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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(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, 2000
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)
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<S> <C>
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)
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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 [ ] No [X]
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 19, 2000 was $1,141,776,708.
As of September 19, 2000, there were 77,109,340 shares of the Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive proxy statement for the Company's 2000 Annual Meeting of Stockholders
(incorporated in Part III to the extent provided in Items 10, 11, 12 and 13
hereof).
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Sensormatic Electronics Corporation is the global leader in electronic security.
We develop, manufacture, market, distribute and service the most advanced lines
of integrated security products for article protection, video surveillance,
access control and asset tracking. We have three product divisions: electronic
article surveillance ("EAS") systems, video systems, including closed circuit
television ("CCTV"), and access control and asset tracking and management
systems. Our EAS products include reusable hard tags and disposable labels used
with our detection and deactivation systems. Our video systems include various
types of micro-processor-controlled CCTV cameras, digital recording devices and
monitoring systems. Our access control and asset management systems provide
intelligent tagging, tracking and access systems to monitor the movements of
people and/or assets.
We have maintained our focus on developing products and services that directly
answer the diverse requirements of our extensive customer base. During the past
year, we issued more than 60 new product releases. Our customers include 93 of
the top 100 retailers in the world, as well as more than half of the Fortune 500
companies. We have created an unmatched selection of integrated security
solutions to traditional security problems in a wide range of industries. At the
same time, we are introducing advanced product applications and "suites" for the
extended security needs of modern businesses, with their complex, geographically
distributed operations, facilities and supply chains.
Established in 1966, we employ approximately 5,500 individuals. We have one of
the largest network of sales, service and support professionals in our industry,
along with an extensive network of third party dealers and distributors, meeting
the needs of customers in 113 countries. We operate in two geographically
segmented business units and reportable business segments: Americas (including
North and Latin America) and EMEA (including Europe, the Middle East, Africa and
Asia Pacific).
Certain information about our reportable segments is contained in Note 14 of
Notes to Consolidated Financial Statements under Item 8 of this report.
Our principal executive offices are located at 951 Yamato Road, Boca Raton,
Florida 33431-0700 (561-989-7000). As used in this report, the terms "we", the
"Company" and "Sensormatic" refer to Sensormatic Electronics Corporation and its
subsidiaries unless the context indicates otherwise.
BUSINESS STRATEGY
Our core strategy is to continue to build products and deliver services that our
customers want, and to continually develop new products and applications to
anticipate and meet their expanding needs. We believe that the successful
implementation of our restructuring and infrastructure rebuilding programs over
the past several years, and the reorganization of business units effected in
fiscal 2000, provide a solid foundation for renewed controlled growth.
Today's security applications primarily involve automatic sensing of articles
and people: EAS, video surveillance and digital recording, access control, and
article tracking. We are in the process of expanding these traditional security
applications into a comprehensive securing of today's business under the
"Sensormatic" brand. This would include fields such as operations management,
inventory control, intelligent EAS, monitoring services, and auto ID. As part of
this transition, we have adopted the marketing phrase "from Today's Security
Business to Securing Today's Business."
Extended Security Technologies. In order to deliver these expanded products and
services, we plan to develop a fully integrated suite of products and
knowledge-based technologies that we are calling Extended Security
Technologies(TM), or EST(TM). Our existing products form the backbone for EST.
For example, we already sell and install EAS systems integrated with video,
digital video management and access control technologies. Our SensorID Group is
designing products that integrate the data collection and tracking
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capabilities of radio frequency identification ("RFID") with the security
capabilities of our acousto-magnetic Ultra-Max(R) EAS technology. We anticipate
that our Extended Security Technologies will have retail applications such as
self-checkout, enhanced inventory management, stock cycle counts and combating
theft and returns fraud, while manufacturers will be able to use them for
process and quality control, productivity assessment, anti-diversion and
inventory tracking.
In order to achieve our goals, we plan to develop and acquire new product
technologies by
- Significantly expanding research and development. Over the next three
fiscal years, we expect to increase our investment in research and
development from 2.6% in fiscal 2000 to 5% of revenues;
- Continuing to partner with leaders in complementary technologies in order
to expand the capabilities we can offer customers. For example, using
technology developed with one of these partners, our customers can mine
digitized video over the Internet; and
- Making strategic and/or technology-based acquisitions. We recently
acquired companies with cutting-edge video management, object tracking
and Internet video transmission technology, and anticipate making further
acquisitions to supplement our internal research and development.
We work closely with our customers to customize our products in response to
their requirements. During the past year, we have adapted and customized outdoor
EAS systems for use in garden centers and other outdoor merchandisers, a
hand-held deactivator for mass merchandisers and a customized Ultra-Max EAS
label for the book industry. In addition to assuring a satisfied customer, these
initiatives enable us to offer the marketplace the products it wants.
Delivering Superior, Value-Added Service. Reinforcing our commitment to
delivering superior service to our customers, we formed Global Services as a new
business unit to ensure the delivery of quality products and services worldwide.
We intend to make the Global Services business unit profitable for fiscal 2001.
Source Tagging. A major catalyst for the growth of our EAS product line is our
Source Tagging business. Source tagging means applying anti-theft labels to
products or packaging as part of the manufacturing or packing process. Source
tagging permits retailers to receive products pre-tagged with electronic
security devices, so they can speed merchandise to the selling floor and permit
their personnel to focus on customer service. Source tagging also presents
advantages for manufacturers by making their products more attractive to their
retail customers and, by permitting the open display of their merchandise,
increasing sales.
Our Ultra-Max technology is particularly well-suited to source tagging. In 2000,
Ultra-Max source tagging programs were adopted or significantly expanded by a
number of major retailers, including Wal-Mart, CVS, Kmart and The Home Depot,
and it has been recommended by numerous trade associations around the world,
including those representing the music, DVD, perfume and "do-it-yourself"
industries. Our source tagging programs were a major factor in the strong growth
in sales of our Ultra-Max labels, with more than 1.65 billion labels sold for
source tagging in 2000. These programs are also a major source of recurring
revenues.
BUSINESS ORGANIZATION
The Company is organized into two principal geographical sales organizations,
which are the Company's reportable segments: Americas (including North and Latin
America) and EMEA (including, Europe, the Middle East, Africa and Asia Pacific).
These geographical sales organizations are responsible for bringing to market to
all customers within their respective regions all of the Company's products and
services. The Company is also organized into four Global Divisions: Electronic
Article Surveillance (EAS), Access Control, Video Systems and Global Services.
All of the Company's products are supported by an extensive quality control
program and supply chain management. Sensormatic formed its SensorID Group to
explore the many possible applications of combining radio frequency
identification technology with Ultra-Max to address the needs of the extended
supply chain. The recently formed Global Services Division has as its mission to
ensure the delivery and installation of quality products and services worldwide.
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PRINCIPAL PRODUCTS AND SYSTEMS
Our products and systems are focused in three general categories:
- EAS systems and devices. These consist of electronic detection units
which work in conjunction with specially designed reusable tags and/or
disposable labels and label deactivation units. Benefit denial products,
which render stolen merchandise damaged or unusable, can be used in
conjunction with EAS systems or separately. These systems and devices are
most commonly used by retailers to help prevent shoplifting, reduce
inventory shrinkage and enhance or improve merchandising of products.
- Video systems. These consist of computer controlled CCTV cameras
integrated with sophisticated video switching digital video management,
and remote transmission products. With our recent acquisitions, we have
also expanded our expertise in digital video processing and transmission
equipment as well video management and object tracking. All of these
systems are used to monitor activity throughout an organization for
operational safety and/or theft deterrence and detection purposes.
- Access control and asset management systems. These 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.
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 onto floors as freestanding pedestals or
concealed in or under floors, mounted on walls or hung from ceilings. They 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 can sound an alarm, activate a light,
display and record an electronic message or otherwise indicate 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 checkout area or coordinated with a checkout
scanner 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, we offer our proprietary
technologies as well as every other major EAS technology type available. A
description of the principal EAS technologies, as well as our systems and
products incorporating such technologies, follows:
Ultra-Max 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(R), Sensor-Max, Mega-Max, MAX Checkout(TM), Ultra-Post(TM), Rapid
Pad(TM), ScanThru(TM), and ScanMax(TM). The versatility of Ultra-Max enables it
to protect assets, merchandise, people, property and information for all retail
segments including department stores, supermarkets, do-it-yourself, drug and
apparel specialty stores. The success of Ultra-Max is attributable to its unique
combination of features, including unobstructed coverage of wide exits, a high
"pick rate" or ability to detect labels or tags, virtually no false alarms, ease
of deactivation, ability to be reactivated, and ability to work in close
proximity to metal and liquids. 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
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wide range of packaging materials and product substances, including foil and
metal, are unaffected by moisture, can be activated and de-activated as required
and are well suited for application in high-speed manufacturing processes.
SensorStrip(TM) Checkout systems utilize proprietary advanced magnetostrictive
technology and standard low frequency electromagnetic technology. These systems
were designed to protect high-theft items in supermarkets and hypermarkets. The
magnetostrictive technology sold by the Company includes SensorStrip Checkout
and SensorStrip Checkout Plus. The SensorStrip Checkout Plus, a relatively
narrow exit system, 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 floor or
ceiling mountings which allow for wide exit, flexible installations which can
fit in multiple store configurations, and a variety of lightweight tags and
labels. Existing microwave system installations represent a large potential for
upgrades to Ultra-Max.
Swept-RF or swept radio frequency systems utilize low radio frequency technology
and are principally used to cover single door exits. We distribute swept-RF
labels from an independent European RF label manufacturer.
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. Our Inktag(R),
SensorInk(TM) and Microlock(R) products are part of a family of benefit denial
products. The Inktag and SensorInk products are fastened to clothing and other
soft goods in the retail market. When unauthorized removal of an Inktag or
SensorInk unit is attempted, the vials of ink inside the unit break and stain
the merchandise. The Inktag and SensorInk 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.
Video Systems
Video 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,
correctional facilities, airports and numerous other facilities. Our video
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 video products and systems offered by the Company.
Video cameras can be used indoors and outdoors to monitor, investigate and
record events. We offer many types of cameras, including fixed cameras,
pan/tilt/zoom devices and the more sophisticated SpeedDome(R) Ultra and
DeltaDome(TM) advanced programmable dome cameras. These digital cameras are
available in high-resolution color or monochrome formats. The programmable domes
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. The domes may be integrated with other
Sensormatic products to create a more comprehensive overall security program.
Matrix switcher/controller systems 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 matrix switcher/controller systems, ranging from systems which can
support up to sixteen cameras to more complex systems, which support more than
8,000
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cameras. Matrix switcher/controller systems include high-end systems such as the
MegaPower(TM) 1024 (8,192 cameras/128 monitors) and AD168 (168 cameras/24
monitors) used in large, complex configurations, and the more retail-oriented
family of products consisting of View Manager(R)16 ("VM16") and View Manager(R)
96 ("VM96"), which when used with a Touch Tracker(R) controller, can control 16
and 96 cameras, respectively.
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) brand names. These video transmission systems are PC based and can
be operated over standard telephone lines or the ISDN ("Integrated Services
Digital Network") lines, allowing users to view video images and/or control and
operate cameras, alarm inputs, and relay controls from remote locations.
SensorLink PC and HyperScan 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 1997 "Judge's
Choice" award of the Security Industry Association ("SIA"), 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. Our
Integra(TM) digital time-lapse recorder, which uses DVD-RAM disk technology to
provide outstanding image quality, won the 2000 SIA "Judge's Choice" award.
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. These versatile systems
can also be integrated with ERP (enterprise resource planning) systems providing
shared information across many applications.
The Company offers a full line of access control systems to address a wide range
of customers and their requirements. Systems include the C-CURE(R) 800, a
scaleable access control and security management system that monitors and
controls entrances and exits with fully embedded photo imaging, e-mail and
broadcast paging as well as RFID asset tracking and integrated CCTV; and
C-CURE(R) 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. The Company also
recently introduced a new intelligent modular controller, iSTAR(TM). iSTAR is
the first access control controller to use Windows(R)CE and a Motorola Power
PC(TM) and can operate over a standard network allowing it to exchange
information with other building management systems.
The Company continues to develop advanced technology in the area of asset
tracking with RFID. These systems will combine the power and flexibility of the
Company's C-CURE access control management and reporting system with RFID
readers or sensors for the purpose of reading and tracking "smart" tags. These
smart tags are RFID transponders that are attached to, or imbedded within,
employee access control badges, high value assets, vehicles or other objects.
These systems are intended to 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.
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Furthermore, asset management systems are new and important initiatives within
Sensormatic, which will utilize "smart" tags that combine the security benefits
of conventional EAS tags with the intelligence capabilities of RFID technology.
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 are intended to 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 a variety of applications 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's SensorID Group is currently testing the newly combined RFID and
Ultra-Max technology called smartEAS(TM) and is in discussions with a wide range
of customers to develop the next applications.
Consolidated reported revenues by principal products and systems for the years
ended June 30, 2000, 1999 and 1998 are presented below. The reported amounts,
for all principal products and systems, were negatively impacted by foreign
currency fluctuations. Eliminating the impact of foreign currency fluctuations,
total revenues increased 12% in fiscal 2000 and 6% in fiscal 1999.
CONSOLIDATED REVENUES BY PRINCIPAL PRODUCTS AND SYSTEMS
YEARS ENDED JUNE 30,
($ in millions)
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2000 1999 1998
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EAS(1)...................................................... $ 601.0 $ 548.2 $539.8
Video Systems............................................... 293.9 292.3 307.1
Access Control and Asset Management......................... 48.8 45.0 32.6
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Subtotal.......................................... 943.7 885.5 879.5
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Installation, Maintenance and Other......................... 156.3 132.0 107.4
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Total............................................. $1,100.0 $1,017.5 $986.9
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(1) Increases in Ultra-Max revenue of 20.9% in fiscal 2000 and 11.9% in fiscal
1999, 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
We market our EAS products and systems principally to retailers. Many retailers
have made the use of EAS systems 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 entertainment
stores have increasingly become users of EAS products and systems. We believe
that we hold a significant market share of this worldwide EAS market. Retailers
also make extensive use of video systems to enhance security and the safety of
their operations, and also utilize access control systems.
In addition to retail applications, our Ultra-Max technology and several of our
other EAS technologies are used in non-retail applications to protect assets
such as personal computers, facsimile and copy machines,
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telephones, artwork, limited access files and portable laboratory equipment and
tools from loss by unauthorized removal.
Non-retail installations of our video, access control and/or asset management
products and systems range from small to medium size businesses to large
domestic and international operations and businesses. We sell our products into
these industry segments primarily through an indirect global network of dealers
and distributors. We engage in various direct advertising and marketing
activities to stimulate demand for our products and partners with the dealers
and distributors to fulfill the needs of end-user customers. We have been
selected as the security provider of choice by many of the world's leading trade
organizations, retailers, manufacturers and corporations, as well as by major
event committees such as those responsible for the Expo 2000 World's Fair in
Hanover, Germany. The Company is also the Official Electronic Security Sponsor
and Supplier of the 2002 Olympic Winter Games in Salt Lake City, Utah, and
Official Electronic Security Supplier of the U.S. Olympic Team throughout 2004.
We are continuing to add to our broad range of electronic security products and
systems to offer our outstanding customer base of 93 of the top 100 retailers in
the world, as well as more than half of the global Fortune 500 companies - an
unmatched selection of integrated security solutions to traditional security
problems in a wide range of industries. At the same time, we are introducing
advanced product applications and "product suites" for the extended security
needs of modern businesses, with their complex, geographically distributed
operations, facilities and supply chains, in order to meet our goal of Securing
Today's Business.
Marketing Strategies
The Company's principal marketing strategies are as follows:
Recurring label sales
The sale of EAS systems and devices to hard goods retailers has been growing
significantly in recent years and we believe that there is potential for
continued growth. Hard goods merchandise is protected with labels, that can be
deactivated at the point of sale and then leave the store with the merchandise,
representing a source of recurring revenues. Labels may be self-adhesive,
stick-on labels, which are attached to merchandise by the retailer or source
tags applied at the point of manufacture or distribution.
Source tagging
We have formed relationships with manufacturers and packaging companies, as well
as increasing numbers of our major retail customers around the world to apply
EAS labels during manufacturing or packaging processes. Virtually all retail
segments, including discount, drug stores, hypermarkets, food, multi-media, home
improvement and automotive parts stores, are now covered by these programs.
Source tagging helps retailers increase product sales and profitability through
open merchandising and product exposure, reduced shrinkage, and reduced costs by
eliminating the need for store personnel to apply security tags and labels to
merchandise. Currently, thousands of vendors worldwide have participated in
source tagging with the Company's EAS technologies. The Company estimates that
in fiscal 2000, these suppliers provided U.S. and international retailers with
more than 1.65 billion source tagged items, which represent 40% of total Company
EAS label sales. Source tagging programs are expected to grow at a rapid pace in
fiscal 2001. The increased utilization of source tagging is expected to result
in increased label sales and/or royalty income as well as increased sales of
systems and deactivators.
Licensing label production
The Company has entered into a license agreement with a leading label producing
company to manufacture the Company's Ultra-Strip labels. 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. These programs are intended to result in a broader distribution of
Ultra-Strip labels and, therefore, facilitate the growth of Ultra-Max
technology. Royalty fees to be paid to the Company based on sales generated by
the licensees will provide recurring revenue to the Company.
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Product choice
While our proprietary Ultra-Max technology is our most advanced EAS technology,
offering an unmatched combination of wide exit coverage, high "pick rate"
versatility and virtually no false alarms, we recognize other technologies may
be preferred by some customers. Accordingly, we offer a broad range of EAS
technologies in order to comply with the customer's specific needs.
Providing Extended Security Technologies under the Sensormatic Brand
Our ultimate objective is to build on our strong base of traditional electronic
security products to offer a fully integrated suite of products and
knowledge-based technologies -- Extended Security Technologies. These products
and technologies, which will be consolidated and marketed under the Sensormatic
brand name, will be designed to meet the expanded security and operational needs
of today's businesses.
SALES AND SERVICE ORGANIZATION
At June 30, 2000, the Company employed approximately 2,400 sales and customer
engineering personnel worldwide to market and service its products directly to
retail and non-retail 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
numerous 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 presently markets its products directly in more than 29 countries
throughout North America, Europe and certain Asia/Pacific and Latin American
countries, and sells its products to dealers and distributors in more than 84
other countries. The Company will continue to explore expanding into additional
countries in the Middle East, Latin America, Asia, Africa and Eastern Europe
using similar distribution arrangements.
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 the 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. The Company has an indirect sales
force dedicated to supporting its dealers and distributors in promoting the
Company's products and engages in international marketing.
The Company has organized its customer service engineering force into a separate
Global Services Division, to provide the delivery and installation of quality
products and services worldwide.
BACKLOG
As of June 30, 2000 and June 30, 1999, the Company had a backlog of orders of
$42.6 million and $51.9 million, respectively. Backlog includes only expected
revenues from firm orders, which are expected to be installed or delivered
within one year. 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 our business is not necessarily seasonal, it has been our experience,
with respect to worldwide retail customers, that new orders and installations
generally decrease during the December through February period. We believe this
is attributable to the focus by retail store management on 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.
9
<PAGE> 10
PATENTS AND RELATED RIGHTS
As of June 30, 2000, the Company owned or was the exclusive licensee of 296
active patents issued by the U.S. Patent and Trademark Office (as well as 596
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 video systems and components. The Company had
730 patent applications pending in the U.S., and corresponding patent
applications pending in various foreign countries, for various other inventions
relating to its products. There can be no assurance that any patents will be
issued to the Company on any of its pending 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
The Company's major production facilities are located in Puerto Rico, Florida
and Ireland. The Company also has a manufacturing facility in Brazil and does
limited final assembly and testing at its San Diego facility. The Puerto Rico
facility is the Company's largest and accounts for two-thirds of the Company's
manufacturing personnel. The Boca Raton, Florida facility specializes in EAS
label production. The operation in Cork, Ireland allows the Company to
manufacture a wide range of products closer to its large European customer base.
Fabrication of many access control products is sub-contracted to local
manufacturing facilities near the access control division located in
Massachusetts, while most hard tag production is sub-contracted to low cost,
high quality suppliers in Mexico and China.
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. A
core supplier base of approximately 140 major suppliers, representing 97% of
purchasing dollars, has been established worldwide to maintain a generally
reliable flow of quality materials at the lowest possible cost. Certain magnetic
materials used in the manufacture of Ultra-Max labels and tags are currently
purchased from one supplier. While there are potential alternatives to the
supply of such material by that supplier, the loss or disruption of this source
of supply could result in increased costs or product shortages or otherwise
materially adversely affect the Company's business. The Company has been
pursuing development of alternative materials for use in the Company's Ultra-Max
labels and additional sources of supply.
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's consolidation program for its warehousing and distribution
locations, which commenced during fiscal year 1998, was substantially completed
during fiscal 2000. This program leverages the use of third party logistics
service providers, enabling the Company to capitalize on "best in class"
logistics services and resources. The number of warehouse locations was
significantly reduced.
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<PAGE> 11
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, video, and access control systems. These alternatives include guards and
private detective services, mirrors, burglar alarms and other magnetic and
electronic devices, and services combining some or all of the above elements. A
number of other companies market EAS equipment to retail stores directly or
through distributors, including Sentry Technology Corporation in the U.S.,
Checkpoint Systems, Inc. (including its recent acquisition of Meto AE) in the
U.S., Europe, Latin America and Asia and Nedap B.V. in Europe, all of which are
principal competitors of the Company. With respect to video system components,
there are numerous companies, including Philips, Panasonic, Pelco and Vicon,
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, as well, including Cardkey Inc., Westinghouse Electronic
Corporation, Northern Computers Inc. and Casi-Rusco Inc.
Sensormatic competes in marketing its systems and products principally on the
basis of:
- product performance
- multiple technologies
- integrated security solutions
- service
- price
Price competition has been intense in recent years and could adversely affect
our business. In addition, either of the following could adversely affect our
business.
- Other firms with greater financial and other resources could enter into
direct competition, or expand the scope of their existing competition,
with us.
- New technologies could be developed and introduced into the marketplace.
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. Installment contract 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. It is the
Company's policy to securitize sales-type leases. 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, 2000, 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
We have historically maintained a high level of accounts receivable and
sales-type leases outstanding, measured as a percentage of revenues. One reason
for this is that a key element of our marketing strategy is to increase market
penetration by providing alternative financing options to our retail customers.
These
11
<PAGE> 12
alternatives include deferred billing and long-term installment sales and lease
terms, and they result in extended accounts receivable recovery periods.
Additionally, the Company has experienced a historical pattern of delayed
payments by certain retail customers. As a result, our levels of receivables
past due represent a relatively high percentage of total receivables. This
strategy has given us a competitive marketing program and has helped us
penetrate markets and increase customer loyalty and commitment to Sensormatic.
Our ability to pursue such a strategy results from our relatively high gross
profit margins and the financing programs we have put in place which allow us to
sell our customer receivables and leases and thereby monetize the accounts
receivable.
PRODUCT RESEARCH, DEVELOPMENT AND ENGINEERING
Over the past decade, research, development and engineering expenses have
trended upward. 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 and replacement of less effective products in all
product categories continues to be a high priority for the Company. During
fiscal 2000, the Company introduced more than 30 new or enhanced EAS products,
while eliminating 30% of its older product portfolio. Additionally, during
fiscal 2000, the Company introduced more than 30 new or enhanced video and
access control products.
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, digital storage video
compression technology, RF data transmission and software development skills.
Several of the Company's EAS systems depend on the use of magnetic materials and
the Company has liaisons with many key research centers throughout the world.
Software is another major element in the Company's new product designs and
manufacturing processes.
In fiscal 2000, 1999 and 1998, the Company incurred approximately $30.8 million,
$25.8 million and $27.2 million, respectively, for research, development and
engineering costs. The reduced level in fiscal 1999 when compared to 1998 was
due to the Company's efforts to outsource certain products resulting in a
reduction in the associated research, development and engineering expenses.
During fiscal 2001, the Company expects spending for research, development and
engineering to increase approximately 25%.
GOVERNMENTAL REGULATION
The sale and use of our products are subject to regulation by a number of
governmental authorities. These include authorities with jurisdiction over the
sale and use of electronic and communications equipment, as well as authorities
in charge of health and safety standards.
Our products comply with the governmental requirements and standards, which are
currently applicable in the U.S. and other countries where Sensormatic markets
products directly or through its subsidiaries. Our products also comply with
standards in a number of other countries where our products are marketed through
distributors.
EMF Emission
Electromagnetic field ("EMF") emissions from our EAS systems are within the
levels permitted by the current U.S. governmental safety standards for this type
of equipment. While we cannot assure that more restrictive EMF standards will
not be adopted in the U.S., we believe that the EMF levels generated by the EAS
systems that we market will remain within any new EMF safety standards which may
be established.
In Europe, where we have a high level of business activity, we are participating
actively in the development of evolving technical standards by CENELEC (European
Committee for Electrotechnical Standardization) and ETSI (European
Telecommunications Standards Institute). In order for us to apply the CE Mark,
which is required by the European Union ("EU"), our products must meet the
standards established by CENELEC, ETSI and other standard-setting organizations.
New standards were introduced in 1996 to apply the CE Mark, and our products
were certified to those standards.
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<PAGE> 13
In 1999, the EU Council of Health Ministers recommended new basic guidelines for
exposure to EMF emissions. The guidelines state that standards for
implementation must be developed by EU member states and/or bodies such as
CENELEC. These standards would relate to measurement methods, duration of
exposure and other criteria, and would be subject to adoption, and possible
modification, by individual countries. We are actively working with CENELEC to
help develop such standards relating to EAS and related products. We expect that
the products we market will comply with the standards that are developed to
implement the basic guidelines, as and when such standards are adopted by the
individual EU countries.
FDA Activities
The U.S. Food and Drug Administration ("FDA") has been examining the effects of
various devices, including EAS systems, on implantable medical devices (such as
pacemakers). The FDA has issued a physician advisory letter and an industry
guidance document 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 and, subsequently, 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 Sensormatic and the
International Electronic Article Surveillance Manufacturers Association (of
which Sensormatic is a member), have long offered the same "don't linger/don't
lean" advice as was given by the FDA. An American Heart Association Science
Advisory also agreed with the FDA recommendations, as have statements issued by
the European Society of Cardiology and the U.K. Medical Devices Agency.
We are also aware of other studies of whether any hazards are posed to wearers
of implantable medical devices by EAS systems. We believe that there is
substantial evidence that no health hazard is posed by the interactions between
our EAS systems and such medical devices, including opinions expressed by
leading physicians. We have presented such evidence to the FDA, and offer such
evidence to persons conducting such studies. However, we cannot assure 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.
We are also aware of prior attempts by one of our competitors to generate
adverse publicity regarding this issue. We cannot assure that such attempts will
not adversely affect the Company.
Continuing Review
Governmental bodies, as well as standard-setting organizations such as CENELEC,
ETSI and others, are continually considering the establishment of new standards
and reconsidering existing standards relating to products and health and safety
issues. We cannot assure that adverse changes in applicable standards will not
occur or that new and adverse standards will not be adopted. Similarly, we
cannot assure that our products will meet all applicable regulations and
standards in all countries where we wish to market our products.
EMPLOYEES
As of June 30, 2000, the Company employed approximately 5,500 persons worldwide.
The Company also uses temporary staff, particularly in manufacturing areas, to
balance workload during peak periods.
ITEM 2. PROPERTIES
Domestically, the Company owns or leases facilities in Florida, Georgia, Puerto
Rico, California, Massachusetts, and New York for executive, marketing, product
development, manufacturing and warehousing activities. The Company also leases
space in various locations throughout the U.S. for sales and customer
engineering offices and warehouse space in order to most effectively serve its
customers.
The Company's international subsidiaries own or lease office and warehouse space
for their operations. The principal facilities are located in Argentina,
Australia, Belgium, Brazil, Canada, France, Germany, Ireland,
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<PAGE> 14
Italy, Mexico, The Netherlands, Singapore, Spain, Sweden and the U.K.
Additionally, the Company sub-contracts manufacturing in Mexico and China.
The Company considers its key properties identified above as suitable to its
business and, in general, adequate for its current and near-term needs.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information as of September 19, 2000 with respect
to the executive officers of the Company.
<TABLE>
<CAPTION>
OFFICER
NAME AGE SINCE POSITION
---- --- ------- --------
<S> <C> <C> <C>
Per-Olof Loof.......................... 49 1999 President and Chief Executive Officer
Gregory C. Thompson.................... 45 1997 Vice President, Controller and Acting Chief
Financial Officer
Jerry T. Kendall....................... 57 1993 Executive Vice President, Americas
John P. Smith.......................... 52 1999 Executive Vice President, Europe, Middle East,
Africa and Asia/Pacific (EMEA)
Theodore K. Bullock.................... 54 2000 Senior Vice President, Global Services
Stephan G. Cannellos................... 47 1999 Senior Vice President, Access Control Division
Thomas E. Cashman...................... 40 2000 Senior Vice President, Video Systems Division
Kenneth W. Chmiel...................... 56 1997 Senior Vice President, Supply Chain Operations
and EAS
Dennis Constantine..................... 59 1999 Senior Vice President, Business Development and
Operations
David Bruce Gant....................... 49 2000 Senior Vice President, Human Resources
Thomas F. Donahue...................... 50 1999 Vice President and Treasurer
Walter A. Engdahl...................... 62 1992 Vice President, Corporate Counsel and Secretary
</TABLE>
The terms of office of each of the officers, pursuant to the By-Laws of the
Company, will continue until the next Annual Meeting of the Board of Directors
(to be held after the next Annual Meeting of Stockholders) and until a successor
is elected and qualified.
Per-Olof Loof joined the Company as President and Chief Executive Officer in
August 1999. Prior to joining the Company, Mr. Loof served as Senior Vice
President in charge of Financial Services Group, the largest division in NCR.
Prior to joining NCR, Mr. Loof was President and CEO of AT&T ISTEL Corp., a
leading Europe-based system integrator. Prior to AT&T, Mr. Loof spent twelve
years with Digital Equipment Corp., holding a variety of management positions,
including Vice President, Sales and Marketing for Europe and Vice President,
Financial Services Enterprises.
Gregory C. Thompson joined the Company as Vice President and Controller in 1997.
In August 2000, Mr. Thompson was appointed to the position of Acting Chief
Financial Officer. From 1990 to 1997, Mr. Thompson was with Wang Laboratories
where he progressed from Assistant Controller to Vice President and Corporate
Controller. Wang Laboratories, a high-technology company, specializing in
software and services, was acquired, in June 1999, by Getronics N.V., a company
headquartered in the Netherlands
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<PAGE> 15
focusing on computer-related services. From 1984 to 1990, Mr. Thompson was with
Price Waterhouse. From 1977 to 1984, Mr. Thompson was with Coopers & Lybrand.
Jerry T. Kendall joined Sensormatic as Senior Vice President -- Sales, Marketing
and Service of Security Tag Systems, Inc., which was acquired by the Company
during fiscal 1993, and was appointed Vice President of Marketing in September
1993. In 1996, Mr. Kendall was appointed Senior Vice President and President
North America Retail Operations, with responsibilities to lead the retail
business unit field sales, service and administrative organization in the U.S.
and Canada. In December 1999, Mr. Kendall was appointed Executive Vice President
of Americas.
John P. Smith joined the Company in September 1998 as Vice President,
International Retail Operations. In January 1999, he was appointed Senior Vice
President and President of Europe Operations. In December 1999, Mr. Smith was
appointed Executive Vice President of EMEA. Prior to joining the Company, Mr.
Smith was Managing Director, Chubb Electronic Security U.K. Ltd., which is a
division of Williams plc, a global security company. Before joining Chubb
Electronic Security U.K. Ltd., Mr. Smith was Chief Operating Officer for
Automated Security Holdings (ASH) plc U.K.
Theodore K. Bullock was appointed to the newly created position of Senior Vice
President of Global Service in July 2000. Mr. Bullock comes to the Company from
UNISYS Corporation's Global Network Services where he was Group Vice President
and General Manager of Global Professional Services. Mr. Bullock began his
career with UNISYS in 1969 when he joined Sperry Rand Corporation as a systems
analyst and consultant. Over the next 15 years, he ascended through several
management positions in the Sperry Univac Professional Services organization and
subsequently was promoted to key management positions in Sperry's Maintenance
Services organization. Mr. Bullock was named Vice President of Global Operations
in 1994, and was given his professional Services responsibilities in 1998.
Stephan G. Cannellos joined the Company in August 1998 as Vice President and
General Manager of the Access Control Division. In October 1999, Mr. Cannellos
was appointed Senior Vice President of the Access Control Division and SensorID
Group. Prior to joining the Company, from August 1993 to August 1998, Mr.
Cannellos was Vice President and General Manager of LASER Systems
Group -- General Scanning.
Thomas E. Cashman returned to Sensormatic as Senior Vice President of Video
Systems Division in August 2000. Mr. Cashman had originally joined the Company
with the acquisition of Robot Research in 1993 where he served as President and
COO. After the acquisition, he became Vice President and General Manager of the
San Diego-based division. In 1998, Mr. Cashman left the Company to become Chief
Executive Officer of Dedicated Microcomputers Group, Ltd., in Manchester, U.K.
Kenneth W. Chmiel joined the Company in July 1997 as Senior Vice President of
Supply Chain Operations and is responsible for managing product manufacturing
and distribution. In May 1999, his role was expanded to include the EAS product
division. Prior to joining the Company, Mr. Chmiel served as Executive Vice
President and Chief Operating Officer of Amerail/Morrison Knudsen Corporation's
Transit Systems Group from 1993, and as Executive Vice President of the
Manufacturing Group from 1990. From 1973 to 1989, Mr. Chmiel held a number of
different management positions with AlliedSignal.
Dennis Constantine joined the Company in April 1997 as Vice President and
General Manager of the EAS Product Company. In May 1999, Mr. Constantine was
appointed Senior Vice President -- Operations. Prior to joining the Company, he
was with Recognition International Inc. for seven years where he progressed from
Division President, Systems Division to Division President, OEM and Technology
Division. Recognition International Inc., which merged with Banctec Corporation,
is an international provider of document processing hardware, software and
services.
David Bruce Gant joined the Company in May 2000 as Senior Vice President, Human
Resources. From 1998 to the date he joined the Company, Mr. Gant was Corporate
Vice President of Human Resources for American Power Conversion Company, a $1.3
billion electronics company producing uninterrupted power supplies, surge
protection devices and related software. Prior to working with American Power
Conversion Company, Mr. Gant spent twenty years with Hewlett-Packard Company in
a variety of increasingly responsible positions within the Human Resources
organization.
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<PAGE> 16
Thomas F. Donahue joined the Company in September 1999 as Vice President and
Treasurer. From December 1997 to August 1999, Mr. Donahue was Vice President and
Treasurer of Citibank Universal Card Services Corporation, a $17 billion asset
credit card company. From January 1990 to November 1997, Mr. Donahue held
various financial management positions, most recently as Assistant Treasurer,
with AT&T Universal Card Services.
Walter A. Engdahl was appointed Vice President -- Corporate Counsel of the
Company in February 1992 and became Secretary of the Company in 1993 and General
Counsel in 1999. He is a member of the Bars of both Florida and New York.
None of the above executive officers has any family relationship with any other
director or executive officer of the Company.
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<PAGE> 17
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 2000
First Quarter.......................................... $14 1/2 $11 1/8
Second Quarter......................................... 17 15/16 10 1/2
Third Quarter.......................................... 22 7/8 15
Fourth Quarter......................................... 23 3/16 14 1/16
FISCAL 1999
First Quarter.......................................... $15 1/16 $ 5 3/16
Second Quarter......................................... 8 1/8 3 3/16
Third Quarter.......................................... 11 7/16 7 5/8
Fourth Quarter......................................... 14 7/16 9 3/16
</TABLE>
As of September 19, 2000, there were 3,453 shareholders of record of the
Company's Common Stock.
The Company did not pay any dividends on the Common Stock during fiscal 2000 or
fiscal 1999. Under certain of the Company's financial agreements, the Company is
only permitted to pay cash dividends to the extent that cumulative income
exceeds a specified amount. Under these covenants, the Company was unable to pay
cash dividends in recent years and has limited ability to pay cash dividends at
present. The Company has no plans in the foreseeable future to pay dividends on
the Common Stock and intends to use available funds for acquisitions, repayment
of debt, additional capital expenditures and payment of preferred stock
dividends.
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<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA AND QUARTERLY SUMMARY
SELECTED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
YEAR ENDED
Revenues....................................... $1,100.0 $1,017.5 $ 986.9 $1,025.7 $ 994.6
Operating income (loss)(1)..................... 136.1 81.5 40.1 2.1 (134.5)
Net income (loss).............................. 72.2 38.1 (32.7) (21.4) (97.7)
Earnings (loss) applicable to common
stockholders................................. 60.3 26.6 (35.2) (21.4) (97.7)
Basic earnings (loss) per common share......... 0.79 0.35 (0.47) (0.29) (1.33)
Diluted earnings (loss) per common share....... 0.78 0.35 (0.47) (0.29) (1.33)
Cash dividends per common share................ -- -- -- 0.22 0.22
AT YEAR END
Total assets................................... $1,762.9 $1,775.6 $1,799.5 $1,646.6 $1,621.3
Total debt..................................... 427.5 508.1 548.7 523.3 516.5
Total stockholders' equity(2).................. 945.8 889.7 902.0 772.9 831.7
</TABLE>
---------------
(1) Net income (loss) includes the following pre-tax items:
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Restructuring (reversals)
charges and inventory
write-downs relating to
restructuring activities...... $(8.3) $ -- $21.9 $26.8 $85.3
Litigation (recoveries)
settlements, net.............. (0.5) (6.2) 45.7 -- --
----- ----- ----- ----- -----
$(8.8) $(6.2) $67.6 $26.8 $85.3
===== ===== ===== ===== =====
</TABLE>
(2) In fiscal 1998, the Company issued 6 1/2% Convertible Preferred Stock for
net proceeds of $166.7 million.
QUARTERLY SUMMARY (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
------------- ------------- ------------ --------- --------
<S> <C> <C> <C> <C>
FISCAL 2000
Revenues................................ $254.6 $270.4 $261.1 $313.9
Operating income........................ 19.1 32.4 34.4(1) 50.2
Net income.............................. 7.4 15.7 19.6 29.4
Earnings applicable to common
stockholders......................... 4.3 12.7 16.7 26.5
Basic and diluted earnings per common
share................................ $ 0.06 $ 0.17 $ 0.22 $ 0.34
FISCAL 1999
Total revenues.......................... $227.2 $250.4 $245.5 $294.4
Operating income........................ 6.2 12.8 22.0 40.3
Net (loss) income (2)................... (1.5) 7.3 9.2 23.0
(Loss) earnings applicable to common
stockholders......................... (4.3) 4.6 6.5 19.9
Basic and diluted (loss) earnings per
common share......................... $(0.06) $ 0.06 $ 0.09 $ 0.26
</TABLE>
---------------
(1) Includes a pre-tax restructuring reversal of $8.3 million and a pre-tax
litigation insurance recovery of $0.5 million recorded in the third quarter.
(2) Includes a pre-tax litigation insurance recovery of $6.2 million recorded in
the second quarter of fiscal 1999.
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<PAGE> 19
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.
RESULTS OF OPERATIONS
OVERVIEW
Consolidated revenues increased 8.1% to $1,100.0 million in fiscal 2000 versus
$1,017.5 million in fiscal 1999, as compared to an increase of 3.1% in fiscal
1999 versus fiscal 1998. Excluding the effects of foreign currency fluctuations,
revenues for fiscal 2000 increased 11.5%, as compared with fiscal 1999. Revenues
for fiscal 2000 increased due to 4.4% growth in the Company's EMEA (Europe,
Middle East, Africa and Asia/Pacific) business unit, as well as 10.6% growth in
the Americas business unit driven by strong sales of Ultra-Max equipment and
source tagging labels, as evidenced by several major account wins occurring
during fiscal 2000.
Results of operations reflected operating income of $136.1 million in fiscal
2000 versus $81.5 million in fiscal 1999 and $40.1 million in fiscal 1998. The
Company reported net income of $72.2 million, or $0.78 per diluted share, in
fiscal 2000, net income of $38.1 million, or $0.35 per share, in fiscal 1999,
and a net loss of $32.7 million, or a per share loss of $0.47, in fiscal 1998.
The Company's results for fiscal 2000 include the effect of pre-tax
restructuring reversals of $(8.3) million, while fiscal 1998 results include
pre-tax restructuring charges of $21.9 million.
In fiscal 2000, 1999 and 1998 the Company incurred net litigation (recovery)
settlement costs of $(0.5), $(6.2) and $45.7 million, respectively, the
after-tax effect of which was $(0.4), $(4.3) and $31.9 million, respectively.
See "Restructuring Charges and Litigation Settlement Charges " below and Note 2
of the Notes to the Consolidated Financial Statements for further discussion.
RESULTS OF OPERATIONS -- FISCAL 2000 COMPARED TO FISCAL 1999
Revenues
Revenues for fiscal 2000 increased 8.1% to $1,100.0 million from $1,017.5
million in fiscal 1999. After adjusting for currency fluctuations, revenues for
fiscal 2000 increased 11.5%, as compared with fiscal 1999. Fiscal 2000 results
reflect strong growth in the Company's Americas business unit, which improved
10.6% with $678.0 million in revenues, driven by strong sales of Ultra-Max
equipment and source tagging labels. Revenues in the Company's EMEA business
unit totaled $422.0 million, a 4.4% improvement in fiscal 2000 compared to
fiscal 1999 marking the first year of increasing EMEA revenues since 1995 and
return to profitability for Europe. With a much-improved infrastructure, the
Company plans to focus on additional revenue growth in Europe for fiscal 2001.
Consolidated revenues for the Electronic Article Surveillance ("EAS") product
lines increased 9.6% to $601.0 million in fiscal 2000 from $548.2 million in
fiscal 1999. EAS revenue growth was driven by a 20.9% increase in Ultra-Max
revenues in fiscal 2000 as compared to fiscal 1999, partially offset by declines
in other EAS system revenues, principally microwave systems, which decreased
30.7%. EAS label unit volume for source tagging increased by approximately 65.0%
in fiscal 2000 as compared to fiscal 1999, with sales of 1.65 billion labels, or
$58.5 million in fiscal 2000 compared to $36.6 million in fiscal 1999. The
Company plans to continue making additional capital investments in fiscal year
2001 to increase manufacturing capacity for Ultra-Max labels. In fiscal 2000, a
number of major retailers began source tagging with Ultra-Max. In addition, many
of the Company's existing clients, including Wal-Mart, CVS, Kmart and The Home
Depot, significantly expanded their source tagging programs. As a result, the
Company gained a strong foothold in the global food and drug store markets,
while increasing its established presence in the music and "Do It Yourself"
("DIY") industries.
While the overall Video Systems product line revenues were flat in fiscal 2000
versus fiscal 1999, sales of digital video systems increased 88.0%, offset by
decreases in multiplexer revenue driven by price competition. The challenge
being addressed in the video division is to enhance the product line to ensure
that the needs of all potential customer segments are addressed. The Company has
begun the development of a new system,
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expected to be released early in fiscal 2001, the introduction of which is
expected to stimulate sales from price sensitive customers.
The Company's Access Control Division ("ACD") revenues increased 8.5% in fiscal
2000 versus 1999, continuing the Company's leadership in the high-end access
control market. The Company anticipates double digit revenue growth from its ACD
division for fiscal 2001.
Installation and Maintenance revenues increased 18.5% in fiscal 2000 as compared
with fiscal 1999. This increase was driven largely by installations at major
U.S. retailers in the Company's Americas business unit. During fiscal 2000, the
Company formed a Global Services business unit to ensure the delivery and
installation of quality products and services to customers around the world. The
appointment of strong leadership in this business unit helped achieve a $14
million improvement in operating income for this unit with a goal to become
profitable by the second quarter of fiscal 2001 and profitable for fiscal year
2001.
Gross Margins and Operating Income
Gross margins were 44.9% for fiscal 2000 compared with 42.6% for fiscal 1999.
The improvement in gross margin percentages was across all sales regions and
product divisions reflecting the achievement of the Company's goals of product
cost reductions and efficiency improvements in manufacturing operations. As the
Company continues to focus on reducing manufacturing costs and improving overall
processes, it expects to maintain or further improve in fiscal 2001 the current
gross margin level of 45%.
Excluding restructuring reversals, operating income for fiscal 2000 was $127.8
million, or 11.6% of revenues, versus $81.5 million, or 8.0% of revenues in
fiscal 1999. The Company's focus on reducing operating costs combined with an
increase in gross margins produced a significant turnaround, particularly in the
Company's European operations, generating close to a $17 million improvement in
operating income for fiscal 2000 and the return to profitability for Europe.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses were $287.9 million, or
26.2% of revenues, in fiscal 2000 compared to $282.0 million, or 27.7% of
revenues, in fiscal 1999. The increase in SG&A expenses in fiscal 2000 was the
result of higher selling costs on increased sales volume partially offset by
savings achieved from the execution of the restructuring plans from prior years.
Expressed as a percentage of revenues, SG&A expenses decreased in fiscal 2000
largely as a result of the Company's focused efforts to reduce costs through
implementation of shared services departments and of the Company's Enterprise
Resource Planning ("ERP") computer information system. The Company continues to
monitor operating expenses and to eliminate excess resources wherever it seems
prudent. The Company's long-term target is to reduce total operating expenses,
including SG&A, to 30% of revenues. However, in the near term, the Company may
incur additional expenses as it plans to invest in new marketing programs and
explore acquisition opportunities to promote revenue growth for the Company.
Provision for Doubtful Accounts
Provision for doubtful accounts, as a percentage of total revenues, was 2.2% in
both fiscal 2000 and 1999.
Research, Development and Engineering Expenses
The Company continued its commitment to new products and technology by investing
$30.8 million, or 2.8% of revenues, in research and development activities
during fiscal 2000 compared to $25.8 million, or 2.6% of revenues, in fiscal
1999. The Company believes that the timely introduction of new products and
development of new technology platforms are important components of its
competitive strategy and anticipates future research and development spending
will increase to approximately 5% of revenues.
Other (Expenses) Income
Non-operating expenses (excluding litigation recoveries) decreased from $32.2
million in fiscal 1999 to $28.7 million in fiscal 2000. The decrease is
principally due to the free cash flow of $96.9 million generated in fiscal 2000
resulting in a decrease in interest expense from lower average debt levels. The
decrease in other, net
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expense from $5.9 million in fiscal 1999 to $5.0 million in fiscal 2000 is
primarily due to insurance recoveries partially offset by increased minority
interest expense.
Income Taxes
The Company's worldwide effective tax rate provision for fiscal 2000 was 33.1%
as compared to 31.2% in fiscal 1999. The effective tax rate was slightly higher
in fiscal 2000 primarily due to the higher level of profitability and the mix of
earnings and income tax rates of international subsidiaries. For additional
information regarding income taxes, refer to Note 8 of the Company's Notes to
Consolidated Financial Statements.
Shortly after the close of the Company's fiscal year, Germany enacted tax
legislation reducing its federal tax rate to 25%. The rate change is effective
for the Company's fiscal year ended June 2002 and is not expected to have a
significant effect on the deferred tax asset.
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.
RESTRUCTURING CHARGES AND NET LITIGATION SETTLEMENT CHARGES
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, 2000, all planned terminations had been
completed and the majority of the facilities had been vacated or subleased. The
Company also reviewed its existing product lines and product sourcing to
discontinue marginally profitable products and outsource manufacturing of other
products.
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
included the divestiture of non-core businesses and workforce reductions,
principally in its European operations. The Company planned for the reduction in
workforce of approximately 1,200 positions, of which 600 related to the
divestiture of non-core businesses and the remaining positions principally
represented the termination of administrative personnel. As of June 30, 2000,
approximately 95% of the positions had been eliminated, including the positions
associated with the divested business units, and the rest will be terminated as
soon as practicable. In general, the involuntary termination 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.
During the third quarter of fiscal 2000, the Company recorded an $8.3 million
reversal of restructuring charges (consisting of $2.9 million and $5.4 million
associated with the 1996 and 1997/1998 restructuring plans, respectively) as a
result of revised estimates to its original restructuring plans. The reversal
relates primarily to actions pertaining to the closure of certain North America
facilities, which are no longer going to be undertaken given the increased
demand for labels and required manufacturing capacity, and remeasurements of
European restructuring requirements based on decisions not to exit operations in
certain countries.
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 provided 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
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in the first quarter of fiscal 1998. During fiscal 1998, the Company also
recovered $7.3 million, with a net after-tax effect of $5.1 million from its
primary directors and officers liability insurance policy, and was paid $10.0
million by one of its two excess directors and officers liability insurers
pursuant to a settlement. In addition, in the second quarter of fiscal 1999, the
Company reached agreement with its other excess insurance carrier providing for
the payment by the carrier of $6.2 million in fiscal 1999 and $0.5 million in
fiscal 2000 in settlement of its insurance obligations in connection with, among
other things, settlement of the above class action, and recorded the related
insurance recovery.
RESULTS OF OPERATIONS -- FISCAL 1999 COMPARED TO FISCAL 1998
Revenues
Revenues for fiscal 1999 increased 3.1% to $1,017.5 million from $986.9 million
reported in fiscal 1999. After adjusting for currency fluctuations and
divestitures, revenues for fiscal 1999 increased 5.9%, as compared with fiscal
1998. Fiscal 1999 results reflected strong growth in the Company's North America
Retail business unit reflecting significant purchases of Ultra-Max systems by
retailers as well as increasing demand for the Company's disposable security
labels used in source tagging.
Consolidated revenues for the EAS worldwide product lines increased 1.7% from
fiscal 1998. EAS revenue growth was driven by an 11.9% increase in Ultra-Max
revenues in fiscal 1999 as compared to fiscal 1998, offset by declines in other
EAS system revenues, principally electromagnetic systems. Revenues from
electromagnetic systems, principally sold in Europe, decreased 27.4% from fiscal
1998 principally due to market saturation in certain countries with older
technologies. Label unit volume for source tagging increased by approximately
53.8% in fiscal 1999 as compared to fiscal 1998, resulting in sales of more than
1 billion labels.
Overall reported CCTV, Access Control and Asset Management product line revenues
were flat in fiscal 1999 as compared to fiscal 1998. In the CCTV product line,
revenue increases in domes and digital video were offset by decreases in
multiplexer revenue driven by price competition. CCTV, Access Control and Asset
Management revenues were negatively impacted in fiscal 1999 by a decline in
revenues partially due to the divestiture of non-core businesses. The primary
divestiture was the Company's U.S. commercial/industrial direct sales and
service business, which had fiscal year 1998 revenues of approximately $11
million. Excluding the effects of all divested businesses, revenues in this
product line increased 3.9% in fiscal 1999 as compared to fiscal 1998.
Installation and Maintenance revenues increased 22% in fiscal 1999 as compared
with fiscal 1998. This increase was driven largely by installations at major
U.S. retailers in the Company's North America Retail business unit.
North America Retail revenue for fiscal 1999 increased 20.9% versus fiscal 1998.
The increase in North America retail revenues was driven by large purchases of
Ultra-Max systems by major U.S. retailers and increased demand for the Company's
disposable security labels used in source tagging.
Europe revenues decreased 3.6% in fiscal 1999 as compared to fiscal 1998. Europe
retail revenues, which accounted for 80% of total Europe revenues, decreased
4.4% while Europe C/I revenues were flat. Europe Retail's results during fiscal
1999 were negatively impacted by the market saturation of electromagnetic
technology products in hypermarkets and lower levels of sales-type leases.
International revenues, which included primarily Latin America and Asia Pacific,
decreased 14% in fiscal 1999 as compared to fiscal 1998. International retail
revenues, which accounted for approximately 80% of total International revenues,
decreased 7%. Excluding the effects of currency fluctuations and divestitures,
International Retail revenue decreased 2% in fiscal 1999 as compared to fiscal
1998. The decrease in International Retail was largely due to overall economic
weakness in many of these economies.
Revenues generated by North America based C/I decreased by 6.4% in fiscal 1999
as compared to fiscal 1998. The decrease in revenues was principally due to the
divestiture in September 1997 of the U.S. commercial/industrial direct sales and
service business. Excluding the effect on revenues of this divested non-core
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business, North America based C/I revenues increased 6.4% in fiscal 1999 as
compared to fiscal 1998. The increase in revenues was due to new product
introductions and customer service initiatives.
Gross Margins and Operating Income
Gross margins were 42.6% for fiscal 1999 compared with 44.8% for fiscal 1998.
The decline in gross margin percentages was primarily due to a 22.9% increase in
service revenue, which currently has a lower gross margin than the Company's
product revenue, and to a lesser degree by pricing allowances on larger
shipments to major retailers.
Excluding restructuring charges, operating income for fiscal 1999 was $81.5
million or 8.0% of total revenue, versus $62.0 million or 6.3% of total revenue
in fiscal 1998.
Selling, General and Administrative Expenses
Total selling, general and administrative expenses, as a percentage of total
revenues, were 27.7% in fiscal 1999 versus 31.2% in fiscal 1998. Included in
selling, general and administrative expenses in fiscal 1998 was $10.8 million
relating to certain employee separation and warranty and contract resolution
costs. The decrease in expenses as a percentage of revenue for fiscal 1999
largely reflects the benefit from executing the restructuring plans and the
Company's focused efforts to reduce costs and improve profitability.
Provision for Doubtful Accounts
Provision for doubtful accounts, as a percentage of total revenues, was 2.2% and
2.4% in fiscal 1999 and 1998, respectively.
Research, Development and Engineering Expenses
Research, development and engineering expenses decreased to 2.5% of total
revenues in fiscal 1999 versus 2.8% in fiscal 1998. The decrease as a percentage
of revenues as compared to the prior year was due to the Company's efforts to
outsource certain products resulting in a reduction of the associated research,
development and engineering expenses.
Other (Expenses) Income
Non-operating expenses, which include interest expense and interest income,
decreased from $41.2 million in fiscal 1998 to $32.2 million in fiscal 1999. The
decrease was principally due to a decrease in interest expense resulting from
lower average debt levels throughout fiscal 1999 as compared to fiscal 1998.
Income Taxes
The Company's worldwide effective tax rate provision (benefit) for fiscal 1999
was 31.2% as compared to (30.1)% in fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 2000, cash and cash equivalents increased $14.9 million. Cash flow
provided by operating activities was $154.2 million in fiscal 2000 compared with
$194.8 million in fiscal 1999 and cash used of $34.9 million in fiscal 1998. The
decrease in cash provided by operations in fiscal 2000 as compared to fiscal
1999 was primarily due to higher revenues resulting in increases in customer
receivables. In fiscal 1999, the Company initiated a program to more carefully
manage the timing of vendor payments resulting in a $20.5 million reduction in
accounts payable. The Company maintained this program throughout fiscal 2000.
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
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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.
The terms of certain of the Company's principal receivable securitization
programs provide for over-collateralization and, accordingly, the Company does
not receive the full balance of such receivables until the customer's
receivables have been paid in full to financing institutions. The Company
accounts for this over-collateralization as a "Receivable due from financing
institutions" which is included in "Other current assets" and the non-current
portion in "Patents and other assets."
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 over-collateralization
holdbacks.
The Company's investing activities used $61.0 million of cash in fiscal 2000,
compared with $69.8 million in fiscal 1999. Additions to property, plant and
equipment, during fiscal 2000, totaled $46.0 million, primarily relating to
investments in the Company's global enterprise resource planning system and
label manufacturing operations for new production equipment to meet increasing
global demand. Investing activities also included increases in revenue equipment
of $9.6 million, which represents equipment held under operating leases, and the
payment of $8.0 million to Honeywell, less reimbursements of $1.2 million, in
consideration of a certain patent assignment and license. During fiscal 2001,
the Company plans to continue its investment in label manufacturing operations
for new production equipment.
Fiscal 2000 financing activities used cash of $76.9 million as compared with
$37.4 million in fiscal 1999. Fiscal 2000 cash used in financing activities is
due primarily to the repayment of the $70.0 million Senior Note due March 2000.
The Company's percentage of total debt to total capital was 31.1% at June 30,
2000 as compared to 36.4% at June 30, 1999. Under certain of the Company's
financial agreements, the Company is only permitted to pay cash dividends to the
extent that cumulative income exceeds a specified amount. Under these covenants,
the Company was unable to pay cash dividends in recent years and has limited
ability to pay cash dividends at present. The dividend payable on October 2,
2000 to holders of record of the Depositary Shares as of September 21, 2000 will
be made in cash, at a rate of $0.40625 per Depositary Share. The Company intends
to make future preferred stock dividends in cash. The Company has no plans in
the foreseeable future to pay dividends on the Common Stock and will use
available funds for acquisitions, additional capital expenditures, and repayment
of $50 million Senior Notes due in fiscal 2001.
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 improved
days sales outstanding and increased inventory turns which are expected to
reduce working capital requirements.
On December 9, 1999, the Company entered into a new $115.0 million three-year
revolving credit agreement, which was increased to $125.0 million on March 21,
2000. No borrowings were outstanding under the facility at the end of fiscal
2000. As of June 30, 2000, the facility was utilized for standby letters of
credit totaling $16.4 million resulting in $108.6 million available for use
under the facility. The total cost of the new facility is comparable to the
previous facility. The $125.0 million Revolving Credit Facility will expire in
December 2002.
The Company requires significant cash flow to meet its debt service and other
continuing obligations. As of June 30, 2000, the Company had $427.5 million of
total indebtedness outstanding. The Company's expected principal liquidity
requirements are working capital, financing of customer equipment purchases,
investments in revenue equipment and capital expenditures, strategic
acquisitions, interest and a $50.0 million principal payment on the Senior Notes
due on March 31, 2001, and payment of preferred stock dividends. At June 30,
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2000, the Company's principal sources of liquidity are (i) cash on hand, (ii)
cash flow from operations, (iii) borrowings under the $125.0 million Revolving
Credit Facility, and (iv) receivable securitization facilities, which the
Company believes will be sufficient to meet its liquidity needs for the
foreseeable future.
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
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In June 1999, the FASB issued SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement 133" which amended SFAS 133 to change the
effective date to fiscal quarters of fiscal years beginning after June 15, 2000.
SFAS 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. SFAS 133 requires the Company to record
all derivatives as either assets or liabilities in the Consolidated Balance
Sheet and measure those instruments at fair value. The accounting for changes in
the fair value depends on the intended use of the derivative and the resulting
designation.
The Company adopted SFAS No. 133 in the first quarter of fiscal 2001 and, given
the Company's current use of derivatives and hedging activities, the impact of
transitioning to this statement was not material on its consolidated financial
statements. The impact of SFAS 133 on the Company's future financial statements
will depend on a variety of factors, including the future level of forecasted
and actual foreign currency transactions, the extent of the Company's hedging
activities, the types of hedging instruments used and the effectiveness of such
instruments.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition," which provides guidance
on the recognition, presentation, and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met to recognize revenue and provides guidance for disclosure related to revenue
recognition policies. The Company plans to adopt SAB 101 in the fourth quarter
of fiscal 2001 and is currently assessing the impact this statement will have on
its consolidated financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25." The Company is required to adopt the Interpretation on July 1,
2000. The Interpretation clarifies guidance for certain issues that arose in the
application of APB No. 25, "Accounting for Stock Issued to Employees." Adoption
of Interpretation No. 44 has no current impact on the Company's financial
statements. Any future impact will depend on the extent to which the Company
modifies any of its outstanding stock-based awards.
YEAR 2000 ISSUE
Since January 1, 2000, the Company has experienced no disruptions in its
business operations as a result of Year 2000 compliance problems and received no
reports of any Year 2000 compliance issues from either internal or external
sources. Nonetheless, some problems related to Year 2000 risks may not appear
until after January 1, 2000. Year 2000 issues could include problems with the
Company's own products and services or with third-party products or technology.
The Company can provide no assurance that all supplier and customer Year 2000
compliance plans were successfully completed in a timely manner, although it is
not currently aware of any problems, which would significantly impact its
operations.
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EURO CONVERSION
On January 1, 1999, certain member nations of the European Union ("EU") adopted
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 the participating EU
member 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, 2000, approximately 16.6% of the Company's revenues were derived from
participating EU member 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 that 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) changes in regulations or
standards applicable to the Company's products, (7) competition and (8) 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 15 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 9 of Notes
to Consolidated Financial Statements. The Company uses interest rate swap
agreements to further limit the Company's exposure to short-term interest rate
movements relating to off balance sheet receivable financings.
At June 30, 2000 and 1999, the Company's fixed rate long-term debt had a face
value and carrying value of $415.0 million and $485.0 million, respectively. The
fair value of long-term debt at June 30, 2000 and 1999
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was $402.0 million and $492.8 million, respectively. Based upon a hypothetical
1% point increase in the period end market interest rate across all long-term
debt maturities, the fair value of this liability would decrease by
approximately $12.8 million and $16.9 million, respectively.
In order to manage the risk associated with the variance amount on the sale of
certain receivables, including the U.K. financing program as described in Note
15 of Notes to Consolidated Financial Statements under Item 8 of this Report,
the Company enters into interest rate swap agreements, 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. The Company had none of
these interest rate swap agreements outstanding at June 30, 2000. The notional
amount of interest rate swap agreements at June 30, 1999 was $123.7 million. The
carrying value and fair value of the liability for these agreements were $0.7
million and $0.5 million, respectively, at June 30, 1999. Based upon a
hypothetical 1% point increase in the period end market interest rate as of June
30, 1999, the fair value of this liability would have decreased by approximately
$2.2 million resulting in a receivable of $1.7 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. dollar
as compared to foreign currencies. Its offshore operations are principally in
Europe, Asia and Latin America. 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 contracts are offset by changes in the fair value of net underlying
foreign currency transaction exposures. The Company's principal currency
exposures relate to the Euro 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
primarily using forward contracts.
At June 30, 2000 and 1999, the Company had in place foreign currency forward
contracts with a notional amount of $50.5 million and $65.8 million,
respectively. The carrying value of these contracts was an asset of $1.2 million
at June 30, 2000 and $0.9 million at June 30, 1999. The fair value of these
contracts at June 30, 2000 was $0.9 million and at 1999 was immaterial. Based
upon a 10% strengthening of the U.S. dollar compared to these foreign
currencies, the estimated fair value of the asset would increase for fiscal 2000
and 1999 by $4.9 million and $6.6 million, respectively. 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 gains
(losses).
27
<PAGE> 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
FINANCIAL STATEMENTS: ----
<S> <C>
Reports of Independent Certified Public Accountants.... 29
Consolidated Balance Sheets at June 30, 2000 and
1999.................................................. 31
Consolidated Statements of Operations for the years
ended June 30, 2000, 1999 and 1998.................... 32
Consolidated Statements of Cash Flows for the years
ended June 30, 2000, 1999 and 1998.................... 33
Consolidated Statements of Stockholders' Equity for the
years ended June 30, 2000, 1999 and 1998.............. 34
Notes to Consolidated Financial Statements............. 35
Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts..... 59
</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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
28
<PAGE> 29
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of Sensormatic Electronics Corporation
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Sensormatic Electronics Corporation and its subsidiaries at June 30, 2000 and
1999 and the results of their operations and their cash flows for each of the
years then ended in conformity with accounting principles generally accepted in
the United States of America. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
Miami, Florida
August 1, 2000
29
<PAGE> 30
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors --
Sensormatic Electronics Corporation
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows for the year ended June 30, 1998. Our audit
also included the financial statement schedule for the year ended June 30, 1998
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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations,
stockholders' equity and cash flows of Sensormatic Electronics Corporation for
the year ended June 30, 1998, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
financial statement schedule for the year ended June 30, 1998, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
West Palm Beach, Florida
August 13, 1998
30
<PAGE> 31
SENSORMATIC ELECTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
-------- --------
(IN MILLIONS, EXCEPT
PAR VALUE AMOUNTS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 223.9 $ 209.0
Customer receivables, net................................. 329.4 318.6
Inventories, net.......................................... 152.9 163.7
Current portion of deferred income taxes.................. 38.5 31.2
Other current assets...................................... 53.1 46.0
-------- --------
TOTAL CURRENT ASSETS.............................. 797.8 768.5
Customer receivables, net -- noncurrent..................... 43.7 76.5
Revenue equipment, less accumulated depreciation of
$51.2 in 2000 and $52.6 in 1999........................... 65.1 71.2
Property, plant and equipment, net.......................... 156.6 137.5
Costs in excess of net assets acquired, less accumulated
amortization of $96.8 in 2000 and $85.5 in 1999........... 417.5 439.7
Deferred income taxes....................................... 149.5 150.2
Patents and other assets, less accumulated amortization
of $51.5 in 2000 and $44.6 in 1999........................ 132.7 132.0
-------- --------
TOTAL ASSETS...................................... $1,762.9 $1,775.6
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and short-term debt..... $ 56.2 $ 80.4
Accounts payable.......................................... 71.9 76.0
Other current liabilities and deferred income taxes....... 255.7 246.1
-------- --------
TOTAL CURRENT LIABILITIES......................... 383.8 402.5
Long-term debt.............................................. 371.3 427.7
Other noncurrent liabilities and deferred income taxes...... 62.0 55.7
-------- --------
TOTAL LIABILITIES................................. 817.1 885.9
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10.0 shares authorized
6 1/2% Convertible Preferred Stock, 0.7 shares
outstanding in 2000 and 1999........................... 166.3 166.7
Common stock, $.01 par value, 125.0 shares authorized,
77.1 and 75.6 shares outstanding in 2000 and 1999,
respectively........................................... 761.5 743.5
Retained earnings......................................... 193.7 133.4
Treasury stock at cost and other, 1.7 shares in 2000 and
1999................................................... (11.4) (10.4)
Accumulated other comprehensive loss...................... (164.3) (143.5)
-------- --------
TOTAL STOCKHOLDERS' EQUITY........................ 945.8 889.7
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $1,762.9 $1,775.6
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
31
<PAGE> 32
SENSORMATIC ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- ------
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Sales..................................................... $ 907.3 $ 841.5 $831.9
Rentals................................................... 36.4 44.0 47.6
Installation, maintenance and other....................... 156.3 132.0 107.4
-------- -------- ------
Total revenues.................................... 1,100.0 1,017.5 986.9
Costs of sales.............................................. 605.7 583.6 544.4
-------- -------- ------
Gross Margin................................................ 494.3 433.9 442.5
-------- -------- ------
Operating costs and expenses:
Selling, general and administrative....................... 287.9 282.0 308.2
Provision for doubtful accounts........................... 24.6 22.5 23.4
Restructuring (reversals) charges......................... (8.3) -- 21.9
Research, development and engineering..................... 30.8 25.8 27.2
Amortization of intangible assets......................... 23.2 22.1 21.7
-------- -------- ------
Total operating costs and expenses................ 358.2 352.4 402.4
-------- -------- ------
Operating income............................................ 136.1 81.5 40.1
-------- -------- ------
Other (expenses) income:
Interest income........................................... 16.6 17.8 16.0
Interest expense.......................................... (40.3) (44.1) (50.8)
Litigation recoveries (settlements)....................... 0.5 6.2 (45.7)
Other, net................................................ (5.0) (5.9) (6.4)
-------- -------- ------
Total other (expenses) income..................... (28.2) (26.0) (86.9)
-------- -------- ------
Income (loss) before income taxes........................... 107.9 55.5 (46.8)
Provision for (benefit of) income taxes..................... 35.7 17.4 (14.1)
-------- -------- ------
Net income (loss)........................................... $ 72.2 $ 38.1 $(32.7)
======== ======== ======
Earnings (loss) applicable to common stockholders........... $ 60.3 $ 26.6 $(35.2)
======== ======== ======
Basic earnings (loss) per common share...................... $ 0.79 $ 0.35 $(0.47)
======== ======== ======
Diluted earnings (loss) per common share.................... $ 0.78 $ 0.35 $(0.47)
======== ======== ======
Weighted Shares Outstanding
Basic..................................................... 76.5 75.0 74.2
Diluted................................................... 77.3 75.3 74.5
</TABLE>
The accompanying notes are an integral part of these financial statements.
32
<PAGE> 33
SENSORMATIC ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 72.2 $ 38.1 $(32.7)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation........................................... 40.2 42.4 42.6
Amortization........................................... 23.2 22.1 21.7
Net changes in operating assets and liabilities:
Customer receivables................................... 18.7 29.5 (20.9)
Inventories............................................ 10.9 33.9 (11.0)
Current and deferred income taxes relating to
restructuring and net litigation settlement
charges.............................................. -- -- (19.9)
Accounts payable....................................... (3.8) 20.5 (10.0)
Restructuring, net..................................... (12.5) (8.8) 7.3
Other, net............................................. 5.3 17.1 (12.0)
------ ------ ------
Net cash provided by (used in) operating
activities...................................... 154.2 194.8 (34.9)
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (46.0) (29.1) (29.3)
Increase in revenue equipment, net........................ (9.6) (22.7) (23.3)
Additional investments in acquisitions and patents........ (7.8) (20.7) (19.7)
Proceeds from sale of business............................ -- -- 8.2
Other, net................................................ 2.4 2.7 10.2
------ ------ ------
Net cash used in investing activities............. (61.0) (69.8) (53.9)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank borrowings and other debt............................ 2.3 4.3 442.4
Repayments of bank borrowings and other debt.............. (82.0) (40.3) (416.1)
Issuance of Convertible Preferred Stock, net.............. -- -- 166.7
Proceeds from issuance of common stock under employee
benefit plans.......................................... 4.7 -- 1.1
Other, net................................................ (1.9) (1.4) 1.0
------ ------ ------
Net cash (used in) provided by financing
activities...................................... (76.9) (37.4) 195.1
------ ------ ------
Effect of foreign currency translation on cash balances..... (1.4) (5.6) (1.0)
------ ------ ------
Net increase in cash and cash equivalents................... 14.9 82.0 105.3
Cash and cash equivalents at beginning of year.............. 209.0 127.0 21.7
------ ------ ------
Cash and cash equivalents at end of year.................... $223.9 $209.0 $127.0
====== ====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid during the year......................... $ 16.1 $ 11.0 $ 9.2
Interest paid during the year............................. $ 43.0 $ 45.9 $ 49.5
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<PAGE> 34
SENSORMATIC ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
PREFERRED COMMON RETAINED TREASURY STOCK COMPREHENSIVE
STOCK STOCK EARNINGS AND OTHER LOSS TOTAL
--------- ------ -------- -------------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1997........................ -- $730.5 $143.7 $(14.0) $ (87.3) $772.9
Net loss...................................... -- -- (32.7) -- -- (32.7)
Cumulative translation........................ (7.7) (7.7)
------
Total comprehensive loss................ (40.4)
------
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 (paid in Common)..... -- 2.4 (2.4) -- -- --
Other......................................... -- (0.9) (0.3) 2.3 -- 1.1
------ ------ ------ ------ ------- ------
BALANCE AT JUNE 30, 1998........................ 166.7 733.7 108.3 (11.7) (95.0) 902.0
Net income.................................... -- -- 38.1 -- -- 38.1
Cumulative translation........................ -- -- -- -- (48.5) (48.5)
------
Total comprehensive loss................ (10.4)
------
Stock issued pursuant to employee benefit
plans....................................... -- 0.1 -- -- -- 0.1
Preferred stock dividend (paid in Common)..... -- 11.5 (11.5) -- -- --
Other......................................... -- (1.8) (1.5) 1.3 -- (2.0)
------ ------ ------ ------ ------- ------
BALANCE AT JUNE 30, 1999........................ 166.7 743.5 133.4 (10.4) (143.5) 889.7
Net income.................................... -- -- 72.2 -- -- 72.2
Cumulative translation........................ -- -- -- -- (20.8) (20.8)
------
Total comprehensive income.............. 51.4
------
Stock issued pursuant to employee benefit
plans....................................... -- 6.8 -- -- -- 6.8
Preferred stock dividend (paid in Common)..... -- 11.9 (11.9) -- -- --
Income tax benefit from stock options
exercised................................... -- 0.4 -- -- -- 0.4
Other......................................... (0.4) (1.1) -- (1.0) (2.5)
------ ------ ------ ------ ------- ------
BALANCE AT JUNE 30, 2000........................ $166.3 $761.5 $193.7 $(11.4) $(164.3) $945.8
====== ====== ====== ====== ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
34
<PAGE> 35
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
intercompany balances and transactions have been eliminated in consolidation.
Cash and cash equivalents
Cash equivalents include short-term highly liquid investments with a maturity of
three months or less from date of purchase. 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 through 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. Installation and service
revenues are recognized at date of performance and maintenance revenues are
recognized ratably over the service contract term. 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 to customers 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,
2000 aggregated $41.2 million and are due as follows: 2001 -- $19.9 million;
2002 -- $12.2 million; 2003 -- $6.3 million; 2004 -- $2.1 million; 2005 and
thereafter -- $0.7 million.
Accounting for currency translation and transactions
Foreign currency transactions and financial statements, where the functional
currency is not the U.S. dollar, 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 accumulated other comprehensive loss, a separate
component of consolidated stockholders' equity. Gains and losses attributable to
other intercompany transactions are included in results of operations.
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.
35
<PAGE> 36
SENSORMATIC ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, if any, are stated at cost.
The Company principally uses foreign exchange forward contracts to hedge certain
identifiable, foreign currency intercompany firm commitments and certain
short-term intercompany advances. 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. Gains and losses
on the contracts which hedge identifiable intercompany firm commitments are
deferred and recorded in net income in the period in which the related
transaction occurs. Losses are not deferred if it is estimated that deferral
would lead to recognizing losses in later periods. Forward contracts which hedge
identifiable intercompany firm commitments and intercompany advances are stated
at market value.
Cash flows related to interest rate agreements and foreign exchange forward
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 periods ranging from 20 to 40 years. Patents and other
intangibles, stated at cost, are amortized using the straight-line method over
periods ranging from 5 to 15 years.
Earnings per share
Basic earnings per share ("EPS") is calculated by dividing earnings (loss)
applicable to common stockholders by the weighted average number of common
shares outstanding. Earnings (loss) applicable to common stockholders is
calculated by deducting dividends on preferred stock from net income (or adding
dividends declared on preferred stock to a net loss). Diluted earnings per share
includes the dilutive effect of common stock equivalents outstanding during the
period using the treasury stock method of accounting. Common stock equivalents
include stock options issued under benefit plans. The reconciliation of the
numerator and denominator of the EPS calculation is presented in Note 7.
Impairment
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 such
assets will not be recoverable, as generally determined based on estimated
undiscounted cash flows over the remaining amortization period, the carrying
amount of such assets would be adjusted to fair value.
Concentration of credit risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and equivalents, customer receivables,
primarily with retail customers, and financial instruments used in hedging
activities. The Company's cash management and investment policies restrict
investments to low-risk, highly liquid securities, and the Company performs
periodic evaluations of the credit standing of the financial institutions with
which it deals. The Company minimizes its exposure to credit risk concentration
for receivables 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. The Company
performs ongoing credit evaluations of its customers' financial condition and
maintains reserves for potential credit losses. As of June 30, 2000, management
believes the Company had no significant concentrations of credit risk.
36
<PAGE> 37
SENSORMATIC ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Impact of recently issued accounting standards
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition," which provides guidance
on the recognition, presentation, and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met to recognize revenue and provides guidance for disclosure related to revenue
recognition policies. The Company plans to adopt SAB 101 in the fourth quarter
of fiscal 2001 and is currently assessing the impact this statement will have on
its consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". In June 1999, the FASB issued SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement 133" which amended SFAS 133 to change the
effective date to fiscal quarters of fiscal years beginning after June 15, 2000.
SFAS 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. SFAS 133 requires the Company to record
all derivatives as either assets or liabilities in the Consolidated Balance
Sheet and measure those instruments at fair value. The accounting for changes in
the fair value depends on the intended use of the derivative and the resulting
designation.
The Company adopted SFAS No. 133 in the first quarter of fiscal 2001 and, given
the Company's current use of derivatives and hedging activities, the impact to
transition to this statement was not material on its consolidated financial
statements. The impact of SFAS 133 on the Company's future financial statements
will depend on a variety of factors, including the future level of forecasted
and actual foreign currency transactions, the extent of the Company's hedging
activities, the types of hedging instruments used and the effectiveness of such
instruments.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25." The Company is required to adopt the Interpretation on July 1,
2000. The Interpretation clarifies guidance for certain issues that arose in the
application of APB No. 25, "Accounting for Stock Issued to Employees." Adoption
of Interpretation No. 44 has no current impact on the Company's financial
statements.
Use of estimates in the preparation of financial statements
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 consolidated financial statements and
accompanying notes. The more significant estimates made by management include
the provision for doubtful accounts receivable, inventory write-downs for
potentially excess or obsolete inventory, restructuring charges, warranty
reserves, and the amortization period for intangible assets. Actual results
could differ from those estimates. Management periodically evaluates estimates
used in the preparation of the financial statements for continued
reasonableness. Appropriate adjustments, if any, to the estimates used are made
prospectively based on such periodic evaluation.
Reclassifications
Certain amounts in the prior years' Consolidated Financial Statements have been
reclassified to conform to the current fiscal year's presentation.
2. 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
37
<PAGE> 38
SENSORMATIC ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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. 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 of $48.7 million resulted in an after-tax
impact of $32.3 million.
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, 2000, all planned terminations have been completed and more than 70% 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
related to the divestiture of non-core businesses and the remaining positions
principally represented the termination of administrative personnel. As of June
30, 2000, approximately 95% of the positions had been eliminated, including the
positions associated with the divested business units.
During the third quarter of fiscal 2000, the Company recorded an $8.3 million
reversal of restructuring charges (consisting of $2.9 million and $5.4 million
associated with the 1996 and 1997/1998 restructuring plans, respectively) as a
result of revised estimates to its original restructuring plans. The reversal
relates primarily to actions pertaining to the closure of certain North America
facilities, which are no longer going to be undertaken given the increased
demand for labels and required manufacturing capacity, and remeasurements of
European restructuring requirements based on decisions not to exit operations in
certain countries.
38
<PAGE> 39
SENSORMATIC ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the details and the activity of the 1996 and
1997/1998 restructuring charge reserves as of June 30, 2000:
<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
1996 RESERVE --------- ------ -------- ----------- ----- -------- ------------- -----------
<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....... (19.6) -- 10.6 (9.0) -- 9.0 -- --
----- ------ ------ ----- ----- ------ ----- -----
Total...................... $65.7 $(11.4) $(25.9) $28.4 $(8.0) $ (9.9) $ -- $10.5
----- ------ ------ ----- ----- ------ ----- -----
</TABLE>
<TABLE>
<CAPTION>
ACCRUAL ACCRUAL ACCRUAL
BALANCE AT UTILIZATION BALANCE AT UTILIZATION BALANCE AT
JUNE 30, ---------------- JUNE 30, ---------------- JUNE 30,
1997 CASH NON-CASH 1998 CASH NON-CASH 1999
1996 RESERVE (CONTINUED) ---------- ----- -------- ---------- ----- -------- ----------
<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 (0.4) -- 4.8
Employee termination and related costs............... 3.3 (3.3) -- -- -- -- --
----- ----- ----- ---- ----- ---- ----
Total........................................ $10.5 $(4.0) $(0.9) $5.6 $(0.4) $ -- $5.2
----- ----- ----- ---- ----- ---- ----
</TABLE>
<TABLE>
<CAPTION>
ACCRUAL ACCRUAL
BALANCE AT UTILIZATION BALANCE AT
JUNE 30, 2000 ---------------- JUNE 30,
1999 (REVERSALS) CASH NON-CASH 2000
1996 RESERVE (CONTINUED) ---------- ----------- ----- -------- ----------
<S> <C> <C> <C> <C> <C>
Product rationalization, related equipment
charges and other......................................... $0.4 $(0.4) $ -- $-- $ --
Closure of facilities and related costs..................... 4.8 (2.5) (0.3) -- 2.0
Employee termination and related costs...................... -- -- -- -- --
---- ----- ----- -- ----
Total............................................... $5.2 $(2.9) $(0.3) $-- $2.0
==== ===== ===== === ====
</TABLE>
<TABLE>
<CAPTION>
ACCRUAL ACCRUAL
BALANCE AT 1998 UTILIZATION BALANCE AT UTILIZATION
1997 JUNE 30, ADDITIONS/ ----------------- JUNE 30, ----------------
PROVISION 1997 (REVERSALS) CASH NON-CASH 1998 CASH NON-CASH
1997/1998 RESERVE --------- ---------- ----------- ------ -------- ----------- ----- --------
<S> <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)
Closure of facilities and
related costs................ 6.5 6.5 8.8 0.2 (5.6) 9.9 (1.3) 0.1
Closure of facilities (1)...... -- (2.9) (2.9)
Employee termination and
related costs................ 0.5 0.5 20.4 (10.4) -- 10.5 (6.7) --
Non-core business
divestitures................. 16.9 16.9 (7.3) -- -- 9.6 (0.4) --
----- ----- ----- ------ ----- ----- ----- -----
Total.................. $26.8 $23.9 $21.9 $(10.2) $(7.2) $28.4 $(8.4) $(1.0)
----- ----- ----- ------ ----- ----- ----- -----
Inventory write downs recorded
as a component of cost of
sales........................ -- (4.2) -- -- 3.6 (0.6) -- 0.6
----- ----- ----- ------ ----- ----- ----- -----
Total.................. $26.8 $19.7 $21.9 $(10.2) $(3.6) $27.8 $(8.4) $(0.4)
===== ===== ===== ====== ===== ===== ===== =====
<CAPTION>
ACCRUAL
BALANCE AT
JUNE 30,
1999
1997/1998 RESERVE -----------
<S> <C>
Product rationalization,
related equipment charges and
other........................ $ 0.2
Closure of facilities and
related costs................ 8.7
Closure of facilities (1)...... (2.9)
Employee termination and
related costs................ 3.8
Non-core business
divestitures................. 9.2
-----
Total.................. $19.0
-----
Inventory write downs recorded
as a component of cost of
sales........................ --
-----
Total.................. $19.0
=====
</TABLE>
39
<PAGE> 40
SENSORMATIC ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
ACCRUAL ACCRUAL
BALANCE AT 2000 UTILIZATION BALANCE AT
JUNE 30, REALLOCATIONS/ ---------------- JUNE 30,
1999 (REVERSALS) CASH NON-CASH 2000
---------- -------------- ----- -------- ----------
<S> <C> <C> <C> <C> <C>
1997/1998 RESERVE (CONTINUED)
Product rationalization, related equipment charges and
other..................................................... $ 0.2 $(0.2) $ -- $ -- $ --
Closure of facilities and related costs..................... 5.8 (4.2) (1.4) -- 0.2
Employee termination and related costs...................... 3.8 2.5 (2.5) -- 3.8
Non-core business divestitures.............................. 9.2 (3.5) -- (4.8) 0.9
----- ----- ----- ----- ----
Total............................................... $19.0 $(5.4) $(3.9) $(4.8) $4.9
===== ===== ===== ===== ====
</TABLE>
---------------
(1) The 1997 provision of $6.5 million includes $2.9 million charged directly to
the impaired assets.
3. 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, 2000 and 1999 are summarized as follows:
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
Trade accounts receivable due within 1 year................. $344.6 $306.1
Allowance for doubtful accounts............................. (42.7) (30.6)
------ ------
Trade accounts receivable due in 1 year, net.............. $301.9 $275.5
====== ======
Installment and deferred receivables........................ $ 29.1 $ 43.7
Allowance for doubtful accounts............................. (1.9) (5.2)
Unearned interest and maintenance........................... (19.7) (21.4)
------ ------
Total installment and deferred receivables, net... 7.5 17.1
Less: Amounts due in 1 year, net............................ (6.5) (14.3)
------ ------
Total noncurrent installment and deferred
receivables, net................................ $ 1.0 $ 2.8
====== ======
Sales-type leases-minimum lease payments receivable......... $ 93.9 $144.3
Allowance for uncollectible minimum lease payments.......... (6.7) (11.5)
Unearned interest and maintenance........................... (23.5) (30.3)
------ ------
Total sales-type leases, net...................... 63.7 102.5
Less: Amounts due in 1 year, net............................ (21.0) (28.8)
------ ------
Total noncurrent sales-type leases, net........... $ 42.7 $ 73.7
====== ======
Total customer receivables.................................. $373.1 $395.1
Less: Amounts due in 1 year, net............................ 329.4 318.6
------ ------
Total noncurrent customer receivables............. $ 43.7 $ 76.5
====== ======
</TABLE>
Net receivables and sales-type lease receivables at June 30, 2000 are due as
follows: 2001 -- $329.4 million; 2002 -- $16.7 million; 2003 -- $9.1 million;
2004 -- $7.4 million; 2005 -- $6.2 million and $4.3 million thereafter.
40
<PAGE> 41
SENSORMATIC ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACCOUNTS RECEIVABLE FINANCING
As of June 30, 2000, the Company's primary receivable financing agreements with
financial institutions are described below:
Effective June 2000, the Company entered into a five year L100 million
(approximately $160.0 million) asset backed commercial paper conduit program
(the "Program") which allows for the sale of accounts receivable from eligible
equipment lease contracts originating in the United Kingdom and Scotland on a
nonrecourse basis to a Special Purpose Vehicle owned by a third party. This
agreement was intended to replace a similar facility, which was also outstanding
at June 30, 2000.
Effective April 1999, the Company entered into Purchase and Sale Agreements with
a U.S. leasing institution. Under these agreements, the Company sells equipment
leases to its wholly owned non-consolidated special purpose corporation which in
turn sells the related receivables to the leasing institution. In addition, the
Company entered into a leasing program agreement whereby future equipment leases
will be originated by the leasing institution and the leasing institution will
pay the Company a discounted value for the equipment leases.
Under the Company's other sale of receivables agreement in the U.S., certain
pre-approved trade accounts receivables are sold to the financial institution.
The financing institution advances cash, in anticipation of customer
collections, to the Company at fluctuating interest rates of 60 basis points in
excess of LIBOR.
During fiscal 2000 and 1999, the Company received cash proceeds of $379.5
million and $315.3, respectively, under all of the Company's receivable sale
agreements. Collection of a portion of the sale of receivables is deferred and
reflected in the financial statements, primarily in other non-current assets.
Such amounts, which approximate $31.9 million in 2000 and $31.5 in 1999, are
recorded at fair market value based on management's assessment of realization
and the expected timing of cash flows. The Company expects recourse amounts
associated with the aforementioned activities to be minimal, and has adequate
reserves to cover potential losses. 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.
5. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
Finished goods.............................................. $128.6 $135.7
Parts....................................................... 41.3 45.2
Work-in-process............................................. 6.9 11.2
------ ------
176.8 192.1
Less allowance for excess and obsolete inventory............ (23.9) (28.4)
------ ------
Total inventories, net............................ $152.9 $163.7
====== ======
</TABLE>
41
<PAGE> 42
SENSORMATIC ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows:
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
Machinery and equipment..................................... $161.7 $141.3
Buildings and improvements.................................. 50.6 50.9
Leasehold improvements and furniture and fixtures........... 26.5 30.2
Enterprise resource planning system assets.................. 28.5 22.8
Land........................................................ 11.5 11.5
------ ------
278.8 256.7
Less accumulated depreciation and amortization.............. (122.2) (119.2)
------ ------
Total property, plant and equipment, net.......... $156.6 $137.5
====== ======
</TABLE>
The Company leases certain operating plant and equipment. The future lease
commitments for plant and equipment and other assets at June 30, 2000 aggregated
$27.8 million and are due as follows: 2001 -- $11.0 million; 2002 -- $5.9
million; 2003 -- $3.6 million; 2004 -- $2.1 million; 2005 -- $1.6 million and
$5.8 million thereafter. Rent expense for certain operating plant and equipment
was charged to operations as follows: 2000 -- $18.6 million, 1999 -- $18.9
million and 1998 -- $10.7 million.
7. EARNINGS PER SHARE
The following data show the amounts used in computing earnings (loss) per share
and the effects on income and the weighted-average number of shares of
potentially dilutive common stock. The reconciliation of the numerator and
denominator of the EPS calculation is presented below (in millions except per
share data):
<TABLE>
<CAPTION>
2000 1999 1998
----- ----- ------
<S> <C> <C> <C>
Numerator:
Net income (loss)...................................... $72.2 $38.1 $(32.7)
Less: Preferred stock dividends........................ (11.9) (11.5) (2.5)
----- ----- ------
Income (loss) applicable to common stockholders........ $60.3 $26.6 $(35.2)
===== ===== ======
Denominator:
Basic EPS -- weighted average shares................... 76.5 75.0 74.2
Dilutive effect: Stock options......................... 0.8 0.3 0.3
----- ----- ------
Diluted EPS -- weighted average shares................. 77.3 75.3 74.5
===== ===== ======
Basic income (loss) per share............................... $0.79 $0.35 $(0.47)
===== ===== ======
Diluted income (loss) per share............................. $0.78 $0.35 $(0.47)
===== ===== ======
</TABLE>
Options to purchase 4.8 million shares of Common Stock were not included in
computing diluted earnings per share because their effects were antidilutive.
Additionally, Common Stock issuable upon the conversion of the 6 1/2%
Convertible Preferred Stock, was not included in the denominator in the
computation of diluted EPS as the impact would be anti-dilutive.
42
<PAGE> 43
SENSORMATIC ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
The income tax provisions (benefits) on income (loss) are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
----- ----- ------
<S> <C> <C> <C>
U.S. Federal income taxes:
Current................................................... $12.5 $(1.3) $ 1.6
Deferred.................................................. 15.8 11.8 (20.5)
Foreign income taxes:
Current................................................... 13.5 (0.8) 15.2
Deferred.................................................. (7.4) 4.9 (6.0)
State and other............................................. 1.3 2.8 (4.4)
----- ----- ------
Total............................................. $35.7 $17.4 $(14.1)
===== ===== ======
</TABLE>
The 2000, 1999 and 1998 deferred provisions include a tax (utilization) benefit
of $(2.4) million, $(3.2) million and $15.9 million, respectively, relating to
net operating losses.
The United States (including Puerto Rico) and foreign components of income
(loss) before income taxes are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------ ----- ------
<S> <C> <C> <C>
United States............................................... $ 72.2 $33.0 $(51.3)
Foreign..................................................... 35.7 22.5 4.5
------ ----- ------
Total............................................. $107.9 $55.5 $(46.8)
====== ===== ======
</TABLE>
The U.S. Federal tax rate reconciles to the effective tax rate as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------ ----- ------
<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............................. (4.7) (1.3) (13.7)
Amortization of costs in excess of net assets acquired...... 3.4 9.0 6.9
International tax rate differentials, net of foreign tax
credits................................................... (1.5) (11.1) 12.8
Tax benefit of foreign sales corporation.................... (0.6) (1.1) (2.7)
State income tax effect, net of Federal benefit............. 0.8 3.1 (5.7)
Change in estimate of prior years' accruals................. 5.7 (6.2) 5.0
Valuation allowance......................................... (7.6) (6.5) 2.2
Minority interest........................................... 1.1 1.2 1.4
Other....................................................... 1.5 9.1 (1.3)
------ ----- ------
33.1% 31.2% (30.1)%
====== ===== ======
</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.
43
<PAGE> 44
SENSORMATIC ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Shortly after the close of the Company's fiscal year, Germany enacted tax
legislation reducing its federal tax rate to 25%. The rate change is effective
for the Company's fiscal year ended June 2002 and is not expected to have a
significant effect on the deferred tax asset.
Certain Commonwealth of Puerto Rico taxes (tollgate taxes) are due upon
distribution of earnings at rates ranging up to 10% depending on the fiscal year
earned. At June 30, 2000, approximately $200.5 million of undistributed earnings
were considered indefinitely reinvested in the Puerto Rico subsidiary, upon
which no tollgate taxes have been provided.
The Company is currently undergoing a U.S. Internal Revenue Service audit for
its tax years ending June 30, 1996 and 1995. As of the balance sheet date, no
final determinations have been made relating to any issues raised during the
examination. The Company does not expect any material adjustments and believes
that it has adequately accrued for any potential liabilities.
The effects of temporary differences and carryforwards that give rise to
deferred tax assets and liabilities at June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
--------------------- ---------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Property, plant and equipment.......................... $ -- $ 1.6 $ 25.8 $ --
Reserves and allowances................................ 24.4 (0.6) 26.0 (1.1)
Sales-type leases...................................... (45.9) 1.6 (60.5) 5.0
Undistributed earnings of German subsidiary............ -- 5.5 (4.2) --
Deemed sales revenues from Puerto Rico operations...... 51.4 -- 51.2 --
Restructuring charges.................................. 3.5 -- 7.7 --
NOL and tax credit carryforwards....................... 159.0 -- 152.7 (0.2)
Valuation allowance.................................... (7.6) -- (16.1) --
Deferred acquisition costs............................. -- 18.9 -- 18.6
Other.................................................. 3.2 4.2 (1.2) (8.4)
------ ----- ------ ------
Total deferred income taxes.................. $188.0 $31.2 $181.4 $ 13.9
====== ===== ====== ======
</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.
During fiscal 2000, the valuation allowance was reduced by $8.5 million to $7.6
million due to management's belief that it was more likely than not that future
taxable income would be sufficient to utilize deferred tax assets of $188.0
million. In assessing the likelihood of utilization of existing deferred tax
assets, management has considered the historical results of operations and the
current operating environment.
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) in various countries, including the
United States, the Company generated taxable income in fiscal 2000 and utilized
approximately $34 million of net operating loss carryforwards; (2) prior to the
restructuring charges and shareholder litigation settlement costs, the Company
had a history of pre-tax income; (3) a significant portion of the loss
carryforwards resulted from restructuring and shareholder litigation settlement
costs; (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 assets; and (5) a significant portion of
the net operating losses have an indefinite life or do not expire in the
44
<PAGE> 45
SENSORMATIC ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<S> <C>
- Losses expiring in fiscal 2001 -- 2002: France $12.9, Italy $1.4
- Losses expiring in fiscal 2003 -- 2007: Italy $8.2, Puerto Rico $1.2, Spain $3.9,
United States $6.6
- Losses expiring in fiscal 2008 -- 2012: United States $114.8
- Losses expiring after fiscal 2012: United States losses of $66.3 and $22.4
expiring in 2018 and 2019, respectively
- Losses with indefinite life: Belgium $35.7, France $2.3, Germany
$18.7, Ireland $29.6, Sweden $10.3,
United Kingdom $35.2, Other $1.0
- Foreign tax credits expiring in fiscal 2001 through 2004 are $1.7.
</TABLE>
9. DEBT
Debt is summarized as follows:
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
8.04% Senior Notes due March, 2006.......................... $230.0 $230.0
7.21% Senior Notes due March, 2000.......................... -- 70.0
7.34% Senior Notes due March, 2001.......................... 50.0 50.0
8.21% Senior Notes due January, 2003........................ 135.0 135.0
Other debt, at 3.87% to 9.97%, net of unamortized interest
of $2.0 and $2.5 at 2000 and 1999, respectively........... 12.5 23.1
------ ------
Total debt........................................ 427.5 508.1
------ ------
Less: Amounts payable in 1 year............................. (56.2) (80.4)
------ ------
Total noncurrent debt............................. $371.3 $427.7
====== ======
</TABLE>
During fiscal 2000, the Company repaid the $70 million Senior Notes.
On December 9, 1999, the Company secured a committed line of credit agreement
expiring in December 2002 with a group of U.S. and international banks which
provides for aggregate unsecured borrowings by the Company ("Revolving Credit
Facility") of up to $125.0 million of which $108.6 million was available for use
as of June 30, 2000. Borrowings under this agreement bear interest at the London
Interbank Offered Rate (LIBOR) plus an applicable margin associated with the
Company's credit rating (0.90% at June 30, 2000) and are subject to an annual
facility fee of 0.35% on the total credit line. Additionally, the Company has
various uncommitted lines-of-credit with several financial institutions of which
$5.3 million was utilized at June 30, 2000.
The Revolving Credit Facility replaced the $250.0 million Amended and Restated
Multicurrency Revolving Credit Agreement dated March 18, 1997, which terminated
in accordance with its terms.
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, 2000 and 1999.
45
<PAGE> 46
SENSORMATIC ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. CONVERTIBLE PREFERRED STOCK
In April 1998, the Company issued 6,900,000 Depositary Shares for gross proceeds
of $172.5 million, or $166.3 million net of commissions, discounts and other
transaction issue 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 accrue at a rate per annum equal to 6 1/2% of the liquidation preference
per share of Preferred Stock and are payable quarterly on January 1, April 1,
July 1 and October 1 of each year, and commenced on July 1, 1998. Dividends are
payable in cash or, at the option of the Company and subject to covenants in the
Company's financing agreements, in shares of Common Stock of the Company or a
combination thereof. The Company issued 2,266,652 shares of Common Stock in
payment of the dividends payable, including certain liquidated damages, on the
Preferred Stock on July 1, 1998 through July 3, 2000. Under certain of the
Company's financial agreements, the Company is only permitted to pay cash
dividends to the extent that cumulative income exceeds a specified amount. Under
these covenants, the Company was unable to pay cash dividends in recent years,
and has only limited ability to pay cash dividends at present. The dividend
payable on October 2, 2000 to holders of record of the Depositary Shares as of
September 21, 2000 will be made in cash, at a rate of $0.40625 per Depositary
Share.
The Depositary 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.
11. STOCK OPTION PLANS
Under the Company's existing stock incentive plan (the "1999 Plan") stock
options may be granted to officers and key employees. The 1999 Plan provides for
granting of other awards, such as stock appreciation rights, stock awards and
cash awards, although the Company intends to continue to grant principally stock
options under this plan. The Company also has a Directors Stock Option Plan
under which non-qualified stock options are granted to non-employee directors.
The exercise price of a stock option granted under the 1999 Plan and its
predecessor 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.
All such options are non-compensatory; therefore, any U.S. Federal income tax
benefits received upon their exercise are recorded as an increase to equity.
46
<PAGE> 47
SENSORMATIC ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes activity under all plans for the years ended
2000, 1999, and 1998 (in millions except for price per option amounts):
<TABLE>
<CAPTION>
2000 1999 1998
------------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year.......... 9.2 $17.47 8.1 $19.48 7.3 $21.73
Options granted............................. 1.9 13.11 1.6 7.17 1.9 13.80
Options exercised........................... (0.7) 10.29 (0.1) 9.31 (0.1) 10.29
Options canceled............................ (1.8) 19.28 (0.4) 18.31 (1.0) 25.49
----- ------ ----- ------ ----- ------
Options outstanding, end of year................ 8.6 $16.38 9.2 $17.47 8.1 $19.48
===== ===== =====
Options exercisable, end of year................ 5.5 $18.95 6.0 $20.39 3.9 $19.43
===== ===== =====
Options available for future grant.............. 2.9 3.9 1.0
===== ===== =====
Weighted-average fair value of options granted
during the year............................... $6.65 $4.36 $5.64
===== ===== =====
</TABLE>
The following table summarizes information about stock options outstanding at
June 30, 2000 (in millions except for price per option amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGES OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE AT JUNE 30, CONTRACTUAL EXERCISE AT JUNE 30, EXERCISE
PRICES 2000 LIFE (YEARS) PRICE 2000 PRICE
--------- ----------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$5.37 - 10.63.. 1.2 4.8 $ 7.08 0.3 $ 6.98
11.42 - 15.85.. 2.7 5.5 13.04 0.8 13.58
16.00 - 19.70.. 3.1 2.7 17.40 2.9 17.42
20.60 - 23.00.. 0.8 4.6 22.16 0.7 22.33
26.37 - 30.17.. 0.3 3.9 28.14 0.3 28.15
31.00 - 36.38.. 0.5 3.9 31.62 0.5 31.62
--- ---
$5.37 - 36.38.. 8.6 4.1 $16.38 5.5 $18.95
=== ===
</TABLE>
At June 30, 2000 and 1999, 11.5 million and 13.1 million shares of Common Stock,
respectively, were reserved for the exercise of stock options or additional
awards under the above Plans. Additionally, at June 30, 2000 and 1999, 8.8
million shares of Common Stock were reserved for the conversion of the 6 1/2%
Convertible Preferred Stock.
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
47
<PAGE> 48
SENSORMATIC ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
share for fiscal 2000, 1999 and 1998 would have been reduced to the pro forma
amounts indicated below (in millions except per share data).
<TABLE>
<CAPTION>
2000 1999 1998
----- ----- ------
<S> <C> <C> <C>
Net income (loss):
As reported............................................... $72.2 $38.1 $(32.7)
Pro forma................................................. $66.5 $32.9 $(39.3)
Basic income (loss) per common share:
As reported............................................... $0.79 $0.35 $(0.47)
Pro forma................................................. $0.71 $0.29 $(0.56)
Diluted income (loss) per common share:
As reported............................................... $0.78 $0.35 $(0.47)
Pro forma................................................. $0.70 $0.29 $(0.56)
</TABLE>
These pro forma amounts may not be indicative of future pro forma income and
earnings per share.
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 2000, 1999, and 1998:
<TABLE>
<CAPTION>
2000 1999 1998
----- ----- ------
<S> <C> <C> <C>
Dividend yields............................................. -- -- --
Expected volatility......................................... .54 .513 .361
Risk-free interest rates.................................... 6.39% 4.76% 5.83%
Expected life (in years).................................... 4 8 5
</TABLE>
12. BENEFIT PLANS
Defined Contribution Plans
The Company has retirement plans for U.S. employees, Puerto Rico employees and
for certain European employees, which allow or require employee contributions.
Annual contributions by the Company to these retirement plans are discretionary.
The Company charged to operations $4.2 million, $3.0 million and $7.1 million in
fiscal 2000, 1999, 1998, respectively, related to the plans described under this
section.
Defined Benefit Plans
The Company initiated the following defined benefit plans during fiscal 1999:
(a) Supplemental Executive Retirement Plan for Vice President Level Employees
and (b) Supplemental Executive Retirement Plan for Director Level Employees.
Accordingly, the Company has accounted for these plans in accordance with the
provisions of SFAS No. 87 "Employers' Accounting for Pensions" as it relates to
defined benefit plans. Prior to fiscal 1999, these plans were defined
contribution plans.
48
<PAGE> 49
SENSORMATIC ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the benefit obligations, change in plan assets,
funded status, amounts recognized in the statement of financial position and
rate assumptions associated with the Company's pension plans.
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year................... $ 24.6 $ 23.2
Service cost........................................... 1.0 1.1
Interest cost.......................................... 1.8 1.7
Actuarial gains........................................ (1.1) 0.0
Benefits paid.......................................... (1.5) (1.4)
------ ------
Benefit obligation at end of year......................... $ 24.8 $ 24.6
====== ======
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year............ $ 0.0 $ 0.0
Actual return on plan assets........................... 0.0 0.0
Employer contributions................................. 1.5 1.4
Benefits paid.......................................... (1.5) (1.4)
------ ------
Fair value of plan assets at end of year.................. $ 0.0 $ 0.0
====== ======
RECONCILIATION OF THE FUNDED STATUS
Funded status............................................. $(24.8) $(24.6)
Unrecognized transition obligation........................ 0.5 0.7
Unrecognized prior service cost........................... 3.1 3.6
Unrecognized actuarial gains.............................. (1.1) 0.0
------ ------
Net amount recognized at year-end...................... $(22.3) $(20.3)
====== ======
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION
CONSIST OF:
Prepaid benefit cost...................................... $ 0.0 $ 0.0
Accrued benefit liability................................. (24.1) (24.6)
Intangible asset.......................................... 1.8 4.3
Accumulated other comprehensive income.................... 0.0 0.0
------ ------
Net amount recognized at year-end...................... $(22.3) $(20.3)
====== ======
WEIGHTED-AVERAGE ASSUMPTIONS AS OF JUNE 30
Discount rate............................................... 8.00% 7.50%
Rate of compensation increase............................... 5.00% 5.00%
Expected return on plan assets.............................. N/A N/A
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost.............................................. $ 1.0 $ 1.1
Interest cost............................................. 1.8 1.7
Expected return on plan assets............................ 0.0 0.0
Amortization of transitional obligation................... 0.1 0.1
Amortization of prior service cost........................ 0.5 0.5
Recognized actuarial gains................................ 0.0 0.0
------ ------
Net periodic benefit cost.............................. $ 3.4 $ 3.4
====== ======
</TABLE>
49
<PAGE> 50
SENSORMATIC ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES
With respect to the New Jersey, Florida and German actions involving the
Company, AlliedSignal, Inc. ("Allied") and/or Vacuumschmelze GmBH
("Vacuumschmelze"), during the third quarter of fiscal 2000, the Company and
Honeywell Inc. ("Honeywell"), the corporate successor to Allied, reached an
agreement to discontinue all such actions. The agreement provides, among other
things, for the assignment by Honeywell to the Company of certain patents held
by Honeywell which were the subject of the suits and related patents and
applications, the grant by Honeywell to the Company of an exclusive paid-up
license under certain other patents and rights, certain covenants not to sue,
and the payment by the Company of $8.0 million to Honeywell in consideration of
such patent assignment and license. The Company granted certain license rights,
outside the Company's core Electronic Article Surveillance business, under the
patent rights assigned to it back to Honeywell for use in Honeywell's business.
The agreement also provides for Sensormatic and Honeywell to cooperate in
efforts to enable Honeywell to qualify as an additional source of magnetic
material for Ultra-Max labels.
On March 24, 2000, the Company made the $8.0 million payment to Honeywell and
was also reimbursed $1.2 million by Vacuumschmelze in connection with the
litigation. The net amount of $6.8 million was capitalized and included under
"Patents and other assets, net" in the Consolidated Condensed Balance Sheets.
Vacuumschmelze is presently the sole supplier of the principal electromagnetic
alloy used in the Company's Ultra-Max labels. While there are potential
alternatives to the supply of such material by Vacuumschmelze, the loss or
disruption of this source of supply could result in increased costs or product
shortages or otherwise materially adversely affect the Company's business. The
Company has been pursuing development of alternative materials for use in the
Company's Ultra-Max labels and additional sources of supply.
Contingent payments
In connection with certain acquisitions, the Company pays contingent
consideration (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
included in patents and other assets and amortized over the remaining
amortization period. Contingent consideration payments in fiscal 2000, 1999 and
1998 were $1.0 million, $20.7 million and $19.7 million, respectively.
14. SEGMENT INFORMATION
The Company operates globally and offers products and services, which are sold
to retail customers and to commercial industrial customers. The Company's
products and systems are focused in three general categories under three product
divisions: electronic article surveillance systems ("EAS"), video systems
("VSD"), and access control and asset management systems ("ACD"). The Company
also provides installation and maintenance services ("Service"). Consolidated
revenues by principal products and systems follow:
<TABLE>
<CAPTION>
EAS VSD ACD SERVICE TOTAL
------ ------ ----- ------- --------
<S> <C> <C> <C> <C> <C>
Revenues
2000........................................ $601.0 $293.9 $48.8 $156.3 $1,100.0
1999........................................ $548.2 $292.3 $45.0 $132.0 $1,017.5
1998........................................ $539.8 $307.1 $32.6 $107.4 $ 986.9
</TABLE>
The Company has changed the organization of its operations as reported in fiscal
1999. The Company now operates in two reportable segments consistent with the
way the Company organizes its operations which is based on geographic area. Each
geographic area is responsible for selling all products and services to all
customers within the area. The two reportable segments are (i) Americas and (ii)
Europe, Middle East, Africa and Asia/Pacific ("EMEA").
50
<PAGE> 51
SENSORMATIC ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The accounting policies of the segments are the same as those described in Note
1 Summary of Significant Accounting Policies. There are no intersegment sales.
Segment operating results are measured based on operating income. Corporate and
unallocated expenses primarily include amounts for certain divested businesses
and provisions for restructuring charges. Identifiable assets are comprised of
those accounts of the Company that are identified with the operations of each
segment. Corporate and unallocated assets are primarily comprised of cash.
Capital expenditures included under Corporate and unallocated consist primarily
of manufacturing machinery and equipment and enterprise resource planning system
assets. These amounts are not allocated to the segments.
In 2000, 1999 and 1998, no single customer represented 10% or more of the
Company's sales.
Prior years' amounts have been reclassified to conform to the 2000 presentation.
GEOGRAPHIC SEGMENT INFORMATION
<TABLE>
<CAPTION>
CORPORATE AND
AMERICAS EMEA UNALLOCATED TOTAL
-------- ------ ------------- --------
<S> <C> <C> <C> <C>
Total Revenues
2000................................................. $678.0 $422.0 $ 0.0 $1,100.0
1999................................................. 613.2 404.3 0.0 1,017.5
1998................................................. 560.8 423.1 3.0 986.9
Depreciation/Amortization
2000................................................. $ 23.4 $ 25.7 $ 0.0 $ 49.1
1999................................................. 20.6 23.4 0.0 44.0
1998................................................. 20.5 25.2 0.0 45.7
Operating income
2000................................................. $110.3 $ 21.3 $ 4.5(1) $ 136.1
1999................................................. 86.7 (5.2) 0.0 81.5
1998................................................. 59.8 2.8 (22.5) 40.1
Total assets
2000................................................. $637.6 $881.4 $243.9 $1,762.9
1999................................................. 652.1 885.6 237.9 1,775.6
1998................................................. 614.3 970.7 214.5 1,799.5
Capital expenditures
2000................................................. $ 3.6 $ 4.3 $ 38.1 $ 46.0
1999................................................. 2.0 4.3 22.8 29.1
1998................................................. 4.0 3.5 21.8 29.3
</TABLE>
---------------
(1) Includes $8.3 million restructuring reversal and ($3.8) million for Chief
Executive Officer change that were not allocated to sales areas.
15. FINANCIAL INSTRUMENTS
At June 30, 2000 and 1999, 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.
51
<PAGE> 52
SENSORMATIC ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
SENIOR NOTE DEBT 2000 1999
---------------- ------ ------
<S> <C> <C>
Recorded value............................................ $415.0 $485.0
Fair value................................................ 402.0 492.8
</TABLE>
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 is subject to interest rate risk under various financing facilities,
primarily its receivable financing programs. Under these programs, the Company
sells fixed interest rate receivables to a financing institution which funds the
receivables with a floating rate. Any resulting differential in interest caused
by the varying rates (variance amount) is either paid or received by the
Company.
The Company entered into a fixed to floating interest rate swap agreement with a
party to its U.K. receivable financing program. The effect of the interest rate
swap agreement is to return 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, 2000, the
notional amount of this interest rate swap agreement was L68.5 million. The
interest rate swap agreement will expire when the underlying receivables are
paid down. At June 30, 2000, the floating rate to be paid by the Company was
6.17%, equivalent to the variable cost of funds of the purchaser of the assets,
and the fixed rate to be received was approximately 12.25%. 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, 2000.
In order to manage the risk associated with the variance amount on the sale of
certain receivables, including the U.K. financing program as described above,
the Company enters into other interest rate swap agreements, 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. The
Company had no other interest rate swap agreements outstanding at June 30, 2000.
The notional amount of other interest rate swap agreements at June 30, 1999 was
$123.7 million.
Foreign currency contracts
The Company conducts business in a wide variety of currencies and consequently
enters into foreign exchange forward 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 intercompany firm commitments. At June 30, 2000 and 1999,
the Company's outstanding notional amounts for currency forward contracts were
approximately $50.5 million and $65.8 million, respectively, maturing in three
to twelve months. The fair value of these investments at June 30, 2000 was $0.9
million and at 1999 was not material.
52
<PAGE> 53
SENSORMATIC ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The table below details notional amounts indicated in U.S. dollars of the
Company's outstanding foreign exchange forward contracts at June 30, 2000:
<TABLE>
<CAPTION>
CURRENCIES
----------
<S> <C>
Euro........................................................ $35.9
British Pounds.............................................. 10.5
Other....................................................... 4.1
-----
Total............................................. $50.5
=====
</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 3 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.
53
<PAGE> 54
PART III
ITEMS 10 TO 13 INCLUSIVE
This information required by Item 10 (Directors and Executive Officers of the
Registrant) (other than information as to executive officers of the Company,
which is set forth Part I under the caption "Executive Officers of the
Registrant"), Item 11 (Executive Compensation), Item 12 (Security Ownership of
Certain Beneficial Owners and Management) and Item 13 (Certain Relationships and
Related Transactions) is incorporated by reference to the Company's definitive
proxy statement for the 2000 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or about October 6, 2000, except that the
"Report of the Governance and Stock Incentive Plan Committees" and the
"Performance Graph" and the text describing it contained in the proxy statement
are not incorporated by reference herein.
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:
<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 6 1/2% 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.
</TABLE>
54
<PAGE> 55
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<S> <C> <C>
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).
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, 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 and to Exhibit 10(e) to Form 10-K/A for
the fiscal year ended June 30, 1998).
10(f) -- Stock Purchase Loan Plan and representative forms of note
and security agreements thereunder filed herewith.
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) -- 1999 Stock Incentive Plan and representative forms of
non-qualified stock options and Restricted Stock Agreement
under such Plan (incorporated by reference to Exhibit 10(j)
to Form 10-K for the fiscal year ended June 30, 1999).
10(k) -- 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(l) -- Agreement, dated as of September 1, 1998, between the
Company and Robert A. Vanourek, President and Chief
Executive Officer of the Company (incorporated by reference
to Exhibit 10(k) to Form 10-K for the fiscal year ended June
30, 1998).
10(m) -- 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).
</TABLE>
55
<PAGE> 56
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<S> <C> <C>
10(n) -- 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 (incorporated by reference to Exhibit 10(m) to Form
10-K for the fiscal year ended June 30, 1998).
10(o) -- 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
(incorporated by reference to Exhibit 10(n) to Form 10-K for
the fiscal year ended June 30, 1998) and amendment thereto
dated as of August 5, 1999 (incorporated by reference to
Exhibit 10(o) to Form 10-K for the fiscal year ended June
30, 1999).
10(p) -- 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 (incorporated by reference to
Exhibit 10(o) to Form 10-K for the fiscal year ended June
30, 1998).
10(q) -- 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 (incorporated by
reference to Exhibit 10(p) to Form 10-K for the fiscal year
ended June 30, 1998).
10(r) -- 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
(incorporated by reference to Exhibit 10(q) to Form 10-K for
the fiscal year ended June 30, 1998) and amendment thereto
dated as of August 5, 1999 (incorporated by reference to
Exhibit 10(r) to Form 10-K for the fiscal year ended June
30, 1999).
10(s) -- 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 (incorporated by reference
to Exhibit 10(r) to Form 10-K for the fiscal year ended June
30, 1998) and amendment thereto dated as of August 5, 1999
(incorporated by reference to Exhibit 10(s) to Form 10-K for
the fiscal year ended June 30, 1999).
10(t) -- 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
(incorporated by reference to Exhibit 10(s) to Form 10-K for
the fiscal year ended June 30, 1998).
10(u) -- 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 Operation
(incorporated by reference to Exhibit 10(f) to Form 10-K for
the fiscal year ended June 30, 1998).
10(v) -- Employment Agreement, dated as of August 23, 1999, between
the Company and Per-Olof Loof, President and Chief Executive
Officer of the Company (incorporated by reference to Exhibit
10(x) to Form 10-K for the fiscal year ended June 30, 1999).
10(w) -- Agreement, dated as of August 23, 1999, between the Company
and Per-Olof Loof, President and Chief Executive Officer at
the Company (incorporated by reference to Exhibit 10(y) to
Form 10-K for the fiscal year ended June 30, 1999).
10(x) -- Employment Agreement, dated as of October 29, 1997, between
the Company and Kenneth W. Chmiel, Senior Vice
President-Supply Chain Operations (incorporated by reference
to Exhibit 10(z) to Form 10-K for the fiscal year ended June
30, 1999).
</TABLE>
56
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<S> <C> <C>
10(y) -- Agreement, dated as of September 1, 1998, between the
Company and Kenneth W. Chmiel, Senior Vice President-Supply
Chain Operations (incorporated by reference to Exhibit
10(aa) to Form 10-K for the fiscal year ended June 30,
1999).
10(z) -- Employment Agreement, dated as of September 14, 1998,
between the Company and John P. Smith, Senior Vice President
and President of Europe Operations (incorporated by
reference to Exhibit 10(bb) to Form 10-K for the fiscal year
ended June 30, 1999).
10(aa) -- Agreement, dated as of September 14, 1998, between the
Company and John P. Smith, Senior Vice President and
President of Europe Operations (incorporated by reference to
Exhibit 10(cc) to Form 10-K for the fiscal year ended June
30, 1999).
10(bb) -- 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(cc) -- Revolving Credit Agreement, dated as of December 9, 1999,
between the Company and Bank of America, N.A. and other
lending institutions (incorporated by reference to Exhibit
10.1 to Form 10-Q for the quarter ended ended December 31,
1999).
10(dd) -- Amendment No. 1 to Credit Agreement (incorporated by
reference to Exhibit 10.1 to Form 10-Q for the quarter ended
March 31, 1999).
21 -- List of Subsidiaries of the Company.
23(a) -- Consent of PricewaterhouseCoopers LLP, Independent Certified
Public Accountants.
23(b) -- Consent of PricewaterhouseCoopers LLP, Independent Certified
Public Accountants.
23(c) -- Consent of Ernst & Young LLP, Independent Certified Public
Accountants.
23(d) -- Consent of Ernst & Young LLP, Independent Certified Public
Accountants.
27 -- Financial Data Schedule (EDGAR version only).
</TABLE>
(b) Reports on Form 8-K:
On August 9, 1999, the Company filed a current report on Form 8-K with
respect to the resignation and retirement of Mr. Robert A. Vanourek as
President and Chief Executive Officer, and the appointment of Mr. Per-Olof
Loof to those positions effective August 23, 1999.
57
<PAGE> 58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized, on September 25, 2000.
SENSORMATIC ELECTRONICS
CORPORATION
By: /s/ GREGORY C. THOMPSON
------------------------------------
Gregory C. Thompson
Vice President and Controller and
Acting Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Company and in
the capacities indicated on September 25, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ PER-OLOF LOOF President and Chief Executive Officer
----------------------------------------------------- (Principal Executive Officer) and Director
Per-Olof Loof
/s/ GREGORY C. THOMPSON Vice President and Controller and Acting Chief
----------------------------------------------------- Financial Officer (Principal Financial and
Gregory C. Thompson Accounting Officer)
/s/ RONALD G. ASSAF Chairman of the Board of Directors
-----------------------------------------------------
Ronald G. Assaf
/s/ PAULINE LO ALKER Director
-----------------------------------------------------
Pauline Lo Alker
/s/ THOMAS V. BUFFETT Director
-----------------------------------------------------
Thomas V. Buffett
/s/ TIMOTHY P. HARTMAN Director
-----------------------------------------------------
Timothy P. Hartman
/s/ FRED A. BREIDENBACH Director
-----------------------------------------------------
Fred A. Breidenbach
/s/ JAMES E. LINEBERGER Director
-----------------------------------------------------
James E. Lineberger
/s/ J. RICHARD MUNRO Director
-----------------------------------------------------
J. Richard Munro
/s/ JOHN T. RAY, JR Director
-----------------------------------------------------
John T. Ray, Jr.
</TABLE>
58
<PAGE> 59
SCHEDULE II
SENSORMATIC ELECTRONICS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDING JUNE 30, 2000, 1999, AND 1998
(In millions)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Balance, beginning of period................................ $ 47.3 $ 59.1 $ 63.8
Additions charged to income................................. 24.6 22.5 23.4
Amounts written off......................................... (18.3) (32.8) (22.4)
Other (including currency translation)...................... (2.3) (1.5) (5.7)
------ ------ ------
Balance, end of period...................................... $ 51.3 $ 47.3 $ 59.1
====== ====== ======
</TABLE>
ALLOWANCE FOR INVENTORY LOSSES
<TABLE>
<CAPTION>
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Balance, beginning of period................................ $ 28.4 $ 32.8 $ 29.1
Additions charged to income................................. 8.0 11.5 11.7
Amounts written off......................................... (12.2) (15.5) (7.6)
Other (including currency translation)...................... (0.3) (0.4) (0.4)
------ ------ ------
Balance, end of period...................................... $ 23.9 $ 28.4 $ 32.8
====== ====== ======
</TABLE>
59
<PAGE> 60
0854-10K-00
