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imposition of a constructive trust. The Company
$12.8 thereafter. Rent expense was charged to oper-
intends to vigorously defend against the actions. The
ations as follows (in millions): 1995 - $10.4; 1994 -
ultimate outcome of these actions cannot presently
$10.2 and 1993 - $4.7.
be determined. Accordingly, no provision for any
b. Contingent royalty payments. In connection with liability that may result has been made in the con-
certain acquisitions, the Company pays royalties solidated ¬nancial statements.
(ranging from 3% to 10%) on revenues generated by
the acquired businesses for periods expiring in 1996 d. Restatement of interim ¬nancial statements. In ¬s-
through 2004. Such contingent payments, when cal 1995, revenues related to certain shipments that
incurred, will be recorded as additional cost of the were recorded incorrectly in ¬scal 1995 were identi-
related acquisitions and amortized over the remain- ¬ed and were reported to the Audit Committee of
ing amortization period. Royalty payments in ¬scal the Board of Directors by the Company™s indepen-
1995, 1994 and 1993 were $13.3 million, $7.6 dent certi¬ed public accountants. The Audit Commit-
million and $5.6 million, respectively. tee authorized an expansion of the scope of the
c. Litigation. In July, August and September 1995, ¬scal 1995 audit and retained independent counsel
thirteen actions were ¬led by alleged shareholders to assist in the investigation of this matter. The results
of the Company following announcements by the of the investigation concluded that certain account-
Company that its earnings for the quarter and year ing irregularities resulted in incorrectly recording
ended June 30, 1995, would be substantially below revenues and related costs and expenses for certain
expectations and, in the more recent actions and a product shipments in each quarter of 1995, 1994
complaint amendment, that the scope of the Com- and 1993. These shipments included both product
728 Management Communications

Management Communications

shipments actually made after the end of each quar- approximately $43 million). The acquisitions of
ter as well as shipments subject to nonstandard con- Knogo, ALPS and Security Tag resulted in costs in
tractual terms. In addition, during ¬scal 1995, excess of net assets acquired of approximately $114

Sensormatic Electronics Corporation
certain expenses were incorrectly capitalized during million, $223 million and $47 million, respectively
the third and fourth quarters of ¬scal 1995 as an (based on a preliminary allocation of the Knogo
element of the purchase price of Knogo Corpora- purchase price), which are being amortized using
tion. After carefully evaluating the ¬ndings, the the straight-line method over 40 years. These acqui-
Company concluded the ¬nancial statements for the sitions were accounted for under the purchase
third quarter of ¬scal 1995 required restatement. method and the respective subsidiaries were consol-
(See Note 13.) Further, the Company concluded the idated in the Company™s ¬nancial statements from
effects of these matters on ¬scal 1993, on ¬scal their respective dates of acquisition.
1994 and the quarters therein and on the ¬rst and
The Company™s unaudited pro forma consolidated
second quarters of ¬scal 1995 were such that
condensed statements of income for ¬scal 1995,
restatement of the ¬nancial statements of such peri-
1994 and 1993, assuming the acquisitions of
ods was not required.
Knogo (¬scal 1995 and 1994), ALPS (¬scal 1993)
and Security Tag (¬scal 1993) were effected at the
Note 11. Acquisitions beginning of each year, are summarized as follows
(in millions, except per share data):
On December 29, 1994, the Company acquired the
operations outside of the United States, Puerto Rico
1995 1994 1993
and Canada of Knogo Corporation (”Knogo”) for
Total revenues $922.3 $726.1 $510.2
approximately 3.1 million shares of the Company™s
Income from continuing opera-
Common Stock (with a value of approximately tions before income taxes 89.6 108.7 72.3
$100 million). Based on the preliminary purchase Net income 73.7 79.3 53.9
price allocation, the signi¬cant identi¬able assets Primary earnings per common
share $1.00 $1.22 $ .91
acquired and liabilities assumed and/or incurred in
Fully diluted earnings per
connection with the Knogo acquisition were as common share $ .99 $1.16 $ .89

This pro forma information does not purport to be
Cash and marketable securities $ 5.8
indicative of the results which may have been
Accounts receivable, net 18.7
obtained had the acquisitions been consummated at
Net investment in sales-type leases 17.8
Inventories, net 12.5 the dates assumed (see the ¬nancial statements and
Deferred income taxes, patents and other assets net 26.0
other information related to Knogo in the Com-
Accrued liabilities 54.0
pany™s Current Report on Form 8-K ¬led January
Debt 23.5
11, 1995, as amended on Form 8-K/A ¬led January
27, 1995).
In ¬scal 1993, the Company acquired Automated
In connection with acquisitions during ¬scal 1995,
Loss Prevention Systems (ALPS), a large European
1994 and 1993, the market value of the assets
distributor of EAS and CCTV products, and Security
acquired was as follows (in millions):
Tag Systems, Inc. (Security Tag), a U.S.- based man-
ufacturer and marketer of loss prevention products,
1995 1994 1993
for an aggregate amount of approximately $323
million consisting of approximately $280 million Cash paid (net of cash
acquired) $ 9.6 $11.5 $299.3
(funded with net proceeds of approximately $194.8
Liabilities assumed and/or
million from the issuance of 12.6 million shares of incurred 101.1 13.2 76.6
its Common Stock and from borrowings under a Common stock 149.3 31.0 43.4
Market value of assets
short-term credit facility) and 1.5 million shares of
acquired $260.0 $55.7 $419.3
the Company™s Common Stock (with a value of
Management Communications

17-45 Part 3 Business Analysis and Valuation Applications

Sensormatic Electronics Corporation

Ronald G. Assaf Jerome M. LeWine John T. Ray, Jr.*
Chairman of the Board and Partner, Christy & Viener Senior Vice President
Chief Executive Director Attorney at Law ASC Division
H.B. Fuller Company
Robert A. Vanourek James E. Lineberger
Timothy P Hartman
President and Chief Operating Chairman of the Executive
Chairman of Nations Bank of
Of¬cer Committee
Texas, Private Investor
Partner, Lineberger & Co. Private
Thomas V. Buffet*
Investment Firm
Vice Chairman of the Board,
* Member of the Audit Committee
President, Chipper Investments Dr. Arthur G. Milnes*
Retired Chairman of the Board Professor Emeritus, Electrical
and Chief Executive Of¬cer of Engineering Department
Automated Security Carnegie-Mellon University
730 Management Communications

Management Communications


Sensormatic Electronics Corporation
The Board of Directors
Sensormatic Electronics Corporation
We have audited the accompanying consolidated balance sheets of Sensormatic Electron-
ics Corporation as of June 30, 1995 and 1994, and the related consolidated statements
of income, stockholders™ equity, and cash ¬‚ows for each of the three years in the period
ended June 30, 1995. These ¬nancial statements are the responsibility of the Company™s
management. Our responsibility is to express an opinion on these ¬nancial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable assur-
ance about whether the ¬nancial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in
the ¬nancial statements. An audit also includes assessing the accounting principles used
and signi¬cant estimates made by management, as well as evaluating the overall ¬nan-
cial statement presentation. We believe that our audits provide a reasonable basis for our
In our opinion, the consolidated ¬nancial statements referred to above present fairly, in
all material respects, the consolidated ¬nancial position of Sensormatic Electronics Cor-
poration at June 30, 1995 and 1994, and the consolidated results of their operations
and their cash ¬‚ows for each of the three years in the period ended June 30, 1995, in
conformity with generally accepted accounting principles.
As discussed in Note 9. to the consolidated ¬nancial statements, the Company is a defen-
dant in various lawsuits brought by alleged shareholders claiming, among other things,
violations of federal securities laws. The Company strongly disputes these charges and
intends to vigorously defend against these lawsuits. The ultimate outcome of the litigation
cannot presently be determined. Accordingly, no provision for any liability that may result
has been made in the consolidated ¬nancial statements.
As discussed in Note 5. to the consolidated ¬nancial statements, in 1994 the Company
changed its method of accounting for income taxes.

West Palm Beach, Florida
September 30, 1995
Anacomp, Inc.

O n September 10, 1982, Anacomp, a computer software company, re-
leased its ¬rst annual report after being listed on the New York Stock Exchange. Prior to
1982, the company™s stock was traded on the over-the-counter market. In the annual
report Anacomp™s management outlined the company™s strategy for new software sys-
tems development:
Anacomp is committed to being the world™s leading supplier of software and
services to the banking industry. Anacomp and its subsidiaries have licensed soft-
ware products, sold data processing services, or entered into software consulting
agreements with more than 200 billion-dollar ¬nancial institutions around the
world. But the bank marketplace is changing rapidly. Regulatory and technologi-
cal changes are blurring the distinctions between banks and other ¬nancial insti-
tutions. Bank customers”both retail and wholesale”are becoming more
Anacomp sophisticated and more demanding. Bankers require computer systems which en-
courage total customer relationships, adapt quickly to product changes, and meet
requirements of round-the-clock banking.
Since 1979, Anacomp has been developing a totally new generation of banking
computer software systems to serve those evolving needs. Anacomp™s software de-
velopment effort is one the most substantial ever undertaken by an independent
computer services vendor. It is based on an Anacomp innovation”the software
R&D partnership”and on the philosophy of getting prospective customers in-
volved in developing the software products they will eventually use.
In 1979, when its net worth was $10 million, Anacomp recognized the oppor-
tunity to develop at a cost of $12 million a major new IBM-based real-time retail
banking system. The development was expected to take several years to complete.
Anacomp selected the limited partnership alternative to buffer the company™s
stockholders from the financial risks involved. To help assure the development of
a superior product, Anacomp also sought the participation of a cross-section of
major financial institutions”the ultimate users of the bank product. To induce
these banks to become co-developers, it was necessary to show that the required
funding was in place and that Anacomp™s commitment was firmly established. A

This case was prepared by Professor Krishna Palepu as the basis for class discussion rather than to illustrate either
effective or ineffective handling of an administrative situation. Copyright © 1987 by the President and Fellows of
Harvard College. Harvard Business School case 9-187-153.

732 Case: Anacomp, Inc.

2 Part 4 Additional Cases

limited partnership was the best way to induce four “primary development banks”
to contribute collectively $6 million and 24 software development people for two
years to the project.
The same considerations were present in each of the four subsequent partner-
ships”BANKSERV 10000, CEFT, CDA, and CIBS. Each partnership assumed devel-
opment risks; except for BANKSERV 10000, each project involved several major
banks acting as co-developers with Anacomp. Any product developed becomes the
property of the partnership. Anacomp has the option to purchase the products but
is under no obligation to exercise this option; Anacomp did purchase the CIS and
BANKSERV 10000 systems in 1982. In total, more than $60 million has been raised
since 1979 for investment in the development of new wholesale and retail banking
software products.



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