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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM 10-K/A-1
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER: 1-10739
SENSORMATIC ELECTRONICS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 34-1024665
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
951 YAMATO ROAD
BOCA RATON, FLORIDA 33431-0700
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 561-989-7000
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Name of each exchange on which registered:
NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [X] No [ ]
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 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 aggregate market value of Common Stock held by non-affiliates of the
Registrant as of September 22, 1998 was $596,455,584.
As of September 22, 1998, there were 74,556,948 shares of the common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive proxy statement for the Company's 1998 Annual Meeting of Stockholders
(incorporated in Part III to the extent provided in Items 10, 11, 12 and 13
hereof).
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SENSORMATIC ELECTRONICS CORPORATION
FORM 10K/A-1
Year Ended June 30, 1998
INDEX
Page
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Part I:
Item 1. Business....................................................... 1
Part II:
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matter........................................................ 11
Item 6. Selected Financial Data and Quarterly Summary and Statistical
Information................................................... 12
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition....................................... 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... 24
Item 8. Financial Statements and Supplementary Data.................... 26
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K...................................................... 49
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Founded in 1966, Sensormatic is the leading designer, manufacturer and marketer
of electronic security, sensing and tracking systems in the world. Sensormatic
has a leading market share in its three major market segments: electronic
article surveillance ("EAS") systems, closed circuit television ("CCTV") and
video systems, and access control and asset management systems. The Company's
EAS products include reusable hard tags and disposable labels as well as
detection and deactivation systems. Sensormatic's CCTV products include various
types of micro-processor-controlled cameras and monitoring systems. The
Company's access control and asset management systems provide intelligent
tagging, tracking and access systems to monitor the movements of people and/or
assets.
Sensormatic's installed base of customers (i.e. customers at which Sensormatic
products are installed) includes a substantial majority of the top 100 retailers
in the world, as well as more than half of the global Fortune 500 companies. The
Company operates directly and through dealers and distributors in more than 90
countries and has the largest sales and service network in the industry, with
more than 1,700 personnel directly serving retail customers and more than 600
independent dealers and distributors serving commercial/ industrial customers.
The Company operates in a single business segment. Certain information about the
Company's operations by geographic area is contained in Note 15 of Notes to
Consolidated Financial Statements under Item 8 of this report.
The Company has its principal executive offices at 951 Yamato Road, Boca Raton,
Florida 33431-0700 (561-989-7000). As used in this report, the terms "Company"
and "Sensormatic" refer to Sensormatic Electronics Corporation and its
subsidiaries unless the context indicates otherwise.
STRATEGIC RESTRUCTURING AND OTHER STRATEGIES
The Company's rapid growth and success in the late 1980's and first half of the
1990's took Sensormatic from $100 million in revenues in fiscal 1987 to
approximately $1 billion in fiscal 1998. These results were driven by internal
growth as well as strategic acquisitions. This rapid growth caused the Company
to outgrow its infrastructure and systems. As a result, in 1996 the management
team, led by newly recruited senior management personnel, began implementing a
long-term strategic restructuring plan to harness the Company's growth, rebuild
and improve the infrastructure of the Company and restore stability to the
Company's operations. The plan is centered around three main priorities: (i)
expense and asset control, (ii) investments in processes and systems and (iii)
quality, sustainable growth. The 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. This review of the Company's global operations focused on
operational and organizational structures and systems, facilities utilization,
product rationalization, quality improvements, inventory valuation and accounts
receivable balances and related collection efforts.
At the end of fiscal 1997 and during the first and third quarters of fiscal
1998, the Company recorded additional restructuring charges related to the
divestiture of non-core businesses and additional cost-reduction plans,
principally consisting of staff reductions within its European operations. The
Company's U.S. commercial/industrial direct sales and service business, which
was sold in September 1997, constituted the largest non-core business divested.
The Company elected to exit the commercial/industrial direct sales and service
business due to market conflicts with its indirect sales channels (dealers and
distributors). This strategic decision allows the Company to focus on partnering
with dealers and distributors to promote products in the commercial/industrial
markets and thereby lower its distribution and installation costs while
improving customer service. In connection with this restructuring plan, the
Company planned for the reduction in workforce of approximately 1,200 positions,
of which 600 relate to the divestiture of non-core businesses and the remaining
positions principally represent the termination of administrative personnel. As
of June 30, 1998, approximately 900 positions had been eliminated, including the
positions associated with the divested business units.
In connection with its restructuring plans, the Company embarked upon a
long-term process improvement and total quality management program internally
referred to as "Q(3)". The program's objective is to provide superior value for
customers, shareholders and employees, by establishing a culture of "continuous
improvement" in all of the Company's business processes. Q(3) is a multi-year,
enterprise-wide, effort in which the Company is reengineering operations in
every function and business unit globally. In connection with Q(3), the Company
initiated the implementation of a new enterprise-wide management information
system and an
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extensive internal training program, both of which are expected to significantly
enhance global operational efficiencies and improve customer service.
The Company is organized into four principal sales organizations: North America
Retail, Europe Retail, International Retail (which principally consists of the
Asia Pacific, the Middle East and the Latin America regions) and
Commercial/Industrial Worldwide ("C/I Worldwide"). Product line management for
the Company's electronic article surveillance products is performed by the EAS
Division. The EAS product line management division services retail customers and
sales organizations as well as coordinates engineering, marketing and quality
control. The sales and product line management function for C/I Worldwide
operates as a single business unit. The EAS division and C/I Worldwide are
supported by a supply chain management organization with responsibility for
purchasing, logistics and manufacturing.
The Company has a Global Source Tagging Division, with responsibility for
managing and directing the Company's source tagging initiatives globally. The
Global Source Tagging Division is staffed with sales, marketing and technical
personnel who work globally with major retailers, manufacturers, packaging
companies, licensees, associations and industry consultants to implement and
expand the use of source tagging by manufacturers and distributors.
STRATEGIC MERGERS AND ACQUISITIONS
Over the past several years, the Company has increased its presence in a number
of the geographic areas in which it markets its products and has expanded into
new geographic areas. Additionally, the Company has expanded its
commercial/industrial business through several strategic acquisitions.
The Company's strategy to expand internationally also has included the use of
distribution arrangements with independent, local businesses in certain
countries, and, in some cases, controlling interest ventures with local
businesses, Brazil in particular. The Company has also acquired its distributors
in certain countries, e.g., Colombia and Argentina. The Company presently
markets its products directly in more than 25 countries throughout North
America, Europe and certain Asia/Pacific and South American countries, and, in
more than 65 other countries, the Company sells its products to distributors for
resale or lease. The Company will continue to explore expanding into additional
countries in the Middle East, Latin America, Asia, Africa and eastern Europe
using distribution arrangements.
The Company has over the past several years expanded its commercial/industrial
business through several strategic acquisitions, including Software House, Inc.
("Software House"), a designer and marketer of high-end access control systems;
Robot Research, Inc. ("Robot Research"), a manufacturer and marketer of
sophisticated CCTV display and transmission systems; and American Dynamics, a
manufacturer of CCTV components, switchers and controllers. As a result of these
acquisitions, the Company acquired additional product lines to complement its
previously existing CCTV and access control products, together with well
established dealer/distribution sales channels. These acquisitions have enabled
the Company to integrate certain product lines thereby improving product
compatibility and performance.
PRINCIPAL PRODUCTS AND SYSTEMS
Sensormatic's products and systems are focused in three general categories:
* EAS systems and devices, consisting of electronic detection units which work
in conjunction with specially designed reusable tags and/or disposable labels
and label deactivation units, and benefit denial products. These systems and
devices are most commonly used by retailers to help prevent shoplifting, reduce
inventory shrinkage and enhance or improve merchandising of products.
* CCTV and video systems, consisting of computer controlled cameras integrated
with sophisticated video switching, storage and transmission products which
monitor activity throughout an establishment for operational safety and/or theft
deterrence and detection purposes.
* Access control and asset management systems, which are software-based products
used to monitor, protect and track people and assets. These systems
electronically regulate access to facilities to protect equipment and assets, as
well as track products throughout the supply chain.
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EAS SYSTEMS
EAS systems come in many different forms and make use of a number of different
technologies. The Company's typical EAS system is comprised of an electronic
detection unit, tags and/or labels and a detacher or deactivator. Detection
units can be installed directly into floors as pedestals or concealed under
floors, mounted on walls or hung from ceilings, and are usually placed in high
traffic areas, such as entrances and exits of stores or office buildings,
distribution centers and/or checkout lanes. Specially designed and sensitized
reusable tags or disposable labels are affixed to or embedded in the merchandise
or assets to be protected. When an active tag or label passes through the
detection unit, the system sounds an alarm, a light is activated and/or other
suitable control devices are set into operation indicating a possible theft in
progress. Tags and labels are available in a variety of shapes, sizes and
configurations. Tags are easily removed from merchandise using a specially
designed detacher, enabling the merchandise or asset to be taken through a
controlled zone without incident, and can then be reused. Labels are deactivated
by a deactivator positioned at the cash register and are generally disposed of
after use. Certain labels can be reactivated with the Company's reactivation
devices.
To satisfy many types of customers on a global basis, the Company offers every
major EAS technology type available in addition to the Company's proprietary
technologies. The following is a description of the principal EAS technologies,
as well as the systems and products which incorporate such technologies, offered
by the Company.
ULTRA*MAX(R) systems utilize a proprietary acousto-magnetic technology which is
the most advanced and rapidly growing anti-theft technology in the world. This
technology is used in over 15 different electronic anti-theft systems sold by
the Company under various brand names including Pro*Max(R), Floor*Max(R),
Euro*Max(TM), Sensor*Max, Mega*Max, MAX Checkout(TM), and Ultra*Post(TM). The
versatility of Ultra*Max enables it to protect assets, merchandise, people,
property and information for retailers and commercial/industrial businesses. The
success of Ultra*Max is attributable to its unique combination of features,
unobstructed coverage of wide exits, a high "pick rate" or ability to detect
labels or tags, ease of deactivation, ability to be reactivated, and ability to
work in close proximity to metal. This technology's sophisticated electronic
capability and the unique signal from the label or tag virtually eliminate false
alarms, a problem often encountered by retailers using other technologies.
For use in source tagging, the Company markets Ultra*Strip(TM) labels, which are
used in conjunction with Ultra*Max systems and have the performance
characteristics inherent in the acousto-magnetic technology. Ultra*Strip labels
are the smallest EAS labels available with wide exit coverage performance and
are offered in a standard and narrow width size. These labels have demonstrated
superior pick rates, are compatible with a wide range of packaging materials and
product substances, including foil and metal, are unaffected by moisture and are
well suited for application in high-speed manufacturing processes.
SENSORSTRIP(TM)CHECKOUT (the latest generation of AisleKeeper(R)) systems
utilize proprietary advanced magnetostrictive technology and standard low
frequency electromagnetic technology. These systems are designed to protect
high-theft items in supermarkets and hypermarkets around the world as well as
bookstores, libraries, health clubs, liquor stores and video stores. The
magnetostrictive technology sold by the Company includes SensorStrip Checkout
and SensorStrip Checkout Plus (formerly known as AisleKeeper and AisleKeeper II,
respectively, in the U.S., and as Checkout Control and Checkout Control II,
respectively, in Europe). The SensorStrip Checkout Plus is especially engineered
to comply with the Americans with Disabilities Act as well as the European
Disabilities Acts. The standard SensorStrip label is a thin micromagnetic wire
encapsulated in transparent tape attached to merchandise which is passed around
the system during the checkout process or, with certain versions, may be
deactivated by a device which can be fitted in the conveyor belt at a checkout
station. Like Ultra*Max, Sensormatic's electromagnetic technology supports
source tagging programs.
MICROWAVE systems are anti-shoplifting systems that utilize high radio frequency
technology. Microwave systems protect wide exits and are widely used by
department stores and soft goods (apparel merchandisers) specialty retailers.
These systems are marketed under the names of MicroMax(R), SlimLine(R), and
Sensormat(R) II and offer a variety of features and benefits, such as concealed
protection which allows for wide exit, flexible installations which can fit in
multiple store configurations, and a variety of lightweight tags and labels.
Microwave systems are the most widely used technology with soft good retailers
and the large base of Microwave system installations represents the largest
potential for upgrade to Ultra*Max.
SWEPT-RF OR SWEPT RADIO FREQUENCY systems utilize low radio frequency technology
and are principally used to cover single door exits. The Company markets this
technology under the brand name of System One(R).
BENEFIT DENIAL products are non-electronic anti-theft devices that, when
tampered with, can destroy or damage valuable merchandise or otherwise make it
unfit for resale or use, thereby reducing the incentive to steal. Benefit denial
products can be used alone or in conjunction with other anti-theft systems to
provide an incremental level of security for retailers. The Company's Inktag(R)
and Microlock(R) products are part of a family of benefit denial products. The
Company's Inktag products are fastened to clothing and
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other soft goods in the retail market. When unauthorized removal of an Inktag
product is attempted, the vials of ink inside the unit break and stain the
merchandise. The Company's Inktag products are sold primarily to department,
specialty, discount and mass merchandise stores. The Microlock product is used
to protect items such as eyeglasses and jewelry products by creating physical
obstructions to the use of the merchandise until removed. The Microlock product
is designed for use primarily in department, specialty, discount, mass
merchandise, jewelry, optical and drug stores.
CCTV SYSTEMS
CCTV video surveillance systems are used by a wide-variety of businesses,
industries and government agencies to protect against inventory shrinkage in
retail businesses and for the protection and monitoring of personnel and assets
in office and manufacturing complexes, hospitals, casinos, nuclear facilities,
warehouses, and numerous other facilities. Sensormatic's CCTV systems can be
used alone, integrated with other CCTV components or used in combination with
EAS, Access Control and Asset Management systems. The following is a description
of key CCTV products and systems offered by the Company.
VIDEO CAMERAS can be used indoors and outdoors to monitor, investigate and
record events. The Company offers multiple types of cameras which include fixed,
pan/tilt/zoom and the more sophisticated SpeedDome(R) cameras. These cameras
include digital and high resolution color or monochrome features. SpeedDome
cameras have advanced surveillance features which include the ability to deliver
high resolution images of stationary or moving objects and focus on objects at a
distance in low light conditions, as well as the ability to acquire, zoom and
focus on targets in less than one second. SpeedDome cameras may be integrated
with other Sensormatic products to create a more comprehensive overall security
program.
VIDEO SWITCHERS/CONTROLLERS are used to switch cameras to view an object in
response to an alarm or at an operator's command. The Company markets a full
line of video switchers/controllers, ranging from systems which can support up
to sixteen cameras to more complex systems which support more than 1,000
cameras. Video switchers/controllers are marketed under various brand names
including high-end video switchers/ controllers such as the AD2050 (1,024
cameras/128 monitors) and AD2052 (512 cameras/32 monitors) used in large complex
configurations and the more retail oriented family of products consisting of
View Manager 8, View Manager 16 and View Manager(R) 96 ("VM96"), which when used
with a Touch Tracker(R) keyboard, can control 8, 16, and 96 cameras,
respectively. The VM96 is a PC-based switcher/controller which can be programmed
to automatically pan, tilt and zoom cameras in response to an alarm or at an
operator's command.
VIDEO MULTIPLEXERS provide for sophisticated video manipulation of up to 16
video inputs recorded to a single VCR. This technology captures high quality
video from multiple cameras, providing for security surveillance of multiple
areas within a facility to be viewed on a single video monitor.
VIDEO TRANSMISSION systems allow for the capability to remotely view stores,
warehouses, and other facilities and are marketed under the SensorLink(TM) PC or
HyperScan(R) Ultra brand names. These video transmission systems are PC based
and can be operated over standard telephone lines or the ISDN lines ("Integrated
Services Digital Network"), allowing users to view video images and/or control
and operate cameras, alarm inputs, and relay controls from remote locations.
SensorLink PC and HyperScan(R) allow users to view up to sixteen cameras
simultaneously.
INTELLIGENT DIGITAL VIDEO systems search video recordings, and based on
parameters set by the user, locate and playback preprogrammed alarm events,
light level changes, or special types of motion normally associated with a
security breach. Proprietary video tools provide image magnification and
enhancement to further improve alarm event analysis and documentation.
Intelligent digital video systems are marketed under the brand name
Intellex(TM). A new Intellex unit introduced in 1997 won the Security Industry
Association's 1997 "Judge's Choice" award of the Security Industry Association,
an association of manufacturers and distributors of security systems and
services. Candidates for the "Judge's Choice" award are judged on innovation,
the value of the problems solved and needs addressed, ease of product
installation and implementation, the number of product strengths and benefits
and the value of such benefits.
ACCESS CONTROL AND ASSET MANAGEMENT SYSTEMS
Access control systems are designed to monitor, control and appropriately
authorize passage (pedestrian, asset or vehicular) into and out of designated
areas. In a typical access control system application, each individual is issued
a badge and inserts or swipes the badge at a door reader to gain access to
buildings, rooms, and other enclosures. The Company's access control systems
offer a variety of features and benefits such as environmental security of
people, assets and information, automatic data collection and report generation.
Access Control systems can be integrated with CCTV, and alarm management
systems, thus providing for additional security and protection.
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The Company offers a full line of Access Control systems to address a wide range
of customers and their requirements. Systems include the CoCURE 1 Plus Ultra, a
high end integrated security system that monitors and controls entrances and
exits with a fully embedded photo imaging system; CoCURE 800, a mid-range to
high end integrated access control and security management system allowing
manual control and viewing from display screens; and CoCure 750, a small
facility software application that manages access control and alarm monitoring.
These systems range in capacities from two readers with 3,000 cardholders up to
2,048 readers with 250,000 cardholders.
Asset management systems are new and important initiatives within Sensormatic
which utilize "smart" tags that combine the security benefits of conventional
EAS tags with the intelligence capabilities of RFID technology -- i.e., "radio
frequency identification". RFID chips provide a miniature database able to store
variable data, such as warranty information, time, date, and location of sale or
manufacture. Asset tracking systems will combine existing proprietary asset
protection and access control applications with RFID tags and software to create
a complete range of sensing and tracking solutions which can be used to protect
and track assets in commercial/industrial and retail environments. Asset
management, service, warranty, lease information, perpetual inventory
management, and reverse logistics management are some of the applications to be
provided by asset tracking systems.
The Company began test marketing its new C*Cure Trac system in fiscal 1998.
C*Cure Trac combines the power and flexibility of the Company's C*Cure data base
management and reporting system with RFID reader or sensors for the purpose of
reading and tracking "smart" tags. These smart tags are RFID transporters that
are attached to, or imbedded within, employee access control badges, high value
assets, vehicles or other objects. The C*Cure Trac system can function in a
stand alone mode, be combined within access control applications, function as a
hands free access control system or be integrated into other security
applications.
Consolidated reported revenues by principal products and systems for the years
ended June 30, 1998, 1997 and 1996 are presented below. The reported amounts,
for all principal products and systems, were negatively impacted by foreign
currency fluctuations and divestitures. Eliminating the impact of foreign
currency fluctuations and divestitures, total revenues increased 8% in fiscal
1998 and 3% in fiscal 1997.
CONSOLIDATED REVENUES BY PRINCIPAL PRODUCTS AND SYSTEMS
YEARS ENDED JUNE 30,
($ in millions)
<TABLE>
<CAPTION>
1998(1) 1997 1996
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<S> <C> <C> <C>
EAS(2).......................................................................... $ 539.8 $ 533.0 $ 542.2
CCTV............................................................................ 295.7 314.6 297.5
Access Control and Asset Management............................................. 44.0 60.7 60.8
-------- -------- -------
Subtotal.............................................................. 879.5 908.3 900.5
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Installation, Maintenance and Other............................................. 107.4 117.4 94.1
-------- -------- -------
Total................................................................. $ 986.9 $1,025.7 $ 994.6
======== ======== =======
</TABLE>
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(1) Includes $11.4 in revenues related to the divested U.S.
commercial/industrial direct sales and service business, as compared with
approximately $80.0 in revenues in the prior years. This impacted CCTV and
Access Control product lines. See Item 7, Management's Discussion and
Analysis of Operations and Financial Condition.
(2) Increases in Ultra*Max revenue of 19% in fiscal 1998 and 27% in fiscal 1997,
partially offset by declines in other EAS system revenues. See Item 7,
Management's Discussion and Analysis of Results of Operations and Financial
Condition.
MARKETS AND MARKETING STRATEGY
MARKETS
The Company principally markets its EAS products and systems directly to
retailers. In many retail environments, the use of EAS systems has become a
standard operating practice because these products and systems have proven to be
a cost-effective method of reducing inventory shrinkage. Inventory shrinkage is
often the second largest variable operating expense of retailers, after payroll
costs, and normally ranges from 1% to 5% of sales. EAS products and systems help
improve a retailer's profitability not only by reducing inventory shrinkage, but
also by allowing the use of open merchandising which increases product
accessibility to customers.
EAS products and systems were first used by soft goods retailers to protect
clothing. Due to technological advances, applications for hard goods merchandise
(non-apparel merchandise) have become economical and effective. Hard goods and
food retailers, such as supermarkets, hypermarkets, home improvement centers,
drug, mass merchandise, optical, music, hardware, book, video, and
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entertainment stores have increasingly become users of EAS products and systems.
The Company believes that it holds a significant market share of this worldwide
EAS market. Retailers also make extensive use of CCTV products and systems to
enhance security and the safety of their operations as well as access control
systems.
Several of the newer EAS technologies used by retailers are used in
commercial/industrial markets to protect assets such as personal computers,
facsimile and copy machines, telephones, artwork, limited access files and
portable laboratory equipment and tools from loss by unauthorized removal. Other
specialized applications include the protection of newborn infants in hospitals
and patients in nursing homes and other long term care facilities.
Commercial/industrial installations of the Company's CCTV, access control and/or
asset management products and systems range from small to medium size businesses
to large domestic and international operations and businesses. The Company sells
its commercial/industrial products and systems to end-user customers primarily
through an indirect network of dealers and distributors. This network of dealers
and distributors is global in scale and provides comprehensive coverage of the
commercial/industrial market worldwide. The Company engages in various direct
advertising and marketing activities to stimulate demand for its products and
partners with the dealers and distributors to fulfill the needs of end-user
customers.
The Company has a broad range of electronic security products and systems, and
the Company's customers in general are increasingly receptive to the Company's
ability to design, supply, install and service integrated security systems that
combine the technologies of the Company's various products and systems. The
Company supplies a substantial majority of the top 100 retailers in the world
and more than half of the global Fortune 500 companies use its products.
MARKETING STRATEGY
The Company's principal marketing strategies are as follows:
1. Product choice
The Company's marketing and sales efforts are focused on offering choice to
retailers recognizing that there are different technologies for different
circumstances. Each technology has its advantages and disadvantages. While
Ultra*Max is the newest and fastest growing technology with broad utilization,
the Company's approach is to comply with the customer's choice.
2. Recurring label sales
The sale of EAS systems and devices to hard goods retailers has been growing
significantly in recent years and the Company believes that there is potential
for continued growth. Hard goods merchandise is protected with labels which
leave the store with the merchandise, representing a source of recurring
revenues to the Company. Labels may be self-adhesive, stick-on labels which are
attached to merchandise by the retailer or applied at the point of manufacture
or distribution.
3. Source tagging
The Company has formed relationships with manufacturers, packaging companies and
a number of its retail customers around the world, from virtually all retail
segments (including department stores, specialty apparel, discount, drug stores,
hypermarkets, food, multi-media, home improvement and automotive parts stores),
to apply EAS labels during manufacturing or packaging processes. Source tagging
is intended to help retailers increase product sales and profitability through
open merchandising and product exposure, reduce shrinkage, and reduce costs by
eliminating the need for sales associates to apply security tags and labels to
merchandise. Currently, nearly 800 vendors in the U.S. and approximately 1,800
worldwide participate in source tagging with the Company's EAS technologies. The
Company estimates that in fiscal 1998, these suppliers provided U.S. and
international retailers with more than 650 million source tagged items, which
represents 24% of total Company EAS label sales. To facilitate source tagging,
the Company has entered into technology licensing agreements with various label
manufacturers. This licensing is intended to provide customers with multiple
sources of EAS labels, and to increase the level of research and development
resources directed to these technologies. Source tagging programs at the Company
are expected to grow at a rapid pace in fiscal 1999. The increased utilization
of source tagging is expected to result in increased label sales and/or royalty
income as well as increased system sales.
4. Licensing label production
The Company has entered into license agreements with leading label producing
companies to manufacture the Company's Ultra*Strip labels. The Company believes
its licensing programs will allow it to gain efficiencies in label
manufacturing, distribution and
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application for source tagging that are expected to reduce the overall cost of
source tagging programs to retailers and suppliers as well as reduce the
Company's capital investment in label manufacturing. These programs are expected
to result in a broader distribution of Ultra*Strip labels and, therefore,
facilitate the growth of Ultra*Max technology, as well as allow Sensormatic to
focus on systems and security solutions. Royalty fees to be paid to the Company
based on sales generated by the licensees will provide recurring revenue to the
Company.
5. Commercial/Industrial market
Through its sales and marketing personnel dedicated to C/I customers, the
Company intends to further gain market share in the expanding
commercial/industrial market. C/I Worldwide sales personnel will continue to
build the breadth and quality in its network of dealers and distributors to sell
and market the Company's broad portfolio of products. In addition, the Company
plans to focus on improving levels of customer service and support to dealers
and distributors. The foundation of the Company's C/I Worldwide strategy is to
provide high value products that easily integrate to meet customer needs. It is
the Company's objective to become the sought after provider of products and
services for commercial/industrial customers.
SALES AND SERVICE ORGANIZATION
At June 30, 1998, the Company employed approximately 2,422 sales and customer
engineering personnel worldwide to market and service its products directly to
retail and commercial/industrial customers. In addition, the Company's products
are marketed and serviced by a large network of sales and customer engineering
personnel employed by dealers and distributors throughout the world. Sales and
service personnel are directed from offices located throughout the U.S. and in
more than 90 countries worldwide. The Company believes that a major factor in
its success has been the high quality of its extensive and experienced sales and
service organization.
The Company has organized its sales force into specialized sales groups to
market its systems to specific customer groups. For example, in addition to its
sales and marketing personnel dedicated to C/I customers and the Global Source
Tagging Division, retail specialized sales groups have been created to target
the supermarket industry and key soft goods retailers in the U.S. Similar
specialized sales groups, concentrating on self-service stores and hypermarkets,
have been formed in Europe. The Company will continue to specialize its sales
force and believes such specialization will accelerate its success in marketing
to targeted user groups and provide improved customer service. Approximately 400
personnel employed in the U.S. commercial/industrial direct sales and service
business were transferred to the purchaser of such operations in September 1997.
The Company has retained a smaller sales force dedicated to C/I customers which
will support dealers and distributors in promoting the Company's products and
will engage in national marketing.
BACKLOG
As of June 30, 1998 and June 30, 1997, the Company had a backlog of orders of
$53.5 million and $77.1 million, respectively. Backlog includes only expected
revenues from firm orders which are expected to be installed or delivered within
one year. The June 30, 1997 backlog included orders of $18.1 million for the
U.S. commercial/industrial direct sales and installation business which was sold
in September 1997. Backlog at any time is not necessarily indicative of the
level of business to be expected in the ensuing period.
SEASONAL ASPECT OF THE BUSINESS
Although the business of the Company is not necessarily seasonal, it has been
the Company's experience, with respect to its worldwide retail customers, that
new orders and installations generally decrease during the December through
February period. The Company believes this is attributable to the preoccupation
of retail store management with the holiday selling season and year-end
inventory analysis during this period. Additionally, the traditional European
vacation period during the months of July and August results in a general
decline of new orders and installations during this period.
PATENTS AND RELATED RIGHTS
As of June 30, 1998, the Company owned or was the exclusive licensee of 246
active patents issued by the U.S. Patent and Trademark Office (as well as 489
corresponding foreign patents). These patents cover a variety of inventions and
features, including the Company's acousto-magnetic (Ultra*Max), electromagnetic,
microwave, swept-RF systems and CCTV systems. The Company had 96 patent
applications pending in the U.S. for various other inventions relating to its
products. Patents corresponding to many of the U.S. patents have been issued or
are pending in various foreign countries. There can be no assurance that any
patents will be issued to the Company on any of its pending
7
<PAGE> 10
applications. The Company is also a non-exclusive licensee under certain patents
issued in the U.S. and various foreign countries relating to the manufacture,
use and sale of certain labels for use with its electromagnetic systems.
The Company does not make any representation as to the scope, validity or value
of any patents which have been or may be issued or licensed to it or as to the
possible infringement by its products on patents owned by others.
Although the Company's patent program is important, the Company believes that
because of its technical knowledge and experience, the abilities of its
established and experienced sales and service organization and its leadership
position in the industry, it is not dependent upon patent protection to maintain
its leadership in the electronic security industry.
SUPPLY CHAIN OPERATIONS AND DISTRIBUTION
The Company's major production facilities are located in Puerto Rico, Florida
and Ireland. The Company also has a manufacturing facility in Brazil.
Approximately two thirds of the Company's production takes place in its Puerto
Rico facility, which accounts for approximately 70% of the manufacturing
personnel. The Company's manufacturing operation in Cork, Ireland allows the
Company to manufacture a wide range of products closer to its large European
customer base.
The Company's strategy is to maintain critical manufacturing processes in-house
and to form alliances with independent manufacturing partners to produce its
products at the lowest possible cost. This in-house capability, combined with
such alliances, provides control over costs and quality, while increasing
responsiveness to the demands of the market which results in a distinct
competitive advantage. Independent suppliers provide various component products
and materials used to manufacture the Company's products, and also manufacture
certain component parts and label products to the Company's specifications.
Certain magnetic materials used in the manufacture of Ultra*Max labels and tags
are currently purchased from one or two suppliers. While there are potential
alternative sources of supply of such materials, the loss or disruption of one
or both of such existing suppliers could result in increased costs or product
shortages or otherwise materially adversely affect the Company's business. The
Company is seeking to develop alternative sources of supply for such materials.
A core supplier base of approximately 100 major suppliers has been established
worldwide to maintain a reliable flow of quality materials at the lowest
possible cost.
The Company has improved, and expects to continue to improve, its production
efficiencies and cost structures through new processes, increased automation and
improved product designs. Such improvements, particularly to increase capacity
and lower product costs of EAS products, have required additional capital
investment for new production equipment.
The Company continues to pursue a consolidation strategy for its warehousing and
distribution locations on a worldwide basis. This consolidation strategy
leverages the use of third party logistics service providers, enabling the
Company to capitalize on "best in class" logistics services and resources. These
consolidation efforts commenced at the beginning of fiscal year 1998 and will
continue through the upcoming fiscal year. The number of warehouses will be
reduced significantly during this timeframe.
COMPETITION
The electronic security industry continues to be highly competitive. There are
many alternatives available to protect people and assets, in addition to the use
of EAS, CCTV, and access control systems. These alternatives include, among
other things, guards and private detective services, mirrors, burglar alarms and
other magnetic and electronic devices, and services combining some or all of the
above elements. To the Company's knowledge, there are several other companies
that market EAS equipment to retail stores directly or through distributors,
such as Sentry Technology Corporation in the U.S., Checkpoint Systems, Inc. in
the U.S., Europe, Latin America and Asia and Esselte Meto and Nedap B.V. in
Europe, all of which are principal competitors of the Company. With respect to
CCTV system components and access control systems, there are numerous companies,
including Philips, Panasonic and Pelco, that market directly or through
distributors such equipment to both retail and non-retail customers. There are
many competing companies in the sale of access control systems, including
Cardkey Inc., Westinghouse Electronic Corporation, Northern Computers Inc. and
Casi-Rusco Inc.
The Company competes in marketing its systems and products principally on the
basis of product performance, multiple technologies, service and price. Price
competition has been especially intense in some market segments in recent years.
There can be no assurance that other firms with greater financial and other
resources may not enter into direct competition, or expand the scope of their
existing competition, with the Company, nor that new technologies will not be
developed and introduced into the market place, which could adversely affect the
Company's business.
8
<PAGE> 11
SALES REVENUE
DIRECT SALES AND SALES-TYPE LEASES
The Company's sales revenues are predominantly generated by direct sales and
sales-type leases of new products and systems. Additionally, the Company
generates sales revenues by export sales of new products and systems to
distributors in foreign countries and through the sale of selected new equipment
to dealers and system integrators.
The Company sells its systems on a current, deferred or installment payment
basis. Substantially all deferred payment obligations are payable within one
year. Installment contract obligations are payable monthly over terms generally
up to five years. Both types of obligations are subject to stated or imputed
interest at prevailing market rates and are generally secured by the purchased
equipment. The Company's sales-type leases consist of non-cancelable leases of
new equipment generally with terms of 60 months or greater. The Company believes
that offering its customers flexible terms, including long-term financing, is an
advantageous competitive marketing program. For each of the three fiscal years
in the period ended June 30, 1998, no single customer accounted for 10% or more
of the Company's consolidated revenues.
RENTAL AND INSTALLATION, MAINTENANCE AND OTHER REVENUES
The Company also leases systems under non-cancelable operating leases. Such
leases are generally for terms of 36 to 54 months. Additionally, the Company
generates revenues from the installation, service and maintenance of its
systems.
WORKING CAPITAL ITEMS
The Company historically maintains a high level of accounts receivables and
sales-type leases outstanding, measured as a percentage of revenues. This
results, in part, from a key element of the Company's marketing strategy to
increase market penetration by providing alternative financing options to its
retail customers including deferred billing and long-term installment sales and
lease terms, resulting in extended accounts receivable recovery periods.
Additionally, the Company has experienced a historical pattern of delayed
payments by certain retail customers and, accordingly, the Company's levels of
receivables past due represent a relatively high percentage of total
receivables. This strategy has given the Company a competitive marketing program
and has helped the Company penetrate markets and increase customer loyalty and
commitment to Sensormatic. The ability to pursue such a strategy results from
the Company's relatively high gross profit margins and the financing programs
the Company has put in place which allow the Company to sell its customer
receivables and leases.
PRODUCT RESEARCH, DEVELOPMENT AND ENGINEERING
The Company has increased its research, development and engineering expenditures
during the past decade. The increase in these activities has resulted in the
continued broadening of the systems and technology offered by the Company,
resulting in the expansion of the applications and customer base for the
Company's systems. New product development in all product categories continues
to be a high priority for the Company.
The Company has strengthened its research, development and engineering
activities by increasing its investment in sophisticated engineering equipment,
expanding key consulting relationships throughout the world and substantially
increasing its professional engineering staff, with particular emphasis on
magnetic materials research, digital signal processing and certain application
software development skills. Several of the Company's EAS systems depend on the
use of magnetic materials. Software is another major element in the Company's
new product designs and manufacturing processes. At June 30, 1998, the Company
employed a staff of 202 engineering professionals, including 78 with Masters and
Ph.D. degrees.
In fiscal 1998, 1997 and 1996, the Company incurred approximately $27.2 million,
$24.5 million and $27.7 million, respectively, for research, development and
engineering costs. The reduced level of spending in fiscal 1997 was the result
of planned consolidations and product rationalizations. During fiscal 1999, the
Company expects spending for research, development and engineering to closely
approximate that of fiscal 1998.
GOVERNMENTAL REGULATION
The sale and use of the Company's products are subject to regulation by
governmental authorities having jurisdiction over the sale and use of electronic
and communication equipment or health and safety standards (e.g., the U.S.
Department of Health and Human Services). Such products are in compliance with
currently applicable requirements and standards under the regulations of
government authorities in the U.S., in countries in which
9
<PAGE> 12
the Company markets such products directly or through its subsidiaries and in
many other countries. In particular, electromagnetic field ("EMF") emissions
from the Company's EAS systems are within the levels permitted by such current
U.S. safety standards applicable to such equipment. Although there can be no
assurance that rules or regulations establishing more restrictive standards will
not be adopted by government authorities in the U.S., the Company believes that
the EMF levels generated by the EAS systems it markets will remain within any
such new safety standards which may be established. In addition, in view of the
Company's high level of business activity in the European Union ("EU"), the
Company actively participates in the development of evolving technical standards
issued by CENELEC (European Committee For Electrotechnical Standardization) and
ETSI (European Telecommunications Standards Institute). As of January 1, 1996
new standards were required to be met to apply the CE Mark to market products in
the EU, and the Company certified its products to the CE Mark requirements.
Meeting CE Mark requirements includes meeting standards established by CENELEC,
ETSI and other standards-setting organizations. In addition, the EU Council of
Health Ministers recently recommended basic guidelines for exposure to EMF
fields. These guidelines contemplate that standards relating to measurement
methods, duration of exposure and other criteria must be developed by member
states and/or international bodies such as CENELEC to implement such
guidelines. These guidelines, together with such standards as are developed,
would be subject to adoption, as presented or with modifications, by individual
countries. The Company is actively working with CENELEC to help develop such
standards relating to EAS and related products. The Company expects that the
products it markets will comply with such standards as may be developed
implementing the basic guidelines, if and when such standards and guidelines
have been adopted by individual countries.
Such standard-setting organizations are continually considering the
establishment of new standards and reconsidering existing standards, including
health and safety standards. There can be no assurance that adverse changes or
amendments to existing regulations or standards, or new adverse regulations or
standards, will not be adopted, or that all products of the Company subject to
regulations or standards will meet the requirements of all such regulations and
standards in all countries in which the Company desires its products to be
marketed.
The U.S. Food and Drug Administration ("FDA") has been examining the effects of
various devices, including EAS systems, on implantable medical devices. The FDA
has issued a physician advisory letter recommending that patients with
implantable medical devices avoid lingering near, or leaning on, EAS systems.
FDA staff members indicated, in connection with the release of such letter, that
the FDA does not view interactions with EAS systems as representing a
significant public health hazard and made reference to the large number of
people passing through such systems each day in relation to the small number of
reported incidents. Manufacturers of implantable medical devices, as well as the
Company and the International Electronic Article Surveillance Manufacturers
Association (of which the Company is a member), have long offered the same
advice as was given by the FDA. An American Heart Association Science Advisory
also agreed with the FDA recommendations, as did statements recently issued by
the European Society of Cardiology and the U.K. Medical Devices Agency. The
Company is also aware of other studies as to whether any hazards are posed to
wearers of implantable medical devices by EAS systems. While the Company
believes there to be substantial evidence that no health hazard is posed by the
interactions between the Company's EAS systems and such medical devices,
including opinions expressed by leading physicians, and has presented such
evidence to the FDA, and offers such evidence to persons conducting such
studies, there can be no assurance that such studies will not result in the
publication of adverse reports, the recommendation of precautionary measures
and/or the adoption of regulations which could adversely affect the Company.
The Company is also aware of prior attempts by one of its competitors to
generate adverse publicity regarding these matters. There can be no assurance
that such attempts will not adversely affect the Company.
EMPLOYEES
As of June 30, 1998, the Company employed approximately 5,800 persons worldwide.
The Company had announced plans to reduce its workforce by approximately 1,200
employees in connection with the divestment of non-core businesses and
cost-reduction plans. As of June 30, 1998, the net work force reduction was more
than 700 employees from June 30, 1997 levels pursuant to such plans, with a
major portion of such reduction resulting from the sale of the U.S.
commercial/industrial sales and installation business. The Company also uses
temporary staff, particularly in manufacturing areas, to balance workload during
peak periods.
10
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange ("NYSE")
under the symbol SRM. The following table sets forth for the periods indicated,
the range of the high and low sales prices per common share:
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
FISCAL 1998:
First Quarter..................................................................... $14 3/8 $12 3/8
Second Quarter.................................................................... 17 13 9/16
Third Quarter..................................................................... 19 5/8 16 5/16
Fourth Quarter.................................................................... 16 15/16 12 9/16
FISCAL 1997:
First Quarter..................................................................... $19 3/4 $13 7/8
Second Quarter.................................................................... 21 1/8 12 11/16
Third Quarter..................................................................... 18 14 1/2
Fourth Quarter.................................................................... 17 1/2 12 7/8
</TABLE>
As of September 22, 1998, there were 4,344 shareholders of record of the
Company's Common Stock.
The Company did not pay any dividends on the Common Stock during fiscal 1998.
Certain of the Company's financial agreements currently prohibit the payment of
cash dividends until after the preparation of its audited financial statements
for fiscal 1999, and, it is unlikely that the Company would be able to pay cash
dividends until after the preparation of its audited financial statements for
fiscal 2000 at the earliest. The Company intends to pay dividends on the
Preferred Stock with shares of its Common Stock prior to the time it is able to
pay such cash dividends. The Company did pay a quarterly cash dividend of $.055
per common share during fiscal 1997.
On April 13, 1998, 6,900,000 Depositary Shares were issued by the Company, each
representing a one-tenth interest in a share of Preferred Stock (See Note 11 of
Notes to Consolidated Financial Statements for further details). The aggregate
gross proceeds of the April 13, 1998 Offering were $172.5 million, and the net
proceeds thereof, after deduction of discounts and commissions of $0.75 per
depositary share and estimated expenses of $650,000, were approximately $166.7
million. Such proceeds were used to repay borrowings under the Company's
revolving credit facility, to fund the remaining balance due under the
settlement of the shareholder class action (see Note 14 of Notes to Consolidated
Financial Statements for additional information) and for working capital and
general corporate purposes. The Company has filed a registration statement on
Form S-3 with respect to the Depositary Shares, the Preferred Stock and Common
Stock issuable.
The Company also issued approximately 189,425 shares and approximately 355,359
shares of Common Stock in payment of the dividends payable on the Preferred
Stock on July 1, 1998 and October 1, 1998, respectively. (Registration of these
shares is not required because no additional consideration was paid therefor.)
The resale of these shares will also be covered by the registration statement.
11
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA AND QUARTERLY SUMMARY AND STATISTICAL
INFORMATION
SELECTED FINANCIAL DATA
(in millions, except per share amounts)
<TABLE>
<CAPTION>
1998(1) 1997(1) 1996(1) 1995(5) 1994
------- ------- ------- ------- ----
Restated(6)
<S> <C> <C> <C> <C> <C>
YEAR ENDED
Total revenues....................... $ 986.9 $ 1,025.7 $ 994.6 $ 889.1 $ 656.0
========= ========= ========= ========= =========
Operating income (loss).............. $ 40.1 $ 2.1 $ (134.5) $ 97.9 $ 104.8
========= ========= ========= ========= =========
(Loss) income from continuing operations $ (32.7) $ (21.4) $ (97.7) $ 69.6 $ 72.1
========= ========= ========= ========= =========
Net (loss) income.................... $ (32.7) $ (21.4) $ (97.7) $ 73.7 $ 72.1
========= ========= ========= ========= =========
Earnings (loss) applicable to common
stockholders....................... $ (35.2) $ (21.4) $ (97.7) $ 73.7 $ 72.1
========= ========= ========= ========= =========
Basic (loss) earnings per common share:
Continuing operations.............. $ (0.47) $ (0.29) $ (1.33) $ 0.98 $ 1.20
========= ========= ========= ======== =========
Net (loss) income.................. $ (0.47) $ (0.29) $ (1.33) $ 1.04 $ 1.20
========= ========= ========= ======== =========
Diluted (loss) earnings per common share:
Continuing operations.............. $ (0.47)(2) $ (0.29)(2) $ (1.33)(2) $ 0.96 $ 1.13
========= ========= ========= ======== =========
Net (loss) income.................. $ (0.47)(2) $ (0.29)(2) $ (1.33)(2) $ 1.02 $ 1.13
========= ========= ========= ======== =========
Cash dividends per common share...... $ -- $ 0.22 $ 0.22 $ 0.22 $ 0.21
======== ========= ========= ======== =========
AT YEAR-END
Total assets......................... $ 1,799.5 $ 1,646.6 $ 1,621.3 $ 1,570.9 $ 1,155.5
========= ========= ========= ========= =========
Total debt........................... $ 548.7 $ 523.3 $ 516.5(4) $ 326.7 $ 219.2
========= ========= ========= ========= =========
Total stockholders' equity........... $ 902.0(3) $ 772.9 $ 831.7 $ 952.7 $ 727.7(4)
========= ========= ========= ========= =========
</TABLE>
- ----------
(1) Includes the following pre-tax charges:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Restructuring and inventory write-downs relating to restructuring
activities...................................................... $ 21.9 $ 26.8 $ 85.3
Litigation settlement, net............................................. 45.7 -- --
------- ------- --------
$ 67.6 $ 26.8 $ 85.3
======= ======= ========
</TABLE>
(2) Amounts are not adjusted as the effect is anti-dilutive.
(3) In fiscal 1998, the Company issued 6 1/2% Convertible Preferred Stock for
net proceeds of $166.7.
(4) In fiscal 1996, the Company issued $350.0 Senior Notes (see Note 10 of Notes
to Consolidated Financial Statements); in fiscal 1994, approximately $114.0
of the $114.2 issued of 7% convertible subordinated debentures at June 30,
1993, were converted to approximately 7.3 million shares of Common Stock.
(5) In fiscal 1995, the Company acquired Knogo Corporation's operations
primarily in Europe and Australia.
(6) See Note 2 of Notes to Consolidated Financial Statements.
12
<PAGE> 15
QUARTERLY SUMMARY AND STATISTICAL INFORMATION (UNAUDITED)
(In millions, except per share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
------------- ------------ --------- --------
Restated(4) Restated(4)
<S> <C> <C> <C> <C>
QUARTER ENDED
1998(1)(2)
Total revenues.......................................... $ 245.4 $ 243.7 $ 237.0 $ 260.8
Operating income (loss)................................. $ (18.1) $ 19.2 $ 16.3 $ 22.8
Net income (loss)....................................... $ (58.6) $ 5.4 $ 10.1 $ 10.4
Earnings (loss) applicable to common stockholders....... $ (58.6) $ 5.4 $ 10.1 $ 7.9
Basic and diluted earnings (loss) per common share...... $ (0.79) $ 0.07 $ 0.14 $ 0.11
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
------------- ------------ --------- --------
QUARTER ENDED
1997(3)
Total revenues.......................................... $ 246.0 $ 256.6 $ 250.1 $ 273.0
Operating income (loss)................................. $ 10.9 $ 17.3 $ 15.0 $ (41.1)
Net income (loss)....................................... $ 2.1 $ 6.1 $ 5.8 $ (35.4)
Basic and diluted earnings (loss) per common share...... $ 0.03 $ 0.08 $ 0.08 $ (0.48)
</TABLE>
- ----------
(1) Includes pre-tax restructuring charges and inventory write-downs relating
to restructuring activities of $17.2 (net of a reversal of $12.0 recorded
in the fourth quarter of fiscal 1997) recorded in the first quarter and
$4.7 recorded in the third quarter. These restructuring charges were
allocated to the geographic areas of North America & Other for $(2.8) and
Europe for $24.7. See Note 2 of Notes to Consolidated Financial Statements.
(2) Includes a pre-tax litigation settlement charge of $53.0 recorded in the
first quarter, and a litigation insurance recovery of $7.3 recorded in the
third quarter.
(3) Includes pre-tax restructuring charges and inventory write-downs relating
to restructuring activities of $26.8 recorded in the fourth quarter. These
restructuring charges were allocated to the geographic areas of North
America & Other for $23.9 and Europe for $2.9.
(4) See Note 2 of Notes to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion should be read in conjunction with the consolidated
financial statements. See Note 2 of Notes to Consolidated Financial Statements
for discussion of the restatement of financial statements.
RESULTS OF OPERATIONS
OVERVIEW
Consolidated revenues decreased 4% to $986.9 million in fiscal 1998 versus
$1,025.7 million in fiscal 1997, as compared to an increase of 3% in fiscal 1997
versus fiscal 1996. Reported revenues for fiscal 1998 declined due to the
strengthening of the U.S. dollar against European and Asian currencies, along
with the disposition of non-core businesses. Excluding these effects, fiscal
1998 revenues increased 8% on a comparable basis to fiscal 1997. By business
unit comparable basis, fiscal 1998 revenues increased 14% in North America
Retail, 2% in Europe Retail, 18% in International Retail and 5% in C/I Worldwide
as compared with fiscal 1997.
Results of operations reflected operating income of $40.1 million in fiscal 1998
versus $2.1 million in fiscal 1997 and a loss from operations of $134.5 million
in fiscal 1996. The Company reported a net loss of $32.7 million, or a per share
loss of $.47, in fiscal 1998, versus a loss of $21.4 million, or a per share
loss of $.29, in fiscal 1997 and a net loss of $97.7 million, or a per share
loss of $1.33, in fiscal 1996. The Company's results for fiscal 1998, 1997 and
1996 include the effects of restructuring charges of $21.9 million, $22.6
million and $65.7 million, respectively, and inventory write-downs of $4.2
million and $19.6 million relating to restructuring activities in fiscal 1997
and 1996, respectively. The after-tax effect of these restructuring charges and
inventory write-downs was $15.3 million, $19.0 million, and $54.2 million,
respectively or $.21, $.26 and $.74, per share.
The Company's results also included provisions for doubtful accounts of $23.4
million, $42.8 million and $82.3 million and provisions for excess and obsolete
inventories (excluding the inventory write-downs relating to the restructuring
activities) of $11.7 million, $11.6 million, and $36.7 million, in fiscal 1998,
1997 and 1996, respectively. The provisions for doubtful accounts for fiscal
1997 and 1996 include incremental charges that resulted from an extensive review
of the collectibility of accounts receivable in each of those years amounting to
$16.1 million and $56.5 million, respectively. The provisions for excess and
obsolete inventories for fiscal 1998, 1997 and 1996 include incremental charges
of $3.0 million, $2.5 million and $31.7 million, respectively, relating
principally to the results of the Company's extensive review of its balance
sheet. The Company's results also included incremental charges of $10.8 million,
$3.5 million and $12.5 million in fiscal 1998, 1997 and 1996, respectively, for
certain employee separation
13
<PAGE> 16
and warranty and contract resolution costs. The after-tax effect of these
incremental charges was $9.7 million, $15.6 million, and $64.0 million,
respectively or $.13, $.21 and $.87, per share. In addition, in fiscal 1998 the
Company incurred net litigation settlement costs of $45.7 million, the after-tax
effect of which was $31.9 million or $.43, per share. See "Restructuring
Charges, Incremental Accounts Receivable, Inventory and Other Charges, Net
Litigation Settlement Charges and Other Strategies" below and Notes 3 and 14 of
the Notes to the Consolidated Financial Statements for further discussion.
RESTRUCTURING CHARGES, INCREMENTAL ACCOUNTS RECEIVABLE, INVENTORY AND OTHER
CHARGES, NET LITIGATION SETTLEMENT CHARGES AND OTHER STRATEGIES
Sensormatic has grown from a single technology, single market company to a
global provider of multiple electronic security solutions with revenues of
nearly $1 billion in fiscal 1998. This growth was attained principally through
internally developed new products, various strategic acquisitions and increased
market penetration in existing and new markets. The rapid growth experienced by
the Company in sales, customers and product diversity and the demands of
integrating acquired businesses outpaced the Company's growth in corporate
infrastructure and systems. In addition, expenses and working capital
requirements increased to unacceptable levels. Consequently, in fiscal 1996, the
Company launched a strategic restructuring plan with the following objectives:
(i) expense reduction and asset control, (ii) improved processes and systems,
and (iii) quality, sustainable 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. This
review of the Company's global operations focused primarily on operational
systems, organizational structures, facilities utilization, product
rationalization, quality improvements, inventory levels and accounts receivable
balances and related collection efforts. At the end of fiscal 1997, the Company
announced further restructuring actions which included the divestiture of
non-core businesses and additional cost-reduction plans, which mainly included
staff reductions within its European operations.
RESTRUCTURING CHARGES
As a result of its 1996 restructuring plan, the Company instituted a major
reorganization of its business units. The principal objective of the
reorganization was to improve market focus, customer service and product quality
while reducing costs and eliminating redundancies. 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 30 locations, principally
in the U.K. and U.S. At June 30, 1998, all planned terminations have been
completed and more than one-half of the facilities have been eliminated or
subleased. The Company also reviewed its existing product lines and product
sourcing to discontinue marginally profitable products and outsource other
products.
The fiscal 1996 pre-tax restructuring charges and inventory write-downs relating
to the restructuring activities were $85.3 million (of which $19.6 million
consisted of inventory write-downs recorded in "costs of sales"). The related
estimated cash outlay was $33.3 million. Upon completion of the restructuring
activities, anticipated savings in operating expenses and manufacturing costs
are estimated to be $44 million. Through June 30, 1998, the savings realized as
a result of this plan have been partially offset by reinvestment in the
Company's business, including costs associated with the addition of
approximately 250 employees in strategic growth and key technical areas, the new
enterprise-wide management information system and additional consultants, and by
increased legal fees relating principally to then-pending litigation and
government investigations including the matters referred to under Legal
Proceedings of Item 3. These savings were also partially reflected as reductions
in manufacturing costs which have helped to generally maintain gross profit
margins in the face of intense price competition.
In fiscal 1997, the Company continued to review its organization to improve
market focus and customer service as well as reduce costs. Accordingly, the
Company announced additional restructuring activities in fiscal 1997 which
include the divestiture of non-core businesses and workforce reductions,
principally in its European operations. The principal non-core business divested
by the Company was its U.S. commercial/ industrial direct sales and installation
business which was sold in September 1997. The Company elected to exit this
commercial/industrial direct sales and installation activity due to market
conflicts with its indirect sales channels (dealers and distributors). This
strategic decision allows the Company to focus on partnering with dealers and
distributors to promote products in the commercial/industrial division. In
connection with this restructuring plan, the Company has planned for the
reduction in workforce of approximately 1,200 positions, of which 600 relate to
the divestiture of non-core businesses and the remaining positions principally
represent the termination of administrative personnel. As of June 30, 1998,
approximately 900 positions had been eliminated, including the positions
associated with the divested business units. The pre-tax restructuring charges
related to this restructuring plan were $48.7 million, of which $26.8 million
(of which $4.2 million consisted of inventory write-downs recorded in "costs of
sales") was recorded in the fourth quarter of fiscal 1997, $17.2 million, net of
a reversal of $12.0 million (see Note 2 of Notes to Consolidated Financial
Statements), was recorded in the first quarter of fiscal 1998 and the balance of
$4.7 million was recorded in the third quarter of fiscal 1998. Total cash outlay
related to this restructuring plan, net of expected proceeds from the
divestiture of non-core businesses, was estimated to be $30 million. As of June
30, 1998, $11.8 million had been disbursed, offset by $8.2 million of proceeds
received from the sale of
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non-core businesses. Upon completion of the planned restructuring activities,
the Company expects annualized savings of approximately $50 million.
The most significant portion of the savings from restructuring (approximately
58% or approximately $53.8 million) was expected to result from involuntary
employee terminations. In the fiscal 1996 charge the Company planned for
involuntarily termination of 875 employees. Approximately 63% of these employees
were in Europe. These terminations were completed as of March 31, 1997. In the
fiscal 1998 charge, the Company planned for the involuntary termination of 600
employees (excluding an additional 600 employees that would leave the Company's
employment upon the disposition of non-core businesses). Approximately 44% of
these employees were in Europe. Worldwide, through December 31, 1998, 444
employees had been involuntarily terminated and the rest will be terminated as
soon as practicable. The realized savings in the U.S. are consistent with those
originally expected. In Europe, realized and expected savings from yet to be
completed involuntary terminations of employees are expected to produce the
savings initially contemplated.
In general, the involuntary terminations of employees in Europe is a lengthy
process because of the individual administrative process which needs to be
followed in each country. In addition, as a result of successive changes in
European management, implementation of the European restructuring plan has been
delayed. While the speed of execution is slower than originally anticipated, no
changes have been made to the original restructuring plan and the Company is
proceeding with the remaining involuntary employee separations and location
consolidations.
INCREMENTAL ACCOUNTS RECEIVABLE, INVENTORY AND OTHER CHARGES
In fiscal 1996, as part of the Company's plan to focus on asset management and
review its balance sheet in view of the then existing business environment, the
Company performed an extensive review of the collectibility of accounts
receivable, including off-balance sheet receivables. This initiative was
primarily the result of the overall weakening in the retail industry following a
poor holiday season. In addition, several commercial/industrial and retail
customers had filed for bankruptcy and other customers experienced financial
difficulties. The Company also conducted a review of slow moving and potentially
obsolete inventory in light of softening demand for certain EAS products. In
fiscal 1997 and 1998, the Company recorded further incremental charges relating
to accounts receivables, inventories, certain employee separation and warranty
and contract resolution costs. The related amounts and their effects are
discussed below.
NET LITIGATION SETTLEMENT CHARGE
In November 1997, the Company reached an agreement to settle a series of class
action lawsuits filed during fiscal 1995. The class action stockholder lawsuit
challenged the Company's prior revenue recognition practices in fiscal 1995 and
earlier. The terms of the agreement provide for an approximately $53.5 million
settlement payment. The Company recorded a net pre-tax charge of $53.0 million
with an after-tax effect of $37.0 million in the first quarter of fiscal 1998.
During fiscal 1998, the Company also recovered a portion of the settlement
amount and related expenses from its primary directors and officers liability
insurance policy, which has a policy limit of $10.0 million, and was paid an
amount equal to the policy limit of $10.0 million by one of its two excess
directors and officers liability insurers pursuant to a settlement. The Company
recorded a net pre-tax insurance recovery of $7.3 million with an after-tax
effect of $5.1 million in the third quarter of fiscal 1998. In addition,
subsequent to June 30, 1998, the Company reached agreement with its other excess
insurance carrier providing for the payment by the carrier of $6.25 million in
settlement of its insurance obligations in connection with, among other things,
settlement of the above class action, and recorded the related insurance
recovery.
OTHER STRATEGIES
To assist with the Company's restructuring plan objective to improve processes
and systems, the Company has embarked upon a process improvement and total
quality management program internally referred to as "Q(3)". The program's
objective is to provide superior value for customers, shareholders and
employees. Q(3) is a multi- year effort in which the Company will reengineer the
way it operates enterprise-wide. The program will also establish a culture of
"continuous improvement" in all of the Company's business processes to reduce
cost and increase customer satisfaction. In connection with this program, the
Company has committed to the implementation of a new enterprise-wide management
information system and an extensive internal training program, both of which are
expected to significantly enhance operational efficiencies and improve customer
service.
RESULTS OF OPERATIONS -- FISCAL 1998 COMPARED TO FISCAL 1997
Except as otherwise indicated, the following discussion of operating results
excludes the effects of the net restructuring charges and inventory write-downs
relating to restructuring activities and the net litigation settlement charges
recorded in fiscal 1998 and 1997, which were discussed above.
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REVENUES
Revenues for fiscal 1998 decreased 4%, or $38.8 million, from fiscal 1997.
Fiscal 1998 results were negatively affected by the strengthening of the U.S.
dollar against currencies in Europe and Asia and the related impact of foreign
currency fluctuations, resulting in a reduction in revenues of approximately
$38.4 million. 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 of the U.S. dollar against currencies in Europe and
Asia and the divestiture of non-core businesses, fiscal 1998 revenues increased
approximately 8%.
Consolidated revenues for the EAS product lines remained relatively unchanged
from fiscal 1997. However, Ultra*Max revenues increased 19% in fiscal 1998 as
compared to fiscal 1997. Unit level volume for source tagging, which is based on
UltraoMax technology, increased by approximately 50% in fiscal 1998 as compared
to fiscal 1997, resulting in sales of more than 650 million labels. The increase
in Ultra*Max revenues was partially offset by declines in other EAS system
revenues, principally the SensorStrip Checkout systems. Revenues from
SensorStrip Checkout systems, principally sold in Europe, decreased 21% from
fiscal 1997 where they were negatively affected by the strengthening of the U.S.
dollar against most European currencies and market saturation in certain
countries.
Overall CCTV revenues decreased 6% in fiscal 1998 as compared to fiscal 1997. A
significant percentage of CCTV revenues and nearly all of Access Control
revenues are generated by C/I Worldwide which was negatively impacted in fiscal
1998 by the decline in revenues partially due to the divestiture of a non-core
business. Due to channel conflicts, the Company made a strategic decision to
exit the commercial/industrial direct sales and service business in the U.S. and
partner with its dealers and distributors to promote its products in the
commercial/industrial markets and thereby lower its distribution and
installation costs. The Company's U.S. commercial/industrial direct sales and
service business, which had fiscal year 1997 revenues of approximately $80
million, was sold to Security 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. Installation and product revenues
from the divested business unit were approximately $11.4 million in fiscal 1998.
North America Retail revenue for fiscal 1998 increased 11% versus fiscal 1997.
EAS market penetration increased in the following market segments: music,
discounters, mass merchants, automotive, office supply, home centers, video and
shoes. Excluding the effect on revenues of a divested non-core business, North
America Retail revenues increased 14% in fiscal 1998 as compared with fiscal
1997.
Europe Retail revenues decreased 7% in fiscal 1998 as compared to fiscal 1997.
Excluding the effect of exchange due to foreign currency fluctuations, Europe
Retail revenues increased 2% in fiscal 1998 as compared with fiscal 1997. The
Company expects Europe Retail revenues to remain flat through fiscal 1999. The
Company believes that Europe Retail's results during fiscal 1998 were negatively
impacted by a shift from direct sales to indirect sales, a decrease in sales to
low end users and increased competition.
International Retail revenues, which includes Latin America, Asia Pacific and
the Middle East, increased 12% in fiscal 1998 as compared to fiscal 1997. The
increase in International Retail was largely due to Latin America revenues which
increased by 30% in fiscal 1998 as compared to fiscal 1997. Beginning in the
second quarter of fiscal 1998, Asia Pacific revenue growth was negatively
impacted by the Asian currency volatility. The Company expects this trend to
continue into fiscal 1999. Excluding the effect of acquisitions and currency
effects, International Retail revenues for fiscal 1998 increased 18% as compared
to fiscal 1997.
Revenues generated by C/I Worldwide decreased by 24% in fiscal 1998 as compared
to fiscal 1997. The decrease in revenues is principally due to the divestiture
referred to above in September 1997 of the U.S. commercial/industrial direct
sales and service business. Excluding the effect on revenues of this divested
non-core business and foreign exchange, C/I Worldwide indirect revenues
increased 5% in fiscal 1998 as compared to fiscal 1997.
GROSS MARGINS AND OPERATING INCOME
Before restructuring charges and inventory write-downs relating to restructuring
activities, gross margins were 44.8% for fiscal 1998 compared with 45.4% for
fiscal 1997. The decrease in gross margin percentages reflect pricing pressures
in some market segments for retail article protection equipment, partially
offset by savings from cost reduction efforts.
Excluding restructuring charges and inventory write-downs relating to
restructuring activities, operating income for fiscal 1998 was $62.0 million or
6.3% of total revenue, versus $28.9 million or 2.8% of total revenue in fiscal
1997.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Total selling, general and administration expenses, as a percentage of total
revenues, were 31.2% in fiscal 1998 versus 34.1% in fiscal 1997. Included in
selling, general and administration expenses in fiscal 1998 and 1997 were $10.8
million and $3.5 million, respectively, relating to certain employee separation
and warranty and contract resolution costs. As a percentage of revenue, these
amounts were 1.1% and 0.3% in fiscal 1998 and 1997, respectively. The decrease
in expenses as a percentage of revenue for fiscal 1998 reflects the benefit from
cost reduction efforts resulting from the restructuring actions previously
discussed, as well as 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.
PROVISION FOR DOUBTFUL ACCOUNTS
Provision for doubtful accounts, as a percentage of total revenues, was 2.4% and
4.2% in fiscal 1998 and 1997, respectively. The higher provision for doubtful
accounts in fiscal 1997 reflects the Company's assessment of accounts receivable
collection experience in certain market segments, following the extension review
of accounts which took place in fiscal 1996.
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES
Research, development and engineering expenses increased to 2.8% of total
revenues in fiscal 1998 versus 2.4% in fiscal 1997. Research, development and
engineering spending increased as a percentage of revenues as compared to
the prior year due to the Company's increased focus on new product development
in all product categories. The Company expects fiscal 1999 spending levels for
research, development and engineering to approximate those in fiscal 1998.
OTHER (EXPENSES) INCOME
Non-operating expenses, which include interest expense and interest income,
increased from $32.4 million in fiscal 1997 to $41.2 million in fiscal 1998. The
increase is principally due to an increase in interest expense due to higher
average debt levels in fiscal 1998 as compared to fiscal 1997 as well as the
Company's decision to substitute long-term fixed rate borrowings for short-term
variable rate borrowings to insulate the Company from interest rate volatility.
Fiscal 1997 non-operating expenses also included a gain of approximately $2.4
million as a result of the cancellation of certain foreign currency contracts.
These forward contracts, which allowed the Company to sell British Pounds for a
fixed U.S. dollar amount, were canceled as a result of the recapitalization of
its U.K. affiliate.
TAXES
The Company's worldwide effective tax rate benefit for fiscal 1998 was 30.1% as
compared to 29.4% in fiscal 1997. The effective tax rate for continuing
operations for fiscal 1999 is expected to be approximately 30.0%.
In August 1996, Congress repealed the favorable tax status in Puerto Rico which
is being phased out over a ten year period for years beginning in 1996. The
Company does not anticipate any material adverse effect on net income as a
result of the new law through fiscal 2002; for years thereafter, the Company is
evaluating the impact which is linked to the Company's further growth and
investment in its Puerto Rico manufacturing facility.
Under Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes", a deferred tax asset is recognized for deductible future
temporary differences. A valuation allowance against this asset is recognized
if, based upon the weight of the available evidence, it is more likely than not
that some portion or all of the deferred tax asset will not be realized.
The Company has evaluated its deferred tax assets. Management believes that
future taxable income, more likely than not, will be sufficient to realize
substantially all of these assets; however, there can be no assurance that this
will be the case. In addition, the Company has identified tax planning
strategies it would utilize to realize a substantial portion of the recorded
deferred tax assets. A significant portion of these deferred tax assets relate
to the future benefit of tax net operating loss and credit carryforwards. The
Company has analyzed the use of the carryforwards on a country by country basis
and recognized the related tax benefit where the carryforwards are expected to
be utilized.
In determining the need for a valuation allowance, SFAS No. 109 requires an
assessment of all available evidence both positive and negative. Where a
valuation allowance was not recorded, the Company believes that there was
sufficient positive evidence to support its conclusion not to record a valuation
allowance. Management believes that the Company will utilize the loss
carryforwards to offset future taxable income because: (1) prior to the
restructuring charges and shareholder litigation settlement costs, the Company
had a history of pre-tax income; (2) a significant portion of the loss
carryforwards resulted from restructuring and shareholder litigation settlement
costs, which are not expected to recur; (3) management believes that
restructuring of the Company's businesses will reduce their cost structures and
that they will be profitable and will generate taxable income in the near term;
(4) management is aware of
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viable tax strategies that could be implemented to accelerate taxable income in
order to realize recorded deferred tax assets; and (5) a significant portion of
the net operating losses have an indefinite life or do not expire in the near
term. However, there can be no assurance that the Company will generate taxable
income or that all of its loss carryforwards will be utilized.
See Note 9 of Notes to Consolidated Financial Statements for further discussion,
including amounts of net operating losses by country and expiration dates.
RESULTS OF OPERATIONS -- FISCAL 1997 COMPARED TO FISCAL 1996
Except as otherwise indicated, the following discussion of operating results
excludes the effects of the restructuring charges and inventory write-downs
relating to restructuring activities recorded in fiscal 1997 and 1996, which
were discussed above.
REVENUES
Revenues for fiscal 1997 increased 3%, or $31.1 million, over fiscal 1996 as a
result of increased revenue by North America Retail, International Retail and
the Global Source Tagging Division. The revenue growth resulted principally from
increased sales of Ultra*Max and CCTV systems and products. Ultra*Max revenues
increased 27% from $240.2 million in fiscal 1996 to $304.5 million in fiscal
1997. CCTV revenues increased 6% from $297.5 million in fiscal 1996 to $314.6
million in fiscal 1997. Installation, maintenance and other revenue also
increased 25% to $117.4 million in fiscal 1997 as compared to $94.1 million in
fiscal 1996 as the Company's installed base has increased. Worldwide Access
Control system revenues remained flat at $60.7 million in fiscal 1997 as
compared to $60.8 million in fiscal 1996.
Consolidated revenues for the EAS product lines were down slightly from $542.2
million in fiscal 1996 to $533.0 million in fiscal 1997, a 2% decrease. As
previously mentioned, Ultra*Max revenues increased 27% in fiscal 1997 as
compared to fiscal 1996. This increase was offset by a decrease in other EAS
system revenues, principally the radio frequency technology systems and
SensorStrip Checkout systems. Radio frequency systems are being phased out in
connection with the Company's strategy to upgrade users from the older EAS
technologies to Ultra*Max technology. Revenues from SensorStrip Checkout
systems, principally sold in Europe, were negatively impacted by a weak European
economy, legislation that restricted the expansion of hypermarkets and increased
competition.
Overall CCTV revenues increased 6%, in fiscal 1997 as compared to fiscal 1996. A
significant percentage of CCTV revenues and nearly all of Access Control
revenues are generated by C/I Worldwide which was negatively impacted in fiscal
1997 by market conflicts with its indirect sales channels, product shortages and
late new product introductions. As a result of the channel conflict, the Company
made a strategic decision to exit the commercial/industrial direct sales and
service business in the U.S. and will partner with its dealers and distributors
to promote its products in the commercial/industrial markets and thereby lower
its distribution and installation costs. In September 1997, the Company
completed the sale of its U.S. commercial/industrial direct sales and service
business. Installation and product revenues from this business unit were
approximately $80 million in fiscal 1997.
North America Retail revenue for fiscal 1997 increased 12% versus fiscal 1996.
Fiscal 1996 North America Retail revenues were negatively impacted by product
shortages as well as restructuring activities. This business unit entered fiscal
1997 with a significant backlog which at the end of fiscal 1997 was
approximately one-half of its fiscal 1996 year-end backlog. Significant
increases in revenues were noted in the soft goods and food divisions, with
increases over prior year of 40% and 59%, respectively, as a result of greater
penetration of the retail apparel and food markets along with improved
technology solutions. North America Retail CCTV system revenues increased 20 %
in fiscal 1997 as compared to fiscal 1996 as a result of increased sales to all
market segments.
Europe Retail revenues decreased 8% in fiscal 1997 as compared to fiscal 1996.
European revenues were negatively affected by management changes and a
repositioning of the Company's market focus in the United Kingdom, a weak
economy in southern Europe and France, and the strengthening of the U.S. dollar
which resulted in a decrease to revenues of approximately $18 million. The
Company hired a new management team in the United Kingdom during fiscal 1997,
which is in the process of implementing a new higher-end market EAS strategy.
France's revenue growth was negatively impacted by a weak economy as well as
legislation which has restricted the expansion of hypermarkets. A large
percentage of France's revenue is from the hypermarket industry and as a result
of the legislation, France's market strategy has been to upgrade existing
customers to newer technologies. The Company has also experienced increased
competition in Europe during the year.
Fiscal 1997 revenues in International Retail grew 33% over the prior year. More
specifically, Asia Pacific revenues increased 19% as compared to the prior year
and Latin America revenues increased 45% as compared to the prior year. The
fiscal 1997 increase in Asia Pacific revenues is due principally to increased
business partner revenues, notably in Japan, and the recent opening of a sales
office in
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Beijing. Revenues were slightly affected by some softness in Australia's economy
over the course of the year. Fiscal 1997 Latin America revenues include revenues
from Argentina, which was acquired in October 1996, and Colombia, which was
acquired in May 1996. Excluding these acquisitions, fiscal 1997 Latin America
revenues increased 9% as compared to fiscal 1996, with significant increases in
Brazil, a 51% owned affiliate, and Mexico.
In fiscal 1997, C/I Worldwide was negatively affected by market conflicts with
its indirect sales channels, product shortages, and late new product
introductions. C/I Worldwide revenues were flat in fiscal 1997 as compared to
fiscal 1996. Fiscal 1997 continued to be a transition year for C/I Worldwide as
this new business unit, formed within the Company in late 1996 in connection
with the Company's strategy to expand into and sell integrated security
solutions to the commercial/industrial market, reorganized its management staff
and administrative functions, aligned and just recently segregated product
development and manufacturing activities from its sales organization and
realigned its marketing strategy to partner with its dealers and distributors
rather than sell directly to customers. Additionally, C/I Worldwide centralized
the administrative functions of its indirect sales business in Europe during
fiscal 1997. The above activity negatively affected revenue growth during fiscal
1997.
GROSS MARGINS AND OPERATING INCOME
Before restructuring charges and inventory write-downs relating to restructuring
activities, gross margins were 45.4% for fiscal 1997 compared with 41.6% for
fiscal 1996. The increase in margins is due to the Company's overall cost
reduction efforts, favorable purchase prices on materials used in the
manufacturing process and the reduced effects, year over year, of an extensive
balance sheet review begun in fiscal 1996. Charges related to this review were
$2.5 million and $31.7 million in fiscal 1997 and fiscal 1996, respectively.
Gross margin improvement was offset by lower product pricing resulting from
competition in certain segments of the EAS markets and higher costs associated
with the transfer of more production to the Company's facility in Ireland to
support operations in Europe. The Company has experienced pricing pressures from
certain EAS retail customers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Total selling, general and administration expenses, as a percentage of total
revenues, were 34.1% in fiscal 1997 versus 33.8% in fiscal 1996. In absolute
dollars, selling expenses increased in fiscal 1997 versus fiscal 1996 due to
higher commission expenses as a result of increased revenue. Operating expenses
in the Company's European Retail business unit were higher than fiscal 1996 as a
percentage of revenues due to a significant overhead structure. Accordingly, the
Company announced additional cost reduction programs to reduce overhead cost,
principally in its European Retail business unit. These programs include the
centralization of administrative services and workforce reductions. C/I
Worldwide operating expenses as a percentage of revenue increased over fiscal
1996 levels. The divestiture of non-core businesses, including the exit of the
systems integration business, decreased C/I Worldwide operating expenses as a
percentage of revenues below fiscal 1997 levels. Fiscal 1997 corporate
administrative expense levels were higher than in fiscal 1996 as a result of
increased consulting fees paid in connection with the Company's process
improvement programs. Legal expenses were comparable to fiscal 1996 levels but
remained at higher than normal levels due to expenses incurred to defend against
certain actions which have been brought against the Company and in connection
with an investigation by the Securities and Exchange Commission.
In fiscal 1997 and fiscal 1996 the Company incurred expenses of $4.2 million and
$6.2 million, respectively, related to its involvement as the official
electronic security sponsor and supplier to the Games. The Company's association
with the Games is part of its strategy to expand general awareness of the
Company's total electronic security capabilities. The sales benefit from the
world "showcase" exposure has benefited the Company through new business.
PROVISION FOR DOUBTFUL ACCOUNTS
Provision for doubtful accounts, as a percentage of total revenues, was 4.2% and
8.3% in fiscal 1997 and 1996, respectively. The reduction in the provision for
doubtful accounts as a percentage of total revenue is due to the reduced
effects, year over year, of an extensive review of the collectibility of
accounts receivable begun in fiscal 1996. Incremental charges related to this
review were $16.1 million (1.6% of revenue) and $56.5 million (5.7% of revenue)
in fiscal 1997 and fiscal 1996, respectively.
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES
Research, development and engineering expenses decreased to 2.4% of revenue in
fiscal 1997 versus 2.7% in fiscal 1996. The reduced level of spending is the
result of planned consolidations and product rationalizations. New product
development in all product categories continues to be a high priority for the
Company. During fiscal 1997 the Company introduced 12 major new products,
including UltraPost, Intellex and ScanThru(TM).
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OTHER (EXPENSES) INCOME
Non-operating expenses, which include interest expense and interest income,
increased from $25.4 million in fiscal 1996 to $32.4 million in fiscal 1997. The
increase is principally due to an increase in interest expense due to higher
average debt levels in fiscal 1997 as compared to fiscal 1996 as well as the
Company's decision to substitute long-term fixed rate borrowings for short-term
variable rate borrowings to insulate the Company from interest rate volatility.
In the third and fourth quarters of fiscal 1996, the Company issued $350 million
Senior Notes, the proceeds of which were used to repay short-term U.S. and
European bank borrowings and for general corporate purposes. Fiscal 1997
non-operating expenses also included a gain of approximately $2.4 million as a
result of the cancellation of certain foreign currency contracts. The Company
canceled certain forward contracts which allowed it to sell British Pounds for a
fixed U.S. dollar amount as a result of the recapitalization of its U.K.
affiliate.
TAXES
The Company's worldwide effective tax rate benefit for fiscal 1997 was 29.4% as
compared to 38.9% in fiscal 1996.
In August 1996, Congress repealed the favorable tax status in Puerto Rico which
will be phased out over a ten year period for years beginning in 1996. The
Company does not anticipate any material adverse effect on net income as a
result of the new law through fiscal 2002; for years thereafter, the Company is
evaluating the impact which is linked to the Company's further growth and
investment in its Puerto Rico manufacturing facility.
Under Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes", a deferred tax asset is recognized for deductible future
temporary differences. A valuation allowance against this asset is recognized
if, based upon the weight of the available evidence, it is more likely than not
that some portion or all of the deferred tax asset will not be realized.
The Company has evaluated its deferred tax assets. Management believes that
future taxable income, more likely than not, will be sufficient to realize
substantially all of these assets; however, there can be no assurance that this
will be the case. In addition, the Company has identified tax planning
strategies it would utilize to realize a substantial portion of the recorded
deferred tax assets. A significant portion of these deferred tax assets relate
to the future benefit of tax net operating loss and credit carryforwards. The
Company has analyzed the use of the carryforwards on a country by country basis
and recognized the related tax benefit where the carryforwards are expected to
be utilized.
In determining the need for a valuation allowance, SFAS No. 109 requires an
assessment of all available evidence both positive and negative. Where a
valuation allowance was not recorded, the Company believes that there was
sufficient positive evidence to support its conclusion not to record a valuation
allowance. Management believes that the Company will utilize the loss
carryforwards to offset future taxable income because: (1) prior to the
restructuring charges and shareholder litigation settlement costs, the Company
had a history of pre-tax income; (2) a significant portion of the loss
carryforwards resulted from restructuring and shareholder litigation settlement
costs, which are not expected to recur; (3) management believes that
restructuring of the Company's businesses will reduce their cost structures and
that they will be profitable and will generate taxable income in the near term;
(4) management is aware of viable tax strategies that could be implemented to
accelerate taxable income in order to realize recorded deferred tax assets; and
(5) a significant portion of the net operating losses have an indefinite life or
do not expire in the near term. However, there can be no assurance that the
Company will generate taxable income or that all of its loss carryforwards will
be utilized.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1998, cash and cash equivalents increased $105.3 million primarily
due to the issuance of Convertible Preferred Stock in early April, 1998. Cash
flow used in operating activities was $34.9 million in fiscal 1998 compared with
$2.1 million in fiscal 1997 and $34.3 million in fiscal 1996. The increase in
cash used in operations in fiscal 1998 as compared to fiscal 1997 was primarily
due to an increase in the net loss for the year, as a result of the settlement
of shareholder litigation claims.
The Company historically maintains a high level of receivables and sales-type
leases outstanding, measured as a percentage of revenues. This results, in part,
from a key element of the Company's marketing strategy, which has been to
provide alternative financing options to its retail customers, including
deferred billing and long-term installment sales and lease terms, resulting in
extended accounts receivable recovery periods. Additionally, the Company has
experienced a historical pattern of delayed payments by certain retail customers
and, accordingly, the Company's levels of receivables past due represent a
relatively high percentage of total receivables. The Company's strategy has
helped it penetrate markets and increase customer loyalty and commitment to
Sensormatic. The ability to pursue such a strategy results from the Company's
relatively high gross profit margins and the various accounts receivable
securitization programs the Company has put in place which allow the Company to
sell its customer receivables.
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The terms of certain of the Company's principal receivable securitization
programs provide for overcollateralization and accordingly the Company does not
receive the full balance of the receivable until the customer receivable has
been paid in full to financing institutions. The Company accounts for this
overcollateralization as a "Receivable due from financing institution" which is
included in "Other current assets" and "Patents and other assets -- net".
The Company aggressively pursues the sale and/or securitization of all its
long-term customer receivables and a significant portion of its trade customer
receivables. The Company believes the gross profit margin it receives on the
sale of its products, combined with the interest income it receives on such
receivables, are sufficient to cover the carrying cost of the long-term customer
receivables which it is unable to securitize and the overcollateralization
holdbacks.
The Company's investing activities used $53.9 million of cash in fiscal 1998,
compared to $85.2 million in fiscal 1997. Additions to property, plant and
equipment totaled $29.3 million, primarily including investments in
manufacturing operations for new production equipment and additions to the
Company's enterprise wide-management information system software. Additional
investing activities also included increases in revenue equipment of $23.3
million, which represents equipment held under operating leases, and additional
investments in acquisitions of $19.7 million relating to on-going payments for
commitments relating to prior year acquisitions, all partially offset by the net
proceeds received from the sale of the U.S. commercial/ industrial direct sales
and service business and the Deerfield Beach facility.
Fiscal 1998 financing activities generated cash of $194.1 million as compared
with cash used of $4.7 million in fiscal 1997. The increase is principally due
to proceeds received from the issuance of the new series of 6 1/2% Convertible
Preferred Stock. The proceeds from the Convertible Preferred Stock were
primarily used to repay the outstanding balance under the Company's revolving
credit line, the payable associated with the shareholder litigation settlement,
and working capital and general corporate purposes. See Notes 11 and 14 of Notes
to Consolidated Financial Statements for further discussion.
The Company's percentage of total debt to total capital was 37.8% at June 30,
1998 as compared to 40.4% at June 30, 1997. Certain of the Company's financial
agreements currently prohibit the payment of cash dividends until after the
preparation of its audited financial statements for fiscal 1999, and it is
unlikely that the Company would be able to pay cash dividends until after the
preparation of its audited financial statements for fiscal year 2000 at the
earliest. The Company intends to pay dividends on the Convertible Preferred
Stock with shares of Common Stock prior to the time it is able to pay such cash
dividends.
The Company anticipates continuing to provide vendor financing to its customers
and aggressively pursues collection of all accounts receivable past due. The
Company is closely monitoring inventory and overall working capital requirements
and has implemented numerous programs that are expected to result in reduced
working capital requirements.
The Company requires significant cash flow to meet its debt service and other
continuing obligations. As of June 30, 1998, the Company has $548.7 million of
total indebtedness outstanding. The Company's principal liquidity requirements
are expected to be to provide working capital, finance customer equipment
purchases, invest in revenue equipment and capital expenditures and meet debt
service requirements, including the payment of principal and interest on
borrowings under the Revolving Credit Facility and interest on the Senior Notes.
At June 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 there was unused
availability of $250.0 million, and (iv) receivable securitization facilities
totaling $190.0 million, of which approximately $130.3 million was utilized as
of June 30, 1998. The Company believes that cash on hand and cash flow from
operations, together with borrowings under the Revolving Credit Facility, will
be sufficient to meet its liquidity needs for the foreseeable future. During
1999, the Company plans to invest approximately $30.0 million in capital
projects. The projects include investments in manufacturing operations for new
production equipment and management information systems.
CURRENCY RISKS
See Item 7A, Quantitative and Qualitative Disclosures about Market Risk
INTEREST RATE RISKS AND DERIVATIVES
See Item 7A, Quantitative and Qualitative Disclosures about Market Risk
21
<PAGE> 24
ACCOUNTING STANDARDS
In fiscal 1998, the Company adopted SFAS No. 128 "Earnings Per Share" and SFAS
No. 129 "Disclosure of Information about Capital Structure" which are effective
for periods ending after December 15, 1997. SFAS No. 128 simplifies the previous
required calculation of earnings per share ("EPS") under APB No. 15, "Earnings
per Share", by replacing the previously required calculation of primary EPS with
a basic EPS calculation. It requires a dual presentation, for complex capital
structures, of basic and diluted EPS on the face of the income statement and
requires a reconciliation of basic EPS factors to diluted EPS factors. SFAS No.
129 requires disclosing information about an entity's capital structure.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130 "Reporting Comprehensive Income," which is effective for fiscal years
beginning after December 15, 1997. This Statement establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The new rule requires that the Company
(a) classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in-capital in the equity
section of the balance sheet. The Company plans to adopt SFAS No. 130 in fiscal
1999 with impact only to the Company's disclosure information.
Also in June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. This Statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise", and amends SFAS No.
94, "Consolidation of All Majority-Owned Subsidiaries". This Statement requires
annual financial statements to disclose information about products and services,
geographic areas and major customers based on a management approach, along with
interim reports. The management approach requires disclosing financial and
descriptive information about an enterprise's reportable operating segments
based on reporting information the way management organizes the segments for
making business decisions and assessing performance. It also eliminates the
requirement to disclose additional information about subsidiaries that were not
consolidated. This new management approach may result in more information being
disclosed and require new interim information not previously presented. The
Company plans to adopt SFAS No. 131 in fiscal 1999 with impact only to the
Company's disclosure information.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits -- an amendment of FASB Statements
No. 87, 88 and 106" which is effective for fiscal years beginning after December
15, 1997. This statement revises employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans. The Company plans to adopt SFAS No. 132 in fiscal 1999 with
impact only to the Company's disclosure information.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which is effective for fiscal quarters of
fiscal years beginning after June 15, 1999. This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement amends SFAS No. 52 "Foreign Currency Translation",
and supersedes SFAS No. 80 "Accounting for Future Contracts", No. 105
"Disclosure of Information about Financial Instruments with Off-Balance-Sheet
Risk and Financial Instruments with Concentration of Credit Risk", No. 107
"Disclosures about Fair Value of Financial Instruments", and No. 119 "Disclosure
about Derivative Financial Instruments". The Company plans to adopt SFAS No. 133
in fiscal 2000 and is currently assessing the impact this statement will have on
its consolidated financial statements.
YEAR 2000 ISSUE
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
22
<PAGE> 25
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.
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 are 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.
23
<PAGE> 26
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 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.
EURO CONVERSION
On January 1, 1999, certain member nations of the European Economic and Monetary
Union ("EMU") will adopt a common currency, the Euro. For the three-year
transition period, both the Euro and individual participant's currencies will
remain in circulation. After January 1, 2002, the Euro will be the sole legal
tender for EMU countries. The adoption of the Euro will affect a multitude of
financial systems and business applications as the commerce of these nations
will be transacted in the Euro and the existing national currency. For the year
ended June 30, 1998, approximately 34.2% of the Company's revenues were derived
from EMU countries.
The Company is currently addressing Euro related issues and its impact on
information systems, currency exchange rate risk, taxation, contracts,
competition and pricing. Action plans currently being implemented are expected
to result in compliance with all laws and regulations. While the Company does
not expect the Euro conversion will have a material impact on its operations,
financial condition or liquidity, there can be no certainty that action plans
will be successfully implemented or that external factors will not have an
adverse effect on the Company's operations.
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
Except for historical matters, the matters discussed in this Form 10-K 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, among other possible 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates and foreign
currency exchange rates which may adversely affect its results of operations and
financial condition. The Company seeks to minimize the risks from these interest
rates and foreign currency exchange rate fluctuations through its regular
operating and financing activities and, when considered appropriate, through the
use of derivative financial instruments. The Company's policy is to not use
financial instruments for trading or other speculative purposes and is not a
party to any leveraged financial instruments.
A discussion of the Company's accounting policies for Interest Rate Swap and
Foreign Currency Forward Agreements is included in Notes 1 and 17 of Notes to
Consolidated Financial Statements.
The Company manages market risk by restricting the use of derivative financial
instruments to hedging activities and by limiting potential interest and
currency rate exposures to amounts that are not material to the Company's
consolidated results of operations and cash flows. The Company also has
procedures to monitor the impact of market risk on the fair value of its
long-term debt, short-term debt instruments and other financial instruments,
considering reasonably possible changes in interest and currency rates.
EXPOSURE TO SHORT-TERM INTEREST RATES
The Company utilizes primarily fixed-rate debt as described in Note 10 of Notes
to Consolidated Financial Statements. The Company uses interest rate swaps
agreements to further limit the Company's exposure to short-term interest rate
movements relating to off balance sheet receivable financings.
24
<PAGE> 27
At June 30, 1998 the Company's fixed rate long-term debt had a face value and
carrying value of $485.0 million. The fair value of long-term debt at June 30,
1998 was $471.3 million. Based upon a hypothetical 10% increase in the period
end market interest rate, the fair value of this liability would decrease by
approximately $17.3 million.
At June 30, 1998 the notional amount of interest rate swaps totaled $131.1
million. The carrying value and fair value of the liability for these agreements
were $.5 million and $.9 million, respectively. Based upon a hypothetical 10%
increase in the period end market interest rate, the fair value of this
liability would decrease by approximately $3.1 million.
These amounts are determined by considering the impact of the hypothetical
interest rates on the Company's borrowing cost and interest rate swap
agreements. These analyses do not consider the effects of the reduced level of
overall economic activity that could exist in such an environment. Further, in
the event of a change of such magnitude, management would likely take actions to
further mitigate its exposure to the change. However, due to the uncertainty of
the specific actions that would be taken and their possible effects, the
sensitivity analysis assumes no changes in the Company's financial structure.
EXPOSURE TO EXCHANGE RATES
As a result of the sales of its products in foreign markets the Company's
offshore operations are affected by fluctuations in the value of the U.S.
dollars as compared to foreign currencies. Its offshore operations are in
Europe, Asia and Latin America. Foreign currency forward contracts are used to
hedge against the earnings effects of short-term fluctuation in significant
foreign jurisdictions.
The Company uses foreign currency forward contracts to hedge the exposure to
adverse changes in foreign currency exchange rates. Therefore, increases and
decreases in the fair value of foreign currency forward agreements are offset by
changes in the fair value of net underlying foreign currency transaction
exposures. The Company's principal currency exposures relate to the French
franc, the German deutsche mark and the British pound against the U.S. dollar.
The Company's exposure to changes in foreign currency exchange rates arises from
intercompany loans utilized to finance foreign subsidiaries, receivables,
payables and firm commitments arising from international transactions. The
Company attempts to have all such transaction exposures hedged with internal
natural offsets to the fullest extent possible and, once these opportunities
have been exhausted, through derivative financial instruments with third parties
using forwards.
At June 30, 1998 the Company has in place foreign currency forward contracts
with a notional amount of $260.6 million. The carrying value and fair value of
these contracts was a liability of $7.1 million and an asset of $.3 million at
June 30, 1998, respectively. Based upon a 10% strengthening of the U.S. dollar
compared to these foreign currencies, the estimated fair value of the asset
would increase by $24.7 million. This calculation assumes that each exchange
rate would change in the same direction relative to the U.S. dollar. In addition
to the direct effects of changes in exchange rates quantified above, changes in
exchange rates also change the dollar value of the resulting sales and affect
the volume of sales or the foreign currency sales price as competitors' products
become more or less attractive. The Company's sensitivity analysis of the
effects of changes in foreign currency exchange rates does not factor in a
potential change in levels of local currency prices or sales reported in U.S.
dollars.
The above discussion of the Company's procedures to monitor market risk and the
estimated changes in fair value resulting from the Company's sensitivity
analyses are forward-looking statements of market risk assuming certain adverse
market conditions occur. Actual results in the future may differ materially from
these estimated results due to actual developments in the global financial
markets. The analysis methods used by the Company to assess and mitigate risk
discussed above should not be considered projections of future events or losses.
25
<PAGE> 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
Financial Statements:
<S> <C>
Report of Independent Certified Public Accountants........................................... 27
Consolidated Balance Sheets at June 30, 1998 and 1997........................................ 28
Consolidated Statements of Operations for the years ended June 30, 1998, 1997 and
1996...................................................................................... 29
Consolidated Statements of Cash Flows for the years ended June 30, 1998, 1997 and
1996...................................................................................... 30
Consolidated Statements of Stockholders' Equity for the years ended June 30, 1998,
1997 and 1996............................................................................. 31
Notes to Consolidated Financial Statements................................................... 32-48
Financial Statement Schedules:
For the three years ended June 30, 1998:
Schedule II-- Valuation and Qualifying Accounts........................................... S-1
</TABLE>
Consolidated Financial Statement schedules not included have been omitted
because they are not applicable or the required information is shown in the
Consolidated Financial Statements or notes thereto.
26
<PAGE> 29
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors --
Sensormatic Electronics Corporation
We have audited the accompanying consolidated balance sheets of Sensormatic
Electronics Corporation as of June 30, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended June 30, 1998. Our audit also
included the financial statement schedule listed at Item 8. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Sensormatic Electronics Corporation at June 30, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended June 30, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 2, the 1998 consolidated financial statements have been
restated.
/s/ ERNST & YOUNG LLP
West Palm Beach, Florida
August 13, 1998, except for
Note 2, as to which the
date is August 13, 1999
27
<PAGE> 30
SENSORMATIC ELECTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
(In millions, except par value amounts)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(Restated - See Note 2)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 127.0 $ 21.7
Customer receivables................................................. 326.2 303.6
Inventories, net..................................................... 203.6 199.6
Current portion of deferred income taxes............................. 36.2 42.9
Other current assets................................................. 43.7 54.4
--------- ---------
TOTAL CURRENT ASSETS....................................... 736.7 622.2
Customer receivables-- noncurrent.................................... 132.5 138.5
Revenue equipment, less accumulated depreciation of $60.3 in
1998 and $55.3 in 1997............................................. 69.2 66.8
Property, plant and equipment, net................................... 137.2 145.5
Costs in excess of net assets acquired, less accumulated amortization
of $74.4 in 1998 and $61.2 in 1997................................. 465.5 482.7
Deferred income taxes................................................ 149.4 102.5
Patents and other assets, less accumulated amortization of $33.2
in 1998 and $24.5 in 1997.......................................... 109.0 88.4
--------- ---------
TOTAL ASSETS......................................................... $ 1,799.5 $ 1,646.6
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt...................................................... $ 33.5 $ 21.8
Accounts payable..................................................... 57.0 67.2
Other current liabilities and deferred income taxes.................. 246.3 243.4
--------- ---------
TOTAL CURRENT LIABILITIES.................................. 336.8 332.4
Long-term debt....................................................... 515.2 501.5
Other noncurrent liabilities and deferred income taxes............... 45.5 39.8
--------- ---------
TOTAL LIABILITIES.......................................... 897.5 873.7
Commitments and other matters (Note 14)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10.0 shares authorized.............. -- --
61/2% Convertible Preferred Stock, 0.7 shares outstanding........... 166.7 --
Common stock, $.01 par value, 125.0 shares authorized,
74.4 and 74.3 shares outstanding in 1998 and 1997, respectively.... 733.7 730.5
Retained earnings.................................................... 108.3 143.7
Treasury stock at cost and other, 1.7 shares in 1998 and 1997........ (11.7) (14.0)
Currency translation adjustments..................................... (95.0) (87.3)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY................................. 902.0 772.9
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................... $ 1,799.5 $ 1,646.6
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE> 31
SENSORMATIC ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(In millions, except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- -------
(Restated - See Note 2)
<S> <C> <C> <C>
Revenues:
Sales..................................................... $ 831.9 $ 853.0 $ 850.8
Rentals................................................... 47.6 55.3 49.7
Installation, maintenance and other....................... 107.4 117.4 94.1
-------- --------- ---------
Total revenues.................................. 986.9 1,025.7 994.6
-------- --------- ---------
Operating costs and expenses:
Costs of sales............................................ 525.8 543.6 579.8
Depreciation on revenue equipment......................... 18.6 20.8 20.3
Selling, general and administrative....................... 308.2 349.8 336.2
Provision for doubtful accounts........................... 23.4 42.8 82.3
Restructuring charges..................................... 21.9 22.6 65.7
Research, development and engineering..................... 27.2 24.5 27.7
Amortization of intangible assets......................... 21.7 19.5 17.1
-------- --------- ---------
Total operating costs and expenses.............. 946.8 1,023.6 1,129.1
-------- --------- ---------
Operating income (loss)................................... 40.1 2.1 (134.5)
-------- --------- ---------
Other (expenses) income:
Interest income........................................... 16.0 16.2 16.9
Interest expense.......................................... (50.8) (47.9) (38.4)
Litigation settlement, net................................ (45.7) -- --
Other, net................................................ (6.4) (0.7) (3.9)
-------- --------- ---------
Total other (expenses) income................... (86.9) (32.4) (25.4)
-------- --------- ---------
Loss before income taxes.................................. (46.8) (30.3) (159.9)
Benefit for income taxes.................................. (14.1) (8.9) (62.2)
-------- --------- ---------
Net loss.................................................. $ (32.7) $ (21.4) $ (97.7)
======== ========= =========
Loss applicable to common stockholders.................... $ (35.2) $ (21.4) $ (97.7)
======== ========= =========
Basic and Diluted loss per common share:.................. $ (0.47) $ (0.29) $ (1.33)
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE> 32
SENSORMATIC ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(In millions)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(Restated - See Note 2)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................... $ (32.7) $ (21.4) $ (97.7)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation................................................. 42.6 46.7 42.1
Amortization................................................. 21.7 19.5 17.1
Restructuring charges, net................................... 7.3 18.8 73.9
Net changes in operating assets and liabilities, net of effects of
acquisitions:
Customer receivables, net.................................... (20.9) (30.0) (118.7)
Inventories.................................................. (11.0) (45.8) 43.0
Current and deferred income taxes relating to restructuring
and net litigation settlement charges...................... (19.9) (7.8) (31.1)
Accounts payable............................................. (10.0) 8.4 (4.3)
Other, net................................................... (12.0) 9.5 41.4
-------- -------- --------
Net cash used in operating activities................ (34.9) (2.1) (34.3)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net.................................... (29.3) (38.4) (49.8)
Increase in revenue equipment, net........................... (23.3) (23.0) (36.8)
Acquisitions, net of cash.................................... -- (14.8) (8.6)
Additional investments in acquisitions....................... (19.7) (16.4) (14.9)
Proceeds from sale of business............................... 8.2 -- --
Proceeds from sales and maturities of marketable securities.. -- 2.4 23.3
Other, net................................................... 10.2 5.0 9.0
-------- -------- --------
Net cash used in investing activities................ (53.9) (85.2) (77.8)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank borrowings and other debt............................... 442.4 105.5 1.3
Repayments of bank borrowings and other debt................. (416.1) (96.0) (160.2)
Proceeds from issuance of Convertible Preferred Stock, net... 166.7 -- --
Proceeds from the issuance of Senior Notes, net.............. -- -- 348.3
Dividends paid............................................... -- (16.7) (16.1)
Proceeds from issuance of common stock under employee benefit plans
and for acquisitions...................................... 1.1 5.6 8.9
Other, net................................................... -- (3.1) --
-------- -------- --------
Net cash provided by (used in) financing activities.. 194.1 (4.7) 182.2
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........... 105.3 (92.0) 70.1
Cash and cash equivalents at beginning of year................. 21.7 113.7 43.6
-------- -------- --------
Cash and cash equivalents at end of year....................... $ 127.0 $ 21.7 $ 113.7
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid during the year............................ $ 9.2 $ 10.8 $ 10.3
Interest paid during the year................................ $ 49.5 $ 43.5 $ 30.4
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE> 33
SENSORMATIC ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(In millions)
<TABLE>
<CAPTION>
TREASURY CURRENCY
PREFERRED COMMON RETAINED STOCK TRANSLATION
STOCK STOCK EARNINGS AND OTHER ADJUSTMENTS TOTAL
--------- -------- -------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995..................... $ -- $ 713.9 $ 295.6 $ (13.2) $ (43.6) $ 952.7
Stock issued pursuant to employee
benefit plans................................ -- 9.9 -- (1.1) -- 8.8
Common stock cash dividends.................... -- -- (16.1) -- -- (16.1)
Net loss....................................... -- -- (97.7) -- -- (97.7)
Other.......................................... -- -- -- 0.9 (16.9) (16.0)
------- ------- ------- ------- ------- --------
Balance at June 30, 1996....................... -- 723.8 181.8 (13.4) (60.5) 831.7
Stock issued pursuant to employee
benefit plans................................ -- 6.7 -- (1.3) -- 5.4
Common stock cash dividends.................... -- -- (16.7) -- -- (16.7)
Net loss....................................... -- -- (21.4) -- -- (21.4)
Other.......................................... -- -- -- 0.7 (26.8) (26.1)
------- ------- ------- ------- ------- --------
Balance at June 30, 1997....................... -- 730.5 143.7 (14.0) (87.3) 772.9
Stock issued pursuant to employee
benefit plans................................ -- 1.7 -- -- -- 1.7
Convertible Preferred Stock issued, net
of issuance cost of $5.8..................... 166.7 -- -- -- -- 166.7
Preferred stock dividend....................... -- 2.4 (2.4) -- -- --
Net loss(1).................................... -- -- (32.7) -- -- (32.7)
Other.......................................... -- (0.9) (0.3) 2.3 (7.7) (6.6)
------- ------- ------- ------- ------- --------
Balance at June 30, 1998....................... $ 166.7 $ 733.7 $ 108.3 $ (11.7) $ (95.0) $ 902.0
======= ======= ======= ======= ======= ========
</TABLE>
(1) Restated. See Note 2 of Notes to Consolidated Financial Statements.
The accompanying notes are an integral part of these financial statements.
31
<PAGE> 34
SENSORMATIC ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Consolidated Financial Statements include the accounts of Sensormatic
Electronics Corporation and all of its subsidiaries (the "Company"). All
significant intercompany balances and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
Cash equivalents include short-term highly liquid investments with a maturity of
three months or less from date of acquisition. The recorded amounts approximate
fair value because of the short maturities of these investments.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being determined on
a first-in, first-out basis.
REVENUE EQUIPMENT AND PROPERTY, PLANT AND EQUIPMENT
Revenue equipment (principally equipment on lease) and property, plant and
equipment (including assets acquired under capital leases) are recorded at cost
and depreciated using the straight-line method over their estimated useful lives
(4 years and 6 years for revenue equipment, 10 years through 40 years for
buildings and improvements and 3 years through 10 years for property, plant and
equipment).
REVENUE RECOGNITION
Revenue from product sales is recognized at the time the product is shipped in
accordance with the terms agreed upon by the parties. Revenue from sales-type
leases (primarily with terms of 60 months or greater) is recognized as a "sale"
upon shipment in an amount equal to the present value of the minimum rental
payments under the fixed non-cancelable lease term. The deferred finance charges
applicable to these leases are recognized over the terms of the leases using the
effective interest method.
The Company also leases equipment under long-term operating leases (primarily
leases with terms of 36 to 54 months) which are generally non-cancelable. Rental
revenues are recognized as earned over the term of the lease. Minimum future
rentals on non-cancelable operating leases at June 30, 1998 aggregated $69.5 and
are due as follows: 1999 -- $29.8; 2000 -- $21.4; 2001 -- $11.8; 2002 -- $4.7;
2003 -- $1.7 and thereafter -- $0.1.
Installation and service revenues are recognized as earned and maintenance
revenues are recognized ratably over the service contract term.
RESEARCH, DEVELOPMENT AND ENGINEERING
In fiscal 1998, 1997 and 1996 "Research, development and engineering" included
research and development expenses of $21.0, $19.0 and $21.4, respectively.
ACCOUNTING FOR CURRENCY TRANSLATION AND TRANSACTIONS
Foreign currency transactions and financial statements (except for those
relating to countries with highly inflationary economies) are translated into
U.S. dollars at the rate in effect on the date of the transaction or the date of
the financial statements, except that revenues, costs and expenses are
translated at average exchange rates during each reporting period. Resulting
translation adjustments and transaction gains or losses attributable to certain
intercompany transactions that are of a long-term investment nature are excluded
from results of operations and accumulated in a separate component of
consolidated stockholders' equity. Gains and losses attributable to other
intercompany transactions are included in results of operations.
The financial statements of subsidiaries located in countries with highly
inflationary economies are remeasured as if the functional currency were the
U.S. dollar. The remeasurement creates translation adjustments that are
reflected in net income. Allocations for income taxes included in the
translation adjustments account in stockholders' equity were not significant.
32
<PAGE> 35
INTEREST RATE SWAP AND FOREIGN CURRENCY FORWARD AGREEMENTS
The Company enters into interest rate swap agreements and foreign exchange
forward contracts to manage exposure to fluctuations in interest and foreign
currency exchange rates.
The cash differentials paid or received on interest rate swap agreements are
accrued and recognized as adjustments to interest expense or interest income.
Gains and losses realized upon the settlement of these agreements are deferred
and either amortized to interest expense over a period relevant to the agreement
if the underlying hedged instrument remains outstanding, or recognized
immediately if the underlying hedged instrument is settled and the swap
agreement is terminated. Interest rate agreements are stated at cost, if any.
The Company principally uses foreign exchange forward contracts to hedge certain
identifiable, foreign currency intercompany commitments and certain short-term
intercompany advances. Gains and losses on the contracts which hedge
anticipatory intercompany commitments are deferred and recorded in net income in
the period in which the related transaction occurs. Gains and losses on the
contracts which hedge intercompany advances are recorded as adjustments to net
income because such advances are expected to be repaid in the foreseeable
future. Forward contracts and options which hedge anticipatory intercompany
commitments and intercompany advances are stated at cost (if any) and market
value, respectively.
Cash flows related to interest rate agreements and foreign exchange forward and
option contracts are classified as operating activities in the Consolidated
Statements of Cash Flows.
COST IN EXCESS OF NET ASSETS ACQUIRED AND OTHER INTANGIBLES
Costs in excess of net assets acquired (goodwill) are amortized using the
straight-line method over 20 to 40 years. Patents, stated at cost, are amortized
using the straight-line method over 17 years.
EARNINGS PER SHARE
Basic earnings per common share is calculated by dividing earnings (loss)
applicable to common stockholders by the weighted average number of common
shares outstanding. Diluted earnings per share includes the dilutive effect of
common stock equivalents outstanding during the period using the treasury stock
method. Common stock equivalents include stock options issued under employee
benefit plans.
IMPAIRMENT
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", the Company reviews
long-lived assets and related goodwill for impairment whenever events or changes
in circumstances indicate that the carrying amount of such assets may not be
fully recoverable. If this review indicates that goodwill will not be
recoverable, as generally determined based on estimated undiscounted cash flows
over the remaining amortization period, the carrying amount of goodwill would be
adjusted to fair value.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In fiscal 1998, the Company adopted SFAS No. 128 "Earnings Per Share" and SFAS
No. 129 "Disclosure of Information about Capital Structure" which are effective
for periods ending after December 15, 1997. SFAS No. 128 simplifies the previous
required calculation of earnings per share ("EPS") under APB No. 15, "Earnings
per Share", by replacing the existing calculation of primary EPS with a basic
EPS calculation. It requires a dual presentation, for complex capital
structures, of basic and diluted EPS on the face of the income statement and
requires a reconciliation of basic EPS factors to diluted EPS factors. SFAS No.
129 requires disclosing information about an entity's capital structure.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income,"
which is effective for fiscal years beginning after December 15, 1997. This
Statement establishes standards for the reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The new rule requires that the Company (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in-capital in the equity section of the balance sheet. The
Company plans to adopt SFAS No. 130 in fiscal 1999 with impact only to the
Company's disclosure information.
Also in June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. This Statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise", and amends SFAS No.
94, "Consolidation of All Majority-Owned Subsidiaries". This Statement requires
annual financial statements to disclose information about products and services,
geographic areas and major customers based on a management approach, along with
interim reports. The management approach requires disclosing financial and
descriptive information about an enterprise's reportable operating segments
based on reporting information the way management organizes the
33
<PAGE> 36
segments for making business decisions and assessing performance. It also
eliminates the requirement to disclose additional information about subsidiaries
that were not consolidated. This new management approach may result in more
information being disclosed and require new interim information not previously
presented. The Company plans to adopt SFAS No. 131 in fiscal 1999 with impact
only to the Company's disclosure information.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits -- an amendment of FASB Statements
No. 87, 88 and 106" which is effective for fiscal years beginning after December
15, 1997. This statement revises employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans. The Company plans to adopt SFAS No. 132 in fiscal 1999 with
impact only to the Company's disclosure information.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which is effective for fiscal quarters of
fiscal years beginning after June 15, 1999. This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement amends SFAS No. 52 "Foreign Currency Translation",
and supersedes SFAS No. 80 "Accounting for Future Contracts", No. 105
"Disclosure of Information about Financial Instruments with Off-Balance-Sheet
Risk and Financial Instruments with Concentration of Credit Risk", No. 107
"Disclosures about Fair Value of Financial Instruments", and No. 119 "Disclosure
about Derivative Financial Instruments". The Company plans to adopt SFAS No. 133
in fiscal 2000 and is currently assessing the impact this statement will have on
its consolidated financial statements.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in the prior years' Consolidated Financial Statements have been
reclassified to conform to the current fiscal year's presentation.
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.
34
<PAGE> 37
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, to conform to the fiscal 1999 presentation, 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 had accrued
from April 13, 1998, the date on which the 6 1/2% Convertible Preferred Stock
was issued. 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 year ended June 30, 1998 are as
follows:
Consolidated Statements of Operations:
<TABLE>
<CAPTION>
Year Ended
June 30, 1998
-----------------------------
As Reported As Restated
<S> <C> <C>
Restructuring charges $ 29.2 $ 21.9
Operating income $ 32.8 $ 40.1
Loss from continuing operations $(37.1) $(32.7)
Net loss $(37.1) $(32.7)
Loss applicable to common stockholders $(35.2)
Basic and diluted loss per share $(0.50) $(0.47)
</TABLE>
Consolidated Condensed Balance Sheet:
<TABLE>
<CAPTION>
June 30, 1998
-----------------------------
As Reported As Restated
<S> <C> <C>
Total assets $1,802.4 $1,799.5
Total current liabilities $ 344.1 $ 336.8
Total stockholders' equity $ 897.6 $ 902.0
</TABLE>
3. RESTRUCTURING CHARGES
In fiscal 1996, the Company initiated a review of its global operations, cost
structure and balance sheet directed at reducing its operating expenses,
manufacturing costs and increasing efficiencies. This review focused primarily
on operational and organizational structures and systems, facilities
utilization, product rationalization and inventory valuation, receivable
balances and related collection efforts and certain other matters. As a result
of the review in fiscal 1996, the Company recorded restructuring charges of
$65.7 million and inventory write-downs related to restructuring activities of
$19.6 million. The combined charge was $85.3 million with an after-tax impact of
$54.2 million. The cash outlay related to these charges is estimated to be
approximately $33.3.
The Company recorded additional restructuring charges in the fourth quarter of
fiscal 1997 and the first and third quarters of fiscal 1998 as a result of
further cost-reduction actions, primarily workforce reductions in the Company's
European operations, and the divestiture of non-core businesses which included
the U.S. commercial/industrial direct sales and service business sold in
September 1997. As discussed in Note 2, the Company also reversed certain
restructuring charges in the first quarter of fiscal 1998 which were originally
established in the fourth quarter of fiscal 1997. These net restructuring
charges totaled $44.5 million and the inventory write-downs related to
restructuring activities totaled $4.2 million. The total combined charge was
$48.7 million with an after-tax impact of $32.3 million. The total cash outlay
related to these charges, net of expected proceeds from the divestment of
non-core businesses, is estimated to be approximately $30.0, of which $11.8 has
been disbursed and partially offset by the proceeds received from the non-core
operation divestitures as of June 30, 1998.
35
<PAGE> 38
In fiscal 1996, as a result of the review described above, the Company recorded
a charge related to discontinued products and equipment used in the manufacture
of certain products which will no longer be manufactured or purchased from third
party suppliers. In connection with its review of operational and organizational
structures and systems, management adopted a plan to consolidate certain sales
and manufacturing facilities, reorganize certain business units and corporate
functions, and eliminate redundant positions. The Company planned for the
termination of approximately 875 manufacturing and administrative personnel in
North America and Europe and the reduction of approximately 30 facilities. As of
June 30, 1998, all planned terminations have been completed and more than
one-half of the facilities have been eliminated or subleased. Certain terminated
employees are receiving severance payments over time.
The Company's 1997 and 1998 announced restructuring activities principally
included workforce reductions in the Company's European operations and the
divestiture of non-core businesses which includes the U.S. commercial/industrial
direct sales and service business sold in September 1997. The Company planned
for the reduction in workforce of approximately 1,200 positions, of which 600
would be eliminated in connection with the divestiture of non-core businesses
and the remaining positions principally represented the termination of
administrative personnel.
An expanded summary of the restructuring charges and inventory write-downs
relating to the restructuring plans follows:
<TABLE>
<CAPTION>
1998(1) 1997(2) 1996(2) TOTAL
------------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Product rationalization, related equipment charges
and other........................................ $ -- $ 2.9 $ 45.3 $ 48.2
Closure of facilities and related costs............ 8.8 6.5 23.5 38.8
Employee termination and related costs............. 20.4 .5 16.5 37.4
Non-core business divestitures..................... (7.3) 16.9 -- 9.6
------ ------ ------ -------
Total.................................... $ 21.9 $ 26.8 $ 85.3 $ 134.0
Less: Inventory write-downs recorded as a component
of costs of sales................................ -- (4.2) (19.6) (23.8)
------ ------ ------ -------
Total.................................... $ 21.9 $ 22.6 $ 65.7 $ 110.2
====== ====== ====== =======
</TABLE>
- ----------
(1) To conform with the current interpretation of Emerging Issue Task Force
Abstracts ("EITF") No. 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)", approximately $13.8 of the previously
disclosed fiscal 1998 charge of $43.0 has been reclassified primarily to
"Selling, General and Administrative" expenses.
(2) To conform with the current interpretation of EITF No. 96-9 "Classification
of Inventory Markdowns and Other Costs Associated with a Restructuring",
$4.2 and $19.6 in fiscal 1997 and 1996, respectively, of such amounts have
been reclassified to "Costs of Sales".
36
<PAGE> 39
The following table sets forth the details and the activity of the restructuring
charge reserves for fiscal 1998:
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 Reallocations 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
Balance at Utilization Balance at
June 30, ------------------- June 30,
1997 Cash Non-Cash 1998
--------- ---- -------- ----------
<S> <C> <C> <C> <C>
Product rationalization, related
equipment charges and other................ $ 1.5 $ - $(1.1) $0.4
Closure of facilities and related costs...... 5.7 (0.7) 0.2 5.2
Employee termination and related costs....... 3.3 (3.3) - -
----- ----- ----- ----
Total.................................... $10.5 $(4.0) $(0.9) $5.6
===== ===== ===== ====
</TABLE>
1997/1998 Reserve(1)
<TABLE>
<CAPTION>
Accrual Accrual
Balance at 1998 Utilization Balance at
1997 June 30, Additions/ ----------------- June 30,
Provision 1997 (Reversals) Cash Non-Cash 1998
--------- --------- ----------- ----- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Product rationalization, related
equipment charges and other...... $ 2.9 $ 2.9 $ - $ - $(1.6) $ 1.3
Closure of facilities and
related costs.................... 6.5 6.5 8.8 0.2 (5.6) 9.9
Closure of facilities(2)........... - (2.9) - - (2.9)
Employee termination and related
costs............................ 0.5 0.5 20.4 (10.4) - 10.5
Non-core business divestitures..... 16.9 16.9 (7.3) - - 9.6
----- ----- ----- ------ ----- -----
Total.......................... $26.8 $23.9 $21.9 $(10.2) $(7.2) $28.4
----- ----- ----- ------ ----- -----
Inventory write downs recorded
as a component of
cost of sales(2)................. - (4.2) 3.6 (0.6)
----- ----- ----- ------ ----- -----
Total.......................... $26.8 $19.7 $21.9 $(10.2) $(3.6) $27.8
===== ===== ===== ====== ===== =====
</TABLE>
- ---------------------------------
(1) Certain amounts related to non-core business divestitures have been
restated. See Note 2.
(2) Amounts classified directly to the impaired assets.
37
<PAGE> 40
4. 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 years or
greater) at June 30, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
-------- ------
<S> <C> <C>
Trade accounts receivable due in 1 year........................................... $ 303.9 $ 291.2
Allowance for doubtful accounts................................................... (33.2) (39.6)
-------- --------
Trade accounts receivable due in 1 year, net............................ $ 270.7 $ 251.6
======== ========
Deferred receivables.............................................................. $ 4.9 $ 7.3
Installment receivables........................................................... 38.8 46.0
Allowance for doubtful accounts................................................... (5.6) (7.8)
Unearned interest and maintenance................................................. (14.5) (18.0)
-------- --------
Total deferred and installment receivables, net......................... 23.6 27.5
Less: Amounts due in 1 year, net.................................................. (19.0) (17.6)
-------- --------
Total noncurrent deferred and installment receivables,
net................................................................... $ 4.6 $ 9.9
======== ========
Sales-type leases-minimum lease payments receivable............................... $ 225.1 $ 215.5
Allowance for uncollectible minimum lease payments................................ (20.3) (16.4)
Unearned interest and maintenance................................................. (40.4) (36.1)
-------- --------
Total sales-type leases, net............................................ 164.4 163.0
Less: Amounts due in 1 year, net.................................................. (36.5) (34.4)
-------- --------
Total noncurrent sales-type leases, net................................. $ 127.9 $ 128.6
======== ========
Total customer receivables........................................................ $ 458.7 $ 442.1
Less: Amounts due in 1 year, net.................................................. 326.2 303.6
-------- --------
Total noncurrent customer receivables................................... $ 132.5 $ 138.5
======== ========
</TABLE>
Net receivables and sales-type lease receivables at June 30, 1998 are due as
follows: 1999-- $326.2; 2000-- $42.3; 2001-- $36.6; 2002-- $27.5; 2003-- $17.8
and $8.3 thereafter.
At June 30, 1998 and 1997, credit risk concentration for receivables (including
those subject to recourse) due from supermarkets and specialty, department and
discount store sectors of the U.S. retail market, aggregated $115.6 and $96.9,
respectively. Assuming the obligors under these receivables were to fail to
completely perform according to the terms of the receivables, at June 30, 1998,
the Company estimates its aggregate exposure to loss in these customer groups to
be $81.3. The estimate takes into consideration the related allowances for
doubtful accounts and the estimated realizable value of the collateralized
equipment securing these receivables. The Company minimizes its exposure to
credit risk through its credit review procedures and collection practices and
its general policy of retaining a security interest in the underlying equipment
and ability to re-market such equipment if repossessed.
5. 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. In conjunction with the adoption of SFAS No.
125, the Company entered into three new receivable financing agreements.
The new agreements entered into include a five year (pound)100 million
(approximately $160.0) asset backed commercial paper conduit program (the
"Program") which allows for the sale of accounts receivables from eligible
equipment lease contracts originating in the United Kingdom and Scotland on a
nonrecourse basis to Mont Blanc Receivables Financing Limited ("MBRF"), an
entity sponsored by the Union Bank of Switzerland ("UBS"). Under the Program,
the Company periodically sells receivables to MBRF which in turn sells a
percentage ownership in the receivables to a commercial paper conduit sponsored
by UBS. The Company receives a subordinated receivable from MBRF equal to the
difference between the value of the receivables sold and the cash received from
MBRF.
Effective June 1997, the Company, through a non-consolidated wholly-owned
special purpose corporation, established a committed securitization facility
sponsored by a major U.S. financial institution which will provide for the
transfer of up to $30.0 of the Company's long-term U.S. receivables. Under the
agreement, the Company periodically sells its receivables to the special purpose
corporation which in turn sells a percentage ownership interest in the long-term
receivables to a commercial paper conduit sponsored
38
<PAGE> 41
by the major U.S. financial institution. The Company retains an investment in
the special purpose corporation equal to the difference between the value of the
receivables sold and the cash received from the special purpose corporation.
Additionally, the Company has established an uncommitted facility with a French
financial institution which will allow it to transfer, and record as a sale
under SFAS No. 125, its long-term French equipment leases.
Prior to December 31, 1996, the Company's two U.S. factoring agreements met the
requirements for sales treatment. The Company modified its principal U.S.
factoring agreement to continue to qualify for sales treatment under SFAS No.
125 and subsequently cancelled the second agreement. Under the Company's U.S.
factoring agreement, certain pre-approved U.S. accounts receivables are assigned
to the financial institution without customer non-payment recourse. The
financing institution advances, in anticipation of customer collections, to the
Company at fluctuating interest rates of 45 basis points in excess of the May
31, 1998 and 1997 LIBOR.
During fiscal 1998, the Company sold approximately $395.4 under all of the above
facilities. A portion of the sale of receivables is reflected in the financial
statements, primarily in other noncurrent assets, and such amounts of
approximately $34.5 are recorded at fair market value based on management's
assessment of realization and the expected timing of cash flows. Cash proceeds
from the sale of receivables under these facilities are included in cash flows
from operating activities in the Consolidated Statements of Cash Flows. The
Company is retained as servicer of the receivables sold under all of the above
agreements except for its remaining U.S. factoring agreements. Estimating the
fair value of the servicing asset or liability was not considered practicable
and accordingly, a servicing asset or liability has not been recognized.
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 $128.7 at June 30, 1998. Loss reserves have
been provided for receivables and sales-type lease receivables sold, as deemed
necessary, and are included in accrued liabilities.
6. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Finished goods...................................................................... $ 165.4 $ 145.0
Parts............................................................................... 56.3 58.8
Work-in-process..................................................................... 14.7 24.9
-------- --------
236.4 228.7
Less allowance for inventory losses................................................. (32.8) (29.1)
-------- --------
Total inventories, net.................................................... $ 203.6 $ 199.6
======== ========
</TABLE>
Refer to Note 3 for discussion of restructuring charges and inventory
write-downs relating to restructuring activities.
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Machinery and equipment............................................................. $ 148.4 $ 139.2
Buildings and improvements.......................................................... 52.0 60.3
Leasehold improvements and furniture and fixtures................................... 33.3 31.5
Land................................................................................ 11.9 16.8
-------- --------
245.6 247.8
Less accumulated depreciation and amortization...................................... (108.4) (102.3)
-------- --------
Total property, plant and equipment, net.................................. $ 137.2 $ 145.5
======== ========
</TABLE>
Refer to Note 3 for discussion of restructuring charges related to property,
plant and equipment.
The Company leases certain operating plant and equipment. The future lease
commitments for plant and equipment and other assets at June 30, 1998 aggregated
$42.6 and are due as follows: 1999 -- $16.2; 2000 -- $8.6; 2001 -- $5.1; 2002 --
$2.9; 2003 -- $2.6 and $7.2 thereafter. Rent expense for certain operating plant
and equipment was charged to operations as follows: 1998 -- $9.2; 1997 -- $13.8
and 1996 -- $18.9.
39
<PAGE> 42
8. EARNINGS PER SHARE
In 1997, the 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 under SFAS No. 128:
<TABLE>
<CAPTION>
1998(a) 1997 1996
--------- --------- -------
<S> <C> <C> <C>
Numerator:
Net loss............................................................... $ (32.7) $ (21.4) $ (97.7)
Less: Preferred stock dividends........................................ $ (2.5) -0- -0-
------- ------- -------
Loss applicable to common stockholders................................. $ (35.2) $ (21.4) $ (97.7)
======= ======= =======
Denominator:
Basic EPS-- weighted average shares.................................... 74.2 74.0 73.5
Dilutive effect: Stock options......................................... 0.3 0.2 0.5
------- ------- -------
Diluted EPS-- weighted average shares.................................. 74.5 74.2 74.0
======= ======= =======
Basic loss per share................................................... $ (0.47) $ (0.29) $ (1.33)
======= ======= =======
Diluted loss per share................................................. -- (b) -- (b) -- (b)
======= ======= =======
</TABLE>
- ----------
(a) Restated. See Note 2.
(b) Excluded as result is anti-dilutive.
9. INCOME TAXES
Sensormatic applies SFAS No. 109 "Accounting for Income Taxes" which specifies
an asset and liability approach requiring the recognition of deferred tax assets
and liabilities with respect to the expected future tax consequences of events
that have been recorded in the Consolidated Financial Statements and tax
returns.
The income tax (benefits) provisions on (loss) income from continuing operations
are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
U.S. Federal income taxes:
Current................................................................ $ 1.6 $ 6.0 $ 4.8
Deferred............................................................... (20.5) (21.9) (27.3)
Foreign income taxes:
Current................................................................ 15.2 13.1 3.6
Deferred............................................................... (6.0) (4.7) (36.0)
State and other.......................................................... (4.4) (1.4) (7.3)
------- ------- -------
Total.......................................................... $ (14.1) $ (8.9) $ (62.2)
======= ======= =======
</TABLE>
The 1998, 1997 and 1996 deferred provisions include a tax benefit of $15.9,
$14.2 and $59.2, respectively, relating to net operating losses.
The United States (including Puerto Rico) and foreign components of (loss)
income from continuing operations before income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
United States............................................................ $ (51.3) $ (35.5) $ (74.3)
Foreign.................................................................. 4.5 5.2 (85.6)
------- ------- --------
Total.......................................................... $ (46.8) $ (30.3) $ (159.9)
======= ======= ========
</TABLE>
40
<PAGE> 43
The U.S. Federal tax rate reconciles to the effective tax rate for continuing
operations as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- -------
<S> <C> <C> <C>
U.S. Federal tax rate.................................................... (35.0)% (35.0)% (35.0)%
Benefits due to tax exempt earnings and investment income of
the Puerto Rico operations............................................. (13.7) (19.2) (3.1)
Amortization of costs in excess of net assets acquired................... 6.9 14.4 2.4
International tax rate differentials, net of foreign tax credits......... 12.8 (3.2) 0.9
Tax benefit of foreign sales corporation................................. (2.7) (4.4) (0.3)
State income tax effect, net of Federal benefit.......................... (5.7) (3.1) (3.0)
Adjustment of prior years' accruals...................................... 5.0 -- --
Valuation allowance...................................................... 2.2 18.0 (2.5)
Other.................................................................... 0.1 3.5 1.7
------- ------- -------
(30.1)% (29.0)% (38.9)%
======= ======= =======
</TABLE>
Undistributed earnings of international subsidiaries are indefinitely reinvested
except for earnings of the Company's German subsidiary which are periodically
distributed to utilize the lower German integrated tax rate. No provision has
been made for income taxes that might be payable upon the remittance of the
indefinitely reinvested earnings. Upon distribution of those earnings, the
Company would be subject to both U.S. income taxes and withholding taxes payable
to the various foreign countries. The Company has not determined the amount of
tax liability associated with an unplanned distribution of these permanently
reinvested earnings.
Certain Commonwealth of Puerto Rico taxes (tollgate taxes) are due upon
distribution of earnings at rates ranging from none to 10% depending on the
fiscal year earned. At June 30, 1998, approximately $162.9 of undistributed
earnings were considered indefinitely reinvested in the Puerto Rico subsidiary,
upon which no tollgate taxes have been provided.
The effects of temporary differences and carryforwards that give rise to
deferred tax assets and liabilities at June 30, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------- ------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Property, plant and equipment............................... $ 38.7 $ 1.4 $ 27.2 $ 0.4
Reserves and allowances..................................... 23.7 (1.0) 42.1 (1.4)
Sales-type leases........................................... (66.7) 6.9 (82.9) 7.0
Undistributed earnings of German subsidiary................. (3.2) -- (0.4) --
Prepaid royalties........................................... -- -- -- --
Deemed sales revenues from Puerto Rico operations........... 44.2 -- 30.5 --
Restructuring charges....................................... 6.4 1.9 11.4 --
NOL and tax credit carryforwards............................ 166.1 (0.6) 144.7 (1.8)
Valuation allowance......................................... (19.7) -- (25.3) 0.3
Other....................................................... (3.9) 1.5 (1.9) 1.3
------- ------ ------- ------
Total deferred income taxes....................... $ 185.6 $ 10.1 $ 145.4 $ 5.8
======= ====== ======= ======
</TABLE>
Because deferred tax assets and liabilities are netted by jurisdiction, the
above disclosure reflects the asset and liability characterization based upon
the netting as reflected in the Consolidated Balance Sheets.
SFAS No. 109 requires a valuation allowance to reduce deferred tax assets if,
based on the weight of the available evidence, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. In
determining the need for a valuation allowance, SFAS No. 109 requires an
assessment of all available evidence both positive and negative. Management has
determined that a $19.7 valuation allowance at June 30, 1998 is necessary. The
decrease in the valuation allowance for the years ended June 30, 1998 and 1997
was $5.6 and $2.8, respectively. The decrease in the 1998 deferred tax asset
related to disallowed loss carryforwards. The related valuation allowance was
reduced by an equal amount.
A significant portion of the deferred tax assets recognized relate to net
operating loss and credit carryforwards. Because the Company operates in
multiple off shore jurisdictions, it considered the need for a valuation
allowance on a country by country basis taking into account the effects of local
tax law. Where a valuation allowance was not recorded, the Company believes that
there was sufficient positive evidence to support its conclusion not to record a
valuation allowance. Management believes that the Company will utilize the loss
carryforwards in the future because: (1) prior to the restructuring charges and
shareholder litigation settlement costs, the Company had a history of pre-tax
income; (2) a significant portion of the loss carryforwards resulted from
restructuring and shareholder litigation settlement costs; (3) management
believes that the restructuring of the Company's businesses will reduce their
cost structures and that the Company will be profitable and will generate
taxable income in the near term; (4) management is aware of viable tax
strategies that could be implemented to accelerate taxable income in order to
realize a substantial portion of the recorded deferred tax
41
<PAGE> 44
assets; and (5) a significant portion of the net operating losses have an
indefinite life or do not expire in the near term. However, there can be no
assurance that the Company will generate taxable income or that all of its loss
carryforwards will be utilized.
Net operating losses exist as follows:
* Losses expiring in fiscal 1998 -- 2000: France $1.1, Norway $0.2
* Losses expiring in fiscal 2001 -- 2005: France $12.9, Italy $9.3, Norway $1.6,
Other $10.6, United States $5.8
* Losses expiring in fiscal 2006 -- 2010: Norway $6.7, United States $45.6
* Losses expiring after fiscal 2010: United States losses of $60.0, $31.7 and
$51.3 expiring in fiscal 2011, 2012 and 2013, respectively
* Losses with indefinite life: Belgium $31.4, France $10.0, Germany $23.7,
Sweden $12.0, U.K. $67.7, Other $10.5
* Foreign tax credits expiring in fiscal 2000 through 2002 are $0.8.
10. DEBT
Debt is summarized as follows :
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
8.04% Senior Notes due March, 2006....................................... $ 230.0 $ 230.0
7.21% Senior Notes due March, 2000....................................... 70.0 70.0
7.34% Senior Notes due March, 2001....................................... 50.0 50.0
8.21% Senior Notes due January, 2003..................................... 135.0 135.0
Unsecured revolving credit note payable, at 5.97% to 8.50%............... -- 10.0
Other debt, at 2.88% to 11.0%, net of unamortized interest of $3.5
and $4.4 at 1998 and 1997, respectively................................ 63.7 28.3
-------- --------
Total debt..................................................... 548.7 523.3
-------- --------
Less: Amounts payable in 1 year.......................................... (33.5) (21.8)
-------- --------
Total noncurrent debt.......................................... $ 515.2 $ 501.5
======== ========
</TABLE>
The Company has a committed line of credit agreement expiring in December 1999
with a group of U.S. and international banks which provides for aggregate
unsecured borrowings by the Company of up to $250.0 of which none was utilized
as of June 30, 1998. Borrowings under this agreement bear interest at the London
Interbank Offered Rate (LIBOR) plus 0.375% and are subject to an annual facility
fee of 0.225% of the total credit line. Additionally, the Company has various
uncommitted lines-of-credit with several financial institutions of which $15.3
was utilized at June 30, 1998. Borrowings under these agreements bear interest
at rates from 2.88% to 11.00%.
Under the terms of the Company's principal borrowing and financing agreements,
the Company is required, among other things to maintain a minimum interest
coverage ratio, to maintain a minimum net worth, as defined, is allowed to incur
debt up to a level whereby certain debt-to-total capitalization ratios would not
be exceeded, and is subject to certain limitations with respect to repurchases
of its Common Stock and the payment of cash dividends. The Company was in full
compliance with all of these terms at June 30, 1998 and 1997.
11. CONVERTIBLE PREFERRED STOCK
In April 1998, the Company issued 6,900,000 Depositary Shares for gross proceeds
of $172.5, or $166.7 net of commissions, discounts and other estimated expenses.
Each Depositary Share represents a one-tenth interest in a share of 6 1/2%
Convertible Preferred Stock with a liquidation preference of $250.00 per share
of preferred stock. Dividends on the Preferred Stock will accrue at a rate per
annum equal to 6 1/2% of the liquidation preference per share of Preferred Stock
and will be payable quarterly on January 1, April 1, July 1 and October 1 of
each year, commencing July 1, 1998. The Company issued approximately 189,425 and
355,359 shares of Common Stock which are not currently registered, in payment of
the dividends payable on July 1, 1998 and October 1, 1998, respectively.
Dividends are payable in cash or, at the option of the Company, in shares of
Common Stock of the Company or a combination thereof. Certain of the Company's
financial agreements currently prohibit the payment of cash dividends until
after the preparation of its audited financial statements for fiscal 1999, and,
it is unlikely that the Company would be able to pay cash dividends until after
the preparation of its audited financial statements for fiscal 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
cash dividends. The Depositary
42
<PAGE> 45
Shares are convertible, subject to prior redemption, at any time after July 13,
1998, at the option of the holder thereof into shares of Common Stock at a
conversion price of $19.52 per share of Common Stock, subject to certain
adjustments. The Preferred Stock will be redeemable, at the option of the
Company, in whole or in part, at any time on or after April 4, 2001, at prices
commencing with 103.71% of liquidation preference, declining to 100% of
liquidation preference on April 4, 2005. The Preferred Stock ranks junior in
right of payment to all indebtedness and other liabilities of the Company.
12. STOCK OPTION PLANS
Under the Company's existing stock incentive plan (the "1995 Plan") stock
options may be granted to officers, key employees, and directors who are also
officers or employees or otherwise participate in the 1995 Plan. The 1995 Plan
provides for granting of other awards, such as stock appreciation rights, stock
awards and cash awards, although the Company intends to continue to principally
grant stock options under this plan. The Company also has a Directors Stock
Option Plan under which non-qualified stock options may be granted to directors
not covered by the 1995 Plan.
The exercise price of a stock option granted under all stock option plans is not
less than the fair market value of the Common Stock on the date of grant. Stock
options granted under all such plans generally become exercisable, cumulatively,
in equal annual installments over three years, and expire five or ten years from
the date of grant. The Company has granted to certain corporate officers
performance-based options under the 1995 Plan. These options become exercisable
from four to ten years after grant depending upon the Company's attainment of
certain performance objectives.
All such options are non-compensatory; therefore, any U.S. Federal income tax
benefits received upon their exercise are recorded as an increase to Common
Stock.
Information for all such plans is summarized for fiscal 1998, 1997 and 1996 as
follows (in millions, except for price per option amounts):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- -------
<S> <C> <C> <C>
Options outstanding at beginning of year................................... 7.3 6.6 4.6
Granted.................................................................... 1.9 1.0 2.3
Exercised.................................................................. -- (0.1) (0.2)
Canceled................................................................... (1.1) (0.2) (0.1)
--------- --------- ---------
Options outstanding at end of year......................................... 8.1 7.3 6.6
========= ========= =========
Average price of options exercised......................................... $ 10.29 $ 15.24 $ 13.72
$ 7.42 to $ 7.42 to $ 5.87 to
Exercise prices of options outstanding at end of year...................... $ 36.38 $ 36.38 $ 36.38
Average exercise price of options outstanding at end of year............... $ 19.48 $ 21.73 $ 22.22
Exercisable options at end of year......................................... 3.9 2.8 2.8
Options available for future grants at end of year......................... 1.0 1.7 0.8
</TABLE>
At both June 30, 1998 and 1997, 9.2 million shares of Common Stock were reserved
for issuance of which 9.1 million and 9.0 million, respectively, were reserved
for the exercise of stock options.
The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation."
As permitted by SFAS No. 123, the Company continues to follow the measurement
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and does not recognize compensation expense for its
stock-based incentive plans. Had compensation cost for the Company's stock based
incentive compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the methodology
prescribed by SFAS No. 123, the Company's net income and earnings per share for
fiscal 1998, 1997 and 1996 would have been reduced to the pro forma amounts
indicated below.
<TABLE>
<CAPTION>
1998(1) 1997 1996
------- ------- ------
<S> <C> <C> <C>
Net loss:
As reported.............................................................. $ (32.7) $ (21.4) $ (97.7)
Pro forma................................................................ $ (39.3) $ (26.0) $ (99.6)
Basic loss per common share:
As reported.............................................................. $ (0.47) $ (0.29) $ (1.33)
Pro forma................................................................ $ (0.56) $ (0.35) $ (1.35)
</TABLE>
These pro forma amounts may not be indicative of future pro forma income and
earnings per share.
43
<PAGE> 46
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model, with the following historical weighted
average assumptions applied to grants in fiscal 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- ------
<S> <C> <C>
Dividend yields............................................................ -- 1.17% 1.16%
Expected volatility........................................................ .361 .398 .389
Risk-free interest rates................................................... 5.83% 6.26% 5.78%
Expected life (in years)(2)................................................ 5 5 5
</TABLE>
- ----------
(1) Restated. See Note 2.
(2) With the exception of employee stock purchase plan grants with an expected
life of 1 year.
Based upon the above assumptions, the weighted-average fair value of options
granted during 1998, 1997 and 1996 was $5.64, $7.75 and $7.38, respectively.
13. DEFINED CONTRIBUTION PLANS
The Company has: (a) retirement plans for U.S. employees, Puerto Rico employees
and for certain European employees which allow or require employee
contributions; (b) a Senior Executive Defined Contribution Retirement Plan for
certain officers; and (c) a Key Executive Supplemental Retirement Plan covering
certain officers and key employees. Annual contributions by the Company to all
such retirement plans are discretionary.
The Company charged to operations $7.1, $5.7 and $4.4 in fiscal 1998, 1997,
1996, respectively, related to the plans described under this section.
14. COMMITMENTS AND OTHER MATTERS
CONTINGENT ROYALTY PAYMENTS
In connection with certain acquisitions, the Company pays royalties (ranging
from 3% to 10%) on revenues generated by the acquired businesses for periods
expiring through 2004. Such contingent payments, when incurred, will be recorded
as additional cost of the related acquisitions and amortized over the remaining
amortization period. Royalty payments in fiscal 1998, 1997, and 1996 were $19.7,
$16.4, and $14.9, respectively.
LITIGATION
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 has a
policy limit of $10.0, and has also been paid $10.0 by one of its two excess
directors and officers liability insurers. Subsequent to June 30, 1998, the
Company also reached an agreement providing for the payment of $6.25 by the
other insurer. A pre-tax 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).
44
<PAGE> 47
15. BUSINESS SEGMENT, GEOGRAPHIC AREA AND INTERNATIONAL OPERATIONS DATA
The Company operates in a single business segment and its principal products and
systems are electronic article surveillance, closed circuit television and
access control products and systems. The Company's operations by geographic area
are as follows:
<TABLE>
<CAPTION>
1998 1997 1996(3)
--------- --------- ----------
<S> <C> <C> <C>
Revenues:
North America.................................. $ 579.1 $ 629.9 $ 617.6
Europe......................................... 356.3 388.4 417.3
Other regions.................................. 112.7 86.5 59.4
Inter area transfers........................... (61.2) (79.1) (99.7)
--------- --------- --------
Total consolidated..................... $ 986.9 $ 1,025.7 $ 994.6
========= ========= ========
Operating income (loss)(1):
North America.................................. $ 103.0 $ 35.7 $ (52.6)
Europe......................................... (50.7) (26.0) (48.3)
Other regions.................................. 15.0 20.8 8.2
Corporate items................................ (27.2) (28.4) (41.8)
--------- --------- --------
Subtotal......................................... 40.1 2.1 (134.5)
Total other (expenses)(2).............. (86.9) (32.4) (25.4)
--------- --------- --------
Loss before income taxes......................... $ (46.8) $ (30.3) $ (159.9)
========= ========= ========
Identifiable assets:
North America.................................. $ 892.5 $ 777.3 $ 776.8
Europe......................................... 714.7 703.7 738.9
Other regions.................................. 127.4 110.4 63.2
Corporate items................................ 64.9 55.2 42.4
--------- --------- --------
Total consolidated..................... $ 1,799.5 $ 1,646.6 $1,621.3
========= ========= ========
</TABLE>
- ----------
(1) Fiscal 1998 includes restructuring charges of $21.9, and fiscal 1997 and
1996 include restructuring charges and inventory write-downs related to
restructuring activities of $26.8 and $85.3, respectively. These charges
were allocated to the geographical areas of North America for $(2.8), $23.9
and $57.2, respectively, and to Europe for $24.7, $2.9 and $28.1,
respectively. The fiscal 1998 allocation to North America included a
reversal of $12.0. See Note 2.
(2) Fiscal 1998 includes a net litigation settlement charge of $45.7.
(3) Fiscal 1996 has been reclassified to conform to the fiscal 1997
presentation.
The Company operates in over fifteen European countries and one of these
countries, the United Kingdom, is considered significant with assets of $349.0,
$386.5 and $337.2 at June 30, 1998, 1997 and 1996, respectively. Fiscal 1998,
1997 and 1996 revenue for the United Kingdom was $109.0, $82.9 and $101.2,
respectively and operating income (loss) was $1.6, $(15.1) and $(2.7),
respectively.
45
<PAGE> 48
In fiscal 1998, 1997, and 1996, export sales of $55.9, $31.7 and $37.6,
respectively, are reported in North America revenues. Transfers from North
America to Europe are accounted for at prices sufficient to recover a reasonable
profit margin. Corporate expenses include general corporate expenses, research,
development and engineering expenses and amortization of patents. Identifiable
assets are comprised of those assets of the Company that are identified with the
operations in each geographic area. Corporate assets are comprised principally
of patents and deferred costs.
16. ACQUISITIONS AND DIVESTMENTS
In connection with acquisitions during fiscal 1997 and 1996, the market value of
the assets acquired was as follows:
<TABLE>
<CAPTION>
1997 1996
-------- ----
<S> <C>
Cash paid (net of cash acquired).............................. $ 15.5 $ 8.6
Liabilities assumed and/or incurred........................... 1.2 4.3
Common stock issued........................................... -- --
------- -----
Market value of assets acquired............................... $ 16.7 $12.9
======= =====
</TABLE>
No acquisitions occurred in fiscal 1998.
In September 1997, the Company sold its U.S commercial/industrial direct sales
and service business to 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 which totaled approximately
$30.7.
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 estimated losses resulting from the Company's sale
of this business to STG. See Note 2 for further discussion.
46
<PAGE> 49
The revenues of these operations prior to the divestiture date and included in
the Company's Consolidated Condensed Statement of Operations for June 30, 1998
and 1997 were $11.4 and approximately $80.0, respectively.
17. FINANCIAL INSTRUMENTS
At June 30, 1998 and 1997, the recorded value of all financial instruments
reported as assets such as cash, short-term investments, trade receivables and
payables and short-term debt approximated their fair values, based on the
short-term maturities and floating rate characteristics of these instruments.
FAIR VALUE OF BALANCE SHEET FINANCIAL INSTRUMENTS
The recorded value of balance sheet financial instruments reported as
liabilities, where there is a difference between recorded value and estimated
market value, were as follows:
1998 1997
-------- --------
Senior Note debt
Recorded value...........................$ 485.0 $ 485.0
Fair value...............................$ 471.3 $ 467.9
Fair value is determined based on expected future cash flows (discounted at
market interest rates), quotes from financial institutions and other appropriate
valuation methodologies.
INTEREST RATE AGREEMENTS
The Company enters into interest rate agreements, principally to manage the
interest rate exposure associated with its sale of certain U.S. receivables.
Under the primary receivable financing agreement in the U.S., the Company sells
fixed interest rate receivables. Under such agreement, the financing institution
earns interest at a floating rate based on the one month LIBOR. Any resulting
differential in interest caused by the varying rates (variance amount) is either
paid or received by the Company. In order to manage the risk associated with the
variance amount, the Company enters into interest rate agreements for notional
amounts equal to the outstanding principal amounts of receivables sold, which
have the effect of converting the floating discount rate to a fixed discount
rate, thereby limiting the variance amount paid or received by the Company.
At June 30, 1998, the Company was a party to the following interest rate
agreements:
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>
$ 3.0..................................................... May 1999 7.75% 1 Month LIBOR
2.5..................................................... September 1999 5.84 1 Month LIBOR
4.0..................................................... May 2000 6.16 1 Month LIBOR
1.0..................................................... April 2000 6.58 1 Month LIBOR
0.4..................................................... April 1999 4.60 1 Month LIBOR
0.1..................................................... August 1998 4.80 1 Month LIBOR
0.1..................................................... March 1999 4.65 1 Month LIBOR
30.0..................................................... March 2001 5.68 3 Month LIBOR
30.0..................................................... March 2000 5.92 3 Month LIBOR
30.0..................................................... March 2003 6.05 3 Month LIBOR
30.0..................................................... March 2002 6.01 3 Month LIBOR
</TABLE>
In the third quarter of fiscal 1998, the Company entered into four interest rate
swap agreements with notional amounts totaling $120.0. As a result of these
recent interest rate swap agreements combined with existing swap agreements and
the terms of various finance agreements, approximately 70.0% of the Company's
interest rate exposure is fixed and 30.0% is variable.
The weighted average interest rates paid and received under all such Floating to
Fixed Swap Agreements in fiscal year 1998 were 6.03% and 5.69%, respectively,
and would have been the same assuming market conditions existing at June 30,
1998.
The notional amount of the Company's interest rate agreements at June 30, 1998
and 1997 was $131.1 and $24.1, respectively. Notional amounts do not quantify
risks or represent assets or liabilities of the Company, but are used in the
calculation of cash settlements under the agreements.
47
<PAGE> 50
The fair value of the interest rate agreements represents the discounted cash
flow differential between offsetting interest rate agreements at market interest
rates and existing interest rate agreements at their coupon rates. At June 30,
1998 and 1997 the fair value of these agreements, as determined by the financial
institution counterparties, was immaterial.
In fiscal 1995, the Company entered into an interest rate cap agreement expiring
in September 1999, with a notional amount at June 30, 1998, of $1.0. Under the
agreement the Company will be paid an amount equal to the excess, if any, of the
one month LIBOR over 7% multiplied by the notional amount. At June 30, 1998
there was no such excess.
The Company has entered into a floating to fixed 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
June 30, 1998 the notional amount of this interest rate swap agreement was
(pound)63.7 million. The interest rate agreement will expire when the underlying
receivables are paid down. At June 30, 1998 the floating rate to be paid by the
Company is the one month Fed AA commercial paper composite rate and the fixed
rate to be received is approximately 7.67%. Under SFAS No. 125, financial
components received or incurred in connection with the transfer of financial
assets accounted for as a sale are to be recorded at fair market value at the
date of sale with changes in fair value recognized immediately in earnings. The
fair market value of this interest rate swap agreement was not determinable due
to the open ended expiration date and consequently has not been recognized in
the Consolidated Balance Sheet at June 30, 1998.
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 its 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 the Company's anticipatory intercompany commitments. At June 30, 1998
and 1997, the Company had contract principal amounts of approximately $260.6 and
$173.1, respectively in contracts to sell foreign currency in the future. At
June 30, 1998 and 1997, the Company would have gained $0.3 and $22.2,
respectively, to retire these agreements in the OTC market as determined by the
financial institution counterparties; such amounts represent the fair value of
these instruments.
At June 30, 1998, the Company owned forward and option contracts which allowed
it to sell currencies for the indicated U.S. dollar amounts, in fiscal year 2000
and 1999, as follows:
<TABLE>
<CAPTION>
CURRENCIES 2000 1999
---------- ------ ------
<S> <C> <C>
German Mark..................................................................... $ -- $ 65.9
Italian Lire.................................................................... -- 40.6
French Francs................................................................... -- 69.6
Swedish Krona................................................................... -- 13.8
British Pounds.................................................................. -- 54.8
Spanish Pesetas................................................................. -- 27.9
Irish Punts..................................................................... -- (9.5)
Belgium Franc................................................................... (0.2) (2.2)
Other........................................................................... -- (0.1)
------ --------
Total................................................................. $ (0.2) $ 260.8
====== ========
</TABLE>
CREDIT RISK
The Company is exposed to credit risk to the extent of potential nonperformance
by counterparties on financial instruments. In the event of nonperformance by
the counterparties to the Company's interest rate agreements, the effective
interest rate on the underlying transaction would revert to the respective
contractual rate. The counterparties to the Company's interest rate agreements
and foreign currency contracts are limited to major financial institutions with
investment grade ratings; thus the Company believes the risk of incurring losses
due to credit risk is remote. Refer to Note 4 for disclosure regarding accounts
receivables subject to concentrations of credit risks.
MARKET RISK
Exposure to market risk on financial instruments results from fluctuations in
interest and currency rates during the periods in which the contracts are
outstanding. The mark-to-market valuations of interest rate, foreign currency
agreements and of associated underlying exposures are closely monitored. Overall
financial strategies and the effects of using derivatives are reviewed
periodically.
48
<PAGE> 51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) and (2) The following documents are filed as a part of this report:
Financial Statements and Financial Statement Schedules-- See Index to
Consolidated Financial Statements at Item 8 of this report.
(3) Listing of exhibits:
Note: Unless otherwise indicated below, the following Exhibits were filed
with the original Report and are not being re-filed with this
Amendment.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------ -----------------------
<S> <C> <C>
3(a) Composite Restated Certificate of Incorporation of the Company filed pursuant to
Rule 232.102(c) of Regulation S-T (incorporated by reference to Exhibit 4(d) to
Registration Statement No. 33-61626).
3(b) By-Laws of the Company (incorporated by reference to Exhibit 3(b) to Form 10-K for
the fiscal year end June 30, 1996).
4(a) Article FOURTH of the Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 4(d) to Registration Statement No. 33-61626).
4(b) Note Agreement, dated as of March 29, 1996, among the Company, and the other Purchasers
named therein, including the form of 6.99% Senior Notes due March 2001, 7.74% Senior Notes
due March 2001, and 7.11% Senior Notes due March 2001, issued thereunder (incorporated
by reference to Exhibit 4(a) to Form 10-Q for the fiscal quarter ended March 31, 1996).
4(c) Note Agreement, dated as of January 15, 1993, among the Company, The Northwestern
Mutual Life Insurance Company and the other Purchasers named therein, including the
form of 8.21% Senior Notes due January 30, 2003, issued thereunder, and First Amendment
to such Note Agreement dated as of May 31, 1993 (incorporated by reference to Exhibit
4.4 to Registration Statement No. 33-62750).
4(d) Certificate of Designations of the Powers Preferences and Relative, Participating
Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations
and Restrictions thereof of 61/2% Convertible Preferred Stock of the Company, filed
with the Secretary of State of the State of Delaware on April 9, 1998 (incorporated by
reference to Exhibit 4 to Form 10-Q for the fiscal quarter ended March 31, 1998).
4(e) The Registrant agrees to furnish copies of any instrument defining the rights of
holders of long-term debt of the Registrant and its consolidated subsidiaries that does
not exceed 10 percent of the total assets of the Registrant and its consolidated
subsidiaries, which is not required to be filed as an exhibit, to the Commission upon
request.
10(a) Grant of Industrial Tax Exemption to Sensormatic Electronics Corporation (Puerto Rico)
from the Commonwealth of Puerto Rico (incorporated by reference to Exhibit 10(n) to
Form 10-K for the fiscal year ended May 31, 1986) and Order of Conversion of Grant of
Industrial Tax Exemption (incorporated by reference to Exhibit 10(m) to Form 10-K for
the fiscal year ended May 31, 1988).
10(b) Description of Non-qualified Stock Option Plan (incorporated by reference to
Registration Statement No. 2-74526) and representative form of non-qualified stock
option (incorporated by reference to Exhibit 3(c) to Registration Statement No.
2-74526) and representative form of non-qualified stock option (incorporated by
reference to Exhibit 3(c) to Registration Statement No. 2-74526).
10(c) Amended 1989 Stock Incentive Plan and representative forms of non-qualified stock
option under such Plan (incorporated by reference to Exhibit 10(c) to Form 10-K for the
fiscal year ended June 30, 1994).
</TABLE>
49
<PAGE> 52
<TABLE>
<CAPTION>
<S> <C> <C>
10(d) 1995 Stock Incentive Plan and representative forms of non-qualified stock options and
Restricted Stock Agreement under such Plan (incorporated by reference to Exhibit 10(d)
to Form 10-K for the fiscal year ended June 30, 1995).
10(e) Directors Stock Option Plan, amended and restated as of September 18, 1998, filed
herewith, and representative form of a non-qualified stock option under such Plan
(incorporated by reference to Exhibit 10(h) to Form 10-K for the fiscal year ended May
31, 1992).
10(f) Stock Purchase Loan Plan (incorporated by reference to Exhibit 10(g) to Form 10-K for
the fiscal year ended May 31, 1986).
10(g) Executive Salary Continuation Plan and representative form of agreement thereunder
(incorporated by reference to Exhibit 10(g) to Form 10-K for the fiscal year ended May
31, 1989).
10(h) Board of Directors Retirement Plan and representative form of agreement thereunder
(incorporated by reference to Exhibit 10(h) to Form 10-K for the fiscal year ended May
31, 1989).
10(i) Senior Executive Defined Contribution Retirement Plan and representative form of
agreement thereunder (incorporated by reference to Exhibit 10(h) to Form 10-K for the
fiscal year ended June 30, 1994).
10(j) Employment Agreement, dated as of October 14, 1995, between the Company and Robert A.
Vanourek, President and Chief Executive Officer of the Company (incorporated by
reference to Exhibit 10(v) to Form 10-K/A for the fiscal year ended June 30, 1995).
10(k) Agreement, dated as of September 1, 1998, between the Company and Robert A. Vanourek,
President and Chief Executive Officer of the Company.
10(l) Employment Agreement, dated as of December 21, 1995, between the Company and Garrett E.
Pierce, Senior Vice President, Chief Administrative Officer and Chief Financial Officer
of the Company (incorporated by reference to Exhibit 10(m) to Form 10-K for the fiscal
year ended June 30, 1996).
10(m) Agreement, dated as of September 1, 1998, between the Company and Garrett E. Pierce,
Senior Vice President, Chief Administrative Officer and Chief Financial Officer of the
Company.
10(n) Agreement, dated as of September 1, 1998, between the Company and Ronald G. Assaf,
Chairman of the Board of the Company, amending and superseding Agreement, dated as of
December 23, 1988, between the Company and Mr. Assaf.
10(o) Agreement, dated as of August 9, 1996, between the Company and Ronald G. Assaf,
Chairman of the Board, and former President and Chief Executive Officer of the Company
(incorporated by reference to Exhibit 10(o) to Form 10-K for the fiscal year ended June
30, 1996) and amendment thereto dated as of September 1, 1998 filed herewith.
10(p) Agreement, dated as of September 1, 1998, between the Company and James E. Lineberger,
Chairman of the Executive Committee and a director of the Company, amending and
superseding Agreement, dated as of December 23, 1988, between the Company and Mr.
Lineberger.
10(q) Form of Agreement, dated as of September 1, 1998, between the Company and each of
Thomas V. Buffett, Timothy P. Hartman and John T. Ray, Jr., directors of the Company,
amending and superseding Agreements, dated as of February 12, 1996, between the Company
and such individuals.
10(r) Form of Agreement, dated as of September 1, 1998, between the Company and each of Fred
A. Breidenbach and J. Richard Munro, directors of the Company.
10(s) Agreement, dated as of August 31, 1997, between the Company and Jerry T. Kendall,
Senior Vice President of the Company and President of North America Retail Operations.
10(t) Agreement, dated as of September 1, 1998, between the Company and Jerry T. Kendall,
Senior Vice President of the Company and President of North America Retail Operations.
10(u) Agreement, dated as of June 25, 1997, between the Company and Ronald F. Premuroso,
Senior Vice President of the Company and President of Europe Retail Operations.
10(v) Agreement, dated as of September 1, 1998, between the Company and Ronald F. Premuroso
Senior Vice President of the Company and President of Europe Retail Operations.
10(w) Directors and Officers Liability Insurance Policies (incorporated by reference to
Exhibit 10(v) to Form 10-K for the fiscal year ended June 30, 1996).
10(x) Amended and Restated Credit Agreement, dated as of December 12, 1995, between the
Company, Wachovia Bank of Georgia, N.A., ABN Amro Bank N.V., the other Borrowers listed
therein and the domestic banks and foreign company banks listed therein (incorporated
by reference to Exhibit 10(w) to Form 10-K for the fiscal year ended June 30, 1996).
10(y) Amended and Restated Multicurrency Revolving Credit Agreement, dated as of March 18,
1997, between the Company and The First National Bank of Boston as Agent and other
lenders referred to therein (incorporated by reference to Exhibit 10(w) to Form 10-K
for the fiscal year ended June 30, 1997).
10(z) Second Amendment, dated as of February 20, 1998, to the Amended and Restated
Multicurrency Revolving Credit Agreement, dated as of March 18, 1997, between the
Company and BankBoston, N.A. and other lending institutions (incorporated by reference
to Exhibit 10 to Form 10-Q for the fiscal quarter ended March 31, 1998).
</TABLE>
50
<PAGE> 53
<TABLE>
<CAPTION>
<S> <C> <C>
12 Computation of Ratio of Earnings to Fixed Charges (Amended schedule is filed herewith).
21 List of Subsidiaries of the Company.
23(a) Consent of Independent Certified Public Accountants (reference to Exhibit 23(a) to
Form S-8 Nos. 2-19339, 33-26786, 33-38753, 33-54626 and 33-58299) (Amended schedule
is filed herewith).
23(b) Consent of Independent Certified Public Accountants (reference to
Exhibit 23(b) to Form S-4 No. 33-51957) (Amended schedule is filed herewith).
27 Financial Data Schedule (EDGAR version only) (Amended schedule is filed herewith).
</TABLE>
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the three month period ended
June 30, 1998.
51
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Amendment to the Report to be
signed on its behalf by the undersigned, thereunto duly authorized, on August
17, 1999.
SENSORMATIC ELECTRONICS
CORPORATION
By: /s/ GARRETT E. PIERCE
---------------------------------------
Garrett E. Pierce
SENIOR VICE PRESIDENT, CHIEF ADMINISTRATIVE
OFFICER AND CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment to the Report has been signed below by the following persons on behalf
of the Company and in the capacities indicated on August 17, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
/s/ ROBERT A. VANOUREK President and Chief Executive Officer
- ---------------------------------------- (Principal Executive Officer) and Director
Robert A. Vanourek
/s/ GARRETT E. PIERCE Senior Vice President, Chief
- ---------------------------------------- Administrative Officer and Chief Financial Officer
Garrett E. Pierce (Principal Financial Officer)
/s/ GREGORY C. THOMPSON Vice President and Controller
- ---------------------------------------- (Principal Accounting Officer)
Gregory C. Thompson
</TABLE>
52
<PAGE> 55
SCHEDULE II
SENSORMATIC ELECTRONICS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDING JUNE 30, 1998, 1997, AND 1996
(In millions)
<TABLE>
<CAPTION>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
1998 1997(3) 1996
---- ------- ----
<S> <C> <C> <C>
Balance, beginning of period............................................. $ 63.8 $ 62.8 $ 26.4
Additions charged to income(1)........................................... 23.4 27.2 82.3
Amounts written off...................................................... (22.4) (28.7) (47.3)
Other (including currency translation)................................... (5.7) 2.5 1.4
------ ------ ------
Balance, end of period................................................... $ 59.1 $ 63.8 $ 62.8
====== ====== ======
ALLOWANCE FOR INVENTORY LOSSES
1998 1997 1996
---- ---- ----
Balance, beginning of period............................................. $ 29.1 $ 38.0 $ 10.3
Additions charged to income(1)........................................... 11.7 11.6 36.7
Inventory write-downs related to restructuring activities(2)............. -- 4.2 19.6
Amounts written off...................................................... (7.6) (19.2) (30.2)
Other (including currency translation)................................... (0.4) (5.5) 1.6
------ ------ ------
Balance, end of period................................................... $ 32.8 $ 29.1 $ 38.0
====== ====== ======
</TABLE>
- ----------
(1) Includes incremental charges discussed in Item 7. Management's Discussion
and Analysis of Results of Operations and Financial Condition of the Form
10K/A-1 for fiscal 1998.
(2) Refer to Note 3 of the Notes to the Consolidated Financial Statements for
discussion of restructuring charges.
(3) For the year ending June 30, 1997, a liability of $12.0 relating to the
disposition of a non-core business has been reclassified to other
liabilities. This liability was reversed during the first quarter of fiscal
1998. See Note 2 of Notes to the Consolidated Financial Statements.
S-1
<PAGE> 1
Exhibit 12
SENSORMATIC ELECTRONICS CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions, except ratio amounts)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------
1994 1995 1996 1997 1998
------- ------- -------- ------ ------
<S> <C> <C> <C> <C> <C>
Income (loss) from operations before income taxes........... $ 96.0 $ 89.0 $ (159.9) $ (30.3) $ (46.8)
Add (deduct):
Fixed charges less preferred stock dividends.............. 23.7 30.8 40.5 49.8 52.4
Minority interest in consolidated subsidiaries............ 0.5 1.0 1.6 2.7 4.5
Minority interest adjustment for losses of majority
owned subsidiaries..................................... -- -- -- -- --
Net losses related to 50% or less owned
subsidiaries........................................... -- -- -- -- --
-------- ------- -------- ------- -------
Adjusted Earnings........................................... $ 120.2 $ 120.8 $ (117.8) $ 22.2 $ 10.1
======== ======= ======== ======= =======
Fixed Charges:
Interest.................................................. $ 22.7 $ 29.0 $ 38.4 $ 47.9 $ 50.8
Amortization of debt expense and debt discounts........... -- 0.3 0.6 0.8 0.9
Portion of Rents representive of interest factor.......... 1.0 1.5 1.5 1.1 0.7
Preferred Stock dividends(1).............................. -- -- -- -- --
-------- ------- -------- ------- -------
Total fixed charges............................... $ 23.7 $ 30.8 $ 40.5 $ 49.8 $ 52.4
======== ======= ======== ======= =======
Ratio of Earnings to fixed charges(2)................ 5.07 3.92 -- 0.45 0.19
======== ======= ======== ======= =======
</TABLE>
- ----------
(1) Preferred stock dividends declared in fiscal 1998 were in the form of common
stock, thereby not effecting fixed charges or the income statement.
(2) Earnings for the year ended June 30, 1996 was not able to cover fixed
charges by $158.3.
(3) Restated. See Note 2 of Notes to Consolidated Financial Statements.
<PAGE> 1
Exhibit 23(a)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 2-19339, 33-26786, 33-38753,33-54626 and 33-58299) pertaining to
the Incentive and Non-Qualified Stock Option Plans and the Employee Stock
Purchase Plan of Sensormatic Electronics Corporation of our report dated August
13, 1998 (except Note 2, as to which the date is August 13, 1999), with respect
to the consolidated financial statements and schedule of Sensormatic
Electronics Corporation, as amended, included in the Annual Report on Form
10-K/A-1 for the year ended June 30, 1998.
ERNST & YOUNG LLP
West Palm Beach, Florida
August 13, 1999
<PAGE> 1
EXHIBIT 23(b)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement (Form
S-4 No. 33-51957) of Sensormatic Electronics Corporation and in the related
Prospectus of our report dated August 13, 1998 (except Note 2, as to which the
date is August 13, 1999), with respect to the consolidated financial statements
and schedule of Sensormatic Electronics Corporation, as amended, included in
the Annual Report on Form 10-K/A-1 for the year ended June 30, 1998.
ERNST & YOUNG LLP
West Palm Beach, Florida
August 13, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 127
<SECURITIES> 0
<RECEIVABLES> 518
<ALLOWANCES> 59
<INVENTORY> 204
<CURRENT-ASSETS> 737
<PP&E> 245
<DEPRECIATION> 108
<TOTAL-ASSETS> 1,800
<CURRENT-LIABILITIES> 337
<BONDS> 549
0
167
<COMMON> 734
<OTHER-SE> 2
<TOTAL-LIABILITY-AND-EQUITY> 1,800
<SALES> 832
<TOTAL-REVENUES> 987
<CGS> 544
<TOTAL-COSTS> 947
<OTHER-EXPENSES> 87
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 51
<INCOME-PRETAX> (47)
<INCOME-TAX> (14)
<INCOME-CONTINUING> (33)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (33)
<EPS-BASIC> (.47)
<EPS-DILUTED> (.47)
</TABLE>
