<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A-1
( X ) QUARTERLY REPORT ( ) TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly
Period Ended MARCH 31, 1999 Commission File No. 1-10739
------------------- ----------
SENSORMATIC ELECTRONICS CORPORATION
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 34-1024665
- ------------------------------------------------ --------------------------------------
<S> <C>
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification Number)
organization)
</TABLE>
951 YAMATO ROAD, BOCA RATON, FLORIDA 33431-0700
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(561) 989-7000
----------------------------------------------------
(Registrant's telephone number, including area code)
Same
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X . No .
------ --------
The Registrant had outstanding 75,611,090 shares of Common Stock (par value
$.01 per share) as of April 30, 1999.
<PAGE> 2
SENSORMATIC ELECTRONICS CORPORATION
INDEX
FORM 10-Q
NINE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets................................................. 2
Consolidated Condensed Statements of Operations..................................... 3
Consolidated Condensed Statements of Cash Flows....................................... 4
Notes to Consolidated Condensed Financial Statements.................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................... 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................................................... 20
Signatures.................................................................................................. 21
</TABLE>
<PAGE> 3
SENSORMATIC ELECTRONICS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(In millions, except par value amounts)
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
--------- -------
(Restated-See Note 2)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 143.7 $ 127.0
Customer receivables, net 310.7 326.2
Inventories, net 189.5 203.6
Current portion of deferred income taxes 36.0 36.2
Other current assets 55.7 43.7
------------- -------------
TOTAL CURRENT ASSETS 735.6 736.7
Customer receivables - noncurrent, net 102.8 132.5
Revenue equipment, net 70.2 69.2
Property, plant and equipment, net 138.3 137.2
Costs in excess of net assets acquired, net 450.3 465.5
Deferred income taxes 141.2 149.4
Patents and other assets, net 124.4 109.0
------------- -------------
TOTAL ASSETS $ 1,762.8 $1,799.5
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 83.5 $ 33.5
Accounts payable and accrued liabilities 129.4 118.5
Other current liabilities and deferred income taxes 180.3 184.8
------------- -------------
TOTAL CURRENT LIABILITIES 393.2 336.8
Long-term debt 431.2 515.2
Other noncurrent liabilities and deferred income taxes 47.1 45.5
------------- -------------
TOTAL LIABILITIES 871.5 897.5
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10.0 shares authorized -- --
6 1/2% Convertible Preferred Stock, 0.7 shares outstanding 166.7 166.7
Common stock, $.01 par value, 125.0 shares authorized, 75.3 and 74.4
shares outstanding at March 31, 1999 and June 30, 1998, respectively 742.3 733.7
Retained earnings 114.7 108.3
Treasury stock at cost and other, 1.7 shares at March 31, 1999
and June 30, 1998 (11.1) (11.7)
Accumulated other comprehensive income (121.3) (95.0)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 891.3 902.0
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,762.8 $1,799.5
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
SENSORMATIC ELECTRONICS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended March 31, Ended March 31,
---------------------- ----------------------
1999 1998 1999 1998
--------- ---------- --------- ----------
(Restated-See Note 2) (Restated-See Note 2)
<S> <C> <C> <C> <C>
Revenues:
Sales $ 203.6 $ 199.2 $ 594.4 $ 610.1
Rentals 11.1 11.4 33.4 36.6
Installation, maintenance and other 30.8 26.4 95.3 79.4
--------- ---------- --------- ----------
Total revenues 245.5 237.0 723.1 726.1
--------- ---------- --------- ----------
Cost of Sales:
Costs of sales 134.9 127.0 403.3 384.2
Depreciation on revenue equipment 5.4 4.3 16.0 14.1
--------- ---------- --------- ----------
Total cost of sales 140.3 131.3 419.3 398.3
--------- ---------- --------- ----------
Gross margin 105.2 105.7 303.8 327.8
Operating expenses:
Selling, general and administrative 66.7 67.6 212.0 237.2
Provision for doubtful accounts 5.0 5.2 14.8 15.4
Restructuring charges -- 4.7 -- 21.9
Research, development and engineering 5.9 6.5 19.5 20.0
Amortization of intangible assets 5.6 5.4 16.4 16.0
--------- ---------- --------- ----------
Total operating costs and expenses 83.2 89.4 262.7 310.5
--------- ---------- --------- ----------
Operating income 22.0 16.3 41.1 17.3
--------- ---------- --------- ----------
Other (expenses) income:
Interest income 4.9 3.6 12.9 10.6
Interest expense (11.0) (12.7) (33.5) (38.3)
Litigation recoveries/(settlement) -- 7.3 6.3 (45.7)
Other, net (2.2) (1.8) (4.0) (4.9)
--------- ---------- --------- ----------
Total other (expenses) income (8.3) (3.6) (18.3) (78.3)
--------- ---------- --------- ----------
Income (loss) before income taxes 13.7 12.7 22.8 (61.0)
Provision (benefit) for income taxes 4.5 2.6 7.7 (17.9)
--------- ---------- --------- ----------
Net income (loss) $ 9.2 $ 10.1 $ 15.1 $(43.1)
========= ========== ========= ==========
Earnings (loss) applicable to common
stockholders $ 6.5 $ 10.1 $ 6.7 $(43.1)
========= ========== ========= ==========
Basic and diluted earnings (loss)
per common share $ 0.09 $ 0.14 $ 0.09 $(0.58)
========= ========== ========= ==========
Number of shares used in computation
of basic earnings (loss) per share 75.2 74.2 74.8 74.2
========= ========== ========= ==========
Number of shares used in computation
of diluted earnings (loss) per share 75.7 74.8 75.0 --
========= ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
SENSORMATIC ELECTRONICS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In millions)
<TABLE>
<CAPTION>
Nine Months
Ended March 31,
------------------------
1999 1998
----------- ----------
(Restated-See Note 2)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 15.1 $(43.1)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 49.1 49.2
Restructuring charges/(payments), net (7.6) 12.8
Litigation settlement charge -- 35.7
Net changes in operating assets and liabilities, net of effects of
acquisitions and divestitures:
Decrease/(increase) in receivables and sales-type leases 45.7 (27.1)
Decrease/(increase) in inventories 10.4 (36.1)
Increase in current and deferred income taxes
relating to restructuring and litigation charges -- (20.0)
Other operating assets and liabilities, net (6.3) (25.7)
----------- ----------
Net cash provided by (used in) operating activities 106.4 (54.3)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (20.7) (21.9)
Proceeds from sale of business, net -- 8.2
Increase in revenue equipment, net of deletions (17.6) (17.5)
Additional investment in acquisitions (16.9) (15.2)
Other, net 1.1 4.6
----------- ----------
Net cash used in investing activities (54.1) (41.8)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank borrowings and other debt, net of repayments (33.5) 89.3
Other, net (2.1) 1.4
----------- ----------
Net cash (used in) provided by financing activities (35.6) 90.7
----------- ----------
Net increase (decrease) in cash and cash equivalents 16.7 (5.4)
Cash and cash equivalents at beginning of the year 127.0 21.7
----------- ----------
Cash and cash equivalents at end of the period $ 143.7 $ 16.3
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
SENSORMATIC ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in Millions)
1) BASIS OF PRESENTATION
The consolidated condensed financial statements include the accounts
of Sensormatic Electronics Corporation and its subsidiaries (the
"Company"). The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and notes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month period
ended March 31, 1999 are not necessarily indicative of the results
that may be expected for the year ending June 30, 1999. For further
information, refer to the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the
year ended June 30, 1998.
2) Restatement of Financial Statements
In May 1997, the Company agreed in principle with Pinkertons Inc.
("Pinkertons") to the principal terms of the sale of the Company's
U.S. commercial/industrial direct sales and service business subject
to completion of due diligence and definitive agreements.
During the fourth quarter of fiscal 1997, the Company recognized a
$12.0 restructuring liability for estimated losses due to the
Company's plan to sell this business. In August 1997, the Company
discontinued negotiations with Pinkertons due to the companies'
inability to reach mutually acceptable terms.
In September 1997, the Company sold its U.S. commercial/industrial
direct sales and service business to Securities Technology Group
("STG"). Unlike the Pinkertons transaction, as one of the terms of the
sale, the Company is required to reimburse STG for costs to complete
certain jobs in process if those costs exceed defined amounts. The
Company originally retained the $12.0 restructuring liability as an
estimate of losses under its new agreement with STG, which the Company
viewed as addressing the same underlying business and risk profile as
in the Pinkertons agreement in principle.
In connection with a review of its financial statements incorporated by
reference in the Company's pending registration statement registering
the Company's 6 1/2% Convertible Preferred Stock and related Depository
Shares, the Company has determined that all of the requirements to
recognize the indicated loss under Statement of Financial Accounting
Standards No. 5, "Accounting for Contingencies", were not met as a
result of the new agreement with STG. Accordingly, the $12.0 liability
for estimated losses due to the Company's plan to sell this business
which was originally recorded during the fourth quarter of fiscal 1997
was reversed in the first quarter of fiscal 1998. The Company's
consolidated financial statements for the quarter ended September 30,
1997 have been restated to include the effects of reversing this
liability. During the third quarter of fiscal 1998, the Company
recognized a $4.7 restructuring liability for probable losses resulting
from the Company's sale of this business to STG.
Additionally, for the nine months ended March 31, 1999, the Company has
deducted from earnings applicable to common stockholders the value of
common stock issued as dividends on the 6 1/2% Convertible Preferred
Stock which was issued on April 13, 1998. This has no impact on the
previously reported net income or stockholders' equity.
The effects of the above adjustments on the Company's previously
reported consolidated financial statements for the nine months ended
March 31, 1998 and 1999 are as follows:
5
<PAGE> 7
Consolidated Condensed Statements of Operations:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
March 31, 1998 March 31, 1999
----------------------------- -----------------------------
As Reported As Restated As Reported As Restated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Restructuring Charges $ 29.2 $ 21.9 -- --
Operating income $ 10.0 $ 17.3 $ 41.1 $ 41.1
Income (loss) from continuing operations $(47.5) $(43.1) $ 15.1 $ 15.1
Net loss $(47.5) $(43.1) $ 15.1 $ 15.1
Earnings (loss) applicable to common
stockholders $(43.1) $ 6.7
Basic and diluted loss per share $ (.64) $ (.58) $ 0.20 $ 0.09
</TABLE>
Consolidated Condensed Balance Sheets:
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1999
----------------------------- -----------------------------
As Reported As Restated As Reported As Restated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total assets $1,763.3 $1,763.4 $1,765.7 $1,762.7
Total current liabilities $ 474.0 $ 469.7 $ 400.5 $ 393.2
Total shareholders' equity $ 722.3 $ 726.7 $ 886.9 $ 891.3
</TABLE>
3) RECLASSIFICATIONS
Certain amounts in the consolidated condensed financial statements for
the nine months ended March 31, 1998 have been reclassified to conform
to the fiscal 1998 year-end presentation.
4) RESTRUCTURING
During fiscal 1996, the Company initiated a restructuring plan with the
following objectives: (i) expense reduction and asset control; (ii)
improved processes and systems; and (iii) quality growth. The initial
phase of this plan included an extensive review of the Company's
operations and cost structure. During the fourth quarter of fiscal
1997, the Company announced additional restructuring activities
principally pertaining to workforce reductions in the Company's
European operations and the divestiture of non-core businesses. The
restructuring charges recorded in the fourth quarter of fiscal 1997 and
the first and third quarters of fiscal 1998, net of the reversal of
$12.0 million described in Note 2, totaled $48.7 million with an
after-tax impact of $32.3 million. Included in the total of $48.7
million were inventory write-downs related to restructuring activities
of $4.2 million which were recorded in "cost of sales".
The following tables set forth the details and the activity of the
1996 and 1997/1998 restructuring charge reserves as of March 31, 1999:
6
<PAGE> 8
1996 Reserve
<TABLE>
<CAPTION>
Accrual Accrual
Utilization Balance at Utilization Balance at
1996 ------------------- June 30, ------------------ Reserve June 30,
Provision Cash Non-Cash 1996 Cash Non-Cash 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 Accrual
Balance at Utilization Balance at Utilization Balance at
June 30, ------------------- June 30, ------------------ March 31,
1997 Cash Non-Cash 1998 Cash Non-Cash 1999
--------- ---- --------- ---- ----- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Product rationalization, related
equipment charges and other........ $ 1.5 $ -- $(1.1) $ 0.4 $ -- $ -- $ 0.4
Closure of facilities and
related costs...................... 5.7 (0.7) 0.2 5.2 (0.3) -- 4.9
Employee termination and
related costs...................... 3.3 (3.3) -- -- -- -- --
------ ------ ----- ----- ------ ----- -----
Total........................... $ 10.5 $ (4.0) $(0.9) $ 5.6 $ (0.3) $ -- $ 5.3
====== ====== ===== ===== ====== ===== =====
</TABLE>
1997/1998 Reserve(1)
<TABLE>
<CAPTION>
Accrual Accrual Accrual
Balance at 1998 Utilization Balance at Utilization Balance at
1997 June 30, Additions/ ------------------ June 30, ------------------ March 31,
Provision 1997 (Reversals) Cash Non-Cash 1998 Cash Non-Cash 1999
--------- --------- --------- ---- -------- ---------- ----- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Product rationalization,
related equipment charges
and other................ $ 2.9 $ 2.9 $ -- $ -- $(1.6) $ 1.3 $ -- $ (1.1) $ 0.2
Closure of facilities and
related costs............ 6.5 6.5 8.8 0.2 (5.6) 9.9 (1.8) (0.1) 8.0
Closure of facilities(2).. -- (2.9) (2.9) (2.9)
Employee termination and
related costs............ 0.5 0.5 20.4 (10.4) -- 10.5 (5.0) -- 5.5
Non-core business
divestitures.............. 16.9 16.9 (7.3) -- -- 9.6 (0.5) (0.1) 9.0
----- ------ ------ ------ ----- ----- ------ ----- -----
Total................. $26.8 $ 23.9 $ 21.9 $(10.2) $(7.2) $28.4 $ (7.3) $(1.3) $19.8
===== ====== ====== ====== ===== ===== ====== ===== =====
Inventory write downs
recorded as a
component of cost
of sales(2).............. -- (4.2) 3.6 (0.6) 0.6 --
----- ------ ------ ------ ----- ----- ------ ----- -----
Total................. $26.8 $ 19.7 $ 21.9 $(10.2) $(3.6) $27.8 $ (7.3) $(0.7) $19.8
===== ====== ====== ====== ===== ===== ====== ===== =====
</TABLE>
- --------------------------
(1) Certain amounts related to non-core business hav been restated.
See Note 2.
(2) Amounts classified directly to the impaired assets.
The total aggregate cash outlay related to the fiscal 1996, 1997 and
1998 restructuring charges, net of expected proceeds from the
divestiture of non-core businesses, was estimated to be approximately
$63.3. As of March 31, 1999, the remaining accrual balance relates
primarily to expected cash payments the Company will pay over time
after the restructuring activity occurs.
7
<PAGE> 9
5) CUSTOMER RECEIVABLES
Amounts due to the Company in the form of accounts receivable (which
are generally due within 90 days), deferred receivables (which are
generally due within one year), installment receivables (which have
periodic payments over a term of five years, generally) and net
investment in sales-type leases (which have periodic payments over
lease terms of five to six years, principally) at March 31, 1999 and
June 30, 1998 are summarized as follows:
<TABLE>
<CAPTION>
March 31 June 30
-------- -------
<S> <C> <C>
Trade accounts receivable due in 1 year $ 297.1 $ 303.9
Allowance for doubtful accounts (33.8) (33.2)
--------- --------
Total trade accounts receivable, net $ 263.3 $ 270.7
========== ========
Deferred receivables $ 4.8 $ 4.9
Installment receivables 32.5 38.8
Allowance for doubtful accounts (6.4) (5.6)
Unearned interest and maintenance (12.8) (14.5)
---------- ---------
Total deferred and installment receivables, net 18.1 23.6
Less: Amounts due in 1 year, net (14.4) (19.0)
---------- ---------
Total noncurrent deferred and
installment receivables, net $ 3.7 $ 4.6
========= =========
Sales-type leases-minimum lease payments receivable $ 179.1 $ 225.1
Allowance for uncollectible minimum lease payments (14.1) (20.3)
Unearned interest and maintenance (32.9) (40.4)
--------- ---------
Total sales-type leases, net 132.1 164.4
Less: Amounts due in 1 year, net (33.0) (36.5)
--------- ---------
Total noncurrent sales-type leases, net $ 99.1 $ 127.9
========= =========
Total customer receivables $ 413.5 $ 458.7
Less: Amounts due in 1 year, net 310.7 326.2
--------- ---------
Total noncurrent customer receivables $ 102.8 $ 132.5
========= =========
</TABLE>
6) INVENTORY
Inventories are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1999 June 30, 1998
-------------- -------------
<S> <C> <C>
Finished goods $ 156.2 $ 165.4
Parts 47.9 56.3
Work-in-process 14.3 14.7
--------- --------
218.4 236.4
Less allowance for excess and obsolete inventory (28.9) (32.8)
--------- --------
Total inventories, net $ 189.5 $ 203.6
======== ========
</TABLE>
7) ACCOUNTS RECEIVABLE FINANCING
Effective January 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", and
accordingly, subsequent to the adoption of SFAS No. 125, only
receivables sold or transferred under financing agreements which meet
the criteria for off-balance sheet treatment as defined by SFAS No.
125 are recognized as sales. All other transfers of receivables are
treated as financing transactions. See Note 5 of Notes to Consolidated
Financial Statements in the Company's 1998 Annual Report on Form 10-K
for additional discussion on the Company's accounts receivable
financing program.
8
<PAGE> 10
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 $76.1 at March 31,
1999. Loss reserves have been provided for receivables and sales-type
lease receivables sold and are included in accrued liabilities.
8) 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>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NUMERATOR:
Net income (loss)(a) $ 9.2 $ 10.1 $ 15.1 $(43.1)
Less: Preferred stock dividends (2.7) -0- (8.4) -0-
----- ------ ------ ------
Loss applicable to common stockholders $ 6.5 $ 10.1 $ 6.7 $(43.1)
===== ====== ====== ======
DENOMINATOR:
Basic EPS - weighted average shares 75.2 74.2 74.8 74.2
Dilutive effect: Stock options 0.5 0.6 0.2 0.3
----- ------ ------ ------
Diluted EPS - weighted average shares 75.7 74.8 75.0 74.5
===== ====== ====== ======
Basic earnings (loss) per share $0.09 $ 0.14 $ 0.09 $(0.58)
===== ====== ====== ======
Diluted earnings per share $0.09 $ 0.14 $ 0.09 $ -- (b)
===== ====== ====== ======
</TABLE>
- -------------------
(a) The net income (loss) for the three and nine months ended March 31, 1998
has been restated. See Note 2.
(b) Excluded as result is anti-dilutive.
9
<PAGE> 11
9) COMPREHENSIVE INCOME
As of July 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". The adoption of this Statement had no impact on
the Company's net income or stockholders' equity. SFAS No. 130
establishes new rules for the reporting and display of comprehensive
income and its components. SFAS No. 130 requires foreign currency
translation adjustments to be included in other comprehensive income.
Prior to the adoption of SFAS No. 130, the Company reported such
adjustments in a separate component of stockholders' equity. For the
three months ended March 31, 1999 and March 31, 1998, comprehensive
income was $(26.9) and $18.6, respectively. For the nine months ended
March 31, 1999 and March 31, 1998, comprehensive income was $(11.3)
and $(48.6), respectively.
10) DIVESTITURES
In September 1997, the Company sold its U.S commercial/industrial
direct sales and service business to Securities Technology Group
("STG") for total proceeds of $10.5. The Company also agreed in such
transaction to sell its monitoring business, which was consummated in
October 1997. The Company retained ownership of all of the accounts
receivable related to these operations totaling approximately $30.7.
As one of the terms of the sale, the Company is required to reimburse
STG for costs to complete certain jobs in process if those costs
exceed defined amounts. While there is no stated "cap" or limit on the
amount the Company is obligated to pay the buyer under this provision,
the range of the probable loss that may be incurred by the Company
under this provision is estimated to be between $4.7 and $8.0. No gain
on the sale has been recognized pending the outcome of this
uncertainty.
During the third quarter of fiscal 1998, the Company recognized a $4.7
restructuring liability for probable losses resulting from the
Company's sale of this business to STG. See Note 2.
The U.S. commercial/industrial direct sales and service business had
annual sales of approximately $80.0. The revenues of these operations
prior to the divestiture date and included in the Company's
Consolidated Condensed Statement of Operations for the nine months
ended March 31, 1998 was $11.4.
11) LITIGATION AND OTHER MATTERS
During the first six months of fiscal 1996, a number of class actions
were filed in federal court by alleged shareholders of the Company
following announcements by the Company that, among other things, its
earnings for the quarter and year ended June 30, 1995, would be
substantially below expectations and, in the later actions or
complaint amendments, that the scope of the Company's year-end audit
for the fiscal year ended 1995 had been expanded and that results for
the third quarter of fiscal 1995 were being restated. These actions
were consolidated. The consolidated complaint alleged, among other
things, that the Company and certain of its current and former
directors, officers and employees, as well as the Company's auditors,
violated certain Federal securities laws.
10
<PAGE> 12
The Company has settled the above-referenced consolidated class
action. The settlement agreement, requiring payment by the Company of
approximately $53.5, was approved by the Court and has been fully
performed by the Company. The Company has recovered a portion of the
settlement amount and related expenses from its primary directors and
officers liability insurance policy, which had a policy limit of
$10.0, and has also been paid $10.0 by one of its two excess directors
and officers liability insurers. A pretax charge of $53.0, with an
after-tax effect of $37.0, was recorded by the Company for payments
made in connection with this settlement in the first quarter of fiscal
1998. During the third quarter of fiscal 1998, the Company also
recorded a net estimated insurance recovery of $7.3 ($5.1 after-tax).
During the second quarter of fiscal 1999, the Company recorded an
insurance recovery of $6.3 ($4.4 after-tax) received pursuant to a
settlement agreement reached with the other excess liability insurer.
11
<PAGE> 13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company's consolidated condensed financial statements present a
consolidation of its worldwide operations. This discussion supplements
the detailed information presented in the Consolidated Condensed
Financial Statements and Notes thereto (which should be read in
conjunction with the financial statements and related notes contained
in the Company's 1998 Annual Report on Form 10-K) and is intended to
assist the reader in understanding the financial results and condition
of the Company.
RESULTS OF OPERATIONS - THREE MONTHS AND NINE MONTHS ENDED MARCH 31,
1999 COMPARED TO THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1998
The following discussion of operating results excludes the effects of
restructuring charges (and the reversal of certain of such charges)
and net litigation charges recorded in fiscal 1998, which are
discussed in Note 3 and Item 7, respectively, in the Company's 1998
Annual Report on Form 10-K.
REVENUES
Revenues of $245.5 for the third quarter of fiscal 1999 increased 3.6%
compared with revenues of $237.0 for the same period in fiscal 1998.
The increase in third quarter revenues, as compared with the same
period in fiscal 1998, was due to increases in the Company's North
American Retail unit partially offset by decreases in the Company's
Europe, International and C/I Worldwide business units. Revenues of
$723.1 for the nine months ended March 31, 1999 were relatively
unchanged compared with revenues of $726.1 for the same period in
fiscal 1998. The results for the nine months ended March 31, 1999, as
compared with the same period in fiscal 1998, reflect increases in the
Company's North American Retail unit offset by decreases in the
Company's Europe, International and C/I Worldwide business units. The
first nine months of fiscal 1998 included revenues of $17.4 from
subsequently divested businesses, the largest of which was the U.S.
commercial/industrial direct sales and service business which was sold
in September 1997. Excluding the effects of these non-core businesses,
fiscal 1999 revenues increased approximately 2.0% for the first nine
months, as compared with the same period in fiscal 1998.
For the third quarter and first nine months of fiscal 1999, North
America Retail revenues increased 21.7% and 19.0%, respectively, as
compared with the same periods for fiscal 1998. The increase in
revenues was attributable to significant increases in sales of
electronic article surveillance equipment, primarily Ultra*Max
technology, to major retail chains.
Europe Retail revenues decreased 7.0% and 6.3% for the third quarter
and first nine months of fiscal 1999, respectively, as compared with
the same periods for fiscal 1998. The decrease in Europe Retail
revenues, occurring primarily in southern Europe, was due primarily to
an emphasis on more outright sales rather than sales-type lease
revenue and the competitive challenges in that area, relating to sales
of electro-magnetic technology products.
International Retail revenues, which include Latin America and Asia
Pacific, decreased 8.2% and 9.5% for the third quarter and first nine
months of fiscal 1999, respectively, as compared with the same periods
of fiscal 1998. The overall decrease in International Retail revenues
reflects the unfavorable macro economic conditions in most of the
Asian and Latin American countries.
12
<PAGE> 14
Revenues generated by C/I Worldwide decreased 6.9% and 16.9% in the
third quarter and first nine months of fiscal 1999, respectively, as
compared with the same periods of fiscal 1998. Excluding the effect on
revenues of divested non-core businesses, C/I Worldwide revenues
decreased 6.9% and 8.4% in the third quarter and the first nine months
of fiscal 1999, respectively, as compared with the same periods of
fiscal 1998. Overall revenue declines in the third quarter of fiscal
1999, as compared with the same period of fiscal 1998, were due
principally to continued declines in International C/I resulting from
macro economic conditions existing in that area along with a reduced
emphasis on the sale of direct C/I products and services.
GROSS MARGINS, OPERATING EXPENSES AND OPERATING INCOME
Gross margins on revenues were 42.9% and 42.0% for the three and nine
month periods ended March 31, 1999, respectively, compared with 44.6%
and 45.1% for the comparable periods of the prior year. The decrease
in margins was due to continued volume discounts on major orders in
North America Retail and a higher mix of service revenues at lower
margins than product margins. Gross margins for the three month period
ended March 31, 1999 were 42.9% compared to 41.1% for the three month
period ended December 31, 1998. The Company expects a continued
sequential improvement in margins in the upcoming quarter from the
current quarter due to typically high capacity utilization and a high
percentage of product sales relative to lower-margin service revenues
during this period.
Selling, general and administrative expenses, as a percentage of total
revenues, was 27.2% and 29.3% for the third quarter and first nine
months of fiscal 1999, respectively, as compared with 28.5% and 32.7%
for the comparable periods in fiscal 1998. The decrease in expenses as
a percentage of revenues for the third quarter and first nine months
of fiscal 1999, as compared with the comparable periods of the prior
year, reflects the Company's continued effort to implement the
headcount and facilities reductions associated with its previously
announced restructuring plans and the impact of the Company's focused
programs to improve profitability. Ongoing cost containment and
rationalization efforts are expected to generate lower levels and
ratios of selling, general and administrative expense in relation to
revenues in the fourth quarter of fiscal 1999 as the Company completes
the cost reductions outlined in its restructuring plans and further
reduces expenses in the current fiscal year. Included in selling,
general and administrative expenses for the first nine months of
fiscal 1998 are incremental charges of $10.8, or 1.5% of revenues, for
certain employee separation and contract resolution costs.
Provision for doubtful accounts, as a percentage of total revenues,
was 2.0% in the third quarter and first nine months of fiscal 1999, as
compared with 2.2% and 2.1%, respectively, for the same periods in
fiscal 1998.
Research, development and engineering expenses were 2.4% of revenue in
the three months ended March 31, 1999 as compared with 2.7% for the
same period in fiscal 1998. For the first nine months of fiscal 1999,
research, development and engineering expenses were 2.7% of revenue,
as compared with 2.8% for the same period in fiscal 1998.
13
<PAGE> 15
Before restructuring, operating income increased from $21.0 in the
third quarter of fiscal 1998 to $22.0 in the third quarter of fiscal
1999 and from $39.2 for the first nine months of fiscal 1998 to $41.1
for the comparable period in fiscal 1999. The impact of the
incremental charges discussed under selling, general and
administrative expenses above, and $3.0 of additional incremental
charges included in cost of sales, was to reduce operating income by
$13.8 million in the first nine months of fiscal 1998.
OTHER (EXPENSES) INCOME AND TAXES
Net interest and other expenses of $8.3 and $24.6 for the third
quarter and first nine months of fiscal 1999, respectively, reflected
a decrease of $2.6 and $8.0, respectively, from the comparable periods
of fiscal 1998, excluding litigation settlement charges and insurance
recoveries in the first quarter and the third quarter of fiscal 1998,
respectively, and insurance recoveries during the second quarter of
fiscal 1999. These net decreases are primarily due to decreases in
interest expense and increases in interest income. Lower debt levels
resulted primarily from the use of a portion of the proceeds from the
Company's April 1998 preferred stock offering to repay the outstanding
balance under the Company's revolving credit line. Additionally,
improvements in the Company's cash flow during fiscal 1999 have
contributed to the reduction in interest expense. The third quarter
fiscal 1998 insurance recovery of $7.3 ($6.0 after tax) and the second
quarter fiscal 1999 insurance recovery of $6.3 ($4.4 after-tax) are
related to settlement agreements reached with the Company's insurance
carriers related to the shareholder litigation settled in the first
quarter of fiscal 1998.
The provision for income taxes for the third quarter and first nine
months of fiscal 1999 is based on an estimated effective annual
consolidated tax provision rate of 30.0%. The provision for income
taxes for the third quarter of fiscal 1998 and the benefit for income
taxes for the first nine months of fiscal 1998 are based on an
estimated effective annual consolidated tax rate of 31.0%. The tax
benefit for the first nine months of fiscal 1998 related primarily to
the restructuring and litigation charges recorded during the first
quarter.
The Company reported net income of $9.2, or $0.09 per share, and
$15.1, or $0.09 per share, for the third quarter and first nine months
of fiscal 1999, respectively, as compared with net income of $10.1, or
$0.14 per share, for the third quarter of fiscal 1998 and a net loss
of $43.1, or $0.58 per share, for the first nine months of fiscal
1998. Excluding restructuring and litigation charges and associated
insurance recoveries, the Company reported net income of $9.2, or
$0.09 per share, and $10.8, or $0.03 per share, for the third quarter
and first nine months of fiscal 1999, respectively, as compared with
net income of $8.3, or 0.11 per share, and $4.1, or $0.06 per share,
for the third quarter and first nine months of fiscal 1998,
respectively. The results for the nine months of fiscal 1998 include
the effect of the incremental charges of $13.8 discussed under
operating income, above, which had a negative after-tax impact of $9.7
or $0.13 per share.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of fiscal 1999, cash and cash equivalents
increased $16.7 primarily due to an increase in net income (adjusted
for non cash items) and a decrease in receivables and inventories,
offset by the repayment of debt and expenditures related to capital
equipment and revenue equipment. For the nine month period ended March
31, 1999, cash flow provided by operating activities was $106.4
14
<PAGE> 16
compared with cash used in operations for the nine month period ended
March 31, 1998 of $54.3. The improvement in operating cash flow in the
nine month period ended March 31, 1999 was primarily a result of
reduced levels of receivables and inventories in fiscal 1999, as
compared with increases in inventory and receivables in the comparable
period in fiscal 1998. Included in operating cash flow in the first
nine months of fiscal 1998 is a net insurance recovery of $7.3 ($6.0
after-tax) and in the first nine months of fiscal 1999 an insurance
recovery of $6.3 ($4.4 after-tax) related to settlement agreements
reached with the Company's insurance carriers related to the
shareholder litigation settled in the first quarter of fiscal 1998.
In the first nine months of fiscal 1999, the Company used $54.1 of
cash in investing activities, compared with $41.8 in the first nine
months of fiscal 1998. The fiscal 1998 amount included $8.2 million of
net proceeds from the sale of a non-core business.
For the nine month period ended March 31, 1999, $35.6 of cash was used
for financing activities as compared with cash being generated of
$90.7 as a result of financing activities during the nine month period
ended March 31, 1998. The principal use of cash in financing
activities during the first nine months of fiscal 1999 was to repay
approximately $33.5 of debt.
The Company's percentage of total debt to total capital was 36.6% at
March 31, 1999 as compared with 37.8% at June 30, 1998. Certain of
the Company's financial agreements currently prohibit the payment of
cash dividends, as well as the purchase of Company securities, until
certain profit levels are achieved and reflected in the Company's
annual audited financial statements. Under these provisions, it is
unlikely that the Company would be able to pay cash dividends until
after the preparation of its audited financial statements for fiscal
year 2000 at the earliest. The Company intends to pay any dividends
declared on the Convertible Preferred Stock with shares of Common
Stock prior to the time it is able to pay such cash dividends. The
Company issued approximately 295,059 shares of common stock in payment
of the April 1, 1999 dividend on the Preferred Stock.
The Company uses the U.S. dollar as its reporting currency for
financial statement purposes. The Company conducts business in
numerous countries around the world through its international
subsidiaries which use local currencies to denominate their
transactions, and is, therefore, subject to certain risks associated
with fluctuating foreign currencies. The resulting changes in the
financial statements do not indicate any underlying changes in the
financial position of the international subsidiaries but merely
reflect the adjustment in the carrying value of the net assets of
these subsidiaries at the current U.S. dollar exchange rate. Due to
the long-term nature of the Company's investment in these
subsidiaries, the translation adjustments resulting from these
exchange rate fluctuations are excluded from the results of operations
and are recorded in a separate component of consolidated stockholders'
equity. The $26.3 increase in currency translation adjustments at
March 31, 1999 compared to June 30, 1998, which is reflected in the
balance sheet caption "Accumulated other comprehensive income",
resulted primarily from the strengthening of the U.S. dollar relative
to European currencies at March 31, 1999. The Company monitors its
currency exposures but does not hedge its translation exposures due to
the high economic costs of such a program and the long-term nature of
its investment in its international subsidiaries.
15
<PAGE> 17
The Company requires significant cash flow to meet its debt service
and other continuing obligations. As of March 31, 1999, the Company
had $514.7 million of total indebtedness outstanding of which $83.5
was due within 12 months. The Company's expected principal liquidity
requirements are working capital, financing of customer equipment
purchases, investments in revenue equipment and capital expenditures
and interest on the Senior Notes. At March 31, 1999, 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, which remains fully available, and (iv) receivable
securitization facilities. The Company believes that cash flow from
operations, together with borrowings under the Revolving Credit
Facility, will be sufficient to meet its liquidity needs for the
foreseeable future.
RESTRUCTURING
During fiscal 1996, the Company initiated a restructuring plan with the
following objectives: (i) expense reduction and asset control; (ii)
improved processes and systems; and (iii) quality growth. The initial
phase of this plan included an extensive and systematic review of the
Company's operations, cost structure and balance sheet aimed at
reducing its operating expenses and manufacturing costs while
increasing efficiencies. In addition, during fiscal 1997, the Company
announced further restructuring actions which included the divestiture
of non-core operations and additional cost-reduction plans, which
mainly include staff reductions within its European operations. During
the fourth quarter of fiscal 1997, the Company recognized $26.8 of this
charge with plans to record the remaining portion in the first quarter
of fiscal 1998. As a result, the Company recorded $17.2 in
restructuring charges during the first quarter of fiscal 1998, net of
the reversal of $12.0 described in Note 2 to the Consolidated Condensed
Financial Statements. These charges related primarily to product
rationalization and related equipment impairment charges, facility
closures and severance costs. In addition, during the third quarter of
fiscal 1998 the Company recorded additional restructuring charges of
$4.7 related to the Company's sale of its U.S. commercial/industrial
direct sales and service business to STG. The Company may record
additional restructuring charges in future periods related to the
Company's sale of its U.S. commercial/industrial sales and service
business to STG as any additional probable losses become reasonably
estimable.
YEAR 2000 UPDATE
Year 2000
Many computer applications, processor chips embedded in many products
and computers and operating systems that are not Year 2000 compliant
are unable to distinguish between the calendar year 1900 and the
calendar year 2000. The Year 2000 Issue creates potential risks for the
Company, including potential problems in the Company's products as well
as in the Information Technology ("IT") and non-IT systems that the
Company uses in its business operations. The Company may also be
exposed to risks from third parties with whom the Company interacts who
fail to adequately address their Year 2000 Issues. The Company has
recognized the need to ensure that its business operations will not be
adversely affected by the upcoming calendar year 2000 and is cognizant
of the time sensitive nature of the Year 2000 problem. In 1996, the
Company began a project to implement a global enterprise resource
planning system. The Company has completed this implementation at all
manufacturing locations and many of the sales and service subsidiaries
around the world. The Company's key non-compliant IT systems remaining
are in the United Kingdom and implementation is scheduled for September
6, 1999.
16
<PAGE> 18
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 is not
completed in a timely manner, there may be an interruption in, or
failure of, certain normal business activities or operations. This
risk includes unforeseen delays in the implementation of the Company's
enterprise resource planning system. Such interruptions, failures or
delays in implementing the enterprise resource planning system could
have a material adverse impact on the Company's consolidated results
of operations and financial condition, or on its relationships with
customers, suppliers or others.
17
<PAGE> 19
The Company's Contingency Plans
The Company expects to have developed by September 30, 1999, or shortly
thereafter, a comprehensive contingency plan to address situations
that may result if the Company or any of the third parties upon which
the Company is dependent is unable to achieve Year 2000 readiness. The
Company's Year 2000 compliance program is ongoing and its ultimate
scope, as well as the consideration of contingency plans, will
continue to be evaluated as new information becomes available.
Year 2000 Forward-Looking Statements
The foregoing Year 2000 discussion contains "forward-looking
statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such statements, including without limitation,
anticipated costs and the dates by which the Company expects to
complete certain actions, are based on management's best current
estimates, which were derived utilizing numerous assumptions about
future events, including the continued availability of certain
resources, representations received from third parties and other
factors. However, there can be no guarantee that these estimates will
be achieved, and actual results could differ materially from those
anticipated. Specific factors that might cause such material
differences include, but are not limited to, the ability to identify
and remediate all relevant IT and non-IT systems, results of Year 2000
testing, adequate resolution of Year 2000 Issues by businesses and
other third parties who are service providers, suppliers or customers
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.
18
<PAGE> 20
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
Except for historical matters, the matters discussed in this Form 10-Q
are forward-looking statements which reflect the Company's current
views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and
uncertainties which could cause actual results to differ materially
from historical results or those anticipated. Readers are cautioned
not to place undue reliance on these forward-looking statements, which
speak only as of their dates. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. The following
factors could cause actual results to differ materially from
historical results or those anticipated: 1) changes in international
operations 2) exchange rate risk 3) market conditions for the
Company's products 4) the Company's ability to provide innovative and
cost-effective solutions 5) development risks 6) competition and 7)
changes in the economic climate.
19
<PAGE> 21
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Note: Unless otherwise indicated below, the
following Exhibits were filed with the
original Report and are not being
re-filed with this Amendment.
10a) Vice President Level Employees and Officers
Supplemental Employee Retirement Plan and
representative forms of agreement
thereunder.
27) Financial Data Schedule (for SEC use only)
(Amended schedule is filed herewith).
b) Reports on Form 8-K:
On March 2, 1999, the Company filed a current report
on Form 8-K with respect to a change in the
Company's certifying accountants.
20
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SENSORMATIC ELECTRONICS CORPORATION
By: /s/ GARRETT E. PIERCE
----------------------------------
Garrett E. Pierce
Senior Vice President, Chief
Administrative Officer and
Chief Financial Officer
(Principal Financial Officer)
Date: August 17, 1999
21
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