<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A-1
( X ) QUARTERLY REPORT ( ) TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly
Period Ended SEPTEMBER 30, 1998 Commission File No. 1-10739
----------------------- --------
SENSORMATIC ELECTRONICS CORPORATION
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 34-1024665
- ------------------------------------------------ ---------------------------------------
<S> <C>
(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)
(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 74,912,307 shares of Common Stock (par value
$.01 per share) as of November 1, 1998.
<PAGE> 2
SENSORMATIC ELECTRONICS CORPORATION
INDEX
FORM 10-Q/A-1
THREE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <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............................................................... 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................................... 19
Signatures.................................................................................................. 20
</TABLE>
<PAGE> 3
SENSORMATIC ELECTRONICS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions, except par value amounts)
<TABLE>
<CAPTION>
(Unaudited)
September 30, June 30,
1998 1998
------------- --------
(Restated - See Note 2)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 105.4 $ 127.0
Customer receivables 331.7 326.2
Inventories, net 203.8 203.6
Current portion of deferred income taxes 37.1 36.2
Other current assets 43.0 43.7
------------- --------------
TOTAL CURRENT ASSETS 721.0 736.7
Customer receivables - noncurrent 125.6 132.5
Revenue equipment, net 73.2 69.2
Property, plant and equipment, net 137.1 137.2
Costs in excess of net assets acquired, net 471.0 465.5
Deferred income taxes 150.3 149.4
Patents and other assets, net 116.1 109.0
------------- --------------
TOTAL ASSETS $ 1,794.3 $ 1,799.5
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 28.9 $ 33.5
Accounts payable and accrued liabilities 123.7 118.5
Other current liabilities and deferred income taxes 173.4 184.8
------------- --------------
TOTAL CURRENT LIABILITIES 326.0 336.8
Long-term debt 508.2 515.2
Other noncurrent liabilities and deferred income taxes 47.6 45.5
------------- --------------
TOTAL LIABILITIES 881.8 897.5
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10.0 shares authorized -- --
6 1/2% Convertible Preferred Stock, 0.7 shares outstanding 166.7 166.7
Common stock, $.01 par value, 125.0 shares authorized, 74.6 and 74.4
shares outstanding at September 30, 1998 and June 30, 1998, respectively 736.3 733.7
Retained earnings 104.0 108.3
Treasury stock at cost and other, 1.7 shares at September 30, 1998
and June 30, 1998 (11.3) (11.7)
Accumulated other comprehensive income (83.2) (95.0)
------------- --------------
TOTAL STOCKHOLDERS' EQUITY 912.5 902.0
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,794.3 $ 1,799.5
============= ==============
</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>
(Unaudited)
-------------------------------------
Three Months Ended September 30,
1998 1997
------------- --------------
(Restated - See Note 2)
<S> <C> <C>
Revenues:
Sales $ 187.9 $ 204.5
Rentals 11.0 12.6
Installation, maintenance and other 28.3 28.3
------------- --------------
Total revenues 227.2 245.4
------------- --------------
Operating costs and expenses:
Costs of sales 126.5 131.8
Depreciation on revenue equipment 5.2 4.9
------------- --------------
Total cost of sales 131.7 136.7
------------- --------------
Gross margin 95.5 108.7
Operating expenses:
Selling, general and administrative 72.1 92.9
Provision for doubtful accounts 4.7 5.0
Restructuring charges -- 17.2
Research, development and engineering 7.2 6.5
Amortization of intangible assets 5.3 5.2
------------- --------------
Total operating costs and expenses 89.3 126.8
------------- --------------
Operating income (loss) 6.2 (18.1)
------------- --------------
Other (expenses) income:
Interest income 4.0 3.6
Interest expense (10.9) (12.3)
Litigation settlement -- (53.0)
Other, net (1.1) (1.9)
------------- --------------
Total other (expenses) income (8.0) (63.6)
------------- --------------
Loss before income taxes (1.8) (81.7)
Benefit for income taxes 0.3 23.1
------------- --------------
Net loss $ (1.5) $ (58.6)
============= ==============
Loss applicable to common stockholders $ (4.3) $ (58.6)
============= ==============
Basic and Diluted loss per common share $ (0.06) $ (0.79)
============= ==============
Number of shares used in computation
of Basic loss per common share 74.4 74.1
============= ==============
Number of shares used in computation
of Diluted loss per common share -- --
============= ==============
</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)
Three Months
Ended September 30,
-----------------------------------
1998 1997
------------- -----------
(Restated - See Note 2)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1.5) $ (58.6)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 16.5 17.0
Restructuring charges, net (1.6) 14.2
Litigation settlement charge -- 53.0
Net changes in operating assets and liabilities,
net of effects of acquisitions and divestitures:
Decrease/(increase) in receivables and sales-type leases 4.5 (27.9)
Decrease/(increase) in inventories 0.7 (7.4)
Increase in current and deferred income taxes
relating to restructuring and litigation charges -- (20.0)
Other operating assets and liabilities, net (9.2) (0.9)
------------- -----------
Net cash provided by (used in) operating activities 9.4 (30.6)
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5.1) (6.5)
Proceeds from sale of business, net -- 4.5
Increase in revenue equipment, net of deletions (8.3) (8.5)
Additional investment in acquisitions (6.8) (4.5)
Other, net 0.4 1.9
------------- -----------
Net cash used in investing activities (19.8) (13.1)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank borrowings (payments) and other debt (13.1) 46.9
Other, net 1.9 0.2
------------- -----------
Net cash (used in) provided by financing activities (11.2) 47.1
------------- -----------
Net (decrease) increase in cash (21.6) 3.4
Cash and cash equivalents at beginning of the year 127.0 21.7
------------- -----------
Cash and cash equivalents at end of the period $105.4 $25.1
============= ===========
</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)
1. BASIS OF PRESENTATION
The consolidated condensed financial statements include the accounts
of Sensormatic Electronics Corporation and 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 month period ended
September 30, 1998 are not necessarily indicative of the results that
may be expected for the year ending June 30, 1999. 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, 1998.
2. RESTATEMENT OF FINANCIAL STATEMENTS
In May 1997, the Company agreed in principle with Pinkertons Inc.
("Pinkertons") to the principal terms of the sale of the Company's
U.S. commercial/industrial direct sales and service business subject
to completion of due diligence and definitive agreements.
During the fourth quarter of fiscal 1997, the Company recognized a
$12.0 restructuring liability for estimated losses due to the
Company's plan to sell this business. In August 1997, the Company
discontinued negotiations with Pinkertons due to the companies'
inability to reach mutually acceptable terms.
In September 1997, the Company sold its U.S. commercial/industrial
direct sales and service business to Securities Technology Group
("STG"). Unlike the Pinkertons transaction, as one of the terms of
the sale, the Company is required to reimburse STG for costs to
complete certain jobs in process if those costs exceed defined amounts.
The Company originally retained the $12.0 restructuring liability as an
estimate of losses under its new agreement with STG, which the Company
viewed as addressing the same underlying business and risk profile as
in the Pinkertons agreement in principle.
In connection with a review of its financial statements incorporated by
reference in the Company's pending registration statement registering
the Company's 6 1/2% Convertible Preferred Stock and related Depository
Shares, the Company has determined that all of the requirements to
recognize the indicated loss under Statement of Financial Accounting
Standards No. 5, "Accounting for Contingencies", were not met as a
result of the new agreement with STG. Accordingly, the $12.0 liability
for estimated losses due to the Company's plan to sell this business
which was originally recorded during the fourth quarter of fiscal 1997
was reversed in the first quarter of fiscal 1998. The Company's
consolidated financial statements for the quarter ended September 30,
1997 have been restated to include the effects of reversing this
liability. During the third quarter of fiscal 1998, the Company
recognized a $4.7 restructuring liability for probable losses resulting
from the Company's sale of this business to STG.
Additionally, for the three months ended September 30, 1998, the
Company has deducted from loss applicable to common stockholders the
value of common stock issued as dividends on the 6 1/2% Convertible
Preferred Stock which was issued on April 13, 1998. This has no impact
on the previously reported net loss or stockholders' equity.
The effects of the above adjustments on the Company's previously
reported consolidated financial statements for the three months ended
September 30, 1997 and 1998 are as follows:
5
<PAGE> 7
Consolidated Condensed Statements of Operations:
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
September 30, 1997 September 30, 1998
----------------------------- -----------------------------
As Reported As Restated As Reported As Restated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Restructuring Charges $ 29.2 $ 17.2 -- --
Operating loss $(30.1) $(18.1) $ 6.2 $ 6.2
Loss from continuing operations $(65.9) $(58.6) $ (1.5) $ (1.5)
Net loss $(65.9) $(58.6) $ (1.5) $ (1.5)
Loss applicable to common stockholders $(58.6) $ (4.3)
Basic and diluted loss per share $ (.89) $ (.79) $(0.02) $(0.06)
</TABLE>
Consolidated Condensed Balance Sheets:
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1998
----------------------------- -----------------------------
As Reported As Restated As Reported As Restated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total assets $1,683.1 $1,681.4 $1,797.2 $1,794.3
Total current liabilities $ 443.2 $ 434.2 $ 333.3 $ 326.0
Total shareholders' equity $ 698.1 $ 705.4 $ 908.1 $ 912.5
</TABLE>
3. RECLASSIFICATIONS
Certain amounts in the prior period's consolidated condensed financial
statements have been reclassified to conform to the fiscal 1998
year-end presentation.
4. RESTRUCTURING
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. 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 divestiture of non-core businesses. The
restructuring charges recorded in the fourth quarter of fiscal 1997 and
the first and third quarters of fiscal 1998, net of the reversal of
$12.0 million described in Note 2, totaled $48.7 million with an
after-tax impact of $32.3 million. Included in the total of $48.7
million were inventory write-downs related to restructuring activities
of $4.2 million which were recorded in "cost of sales".
The following table sets forth the details and the activity of the
restructuring charge reserves as of September 30, 1998:
6
<PAGE> 8
1996 Reserve
<TABLE>
<CAPTION>
Accrual Accrual
Utilization Balance at Utilization Balance at
1996 ------------------- June 30, ------------------ Reserve June 30,
Provision Cash Non-Cash 1996 Cash Non-Cash Reallocation 1997
--------- ---- -------- ---------- ---- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Product rationalization, related
equipment charges and other........ $ 45.3 $ -- $(34.2) $11.1 $ -- $(12.4) $ 2.8 $ 1.5
Closure of facilities and
related costs...................... 23.5 (1.0) (1.6) 20.9 (1.4) (6.5) (7.3) 5.7
Employee termination and
related costs...................... 16.5 (10.4) (0.7) 5.4 (6.6) -- 4.5 3.3
------ ------ ------ ----- ----- ------ ----- -----
Total........................... $ 85.3 $(11.4) $(36.5) $37.4 $(8.0) $(18.9) $ -- $10.5
------ ------ ------ ----- ----- ------ ----- -----
Inventory write downs
recorded as a component of
cost of sales(2) (19.6) 10.6 (9.0) 9.0 --
------ ------ ------ ----- ----- ------ ----- -----
Total........................... $ 65.7 $(11.4) $(25.9) $28.4 $(8.0) $ (9.9) $ -- $10.5
====== ====== ====== ===== ===== ====== ===== =====
</TABLE>
1996 Reserve (continued)
<TABLE>
<CAPTION>
Accrual Accrual Accrual
Balance at Utilization Balance at Utilization Balance at
June 30, ------------------- June 30, ------------------ September 30,
1997 Cash Non-Cash 1998 Cash Non-Cash 1998
--------- ---- --------- ---- ----- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Product rationalization, related
equipment charges and other........ $ 1.5 $ -- $(1.1) $ 0.4 $ -- $ -- $ 0.4
Closure of facilities and
related costs...................... 5.7 (0.7) 0.2 5.2 (0.1) -- 5.1
Employee termination and
related costs...................... 3.3 (3.3) -- -- -- -- --
------ ------ ----- ----- ------ ----- -----
Total........................... $ 10.5 $ (4.0) $(0.9) $ 5.6 $ (0.1) $ -- $ 5.5
====== ====== ===== ===== ====== ===== =====
</TABLE>
1997/1998 Reserve(1)
<TABLE>
<CAPTION>
Accrual Accrual Accrual
Balance at 1998 Utilization Balance at Utilization Balance at
1997 June 30, Additions/ ------------------ June 30, ------------------ September 30,
Provision 1997 (Reversals) Cash Non-Cash 1998 Cash Non-Cash 1998
--------- --------- ----------- ---- -------- ---------- ----- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Product rationalization,
related equipment charges
and other................ $ 2.9 $ 2.9 $ -- $ -- $(1.6) $ 1.3 $ -- $ (1.1) $ 0.2
Closure of facilities and
related costs............ 6.5 6.5 8.8 0.2 (5.6) 9.9 (0.6) 9.3
Closure of
facilities(2)........... -- (2.9) (2.9) (2.9)
Employee termination and
related costs............ 0.5 0.5 20.4 (10.4) -- 10.5 (0.7) -- 9.8
Non-core business
divestitures.............. 16.9 16.9 (7.3) -- -- 9.6 (0.2) (0.1) 9.3
----- ------ ------ ------ ----- ----- ------ ----- -----
Total................. $26.8 $ 23.9 $ 21.9 $(10.2) $(7.2) $28.4 $ (1.5) $(1.2) $25.7
----- ------ ------ ------ ----- ----- ------ ----- -----
Inventory write downs
recorded as a
component of cost
of sales(2) -- (4.2) 3.6 (0.6) 0.6 --
----- ------ ------ ------ ----- ----- ------ ----- -----
Total................. $26.8 $ 19.7 $ 21.9 $(10.2) $(3.6) $27.8 $ (1.5) $(0.6) $25.7
===== ====== ====== ====== ===== ===== ====== ===== =====
</TABLE>
- ------------------------
(1) Certain amounts related to non-core business divestitures have been
restated. See Note 2.
(2) Amounts classified directly to the impaired assets.
7
<PAGE> 9
The total aggregate cash outlay related to the fiscal 1996, 1997 and
1998 restructuring charges, net of expected proceeds from the
divestiture of non-core businesses, was estimated to be approximately
$63.3. As of September 30, 1998, $36.0 had been disbursed and
partially offset by the net proceeds received from the non-core
business divestitures.
5. 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 have
periodic payments over a term of five years, generally) and net
investment in sales-type leases (which have periodic payments over
lease terms of five to six years, principally) at September 30, and
June 30, 1998 are summarized as follows :
<TABLE>
<CAPTION>
September 30 June 30
------------ --------
<S> <C> <C>
Trade accounts receivable due in 1 year $ 311.1 $ 303.9
Allowance for doubtful accounts (35.6) (33.2)
--------- --------
Total trade accounts receivable, net $ 275.5 $ 270.7
========= ========
Deferred receivables $ 6.1 $ 4.9
Installment receivables 35.3 38.8
Allowance for doubtful accounts (5.4) (5.6)
Unearned interest and maintenance (13.3) (14.5)
--------- --------
Total deferred and installment receivables, net 22.7 23.6
Less: Amounts due in 1 year, net (18.2) (19.0)
--------- --------
Total noncurrent deferred and
installment receivables, net $ 4.5 $ 4.6
========= ========
Sales-type leases-minimum lease payments receivable $ 217.7 $ 225.1
Allowance for uncollectible minimum lease payments (19.8) (20.3)
Unearned interest and maintenance (38.8) (40.4)
--------- --------
Total sales-type leases, net 159.1 164.4
Less: Amounts due in 1 year, net (38.0) (36.5)
--------- --------
Total noncurrent sales-type leases, net $ 121.1 $ 127.9
========= ========
Total customer receivables $ 457.3 $ 458.7
Less: Amounts due in 1 year, net 331.7 326.2
--------- --------
Total noncurrent customer receivables $ 125.6 $ 132.5
========= ========
</TABLE>
8
<PAGE> 10
6. INVENTORY
Inventories are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1998
------------------ -------------
<S> <C> <C>
Finished goods $ 161.6 $ 165.4
Parts 56.0 56.3
Work-in-process 15.6 14.7
--------- ---------
233.2 236.4
Less allowance for excess and obsolete inventory (29.4) (32.8)
--------- ---------
Total inventories, net $ 203.8 $ 203.6
========= =========
</TABLE>
7. PENSION PLANS
On June 11, 1998 the Company's Board of Directors approved a
Supplemental Employee Retirement Plan ("SERP") for vice president
level employees and officers. Selected vice presidents and officers
who participated in the other Sensormatic retirement plans (Senior
Executive Defined Contribution Retirement Plan, Key Executive
Supplemental Retirement Plan and Salary Continuation Plan) and who
elect to participate in the new SERP will be paid a benefit equal to
the higher of what they would receive under the formula set forth in
the SERP or under the former plan. The new SERP for vice presidents
and officers is effective July 15, 1998. As of September 30, 1998, the
Company did not have a liability under this new plan. Additionally, on
August 20, 1998 the Company's Board of Directors approved a
Supplemental Employee Retirement Plan for director level employees.
Selected director level employees who participated in the Company's
Key Executive Supplemental Retirement Plan and who elect to
participate in the new SERP for director level employees will be paid
a benefit equal to the higher of what they would receive under the
formula set forth in the SERP or the former Plan. The SERP for
director level employees is to be effective January 1, 1999. The
Company does not anticipate a material impact on the financial
statements as a result of the adoption of these plans.
8. 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", and
accordingly, subsequent to the adoption of SFAS No. 125, 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 sales. All other transfers of receivables are
treated as financing transactions. See Note 5 of Notes to Consolidated
Financial Statements in the Company's 1998 Annual Report on Form 10-K
for additional discussion on the Company's accounts receivable
financing program.
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 $116.3 at September
30, 1998. Loss reserves have been provided for receivables and
sales-type lease receivables sold and are included in accrued
liabilities.
9. 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
9
<PAGE> 11
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 under SFAS No.
128:
<TABLE>
<CAPTION>
Three Months ended
September 30,
----------------------
1998 1997
------ ------
<S> <C> <C>
NUMERATOR:
Net loss(a) $ (1.5) $(58.6)
Less: Preferred stock dividends (2.8) -0-
------ ------
Loss applicable to common stockholders $ (4.3) $(58.6)
====== ======
DENOMINATOR:
Basic EPS - weighted average shares 74.4 74.1
Dilutive effect: Stock options 0.1 0.2
------ ------
Diluted EPS - weighted average shares 74.5 74.3
====== ======
Basic loss per share $(0.06) $(0.79)
====== ======
Diluted loss per share $ -- (b) $ -- (b)
====== ======
</TABLE>
- -------------------
(a) The net loss for the three months ended September 30, 1997 has been
restated. See Note 2.
(b) Excluded as result is anti-dilutive.
10. COMPREHENSIVE INCOME
As of July 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". The adoption of this Statement had no impact on
the Company's net income or stockholders' equity. SFAS No. 130
establishes new rules for the reporting and display of comprehensive
income and its components. SFAS No. 130 requires foreign currency
translation adjustments to be included in other comprehensive income.
Prior to the adoption of SFAS No. 130, the Company reported such
adjustments in a separate component of stockholders' equity. For the
three months ended September 30, 1998 and September 30, 1997,
comprehensive income was $10.3 and $(67.7), respectively. At September
30, 1998 and June 30, 1998, accumulated other comprehensive income was
$(83.2) and $(95.0), respectively.
11. DIVESTITURES
In September 1997, the Company sold its U.S. commercial/industrial
direct sales and service business to Securities Technology Group
("STG") for total proceeds of $10.5. The Company also agreed in such
transaction to sell its monitoring business, which was consummated in
October 1997. The Company retained ownership of all of the accounts
receivable related to these operations totaling approximately $30.7.
10
<PAGE> 12
As one of the terms of the sale, the Company is required to reimburse
STG for costs to complete certain jobs in process if those costs
exceed defined amounts. While there is no stated "cap" or limit on the
amount the Company is obligated to pay the buyer under this provision,
the range of the probable loss that may be incurred by the Company
under this provision is estimated to be between $4.7 and $8.0. No gain
on the sale has been recognized pending the outcome of this
uncertainty.
During the third quarter of fiscal 1998, the Company recognized a $4.7
restructuring liability for probable losses resulting from the
Company's sale of this business to STG. See Note 2.
The U.S. commercial/industrial direct sales and service business had
annual sales of approximately $80.0. The revenues of these operations
prior to the divestiture date and included in the Company's
Consolidated Condensed Statement of Operations for the three months
ended September 30, 1997 was $11.4.
12. 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
were consolidated. The consolidated complaint alleged, 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.
The Company has settled the above-referenced consolidated class
action. The settlement agreement, requiring payment by the Company of
approximately $53.5, was approved by the Court and has been fully
performed by the Company. The Company has recovered a portion of the
settlement amount and related expenses from its primary directors and
officers liability insurance policy, which had a policy limit of
$10.0, and has also been paid $10.0 by one of its two excess directors
and officers liability insurers. A pretax charge of $53.0, with an
after-tax effect of $37.0, was recorded by the Company for payments
made in connection with this settlement in the first quarter of fiscal
1998. Subsequently, during the third quarter of fiscal 1998, the
Company also recorded a net estimated insurance recovery of $7.3 ($5.1
after-tax). Subsequent to June 30, 1998, the Company also reached an
agreement in principle providing for the payment of $6.25 by the other
insurer (once documentation is finalized, the Company will record the
related insurance recovery).
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 1998 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 ENDED SEPTEMBER 30, 1998 COMPARED
TO THREE MONTHS ENDED SEPTEMBER 30, 1997
The following discussion of operating results excludes the effects of
restructuring charges (and the reversal of certain of such charges)
and litigation charges recorded in fiscal 1998, which are discussed in
Note 3 and Item 7, respectively, in the Company's 1998 Annual Report
on Form 10-K.
REVENUES
Revenues of $227.2 for the first quarter of fiscal 1999 decreased
7.4%, or $18.2, compared to revenues of $245.4 for the same period in
fiscal 1998. Results for the first quarter of fiscal 1999 were
adversely affected by production and shipment delays at the Company's
Puerto Rico manufacturing operations caused by hurricane Georges,
resulting in a reduction in revenues of approximately $10.0. The first
quarter of fiscal 1998 included revenues of $15.6 from businesses
subsequently divested, the largest of which was the U.S.
commercial/industrial direct sales and service business which was sold
in September 1997. Excluding the effects of these non-core businesses,
first quarter fiscal 1999 revenues were essentially flat in comparison
with the first quarter of fiscal 1998.
For the first quarter of fiscal 1999, North America Retail revenues
increased 16.5% as compared to the same period for fiscal 1998. The
increase in revenues was attributable to large shipments of electronic
article surveillance equipment to major retail chains.
Europe Retail revenues decreased 10.8% for the first quarter of fiscal
1999 as compared to the same period for fiscal 1998. The decrease in
Europe retail revenues was due to an emphasis on more outright sales
rather than sales-type leases, swaps and renewals and continued price
competition.
International Retail revenues, which include Latin America and Asia
Pacific, decreased 17.4% for the first quarter of fiscal 1999 as
compared to the same period of fiscal 1998. The decrease in
International Retail was largely due to Latin America revenues which
decreased 21.7% in the first quarter of fiscal 1999. The overall
decrease in International revenues reflects the weakening currencies
and unfavorable economic conditions which exist in the Asian and Latin
American countries.
Revenues generated by C/I Worldwide decreased 30.7% in the first
quarter of fiscal 1999 as compared to the same period of fiscal 1998.
The decrease in revenues is principally due to the divestiture in
September 1997 of the U.S. commercial/industrial direct sales and
service business. Excluding the effect on revenues of divested
12
<PAGE> 14
non-core businesses, C/I Worldwide indirect revenues decreased 7.8% in
the first quarter of fiscal 1999 as compared with the same period of
fiscal 1998 principally due to declines in Asia and Latin America
resulting from the currency and economic conditions existing in those
areas. Subsequent to September 30, 1998, certain steps were taken by
the Company to reposition the Commercial/Industrial unit in light of
the lack of revenue growth.
GROSS MARGINS, OPERATING EXPENSES AND OPERATING INCOME
Gross margins on revenues were 42.0% for the three month period ended
September 30, 1998 compared with 44.3% for the comparable period of
the prior year. Included in cost of sales for the three month period
ended September 30, 1997 is $3.0 of incremental charges (margin impact
of 1.2%) related to the Company's extensive review of its balance
sheet. The decrease in margins was partially due to volume discounts
on major orders in North America Retail and continued price
competition in Europe Retail. The Company anticipates a continued
impact on margin levels in upcoming quarters as a result of further
high-volume sales to individual retail customers. This impact is
expected to be more than offset by additional expense reductions in
the second half of the fiscal year.
Selling, general and administrative expenses, as a percentage of total
revenues, was 31.7% for the first quarter of fiscal 1999 as compared
to 37.9% for the comparable period in fiscal 1998. The decrease in
expenses as a percentage of revenues for the first quarter of fiscal
1999 reflects the Company's continued effort to implement the
headcount and facilities reductions associated with its previously
announced restructuring plans, 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, and the effect of the cost reductions resulting from an
extensive review performed by the Company, beginning in fiscal year
1996, to realign its business. Ongoing cost containment and
rationalization efforts are expected to generate significant
additional declines in operating expenses before the end of the fiscal
year. Included in selling, general and administrative expenses for the
first quarter of fiscal 1998 are incremental charges of $10.8, or 4.4%
of revenues, for certain employee separation and contract resolution
costs.
Provision for doubtful accounts, as a percentage of total revenues,
was 2.1% and 2.0% in the first quarter of fiscal 1999 and 1998,
respectively.
Research, development and engineering expenses increased to 3.2% of
revenue in the three months ended September 30, 1998 as compared to
2.6% for the same period in fiscal 1998. 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. Research, development
and engineering expenses will be substantially unchanged for fiscal
1999 as a result of the Company's continued effort to reduce corporate
overhead expenses.
Before restructuring, operating income increased from $(0.9) in the
first quarter of fiscal 1998 to $6.2 in the first quarter of fiscal
1999. The impact of the incremental charges discussed under gross
margins and under selling, general and administrative expenses above,
was to reduce operating income by $13.8 million in fiscal 1998.
13
<PAGE> 15
OTHER (EXPENSES) INCOME AND TAXES
Net interest and other expenses of $8.0 for the first quarter of
fiscal 1999 reflected a decrease of $2.6 over the comparable period of
fiscal 1998, excluding litigation settlement charges in the first
quarter of fiscal 1998. This decrease is primarily due to the decrease
in interest expense as a result of lower debt levels due to cash
raised in the Company's recent preferred stock offering.
The benefit for income taxes for the first quarter of fiscal 1999 is
based on an estimated effective annual consolidated tax benefit rate
of 30.0%. The benefit for income taxes for the first quarter of fiscal
1998 is based on an estimated effective annual consolidated tax
benefit of 28.6%. The tax benefit for the prior year related primarily
to the restructuring and litigation charges recorded during the first
quarter.
The Company reported a net loss of $1.5, or $0.06 per share, for the
first quarter of fiscal 1999 as compared to a net loss of $58.6, or
$0.79 per share, for the same period of fiscal 1998. Excluding
restructuring and litigation charges, the Company reported a net loss
of $9.6, or $0.13 per share, for the first quarter of fiscal 1998.
The foregoing net loss includes the effect of the incremental charges
of $3.0 discussed under gross margins and of $10.8 discussed under
selling, general and administrative expense, which had a negative
after-tax impact of $9.7 or $0.13 per share.
LIQUIDITY AND CAPITAL RESOURCES
During the first three months of fiscal 1999, cash and cash
equivalents decreased $21.6 primarily due to expenditures related to
fixed assets and the repayment of debt. For the three month period
ended September 30, 1998, cash flow provided by operating activities
was $9.4 compared with cash used in operations for the three month
period ended September 30, 1997 of $30.6. The improvement in operating
cash flow in the three month period ended September 30, 1998 was
primarily a result of relatively flat levels of receivables and
inventories in fiscal 1999.
In the first three months of fiscal 1999, the Company used $19.8 of
cash in investing activities, compared to $13.1 in the first three
months of fiscal 1998. The fiscal 1998 amount included $4.5 million of
net proceeds from the sale of a non-core business.
For the three month period ended September 30, 1998, $11.2 of cash was
used for financing activities as compared to cash being generated of
$47.1 as a result of financing activities during the three month
period ended September 30, 1997. The principal use of cash in
financing activities during the first quarter of fiscal 1999 was to
repay approximately $13.0 of short-term debt.
The Company's percentage of total debt to total capital was 37.1% at
September 30, 1998 as compared to 37.8% at June 30, 1998. Certain of
the Company's financial agreements currently prohibit the payment of
cash dividends, as well as the purchase of Company securities, until
certain profit levels are achieved and reflected in the Company's
annual audited financial statements. Under these provisions, it is
unlikely that the Company would be able to pay cash dividends until
after the preparation of its audited financial statements for fiscal
14
<PAGE> 16
year 2000 at the earliest. The Company intends to pay any dividends
declared on the Convertible Preferred Stock with shares of Common
Stock prior to the time it is able to pay such cash dividends. The
Company issued approximately 355,359 shares of common stock in payment
of the October 1, 1998 dividends on the Preferred Stock.
The Company uses the U.S. dollar as its 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
financial statements do not indicate any underlying changes in the
financial position of the international subsidiaries but merely
reflect the adjustment in the carrying value of the net assets of
these subsidiaries at the current U.S. dollar exchange rate. Due to
the long-term nature of the Company's investment in these
subsidiaries, the translation adjustments resulting from these
exchange rate fluctuations are excluded from the results of operations
and are recorded in a separate component of consolidated stockholders'
equity. The $11.8 decrease in currency translation adjustments at
September 30, 1998 compared to June 30, 1998, which is reflected in
the balance sheet caption "Accumulated other comprehensive income",
resulted primarily from the translation of the balance sheets
denominated in British pounds and French francs, reflecting the
weakening of the U.S. dollar relative to such currencies at September
30, 1998. The Company monitors its currency exposures but does not
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.
The Company requires significant cash flow to meet its debt service
and other continuing obligations. As of September 30, 1998, the
Company had $537.1 million of total indebtedness outstanding. The
Company's expected principal liquidity requirements are working
capital, financing of customer equipment purchases, investments in
revenue equipment and capital expenditures and interest on the Senior
Notes. At September 30, 1998, the Company's principal sources of
liquidity are (i) cash on hand, (ii) cash flow from operations, (iii)
borrowings under the $250.0 million Revolving Credit Facility, of
which none was utilized, and (iv) receivable securitization
facilities. The Company believes that cash flow from operations,
together with borrowings under the Revolving Credit Facility, will be
sufficient to meet its liquidity needs for the foreseeable future.
RESTRUCTURING
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 and systematic review of the
Company's operations, cost structure and balance sheet aimed at
reducing its operating expenses and manufacturing costs while
increasing efficiencies. In addition, during fiscal 1997, the Company
announced further restructuring actions which included the divestiture
of non-core operations and additional cost-reduction plans, which
mainly include staff reductions within its European operations. During
the fourth quarter of fiscal 1997, the Company recognized $26.8 of this
charge with plans to record the remaining portion in the first quarter
of fiscal 1998. As a result, the Company recorded $17.2 in
restructuring charges during the first quarter of fiscal 1998, net of
the reversal of $12.0 described in Note 2 to the Consolidated Condensed
Financial Statements. These charges related primarily to product
rationalization and related equipment impairment charges, facility
closures and severance costs. In addition, during the third quarter of
fiscal 1998 the Company recorded additional restructuring charges of
$4.7 related to the Company's sale of its U.S. commercial/industrial
direct sales and service business to STG. The Company may record
additional restructuring charges in future periods related to the
Company's sale of its U.S. commercial/industrial direct sales and
service business to STG as any additional probable amounts become
reasonably estimable.
15
<PAGE> 17
YEAR 2000 ISSUE
Year 2000
Many computer applications, processor chips embedded in many products
and computers and operating systems that are not Year 2000 compliant
are unable to distinguish between the calendar year 1900 and the
calendar year 2000. The Year 2000 Issue creates potential risks for the
Company, including potential problems in the Company's products as well
as in the Information Technology ("IT") and non-IT systems that the
Company uses in its business operations. The Company may also be
exposed to risks from third parties with whom the Company interacts who
fail to adequately address their Year 2000 Issues. The Company has
recognized the need to ensure that its business operations will not be
adversely affected by the upcoming calendar year 2000 and is cognizant
of the time sensitive nature of the Year 2000 problem. In 1996, the
Company began a project to implement a global enterprise resource
planning system. The Company has completed this implementation at all
manufacturing locations and many of the sales and service subsidiaries
around the world. The Company's key non-compliant IT systems remaining
are in the United Kingdom and implementation is scheduled for September
6, 1999.
The Company's State of Readiness
The Company centralized its focus on addressing the Year 2000 Issue by
establishing a Year 2000 Program Management Office in order to
implement a consistent approach to minimizing Year 2000 risks across
the Company worldwide. The Company also assigned Project Teams in each
Business Unit. The Program Management Office and the Project Teams are
assisted by specialists and consultants. The Company's key dates
relative to its program focusing on IT and non-IT systems that the
Company uses in its business operations are as follows:
Inventory and assessment completed August 31, 1999
All Critical components in testing September 30, 1999
Critical components Year 2000 compliant November 30, 1999
The Company has substantially completed testing of its manufactured
products. To aid in communication with the Company's customers and
suppliers, the Company has developed an Internet Web site that
identifies the current Year 2000 status for each of the Company's
products.
A survey of the Company's suppliers and service providers has begun to
insure they are working on this effort and will remain viable
suppliers through and after January 1, 2000. The process of evaluating
the Year 2000 status of the Company's principal suppliers and service
providers will be on-going through the remainder of the calendar year.
16
<PAGE> 18
The Costs to Address the Company's Year 2000 Issues
The cost of implementing the enterprise resource planning system is
estimated at $40.0 million. In addition to the enterprise resource
planning system, the Company currently estimates approximately $1.0
million for the cost associated with the Company's Year 2000 project.
Remediation efforts are not currently expected to be significant;
however, this cannot be assured until after the inventory and
assessment is completed. Should significant remediation efforts be
required, the project cost would exceed $1.0 million.
The Risks of the Company's Year 2000 Issues
The Company presently believes that the Year 2000 issue will not cause
material operational problems for the Company. However, if the Company
is not successful in identifying all material Year 2000 problems, or
its assessment and remediation of identified Year 2000 problems is not
completed in a timely manner, there may be an interruption in, or
failure of, certain normal business activities or operations. This
risk includes unforeseen delays in the implementation of the Company's
enterprise resource planning system. Such interruptions, failures or
delays in implementing the enterprise resource planning system could
have a material adverse impact on the Company's consolidated results
of operations and financial condition, or on its relationships with
customers, suppliers or others.
The Company's Contingency Plans
The Company expects to have developed by September 30, 1999, or shortly
thereafter, a comprehensive contingency plan to address situations
that may result if the Company or any of the third parties upon which
the Company is dependent is unable to achieve Year 2000 readiness. The
Company's Year 2000 compliance program is ongoing and its ultimate
scope, as well as the consideration of contingency plans, will
continue to be evaluated as new information becomes available.
Year 2000 Forward-Looking Statements
The foregoing Year 2000 discussion contains "forward-looking
statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such statements, including without limitation,
anticipated costs and the dates by which the Company expects to
complete certain actions, are based on management's best current
estimates, which were derived utilizing numerous assumptions about
future events, including the continued availability of certain
resources, representations received from third parties and other
factors. However, there can be no guarantee that these estimates will
be achieved, and actual results could differ materially from those
anticipated. Specific factors that might cause such material
differences include, but are not limited to, the ability to identify
and remediate all relevant IT and non-IT systems, results of Year 2000
testing, adequate resolution of Year 2000 Issues by businesses and
other third parties who are service providers, suppliers or customers
17
<PAGE> 19
of the Company, unanticipated system costs, the adequacy of and
ability to develop and implement contingency plans and similar
uncertainties. The "forward-looking statements" made in the foregoing
Year 2000 discussion speak only as of the date on which such
statements are made, and the Company undertakes no obligation to
update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made or to
reflect the occurrence of unanticipated events.
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 risk 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.
18
<PAGE> 20
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Note: Unless otherwise indicated below, the
following Exhibits were filed with the
original Report and are not being
re-filed with this Amendment.
10a) Agreement, dated November 2, 1998, between
the Company and Olin S. Giles, Senior Vice
President and Chief Technical Officer of
the Company.
10b) Agreement, dated November 2, 1998, between
the Company and Olin S. Giles, Senior Vice
President and Chief Technical Officer of
the Company.
27) Financial Data Schedule (for SEC use only)
(Amended schedule is filed herewith).
b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the
three - month period ended September 30, 1998.
19
<PAGE> 21
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, Chief
Administrative Officer and
Chief Financial Officer
(Principal Financial Officer)
Date: August 17, 1999
20
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