 1997.
GROSS MARGINS, OPERATING EXPENSES AND OPERATING INCOME
Gross margins on revenues were 46.6% and 46.0% for the three and six
month periods ended December 31, 1997, respectively, compared with
46.3% and 45.8% for the comparable periods of the prior year. The
relatively stable gross margins reflect improved procurement as well as
13
<PAGE> 15
manufacturing efficiencies at certain plants, offset by intense price
competition in certain market segments.
Selling, general and administrative expenses, as a percentage of total
revenues, was 33.7% and 34.5% for the second quarter and first six
months of fiscal 1998, respectively, as compared to 35.4% and 36.0% for
the comparable periods in fiscal 1997. The decrease in expenses as a
percentage of revenues for the second quarter of fiscal 1998 reflects
the initial benefit from the cost reduction efforts implemented as a
result of the restructuring actions announced during the first quarter
of fiscal 1998. The remaining decrease in expenses as a percentage of
revenues for the first six months of fiscal 1998 reflects the
divestiture of the U.S. commercial/industrial direct sales and service
business which typically had a higher operating expense level in
relation to revenues.
Research, development and engineering expenses increased to 2.8% and
2.7% of revenue in the three and six months ended December 31, 1997,
respectively, as compared to 2.4% and 2.3% for the same periods in
fiscal 1997. Research, development and engineering spending has
increased as a percentage of revenues as compared to the prior year due
to the Company's increased focus on new product developments in all
product categories.
Operating income for the three and six months ended December 31, 1997
increased to $19.2, or 7.9% of revenues, and to $32.1, or 6.7% of
revenues, respectively, versus $17.3, or 6.7% and $28.2, or 5.6% of
revenues, respectively, for the comparable period of fiscal 1997.
INTEREST EXPENSE, OTHER INCOME AND TAXES
Net interest expense of $11.2 and $21.8 for the second quarter and
first six months of fiscal 1998, respectively, reflected an increase of
$2.4 and $5.0, respectively, over the comparable periods of fiscal
1997. This increase is partially due to additional interest expense
related to the shareholder settlement charge recorded in the first
quarter of 1998. The remaining increase is primarily due to increased
debt levels outstanding during the period.
The benefit for income taxes for the first six months of fiscal 1998,
including the restructuring and litigation charge, is based on an
estimated effective annual consolidated tax benefit rate of 30.0%
compared to an estimated effective annual consolidated tax provision
rate of 29.0% utilized for the first six months of fiscal 1997. The tax
benefit for the current year related primarily to the restructuring and
litigation charges recorded during fiscal 1998.
The Company reported net income of $5.4, or $0.07 per share, and $6.6,
or $0.09 per share, for the second quarter and first six months of
fiscal 1998, respectively, as compared to net income of $6.1, or $0.08
per share, and $8.2, or $0.11 per share, respectively, for the same
periods of fiscal 1997, as a result of the factors discussed above.
Including the restructuring and litigation charges, the Company
reported a net loss of $60.5, or $0.82 per share, for the first six
months of fiscal 1998.
14
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
For the six month period ended December 31, 1997, cash flow used in
operating activities was $49.3 compared with cash used in operations
for the six month period ended December 31, 1996 of $11.9. The use of
cash in the six month period ended December 31, 1997 was primarily a
result of increases in customer receivables and receivables due from
financing institutions related to the Company's various securitization
programs and included as a component of other assets.
The Company's investing activities used $35.5 of cash in the six month
period ended December 31, 1997, compared to $62.3 of cash used in the
six month period ended December 31, 1996. The investing activity in
fiscal 1998 was principally due to capital expenditures of $12.7,
increases in the Company's investment in revenue equipment of $16.4 and
additional investments in acquisitions of $10.2; offset by the proceeds
received from the sale of the U.S. commercial/industrial direct sales
and service business. The capital expenditures principally include
investments in manufacturing operations for new production equipment
and the addition of an enterprise-wide management information system
software.
For the six month period ended December 31, 1997, financing activities
generated $78.9 of cash as compared to $31.9 in the six month period
ended December 31, 1996. Cash flows from financing activities were
principally due to additional borrowings of approximately $77.3,
primarily from the Company's unsecured revolving credit facility. The
Company's percentage of total debt to total capital was 46.1% at
December 31, 1997 as compared to 40.4% at June 30, 1997.
The Company uses the U.S. dollar as the reporting currency for
financial statement purposes. The Company conducts business in numerous
countries around the world through its international subsidiaries which
use local currencies to denominate their transactions, and is,
therefore, subject to certain risks associated with fluctuating foreign
currencies. The resulting changes in the statements do not indicate any
underlying changes in the financial position of the international
subsidiaries but merely adjust the carrying value of the net assets of
these subsidiaries at the current U.S. dollar exchange rate. Because of
the long-term nature of the Company's investment in these subsidiaries,
the translation adjustments resulting from these exchange rate
fluctuations are excluded from results of operations and recorded in a
separate component of consolidated stockholders' equity. The $11.1
decrease in the cumulative translation adjustment for the six months
ended December 31, 1997 resulted primarily from the translation of the
balance sheets denominated in French Francs, German Marks and Spanish
Pesetas, reflecting the strengthening of the U.S. dollar relative to
such currency at December 31, 1997. The Company monitors its currency
exposures but has decided not to hedge its translation exposures due to
the high economic costs of such a program and the long-term nature of
its investment in its international subsidiaries.
As a result of the agreement to settle a series of shareholder class
action suits filed during 1995, the Company recorded a pretax charge of
$53.0 during the first quarter of fiscal 1998. The Company believes
that the liquidity provided by existing cash and financing arrangements
is sufficient to meet the Company's funding requirements for such
settlement.
15
<PAGE> 17
At December 31, 1997, the Company's primary source of liquidity
consisted of cash and a committed line of credit totaling
approximately $250.0, of which approximately $73.0 was utilized, and
receivable financing agreements totaling approximately $270.0, of
which approximately $153.0 was utilized. Use of the balances under
such facilities is subject to compliance with certain covenants and,
in the case of such receivable financing agreements, subject to the
terms within such agreements. Under the most restrictive covenant,
$57.3 of additional borrowings are permitted at December 31, 1997.
Additional receivable financing capacity is in place under the
Company's financing agreements which meet the provision for
off-balance sheet treatment under SFAS No. 125. The Company believes
that the liquidity provided by future operations, existing cash and
the financing arrangements described above, along with additional
financing sources that the Company believes would be available to it,
will be sufficient to meet the Company's future capital requirements.
RESTRUCTURING AND SPECIAL CHARGES
During fiscal 1996, the Company initiated a restructuring plan with the
following objectives: (i) expense reduction and asset control; (ii)
improved processes and systems; and (iii) quality growth. The initial
phase of this plan included an extensive review of the Company's
operations and cost structure. In addition, during fiscal 1997, the
Company announced further restructuring actions which included the
divestiture of non-core businesses and additional cost-reduction plans,
which mainly include staff reductions within its European operations,
as well as additional special charges principally for increases to the
valuation allowances for accounts receivable and receivables financed
with third parties. During the fourth quarter of fiscal 1997, the
Company recognized $48.9 of this charge with plans to record the
remaining portion in the first quarter of fiscal 1998. As a result, the
Company recorded $43.0 in restructuring charges during the first
quarter of fiscal 1998, primarily for product rationalization and
related equipment impairment charges, facility closures and severance
costs.
Related to the fiscal 1996 restructuring plan, the Company planned for
the reduction of 875 people and the sale, disposal or termination of
lease arrangements of approximately 30 locations, principally in the
U.K. and U.S. As of December 31, 1997, all planned staff reductions are
complete and approximately one-half of the locations have been
eliminated and the remaining locations are in various stages of
disposition. Approximately $33.3 of these restructuring costs will
result in cash outlays, of which $22.3 has been disbursed as of
December 31, 1997.
Related to the fiscal 1997 restructuring plan, the Company continued to
focus its organization and reduce costs. Accordingly, the Company
divested and sold its U.S. commercial/industrial direct sales and
systems integration business in September 1997. The Company elected to
exit this business activity due to market conflicts with its indirect
sales channels and the need to focus on products related to the
Company's strategy of total systems integration. In connection with its
1997 restructuring plan, the Company has planned for the reduction in
workforce of approximately 1,200 positions, 600 of which will be in
connection with the divestiture of non-core businesses and the
remaining positions principally represent the termination of
administrative personnel principally in Europe. As of December 31,
1997, approximately 650 positions have been eliminated. The total cash
outlay related to this restructuring plan, net of proceeds from the
divestiture of non-core businesses, is estimated to be $30.0, of which
$4.6 has been disbursed and offset by the proceeds received from the
non-core business divestitures, as of December 31, 1997.
16
<PAGE> 18
During the first six months of fiscal 1998, the total restructuring
reserve was reduced by approximately $8.7 as a result of cash and
non-cash charges.
All of the Company's restructuring activities are expected to be
substantially complete prior to the end of fiscal 1998 and the Company
believes the provisions identified as required are adequate to cover
the costs associated with these plans.
YEAR 2000 ISSUE
Until recently, many computer programs were written using two digits
rather than four to define the applicable year in the twentieth
century. Such software may recognize a date using "00" as the year 1900
rather than the year 2000 (the "Year 2000 Issue"). The Company has
addressed its date-sensitive software issues in connection with the
implementation of its enterprise-wide management information system,
which is Year 2000 compliant and accordingly, is expected to eliminate
any material Year 2000 Issues. The Company plans to complete the
installation of its enterprise-wide management information system no
later than December 31, 1999. The cost to the Company of making its
software Year 2000 compliant has not been separately estimated as it
was originally incorporated in the new software implementation project
prior to the widespread recognition of the Year 2000 Issue. It is not
anticipated that such conversion will have a material impact on the
Company's financial statements.
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
Except for historical matters, the matters discussed in this Form 10-Q
are forward-looking statements which reflect the Company's current
views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and
uncertainties which could cause actual results to differ materially
from historical results or those anticipated. Readers are cautioned not
to place undue reliance on these forward-looking statements, which
speak only as of their dates. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. The following
factors could cause actual results to differ materially from historical
results or those anticipated: 1) changes in international operations 2)
exchange rate risks 3) market conditions for the Company's products 4)
the Company's ability to provide innovative and cost-effective
solutions 5) development risks 6) competition and 7) changes in the
economic climate.
17
<PAGE> 19
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company has reached an agreement to settle the consolidated
shareholder class actions filed during calendar 1995 and pending
against the Company and certain of its current and former officers and
directors in the United States District Court for the Southern District
of Florida. These actions, which challenged the Company's prior revenue
recognition and other accounting practices in fiscal year 1995 and
earlier, are described in the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1997 ("Form 10-K"). The agreement
provides, among other things, for the payment by the Company of $53.0
million. The agreement has been submitted to the Court for approval.
The Company expects to recover a portion of the settlement and related
expenses from its primary directors and officers liability insurance
policy, which has a policy limit of $10.0 million. In addition, the
Company is seeking payment from its excess insurance carriers having
combined policy limits of $20.0 million. The Company is currently in
litigation with such excess carriers in the United States District
Court for the Southern District of Florida, which action by such
carriers, seeking to avoid coverage under the policies, is also
described in the Form 10-K. The Company intends to vigorously defend
against the claims made by those carriers and to pursue the recovery of
insurance proceeds from them. In light of the uncertainty as to the
outcome of these actions, the Company has not recorded a provision for
any liability or recovery that may result from those actions.
In the GILFORD action described in the Form 10-K, plaintiff and the
Company have reached an agreement in principle for the dismissal of
that action, which dismissal will be with prejudice if plaintiff's
claims as a member of the class in the consolidated shareholder class
actions settlement described above are allowed.
The Federal Trade Commission ("FTC") reached a resolution in regard to
their inquiry regarding various competitive practices in the electronic
article surveillance ("EAS") industry dating back to the late 1980s. No
monetary payment or adverse impact to the Company is involved. The FTC
examined a variety of issues relating to competitive practices of EAS
manufacturers. Its inquiry ultimately focused on a provision of a 1993
agreement settling litigation for trade libel brought by the Company
against Checkpoint Systems, Inc. ("Checkpoint"). The FTC consent orders
entered into by the Company and Checkpoint, respectively, provide that
the Company and Checkpoint shall declare "null and void" the challenged
provision of their 1993 agreement which prohibited any "negative
advertising". Both companies have also agreed not to enter into any
future agreement which prohibits certain types of advertising.
In addition, reference is made to Item 3 of Part I of the Form 10-K and
to Item 1 of Part II of the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended September 30, 1997.
18
<PAGE> 20
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on November
14, 1997. The following business was transacted:
Three company directors were voted on for re-election: Robert Vanourek,
J. Richard Munro and Timothy P. Hartman. All three were re-elected for
a three year term expiring in the year 2000.
19
<PAGE> 21
Item 5. OTHER INFORMATION
Effective December 17, 1997, Wayland R. Hicks resigned as a member of
the Board of Directors. His term would have expired in the year 1999.
20
<PAGE> 22
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27) Financial Data Schedule (for SEC use only).
b) Reports on Form 8-K:
There were no reports on Form 8-K filed
during the three - month
period ended December 31, 1997.
21
<PAGE> 23
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
(Principal Financial Officer)
Date: February 13, 1998
22
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