marvin markowitz, et al. v. sensormatic electronics...

Case 9:01-cv-08346-DTKH Document 15 Entered on FLSD Docket 10/16/2001 of 90

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF FLORIDA

Case No: 01-8346-Cl V-RYSKAMP

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IN RE: SENSORMATIC ELECTRONICS CORP. )

SECURITIES LITIGATION )

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PIL 11) ox

T 1 52001 /

CONSOLIDATED AMENDED CLASS ACTION COMPLAINT

Plaintiffs allege the following, except as to matters specifically pertaining to them and

their counsel, based upon Counsel's investigation, which included analysis of publicly-available

news articles and reports, public filings, press releases and other matters of public record, contact

with factual sources, review of internal documents and consultation with a forensic accountant.

NATURE OF THE ACTION

This is a class action on behalf of all purchasers of the common stock of

Sensormatic Electronics Corp. ("Sensormatic" or the "Company") between August 8, 2000 and

April 9, 2001, inclusive, (the "Class Period"), brought under the Securities Exchange Act of 1934

(the "Exchange Act')

2. Throughout the Class Period, defendants recognized revenue in violation of

Generally Accepted Accounting Principles ("GAAP"). Defendants recognized revenue upon

shipment of a product even when the customer was allowed to return the product within a certain

time, or the customer could test the product for a year and then decide whether or not to make the

purchase. This sales practice was referred to within the Company as the "try-buy" program. As

a result, defendants' financial results for year-end 2000 and the third quarter of fiscal 2001 were

materially overstated.


3. This was not the first time Defendants engaged in questionable revenue

recognition tactics. As detailed below, defendants' improper accounting methods caught the eye

of the SEC in 1995, which resulted in an investigation, fine, and settlement. See also Exhs. A

and B hereto.

4. Defendants learned early in the Class Period that Sensormatic's sales were

declining, and would continue to decline. Between February 28 and March 1, 2001, an Annual

Product Sales Forum Meeting was held at the Embassy Suites Hotel in Boca Raton. At the

meeting, a former Marketing Manager presented graphs and information detailing several

adverse sales trends. The presentation detailed a dramatic reduction in sales to Sensormatic's top

customers, a trend which was forecasted to continue well into the third quarter. A hard copy of

the presentation was prepared and sent to several Sensormatic executives, including Loof and

Kendall. TI T 41, 43-44, 48-53.

5. On April 10, 2001, defendants revealed the truth: that retail orders had slowed

during the third fiscal quarter and that Sensormatic's revenues and earnings would fall far short of

expectations. Analyst consensus estimates for Sensormatic were $.021 for the third fiscal

quarter; Sensormatic, however, announced that earnings would only hit $0.06 to $0.07 per share

for the quarter, far below Sensormatic's publicly-expressed expectations. Sensormatic!s stock

declined by 31% to trade at $13.

6. On April 26, 2001. the other shoe dropped when defendants admitted that their

Class Period financial statements included falsely recognized revenue. Subsequently, defendants

revealed that even the reduced third quarter financial results were materially overstated through

defendants' improper revenue recognition practices.

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7. Defendants engaged in the fraud for two primary reasons. First, defendants had

for years been seeking a buyer for Sensormatic. Ever since Assaf first initiated negotiations with

Boca-Raton based Tyco Industries in 1997. ¶ 78. A buyer would allow defendants to cash in

their options and receive huge cash bonuses, by virtue of Sensormatic's change of control

provisions. Second, when the possibility of finding a buyer for Sensormatic was not yet

materializing, defendants sold up to 95% of their Sensormatic stock at prices near the Class

Period high, only weeks before the announcement detailed in ¶ 117 below.

While investors and analysts were shocked by the Company's April 10, 2001

announcement in light of the fact that defendants had repeatedly emphasized Sensormatic's

ability to meet third quarter and year-end estimates, defendants were entirely aware of the

Company's declining sales. In addition, defendants were still unsure if a buyer would be found

for Sensormatic. Unwilling to take the risk, defendants rushed to divest themselves of nearly

$8,000,000 worth of Sensormatic stock at prices near the Class Period high. In March, after

selling huge amounts of Sensormatic shares, defendant Assaf renewed negotiations with Tyco in

the hopes that Tyco would bail out Sensormatic. The timing of defendants' stock sales is

illustrated below:

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24

22

20

18

16

14

12


SENSORMATIC INSIDER TRADING

Sensormatic SAM

Kendall Resigns

A

Class Period begins- Annual Product Forum in Boca Raton: Sales Are Down

Defendants dump millions of Sensormatic shares

Announcement: Third quarter profit slumps STOCK DROPS 31%

9. These sales were suspicious in both timing and amount.

A. Defendants Sales Were Suspiciously Timed

10. The majority of the shares (approximately $4.3 million) sold by the defendants

were sold between March 2, 2001 and March 13, 2001. This was one day after the February 28 -

March 1. 2001 Annual Product Forum during which a former Sensormatic Marketing Manager

graphically detailed the Company's declining sales. ¶T 40-44. At that point, defendants had

already received Sensormatic's quarterly review report for the second quarter of 2001, which

indicated that sales were down significantly and would continue to be down in the 3rd quarter

ME


offiscal 2001. ¶ 55. Defendant Hartman sold 75,000 shares on March 13, 2001, only nineteen

trading days from the April 10, 2001 announcement revealing what defendants already knew -

sales were declining dramatically, and would not meet analysts' estimates.

11. Defendants' sold their Sensormatic shares at prices ranging from $19.03 to $22.25.

See, Exhibit B. A large portion of these shares were sold during the week Sensormatic stock

reached its Class Period high, on March 6, 2001. The high of $22.25 for which Assaf sold his

shares, was only cents away from Sensormatic's Class Period high of $22.58 reached on March 6,

2001.

12. In addition, the fact that all of these insiders, who received the Company's

quarterly review reports, weekly and monthly sales forecasts, the Softgoods Sales Report, and

attended regular meetings, sold within days of one another prior to the devastating fiscal third

quarter pre-announcement can hardly be coincidental.

13. Defendants' selling is also suspicious in light of the fact that during 1997-2000,

only defendants Engdahl and Assaf sold shares. Engdahl sold a mere 855 shares in 1997, and

Assaf sold 200.000 in 1998. During 1999 and 2000 none of these defendants sold a single

share. See Exhs. D-E.

B. Defendants Dumped As Much as 95.5% Of Their Sensormatic Holdings

14. In addition to the unusual timing of defendants' sales, the amount of stock they

sold is also indicative of fraudulent intent. As detailed in Exhibit B, these defendants divested

themselves of huge amounts of their Sensormatic holdings. For example, Bufe sold 95.5% of his

holdings; Chmiel sold 65.2%; Engdahl sold 55.7%; Kendall sold 63.5%; Cannellos sold 92.8%;

Assaf sold 14.9%; Hartman sold 58.8% and Buffett sold 25.5%. This unusual selling activity

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indicates that defendants acted with inside knowledge of adverse facts unknown to the public.

JURISDICTION AND VENUE

15. This Court has jurisdiction over the subject matter of this action pursuant to 28

U.S.C. §1331, 1337 and 1367 and Section 27 of the Exchange Act (15 U.S.C. § 78aa).

16. This action arises under Sections 10(b) and 20(a) of the Exchange Act (15 U.S.C.

§ § 78j(b) and 78t(a)) and Rule lOb-S promulgated thereunder (17 C.F.R. § 240.1Ob-5).

17. Venue is proper in this District pursuant to Section 27 of the Exchange Act (15

U.S.C. § 78aa) and 28 U.S.C. § 1391(b) and (c). Substantial acts in furtherance of the alleged

fraud and/or its effects have occurred within this District and Sensormatic maintains its principal

executive offices in this District.

18. In connection with the acts and omissions alleged in this complaint, defendants,

directly or indirectly, used the means and instrumentalities of interstate commerce, including, but

not limited to, the mails, interstate telephone communications, and the facilities of the national

securities markets.

PARTIES

19. Lead Plaintiffs Leo Bugg, Jr., Frank A. Foilmer and Karl Rugart purchased

Sensormatic common stock during the Class Period, as set forth in the certifications

accompanying plaintiffs' lead plaintiff motion, and were damaged thereby. Those certifications

are incorporated by reference herein.

20. Defendant Sensormatic is a maker of anti-theft equipment for retailers.

Sensormatic's executive offices are located at 951 Yamato Road, Boca Raton, Florida.

21. The individual defendants, at all times relevant to this action, served in the

capacities listed below and received substantial compensation:

I on


Name

Per-Olof Loof

Gregory C. Thompson

Ronald G. Assaf

Jerry T. Kendall

Timothy Hartman

Kenneth W. Chmiel

Walter A. Engdahl

Stephan Caimellos

Thomas Buffett

Position

President and Chief Executive Officer

Senior Vice President And Chief Financial Officer

Chairman of the Board, Director

Senior V.P., North Am. Retail

Director

Senior V.P., Supply Chain Operations and EAS Product

V.P. Corporate, Counsel, Secretary

V.P., Geni Manager, ACD

Director

William J. Bufe V.P., Controller

22. Each of the defendants is liable as a participant in a fraudulent scheme that

operated as a fraud or deceit on purchasers of Sensormatic common stock, by disseminating

materially false and misleading statements and/or concealing material adverse facts. In addition,

the Individual Defendants, as senior officers and/or directors of Sensormatic were controlling

persons of the Company. Each exercised their power and influence to cause Sensormatic to

engage in the fraudulent practices complained of herein. Indeed, in Assafs own words, 7aJs

CEO, you should know exactly what you're doing, and not take everyone's word that

everything is okay." Fastirack. pg. 48.

23. On November 29, 2000, the Company announced its promotion of defendant

William J. Bufe from Senior Director of Finance for the Company's American Operations to

Vice President and Controller. The press release stated: "As Vice President and Controller, Bufe

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is responsible for all financial reporting and analysis, the finance and accounting support for

Sensormatic's sales, research and development and manufacturing business units worldwide, as

well as the management of budgeting, forecasting and financial planning."

24. In addition to his responsibilities as a Director, Hartman was a member of the

Audit Committee, and was charged with specific responsibilities. The Audit Committee was

responsible for fulfilling its oversight responsibilities with respect to (i) the financial information

provided to shareholders and the SEC; (ii) the systems of internal controls that management has

established; and (iii) the internal and external audit processes. The Audit Committee was

required to meet at least four times annually, and to meet in separate executive sessions with the

Chief Financial Officer. The Audit Committee members were also required to review with

management the annual financial statements and related footnotes and financial information

included in the Company's 10-K. See, Sensormatic's Proxy, dated November 17, 2000.

BACKGROUND TO THE CLASS PERIOD

25. Sensormatic was founded in 1966 by Assaf and his cousin, Jack Welsh.

Sensormatic describes itself as the global leader in electronic security" and "develop[s],

manufacture[s]. market[s] and distributes. . . the most advanced lines of integrated security

products for article protection. video surveillance, access control and asset tracking. See Form

10-K dated September 28, 2000.

26. The Company has three product divisions, electronic article surveillance systems

("EAS"), video systems, including closed circuit television ("CCTV") and access control and

management systems. The EAS products include reusable hard tags and disposable labels with

detection and deactivation systems. The access control and asset management systems provide

tagging, tracking, and access systems to monitor movements of people and/or assets. For the

In


fiscal year ended June 30, 2000, Sensormatic derived $601.0 million from its EAS division;

$293.9 from Video Systems; and $48.8 from access control and asset management. Id. at 30.

27. Sensormatic's marketing is divided into "softgoods" and 'hardgoods." Softgoods

consist largely of apparel merchandise held by large retailers such as department stores.

Hardgoods consist of non-apparel merchandise sold to customers such as supermarkets, books,

videos, and entertainment stores, as well as the heavy equipment Sensormatic sold, including

pedestals, video cameras and surveillance monitors. Id. at 31.

28. "The early 1990s brought fortune and fame to Sensormatic as more and more

retailers sold security-tagged merchandise." See Fastirack, "The Last Alarm: After Raising

Sensormatic From Birth, Ron Assaf Prepares For A Simpler, If Not Less Hectic, Life." Fall 2001

issue, at pages 47-48. In 1992. Sensormatic was honored as Company of the Year by The Miami

Herald. Id. In 1996, Sensormatic was selected as the exclusive electronic security provider of

the 1996 Olympic Games in Atlanta. id. Along with the high points, Sensormatic experienced

several lows. In November 1995, the Company announced that the SEC was investigating

Sensormatic for accounting violations and "other irregularities." Id. at 46. The federal

investigation alleged that Sensormatic materially misstated profits in 1995 and 1996 by using

out-of-period-revenue to calculate profits. Id. at 47. According to Assaf, Sensormatic was

"recognizing [revenue from] shipments three or four days after the end of the quarter as sales

within the quarter."

29. From 1995 to 1998, Sensormatic experienced slow growth and was forced to

suspend dividend payments to conserve cash. Id. at 48. In August 1999, Per-Olof Loof was

hired as a "rainmaker" to turn the Company's profitability around. Id. Loofs task was "returning


Sensormatic to the top of the investment charts'." See Palm Beach Post, "Corporate Rock; Per-

Olof Loof Has Sensormatic Playing a New Tune," January 16, 2000.

30. Prior to the Class Period, defendants seemed to be on-track to achieving record

growth and profitability. On January 25, 2000, defendants reported a 170% climb in operating

income. A January 25, 2000 press release announced that the Company was making "continued

progress toward its longer-term targets of double-digit sustainable revenue growth and double-

digit operating margins." Olof stated in the press release:

"In October. 1 defined four priorities for Sensormatic. The first was the math has got to work. Our financial model revolves around growing revenues, reducing expenses and investing more in research and development. Recently the 'math' at Sensormatic has been working better and better."

31. At the start of the Class Period, it seemed as if the "math" at Sensormatic

was working, and defendants had left Sensormatic's troubled past behind. However, defendants

still struggled to gain market acceptance.

32. Loof felt if the Company could continue to post a few good quarters, the

Company would regain its high stock price, and he would receive significant personal gain. In an

April 17, 2000 interview with The Wall Street Transcript, Loof was asked what misconceptions

there were about Sensormatic. He responded:

Despite the fanfare surrounding Loofs arrival, Sensormatic employees viewed Loof as an excessive leader, who was "out for himself', and frivolously spent corporate money at the expense of corporate needs, such as flying in his rock band from Sweden to perform at a Sensormatic annual meeting and making a video of himself skiing down a mountain side as a promotional tool for the Company. At the same time, legitimate marketing funds were slashed. Indeed, according to a former Senior Information Systems expert, Information Systems employees were regularly sent to Loofs house during work hours to install software on Loof's children's computers, and to install new digital subscriber lines at LooPs residence. Whenever Loof had a problem with his or his family's computers, employees from Sensormatic were sent out on Company time to take care of things.

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"I think there are a couple of things. I joined the Company in August of 1999, but for a number of years prior to that the company was faced with difficult times that grew out of rapid growth. That caused the company to stumble and earnings suffered from it. I think the investing community wants to ensure that the track we're on now actually continues. We have delivered a couple of really good quarters, and I think they want to make sure that it continues, both in terms of consistent growth as well as managing our expenses. If we can continue to do that, which I really believe we can, I think that the question of our stability will go" away. Id. at 6.

SUBSTANTIVE ALLEGATIONS

Sensormatic's Forward-Looking Statements are Excluded from Safe Harbor Protection As A Result of the SEC's March 25, 1998 Cease-and-Desist Order

33. On March 25, 1998, the Securities and Exchange Commission issued an order in

the administrative proceeding entitled In the Matter of Sensormatic Electronics Corporation, File

No. 3-9563: "Order Instituting Public Administrative Proceedings, Making Findings, and Issuing

Cease-and-Desist Order." (A copy of the SEC Order is annexed hereto as Exhibit A.) In

addition, defendant Assaf entered into a cease-and-desist order with the SEC requiring him to

pay a fine of $50,000 and to refrain from violating the federal securities laws. (A copy of the

cease and desist order entered against Assaf is annexed hereto as Exhibit B.) (The orders are

referred to collectively as the "SEC Cease-and-Desist Orders.")

34. The SEC instituted administrative proceedings against Sensormatic for accounting

violations. Specifically, the SEC Order found that "[f]rom... July 1, 1993 ... through July 10,

1995, Sensormatic manipulated its quarterly revenue and earnings in order to reach its budgeted

earnings goals and thereby meet analysts' quarterly earnings projections. Sensormatic carried out

this fraudulent scheme by improperly recognizing revenue through several different practices.

The conduct. . . primarily involved recognizing and recording revenue in one quarter from

products shipped in the next quarter." The SEC Cease-and-Desist Orders found that Sensormatic

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and Assaf had violated several provisions of the securities laws, including the anti-fraud

provision of the Securities Exchange Act of 1934, Section 10(b), and ordered them to cease and

desist from committing or causing any violation, and future violation, of Section 10(b) and other

sections of the securities laws.

35. As the Company acknowledged in its proxy statement filed with the SEC in

connection with the Company's November 2000 annual shareholders' meeting:

In April 1998, the Company, certain former Company officers and Ronald G. Assaf, the Company's non-executive Chairman of the Board and former Chief Executive Officer, entered into agreements, without admitting or denying any wrongdoing, with the SEC to resolve an SEC investigation, which was described in previously-filed periodic reports of the Company. ... [T]he SEC alleged, among other things, that during [the period July 1, 1993 to July 10, 1995] the Company improperly recognized and recorded revenue in one quarter from product shipped to customers in the next quarter and misstated its quarterly earnings in certain financial statements contained in periodic reports and registration statements. As part of that settlement, the Company agreed to an Order of the SEC that it will not in the future violate certain periodic reporting, books and records, internal controls and antifraud provisions of the Federal securities laws. There were no penalties imposed on the Company.

In its related civil injunctive complaint, the SEC alleged, among other things, that during the relevant period, * * * * Mr. Assaf knew of certain improper recognition policies and knew or was generally aware that certain Company periodic reports filed with the SEC were false and misleading. Mr. Assaf agreed, without admitting or denying any wrongdoing, to a civil final judgment enjoining him from future violations of certain record keeping and periodic reporting provisions of the Federal securities laws and ordering him to pay a civil penalty of $50,000.

36. Defendant Ronald Assaf recently gave an interview to Fasttrack, a magazine

publication. Assaf was questioned about the above-described SEC investigation into

Sensormatic's accounting practices. "We were recognizing shipments three orfour days after

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the end of the quarter as sales within the quarter, 'Assafsays. 'I thought it was pretty

minimal, but serious. I didn't realize how serious. Nor did anyone in the Company, in my

opinion, understand the extent of it because our systems were so antiquated. We had very little

real-time information. And I think the operations people just let it get out of hand.' As CEO,

Assaf says he bore ultimate responsibility for letting the accounting mess worsen, and calls the

debacle the biggest disappointment of his career. 'As CEO, you should know exactly what

you're doing, and not take everyone's word that everything is okay,' Assaf says." Fasttrack,

"The Last Alarm: After Raising Sensormatic From Birth, Ron Assaf Prepares For A Simpler, If

Not Less Hectic, Life." Fall 2001 issue, at pages 47-48.

37. As a result of the SEC Cease-and-Desist Orders, Sensormatic's forward-looking

statements, if any, made during the Class Period, are expressly excluded from safe harbor

protection pursuant to Section 21E of the Securities Exchange Act of 1934 because, as alleged

below, they were made within three years of the SEC Cease-and-Desist Orders prohibiting

Sensormatic and Assaf from further violations of the antifraud provisions of the Federal

securities laws, namely, Section 10(b):

SEC: 21E. Application of Safe Harbor for Forward-Looking Statements

(b) Exclusions - Except to the extent otherwise specifically provided by rule, regulation, or order of the Commission, this section shall not apply to a forward-looking statement -

(I) that is made with respect to the business or operations of the issuer, if the issuer -

(A) during the 3-year period preceding the date on which the statement was first made -

(ii) has been the subject of judicial or administrative decree or order arising

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out of a governmental action that -

(I) prohibits future violations of the antifraud provisions of the securities laws;

(II) requires that the issuer cease and desist from violating the antifraud provisions of the securities laws; or

(III) determines that the issuer violated the antifraud provisions of the securities laws.

Section 21E(b) of the Securities Exchange Act of 1934. (Emphasis added.)

DEFENDANTS' WERE AWARE OF SENSORMATIC'S INABILITY TO MEET FINANCIAL ESTIMATES

A. Defendants' Declining Sales Are Discussed At Annual Product Forum Meetings

38. Sensormatic's drastically declining sales were no mystery to defendants. As

detailed below, defendants were regularly confronted with Sensormatic's decreasing sales figures

through attending regular "town meetings", an Annual Product Forum Meeting, by receiving

regular written sales reports and accessing at-will sales information on the computer system. By

receiving inside information about Sensormatic's deteriorating sales trends, defendants were able

to dump millions of dollars worth of Company stock right before the stock plunged.

39. According to a former Marketing Manager employed at Sensormatic from 1996

until April 2001, who marketed sensor and video products, Sensormatic employees "all knew" in

late December 2000 that the next quarter was going to be bad." The fact that sales would be

down in the upcoming third quarter was no surprise to anyone in Sensormatic. Sensormatic's

retail customers were having problems and did not have the money to make purchases of

Sensormatic products. These customers included The Gap; Federated Department Stores

(including Burdine's, Macy's, Bloomingdale's, music chain stores such as Mars Music, and large

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retail chains such as The Limited, Abercrombie & Fitch. Lord & Taylor, and Dillards. Indeed,

according to this former employee, Sensormatic's sales had been off during the entire 2001 fiscal

year, and as early as July 1999.

40. According to the former Marketing Manager, one of the ways defendants accessed

this inside information was through Sensormatic's Annual Product Forum Meetings. The

Annual Product Forums were held annually in February. Approximately 300 employees from

marketing, engineering, manufacturing, and service from Europe, Asia and the U.S. attended.

Robert Clucas, marketing manager for hard goods," spoke at the forum. Clucas put up a chart

showing that sales would be significantly lower after the Company completed the roll-out of

product sales to Wal-Mart and Auto Zone, which was expected to end later in the year.

According to the former employee, who was present at this meeting. Clucas sought to show that

Sensormatic would have little new business after these large roll-outs were done. According to

this former employee, nothing was done in 2000 to identify new products Sensormatic could sell

in the future.

41. The Product Forum in 2001 was held on February 27, 28, and March Ut at the

Embassy Suites Hotel on Yamato Road, Boca Raton. Several Boca Raton executives attended,

including Dennis Constantine, defendant Dennis Chmiel, and Pedro Del Sol, who was

responsible for the CCTV division (closed-circuit television). After the meeting, a report known

as the Product Forum Presentation Report was published and distributed to all management-level

employees. The report is a hard copy of all the presentations given at the Annual Product Forum.

42. The former Marketing Manager reported that for fiscal years 2000 and 2001,

Sensormatic projected a ten percent year-over-year sales increase, which was unreasonable since

all the major retailers were already Sensormatic customers and were already saturated with

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Sensormatic products. According to this former employee, the Marketing Department was

"waving the red flag for several years." The first time the decreased sales trends were brought to

the Company's attention was during the Annual Product Forum meeting in February 2000 when

Bob Clucas put up a chart and discussed that fact that hardgoods would experience big sales

decreases after the Walmart contract finished.

43. According to the former Marketing Manager, the "sales problem" was a big

concern and was the main topic of the February 2001 Annual Product Forum Meeting. Bob

Clucas spoke again at the Annual Product Forum Meeting at the Embassy Suites Hotel in

February 2001. Clucas spoke on Hardgoods marketing and emphasized that Hardgoods would be

"hurting for sales" since the "next Walmart" was not there. This was the same thing Clucas was

saying during FY2000 and all of 2001. Clucas presented a series of charts which showed a

decrease in Hardgoods sales compared to the previous years. Clucas showed a projection for

sales at the meeting which showed declining sales in Hardgoods for the 3" fiscal quarter (2001)

compared to the 3rd fiscal quarter of 2000. Sales were mainly in accessories (extra tags or

detachers), but not in hardware. Clucas reported that the Company was not making money

rolling out hardware to new retail chains.

44. The former Marketing Manager also spoke at the Annual Product Forum Meeting.

She discussed the fact that Softgoods sales were down significantly, and were not projected to

increase. She emphasized the need for new products, which was crucial since growth had

essentially stopped at Sensormatic. Sensormatic's customers had no need to buy new sensors,

and the pedestals (devices which raise an alarm when a sensor passes them) worked well. The

sensors were lasting 10 to 15 years. Retailers continued using their old sensors, but were

requesting smaller tags and more coverage from the pedestals within the stores. Sensormatic had

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not come up with any new products, and customers were not going to update their pedestals for

minor changes. Sensormatic needed to create a whole new system line or needed to acquire a

company to extend their current product lines to increase sales. Only one day after finding out

that sales were down and were not expected to recover in the third quarter, defendants sold

millions of dollars of their stock at near Class-Period highs. ¶Jl0-13.

B. Sensormatic's Anticipated Earnings Miss Is Discussed In-house

45. In late February 2001, the sales department held a meeting at the Company's main

offices on Yamato Road in Boca Raton. The former Sensormatic Marketing Manager again

made a fifteen minute sales presentation at this meeting. At the meeting, she showed charts

which reported that sales were down even more than they were in the 2" fiscal quarter, and again

described the challenges ahead for Softgoods retailers. She reported that the Company was

experiencing several adverse trends, such as the fact that the market was saturated and the

Company needed next generation products to generate sales. She presented bar charts which

depicted sales for the previous quarter and for the year, which showed a downward trend. The

charts included January through February 2001 sales figures, and year to date sales figures, as

well as FY 2001 figures (July 1, 2000 through December 31, 2000). She tried to "shock"

Sensormatic management into taking action, and told the Company that without new products,

the only things selling were accessories, which would lead to Sensormatic missing their

numbers.

46. Indeed, sales figures and the ability to meet Wall Street estimates were regularly

discussed within Sensormatic. According to a former contract employee with Sensormatic from

September 1999 through February 2001 who handled domestic credit sales for Sensormatic

customers, Loof held quarterly meetings at Sensormatic to announce quarterly sales figures.

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47. According to a former Senior Information Systems Expert who was employed at

the Company between 1995 and April 26, 2001, these all-employee meetings were known as

"town meetings" and were held at the beginning of the Company's fiscal quarter. For example,

the Company held a town meeting in early January, 2001 in the auditorium at Florida Atlantic

University in Boca Raton. The meetings were broadcast live over the Company's network, and

were also videotaped. During these meetings, the status of the Company discussed, sales

statistics for the current quarter were presented and forecasts for future sales in the upcoming

quarters were discussed. There would also be a question and answer session at the end of the

meetings. Loof headed the meetings and all upper management attended, including Jerry

Kendall, Chris Davell, Don Taylor and others. These meetings were not open to investors or

analysts.

C. Internal Reports Detail Sensormatic's Quarterly Sales Decline

1. The September 5, 2000 SoftGoods Sales Report

48. A former Marketing Manager reported that the entire Sensormatic executive team,

including Loof, Kendall, Chmiel, Dennis Constantine (a Senior Vice President) were directly

aware of the decreased sales Sensormatic was experiencing throughout the Class Period.

According to this former employee, two types of internal reports were prepared: a Softgoods

Sales Report and a Quarterly Sales Report. On September 5. 2000, this former employee

prepared and circulated a Sofigoods Sales Report to a large number of Sensormatic executives

and sales people, including defendant Jerry T. Kendall. (A copy of the report is annexed hereto,

and is incorporated as if fully set forth herein, as Exhibit C.) For the first time, the Report

indicated that SofiGoods sales were down significantly. The Sofigoods Sales Report for the 2

quarter was prepared in February of 2001 and discussed results of October through December

on


2000 as well as sales predictions for the 3 rd quarter of fiscal year 2001.

49. The Softgoods Sales Report was distributed by Ann Hasen. assistant to Don

Taylor. Director of Marketing. Taylor reported to Chris Davell and Jerry Kendall (who reported

to Loof). The Sofigoods report included on U.S. sales. The September 5, 2000 Report stated:

You will see in the attached that Sensormatic 's sales to the sofigoods market are declining. While this segment has been our company's bread and butter for many years, the environment in which our customers operate is undergoing tremendous changes. We need creative approaches and new products if we hope to increase sales to the sofigoods market. (Emphasis added).

50. For fiscal year 1999, Softgoods revenue was $139.8 million, and for fiscal year

2000, only $116.9 million. The fiscal year 2000 Sofigoods Sales Report also contained sales

results for the year, an analysis of sales trends, and an action plan for the future. The report

covered all U.S. softgoods accounts.

51. The Softgoods Sales Report set forth data showing that the Company's Softgoods

Gross Revenue was down by 16% in FY 2000 (p. 2): that Department Store Gross Revenue was

down 41% in FY 2000; and that CCTV, Ultra-Max and Microwave sales were all substantially

down compared with FY 2000 (See chart on p.S of Report). ("Ultra-Max" refers to one of

Sensormatic's electronic article surveillance products).

52. The Softgoods Sales Report also showed very clearly that Sensormatic's top 10

softgoods customers continued to decline materially from 1998 to 2000 (See chart on p.6 of

report). The report specifically identified several adverse sales trends:

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FY98

$11.2 Sears $ 8.9MarMaxx $ 6.5 JC Penney $ 6.2 Macy's East $ 5.3 Vict. Secret $ 3.8 Gap $ 3.4 Saks 5 " Ave. $ 3.3 May D&C $ 1.7 Banana Rep. $ 1.4 Macy's West

Top 10 Softgoods Customers

FY99

$9.5 Macy's East $8.5 MarMaxx $7.6 Macy's West $7.0 Sears $5.8 Gap $4.6 Charming Sh. $4.3 JC Penney $3.4 Lord & Taylor $3.2 Famous Barr $2.8 Gap Kids

FY00

$4.9 Aber. & Fitch $4.3 Gap $4.2 MarMaxx $3.8 Sears $3.3 Macy's East $3.3 Macy's West $3.0 Charming Shop $2.9 Old Navy $2.9 Victoria's Secret $2.9 Belk

(Millions)

53. The Report identified several negative sales trends which would

materially and adversely affect the Company's business going forward:

Trends regarding the top 10 softgoods customers:

Sales volume: In FY98, our #1 softgoods customer spent $11.2 million. In FY00, our #1 softgoods customer spent only $4.9 million.

Mix of customers: In FY98 and FY99, 6 of the top 10 customers were department stores. In FY00, only 4 of the top 10 were department stores.

Sears: Sales have declined significantly. The company has severely cut its LP budget.

JC Penney: While ranked 43 in FY98, the company did not make the top 10 list in FY00. Like Sears, JC Penney has severely cut its LP budget.

Macy's: Both divisions had a spike in FY99, but sales have declined due to decreased funding from Federated.

2. Defendants Were Aware Of Sensorinatic 's Third Quarter Drop Through Quarterly Review Reports

54. A former Communications Specialist based in Boca Raton reported that

employees knew Sensormatic sales and revenue numbers were down from January through

March 2001. One of the ways management was privy to this inside information was through

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regular receipt of quarterly sales reports. In addition to "Softgoods Sales Reports", there were

also 'North American Retail Quarterly Marketing Reports" prepared after the product forum

meetings, which included additional information about quarterly sales and trends for the United

States region.

55. According to the former Marketing Manager, there was also a quarterly review

report which was presented orally to the entire executive team, and then widely distributed

throughout the entire management level of Sensormatic. All the executives, including Loof, as

well as managers from marketing, were advised of the sales numbers and the reasons for the

numbers. The 2' quarter report was prepared in February or early March 2001, and reported the

results of October through December 2000 sales. The report also discussed sales predictions for

the 3 rd quarter of fiscal year 2001. The former Marketing Manager saw the report in late

February or early March of 2001, which indicated that sales were down significantly, and

predicted that sales would continue to be down in the 3 quarter offiscal year 2001. The

report indicated that retailers' sales to consumers were down in the 2 quarter of FY2001, which

impacted retailers' purchases from Serisormatic. The report said sales were down for the 2'

quarter of FY200I, and that looking into the 3 r quarter, sales would be down as well.

56. The former Manager reported that sales were down because a large anti-theft

device installation for Walmart was ending, and the retail sales climate was down. Also, retailers

reused Sensormatic products such as the electronic tags, which adversely impacted Sensormatic

sales. Some of the tags lasted ten to fifteen years.

57. According to the former Marketing Manager, two individuals in the Boca Raton

headquarters were responsible sales forecasting, Katrina Holcomb and Monique Young. They

had access to the computer systems and communicated with the salesmen in the field. Young

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and Holcomb reported directly to Chris Davell and Jerry Kendall. Dave!! and Kendall also

regularly had conference calls with field salesmen. Sales representatives would send facsimile

copies of their sales deals to the forecasting department, who in turn prepared sales forecast

reports.

58. The former Marketing Manager reported that both Kendall and Davell had the

sales numbers and reported them "up the ladder" to senior management, including Loof. From

these sales figures, Young and Holcomb prepared weekly and monthly sales forecasts. They

generated a report which projected Sensormatic numbers, which was distributed to the top

executive team and to the Marketing Group. The report contained projected sales revenue in

dollars and units in order to allow the manufacturing department to order raw materials for

production purposes.

59. Defendants knew that Sensormatic's 3 d quarter 2001 sales forecasts - and Wall

Street estimates - were not going to be met, because the sales numbers just were not there.

Young and Holcomb also knew because they received the numbers first from the field

representatives, and created weekly and monthly reports from the numbers received from the

field. From January through March 2001, the following individuals knew what actual sales

volume was by March 1, 2001: Ed Foley (Vice President of the Eastern Region); Steve Watson

(Vice President of Western Region); Chris Davel!; Jerry Kendall and Loof.

60. Defendants could also access Sensonnatic's actual and budgeted sales figures at

will through the Company's computer system. According to a former Senior Principal Engineer

in the Sensormatic Video Systems Division in San Diego, Wendell Keevins, Director of Finance

in San Diego, disseminated sales, revenue and forecasting information. Keevins was in direct

contact with senior management in Boca Raton. All Sensormatic senior employees had direct

-22-


access to financial information at any given time through the Company's MIS (management

information systems) computer systems. Each employee had his own separate drive on the

computer network. The access to specific drives was limited to an employee's position and their

"need to know." Any official with proper access information could "access the financial drive

and pull up the numbers." The higher an employee's position, the more access they were given.

D. Sensormatic Employs a "Try-buy" Practice

61. According to a former Product Development Manager in Boca Raton from

October 2000 through May 2001, Sensormatic management had a "quarter-to-quarter"

philosophy, and were focused on hitting the numbers rather than long-term growth. Due to the

saturated market and the need for new products to stem the trend of declining sales, retail

customers had no need for additional Sensormatic products, and defendants could not meet

quarterly estimates. As a result of this reduced subsequent demand, defendants sought to spur

purchases by offering significant end of quarter discounts.

62. According to a former employee who worked as a Marketing Manager for

Sensormatic during and prior to the Class Period, Sensormatic had a "Try-Buy" practice in place

to aid sales. Under this practice, Sensormatic would install products, such as pedestals, and

allow the customer "try" it out before being obliged to "buy" it later. According to the former

employee, the customer had up to one year to try the merchandise out before they had to buy it.

Sensormatic, however, booked these "tries" as sales, even though customers had not agreed to

purchase the equipment, according to the former employee.

63. In addition to the improper recognition of revenue through these "try-buys" which

artificially inflated defendants' Class Period financial statements, there were other problems with

the program. According to the former Marketing Manager, the Company would install products

-23-


and the customer would try the product and possibly buy it later. Sensormatic counted on the

idea that once the pedestals were installed and embedded into the customer's floor, they would

buy it to avoid the hassle of removing it. However, a great deal of equipment did not 'flip" from

try to buy. The customer had a year to buy the product. Once a year went by, Sensormatic lost

track of who was responsible for converting the 'try" to a "buy". For that reason, try-buys would

fall through the cracks.

64. The use of "try-buys" and improper recognition of revenue during the "try" stage,

resulted in a material overstatement of defendants' financial statements for year-end 2000 and for

the third quarter of 2001. These results were later restated to conform with GAAP. ¶J122-133.

E. Defendants Deeply Discount Product At Quarter-End To Meet Estimates

65. A former Marketing Manager reported that Sensormatic discounted their products

heavily each quarter in order to 'make their numbers" [Sensormatic sales and revenue numbers].

The decision to discount products was made by various sales managers, including Eastern

Regional Vice President Ed Foley, Western Regional Vice President Steve Watson, or Jerry

Kendall for larger accounts. Customers were aware of the deep discounting Sensormatic

engaged in to make their numbers, and would often wait until the last day of the quarter or the

very end of the quarter to make purchases. As discussed below, this practice was material fact

which should have been disclosed to investors. ¶134.

-24-


THE CLASS PERIOD BEGINS

The August 8, 2000 Press Release

66. On August 8. 2000, the Company issued a press release announcing net income of

$72.2 million for its fiscal year ended June 30, 2000.2 Sensormatic achieved this net income

level in substantial part by failing to disclose its practice of recognizing revenue on contingent

sales (i.e. booking revenue when product was shipped that the customer had neither accepted nor

agreed to pay for).

67. The press release announced Fiscal 2000 earnings had surged 123%, the highest

annual revenue Sensormatic's history, and the fifth consecutive quarter in which the Company

has reported significantly improved financial results. Commenting on the Company's seemingly

stellar results, defendant Loof stated: "Our exceptional performance over the past year is clear

proof that this Company has turned around and is again in growth mode."

68. The August 8. 2000 press release attributed the strong earnings improvement" in

fiscal 2000 to "improving margins across all sales regions and product divisions."

69. The market accepted the Company's false statements, as defendants intended. An

August 9. 2000 article in the Palm Beach Post commented on the 123% increase for fiscal 2000,

and quoted Loof as stating, "[i]t's going to be hard to keep that up - 100 percent growth a year,

but I would think that these are numbers that would excite investors." The numbers did "excite

investors." After the press release was issued, the stock jumped 21%, on volume of 1.59 million

shares, the Company's second largest in a year.

2 Sensormatic's fiscal year begins on July 1. Accordingly, fourth quarter and year-end 2000 results are reported on June 30, 2000; first quarter 2001 results are reported on September 30, 2000; second quarter 2001 results are reported on December 31, 2000, and third quarter 2001 results are reported on March 30, 2001.

-25-


70. Wall Street analysts also accepted Sensormatic's reversal of fortune. On August

8, 2000, Bear Stearns (in a research report written by Peter Barry and Cohn McArdle)

Sensormatic raised its rating on the Company from "attractive" to "buy." Analyst Jeff Kessler of

Lehman Brothers, referring to the previous SEC investigation for accounting fraud, noted in the

August 9, 2000 Palm Beach Post article, "[tihis company is so different from the disaster of '95.

It's fair to say that its recovery period is over."

The August 8, 2000 Press Release Was Materially False And Misleading

71. Contrary to LooPs representation that Sensormatic "has turned around," the

Company was in fact once again resorting to improper revenue recognition tactics in order to

artificially inflate Sensormatic's financial results. The August 8, 2000 press release was false.

The press release reported net income of $72.2 million, when actual net income was only slightly

more than $62 million. ¶128. The Company's reported net income was only achieved through

fraudulently recognizing revenue on shipment of products that the customer had not yet accepted

or agreed to pay for (contingent sales). As later revealed on April 26, 2000, defendants issued a

press release announcing the Company would adopt the provisions of SAB 101, and would start

recognizing revenue after product installation is complete and customer acceptance provisions

had been met.

72. This disclosure meant that prior to the fourth quarter of fiscal 2001, defendants

had been fraudulently recognizing revenue to meet quarterly estimates, by recognizing revenue

upon shipment, despite the fact that under GAAP, there were conditions which needed to be

fulfilled prior to revenue recognition. This revenue recognition practice was improper because:

(a) when Sensormatic installed an anti-theft system, even if the installation process took several

months, Sensormatic was recognizing the revenue right away; and (b) when Sensormatic sold

-26-


products on a "contingent" basis, such as through the "try-buy" program, the Company booked

revenue upon shipment of the product. This was improper because the customer would often

decide not to purchase the product (such as in try-buy situations) and the revenue would later

have to be reversed.

73. This fraudulent revenue recognition practice violated GAAP (J122-133), and

materially overstated the Company's net income reported for year-end 2000, and the third quarter

of fiscal 2001. For example, as the Company later admitted, when net income was reported in

compliance with GAAP, the Company actually earned net income of only $63.3 million, not

$72.2 million. See Item 6, Selected Financial Data and Quarterly Summary, 10-K for the fiscal

year ended June 30, 2001.

74. Through the continued use of non-GAAP accounting, defendants were able to

artificially inflate the price of the Company's stock. In the April 26, 2001 press release,

defendants attempted to hide the fact that Sensormatic's revenue recognition practices were

fraudulent. Defendants announced that the Company would be adopting the "recently issued

provisions of SAB 101" in the fourth quarter of fiscal 2001. Defendants falsely stated that prior

to SAB 101, GAAP allowed the recognition of revenue for equipment sales upon shipment.

75. In fact, recognition or revenue prior to the time that customer acceptance

provisions had been met was never allowed under GAAP. See, ¶J122-133.

76. The statements detailed above were also materially false and misleading because

defendants knew, and failed to disclose that Sensormatic employees were deeply discounting

products at the end of each quarter in order to meet quarterly sales numbers. This practice is

considered material information which should have been disclosed to investors. See, ¶134

below.

-27-


77. In addition, decreased sales trends were brought to the Company's attention for the

first time at the Company's Annual Product Forum Meeting in February 2000. At the 2000

Meeting, Bob Clucas put up a chart indicating that sales would be significantly lower after two

new sales roll-outs for Walmart and AutoZone were completed, and because no progress was

made during 2000 in identifying new products that Sensormatic could sell to boost sales to

retailers who were already saturated with Sensormatic products. ¶J38, 40, 43.

78. One of the reasons defendants' were issuing false financial statements was to post

a few good quarters and sell Sensormatic. Assaf was looking to sell Sensormatic for at least

three years. Executive employees at Sensormatic could receive huge cash bonuses if

Sensormatic were sold for a premium. See Proxy, November 17, 2000. According to an article

in the fall 2001 edition of Fastirack magazine, Sensormatic executives had "spoken with Tyco

three or four years ago. . . but the timing wasn't right." This year was different. According to

Assaf, "two friends, one a member of the Tyco board, the other a member of the Sensormatic

board met for dinner in early 2001" to discuss a "transaction of mutual interest." Id. Assaf was

personally involved in talks with Tyco from March through August.

79. On August 4, 2001, defendants announced that Tyco agreed to buy Sensormatic

for $2.3 billion in stock. The Sensormatic bail-out resulted in big gains for the defendants.

Assaf himself will receive a $1.56 million cash bonus and $7 million in Tyco stock. Loof will

receive a $3.3 million cash bonus - - equal to 344% of his annual pay, and $16.1 million in Tyco

stock. Other top executives will receive bonuses equal to 86 to 172 percent of their pay. Id at

48. In addition, Loof received a $1,000,000 loan from Sensormatic to purchase a home in Boca

Raton which will be paid off prior to the Tyco merger. See, Proxy, November 17, 2000.


The Company's Annual Report On Form 10-K

80. On September 28, 2000, defendants filed Sensormatic's Annual Report on Form

10-K for the fiscal year ended June 30, 2000. The 10-K reported an increase in revenues for

fiscal 2000 of 8.1% to $1,100.0 million from $1,017.5 million in fiscal 1999. The Report stated

that fiscal 2000 results reflect strong growth in the Company's Americas business unit, which

improved 10.6% with $678.0 million in revenues. For fiscal 2000, defendants reported $907.3 in

sales and net income of $72.2 million.

The Company's Annual Report On Form 10-K Was False And Misleading

81. The statements detailed above in ¶80 were materially false and misleading

because the financial results reported in the 10-K were overstated, as admitted in the Company's

April 26, 2001 press release and Form 10-K for the fiscal year ended June 30. 2001, by material

amounts:

NetJncomç (Loss)

As originally reported

As restated

Difference

2000 1999 1998

($ In Millions)

72.0 38.1

63.3 36.2

(30.9)

8.9 1.9

1.8

1991

(21.4)

(22.6)

1.2

82. The overstatements resulted from defendants' improper revenue recognition

practices, including recognizing revenue as a result of "try-buys". ¶61-63, 122-133.

83. The statements in the 10-K were also materially false and misleading for the

following reasons:

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(a) Defendants knew, and failed to disclose that Sensormatic employees were deeply discounting products at the end of each quarter in order to meet quarterly sales numbers; See, ¶134 below.

(b) The 10-K omitted any information of a declining sales trend. Indeed, by September 5, 2000, a former Marketing Manager had prepared the "Softgoods Sales Report which revealed that: (1) softgoods revenue was down by 16% in Fiscal Year 2000 (pg. 2); (2) that Department Store Gross Revenue was down 41% in Fiscal Year 2000; and (3) that CCTV, Ultra-Max and Microwave sales were all down substantially (See, chart on pg. 5 of report); ¶J48-53.

(c) The Report showed clearly that sales to Sensormatic's top ten customers were declining materially from 1998 to 2000 (See chart on pg. 6 of report); Id.

(d) The Report identified several adverse trends resulting from declining sales to major customers such as Sears, JCPenney, and Macy's; Id.

(e) The Report indicated that in Fiscal Year 1998, Sensormatic's top customer spent $11.2 million, and that in Fiscal Year 2000, the top customer spent only $4.9 million; Id.

(f) The Report failed to disclose that the Company's revenue recognition policies did not comply with GAAP and that the Company had been recognizing contingent revenue before it had been earned. Id.

84. On September 5, 2000, when the Softgoods Sales Report was finalized by the

former Marketing Manager, it was circulated to a large number of Sensormatic executives and

salespeople, including defendant Jerry Kendall - - who reported directly to Loof. Accordingly, at

the time the 10-K was disseminated to the market and filed with the SEC, defendants had adverse

knowledge of the Company's financial condition and prospects, and failed to include any

discussion of those trends in the 10-K.

Defendants' Fraud Continues In Fiscal Year 2001

85. On October 19, 2000, defendants issued a press release announcing first quarter

fiscal 2001 earnings per share. Defendants reported an earnings per share climb of 100%. The

press release reported that 'increased revenue and higher margins [drove] 6t consecutive quarter

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of improved results." The Company reported net income for the first quarter ended September

30. 2000 of $12.0 million, or $0.12 earnings per diluted share, compared with net income of $7.4

million, or $0.06 per share in the quarter ended September 30, 1999. Commenting on the

enormous rise in profitability, defendant Loof stated: "It is clear that our earnings improvement

continues as we remain focused on consistently delivering improved bottom line results."

86. On or about November 14, 2000, the Company filed its Form l0-Q for the quarter

ended September 30, 2000 with the SEC. This document (which was signed by Defendant

Gregory Thompson and which represented that, 'bin the opinion of management, all adjustments

considered necessary for a fair presentation have been included") was silent with regard to SAB

101 and omitted all disclosures required by SAB 75. J122-133. In addition, the MD&A section

of this Form 10-Q omitted any mention of the declining sales trend analyzed in the September 5,

2000 Softgoods Sales memo described above.

Defendants' First Ouarter 2001 Statements Were False And Misleading

87. Defendants' statements in the October 19, 2000 press release and November 14,

2000 10-Q were materially false and misleading for the following reasons:

(a) As later disclosed, defendants were improperly recognizing revenue through i.e., use of "try-buys." Correction of defendants' false statements ultimately resulted in a cumulative effect adjustment of $27.2 million, a pre-tax restatement of $43.3 million; ¶J 122- 133.

(b) Defendants were aware of, but failed to disclose the adverse trends detailed in the September 5, 2000 Softgoods Sales Report, which included a discussion of significant and continued sales declines ¶J48-53;

(c) Defendants were constantly apprised of actual sales figures, and Sensormatic's inability to meet its own, and Wall Street's financial estimates. Sensormatic employees Katrina Holcomb and Monica Young compiled a monthly and weekly sales forecast report based on information received from sales representatives in the field; ¶J54-60.

-31-


(d) Defendants knew that sales were declining throughout the Class Period, including during the first quarter of fiscal year 2001. Holcomb and Young tracked sales on both a daily and weekly basis. Both had access to Sensormatic's computer systems and communicated with the salesmen in the field. Young and Holcomb reported to Chris Davell and Jerry Kendall. Dave!! and Kendall, in turn, held conference calls with Sensormatic's field people. Kendall and Davell reported "up the ladder" to Per-Olof Loof. ¶J 48-60.

88. Defendants also omitted any mention of Sensormatic's regular deep discounting

policy employed at quarter-end in order to meet estimates. According to a former Marketing

Manager for Sensormatic, the discounting decision was directed by sales managers, especially the

Eastern Regional Vice President, Ed Foley; the Western Regional Vice President, Steve Watson;

and the Divisional Vice President of Sales, Chris Dave!!. Some of the discount deals went to

Jerry Kendall, if the sale was big enough. According to the former employee, Sensormatic's

customers knew of this discounting policy and waited until the end of the quarter to make their

purchases.

89. Defendants failed to disclose these facts in order to post another quarter of

growth, and "deliver improved bottom line results" even if those results were false. Defendants

hoped to draw the eye of a purchaser for Sensormatic, including Tyco, with whom defendants

had begun negotiations years prior. Defendants knew that by posting a few good quarters, they

could regain market credibility and sell the Company, reaping enormous personal benefits.

The Second Quarter Of Fiscal 2001: The Fraud Escalates

90. On January 12, 2001. Sensormatic issued the following press release:

The Company.. .expects revenue growth for the second half of fiscal 2001 to be significantly greater than in the first half.

We are confident about the rest of the year and in our plans to address the issues we are facing," remarked Per-Olaf Loof,

-32-


Sensormatic's president and chief executive officer. "The recent strengthening of the Euro and more favorable currency forecasts should result in accelerating revenue growth in the second half of the year.

Sales Growth in the total UltraMax product line of 16% and pending new contracts support our optimistic view.

91. The press release announced Sensormatic expected to report second quarter

revenue growth of 4% or approximately $281 million, which was less than previously expected.

The shortfall was attributed in part to "weakness in the Euro and other currencies." The press

release announced that EPS was expected to grow by approximately 20% or $0.20 to $0.21 per

share. Loof stated:

"Although it appears that our revenue and earnings will be somewhat lower than previously expected, our overall business is healthy and we expect to report our seventh consecutive quarter of results improvement."

92. On January 12. 2001, defendants held a conference call for the investing public

and analysts. On the conference call, Loof stated that "retail sales were sluggish" but reassured

investors that Sensormatic 's "EPS earnings projections remain the same. On a plan

perspective [Sensormatic] is on target." Loof added "we are holding to the year forecast that we

gave you [analysts] in August, of 35% earnings per share growth."

93. On the January 12 conference call, Loof was asked a question by analyst David

Katz and once again falsely emphasized that Sensormatic would have no trouble meeting

analysts' estimates:

[Katz]: If the street was looking for a buck 25 to a buck 27 a year out, you're not suggesting any changes to those numbers?

[Loofi: Right. We're not suggesting any change to that, and we're not suggesting any change, you know, to the 35% earnings per share growth for this fiscal year. I think this is a little bump.

-33-


94. On January 16, 2001, Jeff Kessler of Lehman Brothers issued a report on

Sensormatic, stating: "This miss [$.04 lower in the second fiscal quarter than expected] will

more than likely be made up in the second half of the fiscal year as a stream of new contract

signings, some large and more take-aways from the competition, should be announced over the

next few weeks, which could provide naother boost to the stock." Kessler rated the stock a

"BUY."

95. On January 25, 2001, the Company also issued a press release announcing its

results of operations for its second fiscal quarter ended December 3 1, 2000. Sensormatic

announced that net income for its second quarter reached $19.2 million, or $0.21 per diluted

common share. EPS for the first half of the year period, the Company announced "This marks

the seventh consecutive quarter of improved results for the Company."

96. The January 25, 2001 earnings announcement also quoted defendant Loof,

Sensormatic's president and chief executive officer: "1 am optimistic that aggressive pricing in

our video division, new customer contracts and innovative product introductions will keep us on

track to meet our 35% earnings growth goal for the fully year, or earnings per share of about

$0.95.

97. On February 12, 2001. Sensormatic filed Form 10-Q with the SEC for the

quarterly period ended December 31, 2000 (the Company's second fiscal quarter). The l0-Q was

signed by defendant Gregory S. Thompson, CFO.

98. The l0-Q stated, with respect to Gross Margin and Operating Expenses:

The Company achieved a substantial cost reduction on hard tags used in the European markets by moving the production from Ireland to China. Also, by expanding capacity and continuing cost reduction efforts in its Boca Raton, Florida manufacturing facility, the Company increased production of source tagging labels while

-34-


significantly reducing the unit cost. As the Company continues its focus on reducing manufacturing costs and improving overall processes, it expects to maintain the gross margin level at its 45% target for the remainder of the current fiscal year.

99. On January 26, 2001, Lehman Brothers (Jeff Kessler), ranked the stock a

"STRONG BUY."

100. On February 9, 2001, Ryan Beck (Peter R. McMullin) issued a "STRONG BUY"

rating for Sensormatic shares. The report predicted $0.21 per share earnings in third fiscal

quarter, as a result of "managements' guidance."

101. Notwithstanding these positive statements, the following Sensormatic insiders

sold their stock between February 5, 2001 and March 13, 2001: William J. Bufe (Vice President

and Controller); Jerry T. Kendall (Senior Vice President, North American Retail); Kenneth W.

Chniiel (Senior Vice President, Supply Chain Operations and EAS Product); Walter A. Engdahl

(Vice President Corporate, Counsel, Secretary); Stephan Cannellos (Vice President and General

Manager, ACD); Ronald G. Assaf (Chairman of the Board of Directors); Timothy P. Hartman

(Director); Thomas Vigus Buffett (Director). The total amount of selling during this period by

these insiders was $7,980,151, as detailed below:

-35-


INSIDER SALES 3

DATE INSIDER STOCK PROCEEDS

215101 William J. Bufe $59,250 (VP, Controller)

2/9/01- 2/12/01 Jerry T. Kendall $1,898,093 (Senior VP, North American Retail)

2/22/01 Kenneth W. Chmiel $445,438 (Senior VP, Supply Chain Operations and EAS Product)

2/23/01 Walter A. Engdahl $221,900 (VP Corporate, Counsel, Secretary)

3/2/01 Stephan Cannellos $457,440 (VP and General Manager ACD)

3/5/01 - 3/7/01 Ronald G. Assaf $2.002.500 (Chairman of the Board, Director)

3/8/01 -3/13/01 Timothy P. Hartman $1,579,312 (Director)

1/26/01, 3/8/01- Thomas Vigus Buffett $418,096 3/9/01 (Director)

TOTAL SALES PROCEEDS:

$7.980J51

Many of these sales were through the exercise of options. A complete analysis of the options and profits from the options, which total over $1.6 million, is attached as Exhibits "D" -

-36-


Defendants' Second Quarter 2001 Statements Were False

102. Defendants' statements detailed above touting strong financial results were

materially false and misleading. Despite Loofs emphasis on Sensormatic's ability to meet the

35% earnings growth goal for the entire year (or EPS of $0.95), defendants knew these

statements were baseless.

103. According to the former Marketing Manager, Sensormatic's second fiscal quarter

(ending December 31, 2000), was prepared some time in February or March 2001. The sales

report set forth the sales results of October through December 2001 and discussed predictions for

the fiscal third quarter of 2001 (ending March 30, 2001).

104. The quarterly sales reports stated that sales were down for the second fiscal

quarter of 2001 and looking into the third fiscal quarter of 2001, sales were down as well.

According to the former Marketing Manager, sales were down for at least two reasons: (i) the

Wal-Mart installation was coming to an end or was over by this time, and (ii) the general retail

climate was down. Retailers typically re-used Sensormatic's products which reduced the number

of new sales of tags Sensormatic could make to retailers. These retailers included The Gap, all

Federated Department Stores, such as Burdine's, Macy's, Bloomingdale's, music chain stores

such as Mars, and the larger retail chains, namely The Limited, Abercrombie & Fitch, all the

May Department Stores, such as Foley's, May Stores, Lord & Taylor and Dillards. The former

employee stated that some tags can last from ten to fifteen years.

105. According to this former employee, the fact that sales would be down in the

Companys third fiscal quarter (January to March 30, 2001) was not a surprise to anyone at

Sensormatic. By late December 2000, defendants Loof, Kendall and Chmiel, as well as Dennis

Constantine, senior vice president, were directly aware of the probability of decreased fiscal third

-37-


quarter sales because they received a copy of the employee's quarterly report, described above,

which identified the adverse sales trends. In addition, Sensormatic had a Quarterly Review

Report which was prepared in hard copy form. The report was presented orally to the entire

executive team, including Loof, Kendall, Chmiel and Constantine.

106. At the time of defendants' statements above touting the "seventh consecutive

quarter of improved results", defendants were also aware of the following adverse facts which

made their statements false:

(a) Sensormatic's sales had "been off" during the entire 2001 fiscal year, according to a former Marketing Manager. Sensormatic employees "all knew in late December 2000 that the next quarter "was going to be bad." Defendants knew that retail customers such as The Gap and Federated Department Stores were having problems selling to retailers, and did not have the budget to purchase Sensormatic products; ¶T48-5 3.

(b) During a February 2000 Annual Product Forum Meeting, Bob Clucas brought up decreased sales trends which indicated that sales were decreasing unless the Company could come up with new products; Id.

(c) Defendants received regular quarterly sales reports which indicated that sales and revenue numbers were down from January through March 2001; ¶J54-59.

(d) Defendants were aware of Sensormatic's actual declining sales figures by virtue of weekly and monthly reports and forecasts, which they were also able to access through the computer systems; ¶J54-60.

(e) Defendants received the September 5, 2000 Softgoods Sales Report which Kendall and Chmiel described specific adverse sales trends - - trends which remained undisclosed; 48-53.

(f) An article in the Sun-Sentinel, dated April 11, 2001, disclosed, as alleged below, that the Company was then discounting product sold by its Video Division to make up for the reduction in sales Sensormatic was then experiencing. ¶119.

107. Similarly, the Form 10-Q was false and misleading because it made no disclosure

in the Management's Discussion and Analysis Section or elsewhere regarding the lower retail

No


sales Sensormatic was then experiencing.

108. On February 19, 2001, Sensormatic issued a press release announcing that

Vitamin Shoppe, a specialty retailer of vitamins, would install Sensormatic's UltraMax anti-theft

system in all 90 of its stores as a first step toward implementing a chain-wide source tagging

program. Jerry Kendall was quoted in the press release as saying: "source tagging has made

impressive inroads among retailers because its advantages are hard to ignore. Retail tests have

shown that source tagging with UltraMax decreases theft while increasing sales." "Those are two

main reasons why UltraMax has become the fastest growing anti-theft technology around the

world."

109. On February 21, 2001, Lehman Brothers (Jeff Kessler) issued a "STRONG BUY"

rating on Sensormatic shares and a June 2001 price target of $25 per share.

110. On February 26, 2001, Sensormatic announced in a press release that it had

acquired Controlled Electronic Management Systems, Ltd. of Belfast, Northern Ireland along

with its parent Company Intellectual Systems, Ltd. "In addition to the range of technology this

acquisition brings to Sensormatic. "the press release stated, "CEM Systems professional staff of

hardware and software engineers along with its network personnel will further strengthen

Sensormatic's future development efforts."

Ill. Two days later, Sensormatic held its annual product forum on February 27, 28 and

March 1, 2001 at the Embassy Suites Hotel on Yamato Road in Boca Raton, Florida, described

above.

112. As set forth above, within afeiv days of the end of this sales forum, defendants

Cannellos, Assaf, Hartman and Buffett had together sold millions of dollars of their Sensormatic

stock, from March 3 to March 9, 2001.

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113. On March 27, 2001, Lehman Brothers (Jeff Kessler) again issued a "STRONG

BUY" rating on the stock. The report made the case for Sensormatic's continued growth and

vitality during economic slowdowns and recessions, explaining that the UltraMax product saves

retailers money by reducing inventory "shrinkage" or employee theft of product. The Lehman

report continued to estimate EPS for Sensormatic's third fiscal quarter (the period ending March

31, 200 1) at $0.20 per share, up 49% for the same period one year prior.

114. On March 29, 2001. Sensormatic issued a press release announcing its acquisition

of Richmond Security Limited, based in Leeds. U.K. The press release stated:

"Richmond has been a valued business partner of Sensormatic for several years and has helped increase our customer base through the sales of our UltraMax® technology and video surveillance systems to some of the U.K.'s leading retailers," said John Smith, executive vice president of Sensormatic's Europe, Middle East and Asia/Pacific Operations. "Through this acquisition, we now have the reach to sell our products to an even broader market."

115. On April 4, 2001, Sensormatic issued a press release announcing its acquisition of

the assets of BEC Technologies, Inc. of Orlando, Florida. The acquired company designs,

manufactures and markets a combination of hardware and software to provide fiber optic

networks for the transmission of audio, video and data signals over long distances. The press

release noted that the acquisition would allow Sensormatic to add to its customer base.

116. The above statements were false and misleading because they omitted to disclose

that the Company was then experiencing a severe slow down in retail orders that would cause the

Company's revenues and earnings to be well below previous "guidance" the Company had

provided the marketplace. Instead, the Company made these series of positive statements about

their newly-acquired businesses and new customers as insiders cashed in on the resulting rise in

the Company's stock price.

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THE TRUTH EMERGES

117. On April 10, 2001, the Company issued a press release announcing its expected

third quarter revenues and earnings. Far from the rosy picture defendants had painted regarding

the Company's new customers, Sensormatic now announced fiscal third quarter revenue that was

2% lower than the prior year's quarter. And instead of EPS of $0.21. as management had led

analysts to believe would be achieved, Sensormatic said it expected to report EPS in the range of

$0.06 to $0.07:

These results are below the Company's previous expectations. The Company attributes the shortfall primarily to the difficult economic environment which caused lower than anticipated purchases by retailers and other customers for the Company's products, reduced gross profit margins and continued negative effects of foreign exchanges.

"We experienced a drop in sales which we believe is primarily due to the difficult global environment. Many of our customers, and potential customers have been taking longer to implement their purchasing decisions and as a result our sales were sluggish. In particular, this quarter, unlike in the past, we were surprised to see that the usual heavy volume of quarter end sales did not materialize. Our gross profit margin declined primarily due to product price reductions in our video division intended to stimulate sales and due to a higher level of lower margin service revenue as a percent of total revenue. Lastly, we were negatively impacted by continued weakness in foreign currencies, particularly the Euro and the British pound," remarked Per-OlofLoof, Sensormatic's president and chief executive officer.

118. Sensormatic's stock price sank on the earnings news. The Company's shares

declined $5.71 per share to $13.00, a 31% decline on heavy trading volume. Many corporate

insiders, however, had profited handsomely in February and March 2001, when they sold their

stock at near five-year highs for approximately $5.6 million. Jerry Kendall, after reaping insider

-41-


trading profits, resigned from his position in April 9, 2001, one day before the adverse earnings

news was released to the public.

119. One April 11, 2001, the day after the Company's earnings announcement, an

article appeared in the Sun-Sentinel, entitled "Sensormatic's Third Quarter Profit Slumps", at

page 3D. The article recounted statements made by defendant Loof to the press and stated: "The

Company said it cut prices for products in its video division and eliminated about 70 field service

jobs during the quarter as orders from retailers declined "[Emphasis added]. According to the

Company's own press release of January 25, 2001, Sensormatic had already begun at that time to

engage in "aggressive pricing in [its] video division," to help meet its 35% earnings growth goal

for the full year. Thus, at least as early as January 25, 2001, the Company began discounting its

video products because it was then experiencing declining orders from retailers, as reported in

the Sun-Sentinel. Yet, nothing in the MD & A Section of Sensoratic's Form l0-Q filed in

February 12, 2001, disclosed the reduced orders from retailers. During the period (February to

March 2001), insiders took advantage of this inside information and sold $7.9 million of their

Company stock.

120. An analyst report issued by Lehman Brothers based on the third quarter

announcement noted that [w]e have previously argued that the Sensormatic story is recession

resistant and were clearly surprised b the weakness. . . we admit that Sensormatic is now a show-

me stock and believe that significant upside in the near-term is unlikely until management can

prove that revenue growth can accelerate and that the company can meet (and hopefully exceed)

the consensus estimates.

121. On April 26, 2001, defendants issued a press release which revealed that the

Company had been recognizing revenue in violation of GAAP. fl122-133. Amazingly, even

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defendants' reduced third quarter financial results were materially overstated. As reported in the

Company's June 30, 2001 10-K, Sensormatic reported a revenue overstatement of 3.7%, an

operating income overstatement of 32.5%, and a 60.4% overstatement of net income for the third

quarter by failing to report revenue in compliance with GAAP. Accordingly, defendants' third

quarter results were far worse than defendants had led the market to believe even on April 10,

2001.

DEFENDANTS' FINANCIAL STATEMENTS VIOLATED GAAP

122. On April 26, 2001, the Company issued a press release reporting third quarter

earnings and stating that the Company:

will adopt the recently issued provisions of SAB 101 in the fourth quarter of fiscal 2001. Under such provisions, the Company will recognize revenue after installation is complete and customer acceptance provisions have been met where post-shipment obligations exist. Prior to the adoption of SAB 101, the Company, under current generally accepted accounting principles, recognizes revenue for equipment sales when title transfer, generally upon shipment. Implementation of SAB 101 will require a cumulative effect adjustment as of July 1, 2000, and fiscal year 2001 quarterly results to be adjusted for the current year effect. The Company estimates that the cumulative effect of this change in accounting principle will be a one-time, non-cash reduction in earnings of about $25 million (net of tax)...'

123. This disclosure first alerted the investment community that the Company had been

recognizing revenue before customer acceptance provisions had been met. This revenue practice

was contrary to GAAP (FASB Statement No. 5 paragraph 75 and Accounting Principles Board

As disclosed in the Company's Form 10-K for the fiscal year ended June 30, 2001: "Implementation of SAB 101 resulted in a cumulative effect adjustment of $27.2 million (net of income tax benefit of $16.1 million)..." Accordingly, the pre-tax impact of the restatement was $43.3 million.

-43-


Opinion No. 10, paragraph 126)

124. State of Financial Accounting Concepts No. 5, paragraph 83(b), states that

"revenues are considered to have been earned when the entity has substantially accomplished

what it must do to be entitled the benefits represented by the revenues." Here, the Company had

no basis for claiming that it had substantially accomplished what it was required to do until the

customer's needs had been satisfied.

125. The Company's sales, as disclosed when the accounting change was explained,

were contingent upon customer acceptance. FASB Statement No. 5, paragraph 17 states: "The

Board has not reconsidered ARB No. 50 with respect to gain contingencies. Accordingly, the

following provisions of paragraphs 3 and 5 of that Bulletin shall continue in effect:

(a) Contingencies that might result in gains usually are not reflected in the accounts since to do so might be to recognize revenue prior to its realization;

(b) Adequate disclosure shall be made of contingencies that might result in gains, but care shall be exercised to avoid misleading implications as to the likelihood of realization.

126. Neither Sensormatic's sales nor the collection of the sales price was reasonably

assured due to the existence of acceptance provisions in sales agreements. APB Opinion No. 12,

paragraph 3 states: "Chapter IA of ARB No. 43, paragraph 1, states that 'Profit is deemed to be

realized when a sale in the ordinary course of business is effected, unless the circumstances are

such that the collection of the sale price is not reasonably assured.' The Board reaffirms this

statement; it believes that revenues should ordinarily be accounted for at the time a transaction is

completed, with appropriate provision for uncollectible accounts."

-44-


127. Accounting And Auditing Enforcement Release No. 812 (September 5, 1996)

states: "Generally Accepted Accounting Principles ("GAAP") provide that revenue should not be

recognized until an exchange has occurred, the earnings process is complete, and the collection

of the sales price is reasonably assured. These conditions ordinarily are met when products are

exchanged for cash or claims to cash, and when the entity has substantially performed the

obligations which entitle it to the benefits represented by the revenue." Here, because of

acceptance provisions, the collection of the sales price was not reasonably assured.

128. The Company's revenue recognition policies did not comply with GAAP during

the Class Period because the Company had been recognizing contingent revenue before it had

been earned. The true net income as computed in compliance with GAAP was $63.3 million.

See Item 6 (Selected Financial Data and Quarterly Summary) of the Company's Form 10-K for

the fiscal year ended June 30, 2001:

2000

1999 1998

1997

($ In Millions)

Net Income (Loss): As originally reported As restated Difference

72.0 03 c- - .i

8.9

38.1 36.2

1.9

(32.7) (30.9)

1.8

(21.4) (22.6)

1.2

129. In addition, the Company's third quarter financial results (which were lower than

previously announced, as discussed below) were materially overstated. See Item 6 (Selected

Financial Data and Quarterly Summary) of the Company's June 30, 2001 Form 10-K which notes

the following for the fiscal 2001 third quarter ended March 31. 2001:

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Revenues Operating Income Net income

As As

Reported Restated

($ In Millions)

256.9 247.8

21.2 16.0

8.5 5.3

Percent Overstatement

3.7% 32.5% 60.4%

130. Moreover, as noted above. Defendants viewed the provisions of SAB 101 as

requiring the Company to change its revenue recognition practices. Accordingly, even assuming

that the Defendants had no knowledge of the falsity of the Company's revenue recognition

policy, certain disclosures were required to have been made in the Company's financial

statements pursuant to the SEC Staff Accounting Bulletin 74 (Topic I 1M).

131. SEC Staff Accounting Bulletin 74 (Topic 1IM) ('SAB 74") requires disclosure of

the potential financial statement effects of adoption of recently issued accounting standards. It

states that: The objectives of the disclosure should be to (1) notify the reader of the disclosure

documents that a standard has been issued which the registrant will be required to adopt in the

future, and (2) assist the reader in assessing the significance of the impact that the standard will

have on the financial statements of the registrant when adopted. It further provides that the

following disclosures should generally be considered by the registrant:

A brief description of the new standard, the date that adoption is required and the date that the registrant plans to adopt, if earlier.

S

A discussion of the methods of adoption allowed by the standard and the method expected to be utilized by the registrant, if determined.

S A discussion of the impact that adoption of the standard is expected to have on the financial statements of the registrant, unless not known or reasonably estimable. In that case, a statement to that effect may be made.

S Disclosure of the potential impact of other significant matters that the registrant believes might result from the adoption of the standard (such as technical

En


violations of debt covenant agreements, planned or intended changes in business practices, etc.) is encouraged.

132. SAB 101 stated: "If a registrant files financial statements with the Commission

before applying the guidance in this bulletin, disclosures similar to those described in Staff

Accounting Bulletin Topic 11 M, Disclosure of the Impact that Recently Issued Accounting

Standards Will Have on the Financial Statements of a Registrant When Adopted in a Future

Period, should be provided."

133. The Company's Form 10-K for the fiscal year ended June 30, 2000 filed with the

SEC on September 28, 2000 stated:

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.

134. In addition to the above violations of GAAP, defendants failed to disclose that

Sensormatic deeply discounted products at Quarter end. There are facts which are considered

material and are required to be disclosed. Specifically, SAB 101 states:

Management's Discussion and Analysis (MD&A) requires a discussion of liquidity, capita resources, results of operations and other information necessary to an understanding of a registrant's financial condition, changes in financial condition, and results of operations. This includes unusual or infrequent transactions, known trends or uncertainties that have had, or might reasonable be expected to have, a favorable or unfavorable material effect on revenue, operating income or net income and the relationship between revenue and the costs of the revenue. Changes in revenue should not be evaluated solely in terms of volume and price changes, but should also include an analysis of the reasons and

-47-


factors contributing to the increase or decrease. The Commission stated in Financial Reporting Release (FRR) 36 that MD&A should "give investors an opportunity to look at the registrant through the eyes of management by providing a historical and prospective analysis of the registrant's financial condition and results of operations, with a particular emphasis on the registrant's prospects for the future." Examples of such revenue transactions or events that the staff has asked to be disclosed an discuss in accordance with FRR 36 are:

• Shipments of product at the end of a reporting period that reasonable might be expected to result in lower shipments and revenue in the next period.

• Granting of extended payment terms that will result in a longer collection period for accounts receivable (regardless of whether revenue has been recognized) and slower cash inflows from operations, and the effect on liquidity and capital resources. (The fair value of trade receivables should be disclosed in the footnotes to the financial statements when the fair value does not approximate the carrying amount.)

• Changing trends in shipments into, and sales from, a sales channel or separate class of customer that could be expected to have a significant effect on future sales or sales returns.

• An increasing trend toward sales to a different class of customer, such as a reseller distribution channel that has a lower gross profit margin than existing sales that are principally made to end users. Also, increasing service revenue that has a higher profit margin than product sales.

S Seasonal trends or variations in sales.

• A gain or loss from the sale of an asset(s).

APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE

135. At all relevant times, the market for Sensormatic common stock was an efficient

market for the following reasons, among others:

(a) Sensormatic common stock met the requirements for listing, and was listed and actively traded, on the NYSE, a highly efficient market;

(b) As a regulated issuer, Sensormatic filed periodic public reports with the SEC;


(c) Sensormatic stock was followed by securities analysts employed by major brokerage firms who wrote reports which were distributed to the sales force and certain customers of their respective brokerage firms. Each of these reports was publicly available and entered the public marketplace.

(d) Sensormatic regularly issued press releases which were carried by national newswires. Each of these releases was publicly available and entered the public marketplace.

136. As a result, the market for Sensormatic securities promptly digested current

information with respect to Sensormatic from all publicly-available sources and reflected such

information in Sensormatic's stock price. Under these circumstances, all purchasers of

Sensormatic common stock during the Class Period suffered similar injury through their

purchase of stock at artificially inflated prices and a presumption of reliance applies.

NO SAFE HARBOR

137. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this complaint.

The specific statements pleaded herein were not identified as "forward-looking statements" when

made. Nor was it stated with respect to any of the statements forming the basis of this complaint

that actual results "could differ materially from those projected." To the extent there were any

forward-looking statements, there were no meaningful cautionary statements identifying

important factors that could cause actual results to differ materially from those in the purportedly

forward-looking statements. Alternatively, to the extent that the statutory safe harbor does apply

to any forward-looking statements pleaded herein, defendants are liable for those false forward-

looking statements because at the time each of those forward-looking was made the particular

speaker knew that the particular forward-looking statement was false, and/or the forward-looking

statement was authorized and/or approved by an executive officer of Sensormatic who knew that

-49-


those statements were false when made.

138. In addition, the entry of the March 25, 1998. SEC order precludes Sensormatic

from invoking the protection of the statutory safe harbor.

SCIENTER ALLEGATIONS

139. As alleged herein, defendants acted with scienter in that defendants knew that the

public documents and statements, issued or disseminated by or in the name of the Company were

materially false and misleading; knew or recklessly disregarded that such statements or

documents would be issued or disseminated to the investing public; and knowingly and

substantially participated or acquiesced in the issuance or dissemination of such statements or

documents as primary violators of the federal securities laws. Defendants! profited from their

fraudulent scheme by selling stock (as detailed above) at suspicious times and in suspicious

amounts. See ¶lO-l3. As set forth elsewhere herein in detail, defendants, by virtue of their

receipt of information reflecting the true facts regarding Sensormatic and its business practices,

their control over and/or receipt of Sensormatic's allegedly materially misleading misstatements

and/or their associations with the Company which made them privy to confidential proprietary

information concerning Sensormatic were active and culpable participants in the fraudulent

scheme alleged herein. Defendants knew and/or recklessly disregarded the falsity and misleading

nature of the information which they caused to be disseminated to the investing public. This case

does not involve allegations of false forward-looking statements or projections but instead

involves false statements concerning the Company's business, finances and operations. The

ongoing fraudulent scheme described in this complaint could not have been perpetrated over a

substantial period of time, as has occurred, without the knowledge and complicity of the

personnel at the highest level of the Company, including the Individual Defendants.

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140. The Individual Defendants engaged in such a scheme to inflate the price of

Sensormatic common stock in order to: (i) protect and enhance their executive positions and the

substantial compensation and prestige they obtained thereby; (ii) enhance the value of their

personal holdings of Sensormatic common stock and options; (iii) have access to capital to

consummate the acquisitions detailed in herein, which the Company desperately needed in order

to introduce new products to the marketplace, which was already saturated with existing

Sensormatic products.

PLAINTIFFS' CLASS ACTION ALLEGATIONS

141. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all persons who purchased or

otherwise acquired Sensormatic common stock between August 8, 2000 and April 9, 2001,

inclusive (the "Class Period"), and who were damaged thereby. Excluded from the Class are de-

fendants, members of the immediate family of each of the Individual Defendants, any subsidiary

or affiliate of Sensormatic and the directors, officers and employees of Sensormatic or its

subsidiaries or affiliates, or any entity in which any excluded person has a controlling interest,

and the legal representatives, heirs, successors and assigns of any excluded person.

142. The members of the Class are so numerous that joinder of all members is

impracticable. While the exact number of Class members is unknown to plaintiffs at this time

and can only be ascertained through appropriate discovery, plaintiffs believe that there are

thousands of members of the Class located throughout the United States. As of March, 2001,

there were reportedly more than 78.6 million shares of Sensormatic common stock outstanding.

Throughout the Class Period, Sensormatic common stock was actively traded on the New York

Stock Exchange (an open and efficient market) under the symbol "SRM". Record owners and

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other members of the Class may be identified from records maintained by Sensormatic and/or its

transfer agents and may be notified of the pendency of this action by mail, using a form of notice

similar to that customarily used in securities class actions.

143. Plaintiffs' claims are typical of the claims of the other members of the Class as all

members of the Class were similarly affected by defendants' wrongful conduct in violation of

federal law that is complained of herein.

144. Plaintiffs will fairly and adequately protect the interests of the members of the

Class and have retained counsel competent and experienced in class and securities litigation.

145. Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:

(a) whether the federal securities laws were violated by defendants' acts and

omissions as alleged herein;

(b) whether defendants participated in and pursued the common course of conduct

complained of herein;

(c) whether documents, press releases, and other statements disseminated to the

investing public and the Company's shareholders during the Class Period misrepresented material

facts about the business, finances, financial condition and prospects of Sensormatic;

(d) whether defendants' statements to the investing public during the Class Period

misrepresented and/or omitted to disclose material facts about Sensormatic's business, finances,

value, performance and prospects;

(e) whether Sensormatic's common stock market price was artificially inflated during

the Class Period due to the material misrepresentations and failures to correct the material

-52-


misrepresentations complained of herein; and

(e) the extent to which the members of the Class have sustained damages and the

proper measure of damages.

146. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as

the damages suffered by individual Class members may be relatively small, the expense and

burden of individual litigation make it impossible for members of the Class to individually

redress the wrongs done to them. There will be no difficulty in the management of this suit as a

class action.

FIRST CLAIM

(Violations Of Section 10(b) Of The Exchange Act And Rule lOb-5 Promulgated Thereunder Against

All Defendants)

147. Plaintiffs repeat and realleges each and every allegation contained above.

148. Each of the defendants: (a) knew or recklessly disregarded material adverse non-

public information about Sensormatic's financial results and then existing business conditions,

which was not disclosed; and (b) participated in drafting, reviewing and/or approving the

misleading statements, releases, reports and other public representations of and about

Sensormatic.

149. During the Class Period, defendants, with knowledge of or reckless disregard for

the truth, disseminated or approved the false statements specified above, which were misleading

in that they contained misrepresentations and failed to disclose material facts necessary in order

to make the statements made, in light of the circumstances under which they were made, not

misleading.

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150. Defendants have violated § 10(b) of the Exchange Act and Rule lOb-5

promulgated thereunder in that they: (a) employed devices, schemes and artifices to defraud; (h)

made untrue statements of material facts or omitted to state material facts necessary in order to

make statements made, in light of the circumstances under which they were made, not

misleading; or (c) engaged in acts, practices and a course of business that operated as a fraud or

deceit upon the purchasers of Sensormatic stock during the Class Period.

151. Plaintiffs and the Class have suffered damage in that, in reliance on the integrity

of the market, they paid artificially inflated prices for Sensormatic stock. Plaintiff and the Class

would not have purchased Sensormatic stock at the prices they paid, or at all, if they had been

aware that the market prices had been artificially and falsely inflated by defendants' false and

misleading statements.

SECOND CLAIM

(Violation Of Section 20(a) Of The Exchange Act Against Individuals Defendants)

152. Plaintiffs repeat and reallege each and every allegation contained above.

153. The Individual Defendants acted as controlling persons of Sensormatic within

the meaning of Section 20(a) of the Exchange Act. By reason of their senior executive and/or

Board positions they had the power and authority to cause Sensormatic to engage in the wrongful

conduct complained of herein.

154. By reason of such wrongful conduct, Sensormatic and the Individual Defendants

are liable pursuant to §20(a) of the Exchange Act. As a direct and proximate result of these

defendants wrongful conduct, plaintiffs and the other members of the Class suffered damages in

connection with their purchases of Sensormatic stock during the Class Period.

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THIRD CLAIM

(Violation Of Section § 20A Of The Exchange Act Against Defendants Bufe and Engciahl)

155. Plaintiffs repeat and real lege each and every allegation contained above. This

claim is asserted against defendants William Bufe and Walter Engdahl

156. Defendants Bufe and Engdahl, by virtue of their positions as Sensormatic Officers

and/or Directors, had access to, and were in possession of, material non-public information about

Sensormatic at the time of their sales of 13,000 shares of Sensormatic stock for proceeds of

$281,150 during the Class Period.

157. By virtue of their participation in the scheme to defraud investors described herein

and their sales of stock while in possession of material non-public information about

Sensormatic, defendants Bufe and Engdahl violated § 10(b) of the Exchange Act and applicable

rules and regulations thereunder.

158. Defendant Buf&s sale of 3,000 shares of Sensormatic stock on February 5, 2001

were made contemporaneously with plaintiff Frank Follmefs purchase of 1,000 shares of

Sensormatic stock on February 5, 2001, and with plaintiff Dr. Karl Rugart's purchase of 1,000

shares on February 6,2001. Defendant Engdahl's sale of 10,000 shares on February 23, 2001,

was contemporaneous with plaintiff Folimer's purchase of 1,000 shares of Sensormatic stock on

March 1, 2001.

159. These plaintiffs and all other members of the Class who purchased shares of

Sensormatic stock contemporaneously with sales of Sensormatic stock by defendants Bufe and

Engdahl: (a) have suffered substantial damages in that, in reliance on the integrity of the market,

they paid artificially inflated prices for Sensormatic stock as a result of the violations of § 10(h)

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and Rule lOb-S herein; and (b) would not have purchased Sensormatic securities at the prices

they paid, or at all, if they had been aware that the market prices had been artificially and falsely

inflated by defendants? misleading statements and concealment of material facts. At the time of

the purchases by these plaintiffs and Class Members, the fair market value of the Sensormatic

securities was substantially less than the price paid for them.

WHEREFORE, plaintiffs pray for relief and judgment, as follows:

(a) Determining that this action is a proper class action under Rule 23 of the Federal

Rules of Civil Procedure;

(b) Awarding compensatory damages in favor of plaintiffs and the other Class

members against all defendants, jointly and severally, for all damages sustained as

a result of defendants' wrongdoing, in an amount to be proven at trial, including

interest thereon;

(c) Awarding plaintiffs and the Class their reasonable costs and expenses incurred in

this action, including counsel fees and expert fees; and

(d) Such other and further relief as the Court may deem just and proper.

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JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by jury.

DATED: October 15. 2001

MILBERG WEISS BERSHAD HYNES & LERACH LLP

By: Kenneth Vvianale Fla. Bar No. 169668 Maya Saxena Fla. Bar. No. 0095494 5355 Town Center Road, Suite 900 Boca Raton, FL 33486 Tel: (561) 361-5000 Fax: (561) 367-8400

Lead Counsel for Plaintiffs and the Class

CAULEY GELLER BOWMAN & COATES, LLP Howard K. Coates, Jr. Fla. Bar. No. 0714305 Jack Reise Fla. Bar. No. 058149 One Boca Place 2255 Glades Road, Suite 421A Boca Raton, FL 33431 Tel: (561) 750-3000 Fax: (561) 750-3364

SCHIFFRIN & BARROWAY, LLC Mark A. Topaz Three Bala Plaza East Suite 400 Bala Cynwyd, PA 19004 Tel: (610) 667-7706 Fax: (610) 667-7056

Attorneys for Plaintiff

-57-


CERTIFICATE OF SERVICE

I HEREBY CERTIFY that a true and correct copy of the foregoing was furnished by U.S.

Mail on this 15th day of October, 2001 to:

GREENBERG TRAURIG, P.A. Mark F. Bideau 777 S. Flagler Drive, Suite 300 East West Palm Beach, FL 33401 Tel: (561) 650-7900 Fax: (561) 655-6222

Mark P. Schnapp 1221 Brickell Avenue Miami, FL 33131 Tel: (305) 579-0500 Fax: (305) 579-0717

SULLIVAN & CROMWELL Gandolfo V. DiBlasi 125 Broad Street New York, NY 10004 Tel: (212) 558-4000 Fax: (212) 558-3588

Attorneys for Defendants

/1


EXHIBIT A


hr ,vww.sec.gov/litigation/admin/337518.txt

UNITED STATES OF AMERICA SECURITIES AND EXCHANGE COMMISSION

SECURITIES ACT OF 1933 Release No. 7518 / March 25, 1998

SECURITIES EXCHANGE ACT OF 1934 Release No. 39791 / March 25, 1998

ACCOUNTING AND AUDITING ENFORCEMENT Release No. 1017 / March 25, 1998

ADMINISTRATIVE PROCEEDING File No. 3-9563

In the Matter of

SENSORMATIC ELECTRONICS CORPORATION,

Respondent.

ORDER INSTITUTING PUBLIC ADMINISTRATIVE PROCEEDINGS, MAKING FINDINGS, AND ISSUING CEASE-AND-DESIST ORDER

I.

The Commission deems it appropriate that public administrative proceedings be, and they hereby are, instituted against Sensormatic Electronics Corporation ("Sensormatic") pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act")

II.

In anticipation of the institution of these administrative proceedings, Sensormatic has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings, and any other proceeding brought by or on behalf of the Commission or to which the Commission is a party, Sensormatic, without admitting or denying the findings contained in this order, consents to the issuance of this Order Instituting Public Administrative Proceedings, Making Findings, and Issuing Cease-and-Desist Order ("Order"), the findings contained herein, and the imposition of the relief set forth below.

III.

The Commission makes the following findings: [1]

A. FACTS

1 . Summary

From at least the start of its fiscal year 1994 (July 1, 1993) through July 10, 1995, Sensormatic manipulated its quarterly revenue and earnings in order to reach its budgeted earnings

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goals and thereby meet analysts' quarterly earnings projections. Sensormatic carried out this fraudulent scheme by improperly recognizing revenue through several different practices. The conduct, which occurred over a number of years and involved employees throughout the organization, primarily involved recognizing and recording revenue in one quarter from product shipped in the next quarter. At the end of each quarter Sensormatic turned back its computer clock that recorded and dated shipments so that out-of--period shipments, and consequently revenue, would be recorded in the prior quarter.

As a result of its improper revenue recognition practices, Sensormatic misstated its quarterly earnings in financial statements contained in periodic reports and registration statements filed with the Commission during the period between the start of its 1994 fiscal year through the third quarter of fiscal year 1995. In addition, Sensormatic issued a press release that overstated its preliminary estimates of earnings for the fourth quarter of fiscal year 1995 by over 40% and for the year by over 18%. Sensormatic's misstatements of its quarterly net income ranged from an understatement of about $1.9 million (an understatement of 9.1%) in the second quarter of fiscal year 1994 to an overstatement of about $5.2 million (an overstatement of 40.5%) in the fourth quarter of fiscal year 1995.

During the relevant period, Sensormatic's senior management, including Sensormatic's former Chief Financial Officer ("CFO"), who also was the Chief Operating Officer ("COO") and Executive Vice President, and its former Vice President of Finance ("VP of Finance"), riot only was aware of the methods used to effectuate the scheme, but also condoned and directed them. Others at various levels and in various departments also participated in these practices.

** FOOTNOTES **

[1] :The Commission's findings herein are made pursuant to Sensormatic's Offer and are not binding upon any other person or entity in these or any other proceedings.

2.Respondent:Sensormatic Electronics Corporation

Sensormatic is a Delaware corporation with its principal executive offices in Boca Raton, Florida. The company manufactures and markets electronic security systems used, among other things, to deter shoplifting. Sensormatic's stock is registered with the Commission pursuant to Section 12(b) of the Exchange Act and is traded on the New York Stock Exchange. As of September 19, 1997, Sensormatic had 74,288,369 shares of common stock outstanding. For fiscal years 1994 and 1995, Sensormatic reported revenues of approximately $656 million and $889.1 million, respectively. Sensormatic's earnings were determined primarily by the recognition of revenue from the sale of equipment.

3.Nanipulation of Quarterly Earnings

(a) Background

The investment community viewed Sensormatic as a growth company, a view that the company fostered through, among other things,

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press releases announcing its significant growth. For fiscal years 1988 through 1995, Sensormatic internally budgeted and achieved revenue growth of over 20% per year. Up until its July 7, 1995 announcement that its earnings for the fourth quarter of fiscal year 1995 would be "substantially below" expectations, the company had reported earnings consistent with analysts' quarterly earnings projections for ten consecutive years. During the relevant period, Sensormatic stated in reports filed with the Commission and disseminated to the public that it recognized revenue upon shipment of product.

In preparation for the end of each quarter, a Sensormatic employee prepared weekly "To-Go" memoranda containing the sales goals that needed to be achieved to reach the company's budgeted earnings goals and estimating the amounts of sales that still needed to be made to achieve the budget. The memoranda were addressed and circulated to top management, including the CFO and the VP of Finance, and were also copied and sent to others in various departments.

At the start of the last month of each quarter, the company usually was short of its sales goals. In the last days of each quarter, the sales department undertook dramatic efforts, including, among other things, reducing prices and offering favorable payment terms, to close sufficient sales to make the goals. Through memoranda and responses to its inquiries, senior management, including the Chief Executive Officer, was kept regularly informed about the status of the quarter.

When senior Sensorrnatic management determined that the company could not attain its budgeted goals, Sensormatic engaged in a variety of improper revenue recognition practices described below that were not in conformity with Generally Accepted Accounting Principles ("GAAP"), including the following:

out-of-period shipments, whereby the company recognized revenue in one quarter on go that were actually shipped in the next quarter;

recognizing revenue when customer shipments were made to a warehouse leased by Sensormatic rather than directly to the customer;

slow shipping, whereby the company recognized revenue when it shipped goods at the end of the quarter but requested the carrier to delay delivery beyond normal transit times to meet a customer's requested delivery date in the new quarter; and

recognizing revenue on FOB destination sales when the product was shipped from Sensormatic rather than at the time when the shipment arrived at the indicated destination, when title and risk of loss passed to the customer.

During the period from fiscal year 1994 through fiscal year 1995,[21 the amount of out-of-period revenue that Sensormatic recognized in quarters ranged from $4.6 million to $30.2 million.

(b)Out-of-Period Shipments

During the relevant period, Sensormatic recognized revenue on out-of-period shipments in every reporting period. Sensorrnatic carried out this practice as described below.

On or shortly before the last day of a quarter, employees from the sales, manufacturing, and shipping departments of Sensormatic met to determine what purchase orders were expected to be received and processed and how long it would take to ship the related product. During the relevant period, purchase orders were accepted through the last day of the quarter and processed

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late into the night on that day. On at least one occasion, orders were accepted throughout the first day of the next quarter but were recorded as having been received in the previous quarter. If these last minute orders could not be shipped by midnight on the last day of the quarter, the decision was made, usually by Sensormatic's VP of Finance or its CFO, as to how much product to ship after the end of the quarter.

Sensormatic then shipped goods for a number of days past the end of the quarter by going through a complicated and costly process to backdate computer-generated records of these shipments. Shortly before midnight on the last day of the quarter, the computer system that recorded and dated shipments was "brought down" so that the computer clock date would reflect the last day of the prior quarter. The computer system then falsely recorded shipments as having occurred on the last day of the prior quarter.

(c)Warehouse Shipments

During part of the relevant period, Sensormatic improperly recognized revenue on products it shipped to warehouses leased by it. The product had been ordered by customers but it was not scheduled to be delivered to the customer until sometime during the next quarter. Nevertheless, Sensormatic recognized revenue in such situations when the product was first shipped to the warehouse. To ensure that orders eventually were sent to customers at the appropriate time, Sensormatic created a set of "off-books" records to track the warehouse shipments on which revenue was prematurely recognized. Certain Sensormatic employees destroyed their copies of off-books records during the fiscal year 1995 audit.

For example, in December 1994, Sensormatic shipped $8 million of goods ordered by one of its largest customers to a warehouse that Sensormatic leased. These goods were shipped to the customer over the next several months, yet Sensormatic prematurely recognized the entire $8 million as revenue in the second quarter of fiscal year 1995, ended December 31, 1994, upon the shipment to the warehouse.

(d)Slow Shipments

During the relevant period, Sensormatic improperly recognized revenue on shipments made during the last days of the quarter but not scheduled to arrive at the customers' location until well into the next quarter. Sensormatic recorded revenue in the quarter just ending, although it had requested carriers to delay delivery of the goods by a few days to as much as a few weeks beyond normal transit times.

(e)FOB Destination Shipments

Sensormatic also improperly recognized revenue when goods were shipped to customers whose contracts and/or purchase orders included FOB destination terms. Under GAAP, revenue should not be recognized in these situations until goods reach their destination, at which point title and risk of loss pass to the customer.

During the relevant period, for at least some of its FOB destination customers, Sensormatic improperly recognized revenue during the last week of certain quarters when shipments left the Sensormatic location. This revenue was prematurely recognized because these shipments did not reach the customer's indicated

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destination before the end of the quarters. For example, at the end of the third quarter of fiscal year 1995, Sensormatic prematurely recognized a substantial amount of revenue when goods were shipped to a customer whose contract with Serisormatic contained an FOB destination provision.

(f)The Purpose of the Improper Revenue Recognition

Sensormatic knew and understood that its stock, which traded at a high price/earnings ratio, was sensitive to quarterly earnings announcements. The company also was concerned with its stock price because it issued stock to finance its acquisitions. Sensormatic senior management regularly communicated with the analyst community, providing information about its earnings goals which the analysts used in determining their quarterly earnings projections for the company. As each quarter progressed, Sensormatic senior management knew the earnings projections being made by the analysts and understood that the company would meet the analysts' quarterly earnings projections if it met its budgeted earnings goals. Thus, Sensormatic manipulated its earnings to meet its goals and thereby meet analysts' projections. Sensormatic's revenue recognition practices also smoothed the company's reported earnings over the course of a year and, in particular, obscured Sensormatic's seasonally weaker third quarter.

During the relevant period, Sensormatic consistently met, within one cent, the analysts' forecasts of quarterly earnings per share ("BPS"), even for the third quarters, the quarter in which Sensormatic had the largest gap between its actual BPS and the analysts' quarterly EPS forecasts. For the third quarter of fiscal year 1994, the analysts' final BPS projection was $0.27, Sensorrnatic reported $0.26 EPS, and the actual BPS was $0.21. For the third quarter of fiscal year 1995, the analysts' BPS projection was $0.33, Sensormatic reported $0.33 BPS, and the restated BPS was $0.21.

(g)Sensormatic's Filings and Press Release

As a result of its improper revenue recognition practices, Sensormatic inaccurately reported quarterly revenue and thereby misstated its quarterly net income and BPS. The chart below summarizes Sensormatic's approximate misstatements in periodic reports and in the July 10, 1995 press release during the relevant time period arising from these improper revenue recognition practices. It also lists the related amounts of improperly recognized revenue.

* *FOOTNOTES* *

[2] :Sensormatic engaged in these improper revenue recognition practices for many years prior to fiscal year 1994. Sensormatic's shipping records indicate that the number of orders shipped and the amount of revenue recognized on the last day of the first, third, and fourth quarters of fiscal year 1993 substantially exceeded the daily average of the number of orders shipped and the amount of revenue recognized for the other days in the quarters. The last day of the third quarter of fiscal year 1993 is illustrative: On that day, Sensormatic shipped 1,692 orders, compared to a daily average number of orders shipped of 232, and recognized $10,351,360 in revenue, compared to a daily average amount of revenue of $506,900.

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I Amount of Net Income I Over! I I Over/ Improperly as Reported l[Under] [Under]

I Recognized by IStatement IStatement of

Revenue Sensormatic J of Net INet Income

I Income I

1994 $8.5 M $14.8 M [$0.8 M] [5.3 %] I Q1 I

1994 $4.6 M $18.8 M [$1.9 M] [9.1 %] I I Q2

1994 $15.8 N $16.4 N $3.6 N 28 .1% I Q3

1994 $15.5 N $22.0 N [$0.9 N] [3.8 1] 1 Q

1995 $12.8 N $20.1 N [$0.5 N] [2.2 %] Qi I

11995 $13.8 N $25.3 N $0.3 N 1.2 % Q2

11995 $30.2 N $24.1 N $6.7 N 38.3 % I Q3 I

1995 $29.3 N $18_$21M* $5.2 N 40.5 1 IQ4 I

Sensormatic's reported estimate in press release.

During the period of the fraudulent scheme, Sensormatic filed with the Commi

Sensormatic also issued a press release on July 10, 1995 that materially ove

(h)Concealing the Scheme

Sensormatic's accounting records were falsified by improperly recording reve

Sensormatic's management also never disclosed these practices, which did not

Certain Sensarmatic employees also took additional measures -- including wit

B.LEGAL ANALYSIS

1.Sensormatic Violated the Antifraud Provisions of the FederalSecurities Law

Section 10(b) of the Exchange Act and Rule lOb-S thereunder prohibit a perso

In addition, to violate Section 10(b) and Rule lob-5, a defendant must act w

A fact is material if there is a substantial likelihood that a reasonable in

Sensorrnatic violated Section 10(b) and Rule lOb-5 by engaging in a scheme to

Sensormatic violated Section 17(a) of the Securities Act and Section 10(b) o


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2.Sensormatic Violated the Reporting Provisions of the Exchange Act

Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder requ

As discussed above, Sensormatic engaged in a fraudulent scheme wherein it fi

Sensormatic's reporting violations deprived investors of accurate and reliab

3.Sensormatic Violated the Recordkeeping and Internal Controls Provisions of the Exchange Act

Section 13(b) (2) (A) of the Exchange Act requires a company such as Sensormat

Sensormatic's practice of recording revenue from out-of-period shipments mv

Sensormatic also failed to devise and maintain internal accounting controls

IV.

Based on the foregoing, the Commission finds that Sensormatic violated Secti

V.

In view of the foregoing, the Commission finds that it is appropriate to imp

Accordingly, IT IS HEREBY ORDERED, pursuant to Section 8A of the Securities

By the Commission.

Jonathan G. Katz Secretary

SERVICE LIST

Rule 141 of the Commission's Rules of Practice provides that the Secretary,

The attached Order Instituting Public Administrative Proceedings, Making Fin

The Honorable Brenda P. Murray Chief Administrative Law Judge Securities and Exchange Commission Mail Stop 11-6 450 Fifth Street, N.M. Washington, D.C. 20549

Securities and Exchange Commission Division of Enforcement 450 Fifth Street, N.M. Mail Stop 7-9 Washington, D.C. 20549 Attention: Sharon Zamore, Esq.

Joseph I. Goldstein, Esq.

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Crowell & Moring, LLP 1001 Pennsylvania Avenue, N.M. Washington, D.C. 20004-2595 Attorney for Respondent Sensormatic Electronics Corporation

Sensormatic Electronics Corporation c/o Joseph I. Goldstein, Esq. Crowell & Waring, LLP 1001 Pennsylvania Avenue, N.M. Washington, D.C. 20004-2595

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EXHIBIT B


http:// i.sec .gov/1itigation/litreleases/IrI 5680.txt

SECURITIES AND EXCHANGE COMMISSION Washington, D.C.

LITIGATION RELEASE NO. 15680 / March 25, 1998

ACCOUNTING AND AUDITING ENFORCEMENT RELEASE NO. 1020

In the Matter of SENSORMATIC ELECTRONICS CORPORATION, Administrative Proceeding File No. 3-9563, Securities Act of 1933 Release No. 33- 7518, Securities Exchange Act of 1934 Release No. 34-39791, and Accounting and Auditing Enforcement Release No. 1017

SECURITIES AND EXCHANGE COMMISSION v. RONALD G. ASSAF, MICHAEL E. PARDUE AND LAWRENCE J. SIMMONS, Civil Action No. 98-757(EGS) (D.D.C. March 25, 1998)

In the Matter of JOY LYNN SCHNEIDER GREEN, CPA, Administrative Proceeding File No. 3-9564, Securities Exchange Act of 1934 Release No. 34-39792, and Accounting and Auditing Enforcement Release No. 1018

In the Matter of THOMAS H. PIKE, Administrative Proceeding File No. 3-9565 , Securities Exchange Act of 1934 Release No. 34-39793, and Accounting and Auditing Enforcement Release No. 1019

The Securities and Exchange Commission ("Commission") today instituted and simultaneously settled administrative proceedings against Sensormatic Electronics Corporation ("Sensormatic"), a manufacturer and marketer of electronic security systems. In addition, the Commission filed a civil action seeking permanent injunctions and civil penalties in the United States District Court for the District of Columbia against the following three former senior officers of Sensormatic: Ronald G. Assaf, formerly Sensormatic's President and Chief Executive Officer and currently the Chairman of its Board of Directors; Michael E. Pardue, formerly Sensormatic's Chief Operating Officer, Chief Financial Officer and Executive Vice President and a member of its Board of Directors; and Lawrence J. Simmons, Sensormatic's former Vice President of Finance. Finally, the Commission instituted and simultaneously settled administrative proceedings against Joy Lynn Schneider Green, Sensormatic's former Controller of U.S. Operations, and Thomas H. Pike, Sensormatic's former Director of Management Information Systems.

SENSORMATIC SETTLES CHARGES OF SECURITIES LAW VIOLATIONS IN CONNECTION WITH SCHEME TO MANIPULATE EARNINGS

In the first of three separate administrative Orders issued today, the Commission found that Sensormatic violated the antifraud, reporting, internal controls, and books and records provisions of the federal securities laws in connection with its manipulation of its quarterly revenue and earnings in order to reach its earnings goals and thereby meet analysts' quarterly earnings projections. Simultaneous with the institution of the administrative proceedings, and without admitting or denying the findings contained in the Commission's Order, Sensormatic consented to the issuance of a cease-and-desist order.

The Commission Order finds, among other things, that from at

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least the start of its 1994 fiscal year through July 10, 1995, Sensormatic manipulated its quarterly revenue and earnings in order to reach its budgeted earnings goals and thereby meet analysts' quarterly earnings projections. During the relevant period, Sensormatic consistently met, within one cent, the analysts' forecasts of quarterly earnings per share, even for the third quarters which were Sensormatic's seasonally weaker quarter.

Sensormatic carried out this fraudulent scheme by improperly recognizing revenue through several different practices. The conduct, which occurred over a number of years and involved employees throughout the organization, primarily involved recognizing and recording revenue in one quarter from product shipped in the next quarter. At the end of each quarter Sensormatic turned back its computer clock that recorded and dated shipments so that out-of-period shipments, and consequently revenue, would be recorded in the prior quarter. According to the Order, revenue also was recognized through the following improper practices: recognizing revenue in one quarter, when products were shipped to warehouses leased by Sensormatic, instead of in the next quarter, when the products were shipped to the customers; slow shipments, whereby revenue was recognized on shipments which were made during the last days of a quarter but which were not scheduled to arrive at the customers' location until well Into the next quarter; and recognizing revenue on goods at the time that they were shipped to customers even though the customers' contracts with Sensormatic contained an FOB destination provision. The amount of out-of-period revenue that Sensormatic recognized In quarters ranged from $4.6 million to $30.2 million.

The Order also finds that, as a result of the fraudulent scheme, Sensormatic filed materially false and misleading periodic reports as well as registration statements for the sale of securities that incorporated these periodic reports by reference. The reports were false and misleading because they misstated Sensormatic's quarterly results of operations, including revenue and net income. They also falsely stated that the company recognized revenue upon shipment, when, in fact, It intentionally and prematurely recognized revenue for shipments made in the succeeding period or periods, and did not comply with generally accepted accounting principles ("GAAP") or the company's stated revenue recognition policy. In addition, Sensormatic issued a press release that overstated its preliminary estimates of earnings for the fourth quarter of fiscal year 1995 by over 40%, and for the year by over 18%. During the relevant period, Sensormatic's misstatements of its quarterly net income ranged from an understatement of about $1.9 million (9.1%) in the second quarter of fiscal year 1994 to an overstatement of about $5.2 million (40.5%) in the fourth quarter of fiscal year 1995.

The Order ultimately finds that, based on the foregoing, Sensormatic violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b), 13(a), 13(b) (2) (A) and 13(b) (2) (B) of the Securities Exchange Act of 1934 ("Exchange Act"), and Exchange Act Rules lOb-5 1 12b-20, 13a-1, and 13a-13. In light of these findings, the Commission orders Sensormatic to cease and desist from committing or causing any violation, and future violation, of these provisions.

COMPLAINT FILED AGAINST FORMER SENSORMATIC OFFICERS

The Commission's Complaint filed in District Court alleges that from at least July 1, 1993, through mid-1995, Pardue and Simmons

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participated in a fraudulent scheme to manipulate Sensormatic's quarterly revenue and earnings by improperly recognizing revenue through several different practices. The Complaint also alleges that Assaf knew that in every quarter Sensormatic recognized revenue improperly on goods shipped after the end of the quarter, but he did not take any steps to stop the improper accounting practices. The Complaint alleges that, under Pardue's and Simmons' supervision, Sensormatic employees backdated computer-generated documents reflecting shipments to make it appear that the shipping had occurred in the prior quarter. According to the Complaint, revenue also was recognized improperly on warehouse shipments, slow shipments and on a contract containing an FOB destination provision. It is alleged that Pardue and Simmons carried out the improper recognition of revenue for the purpose of manipulating Sensormatic's earnings to meet its budgeted earnings goals and thereby meet analysts' quarterly earnings projections. According to the Complaint, during the same period, Assaf understood that by recognizing revenue improperly, the company would meet its earning goals and thereby meet analysts' quarterly earning projections.

The Complaint further alleges that, as a result of Pardue's and Simmons' conduct, Sensormatic filed with the Commission and disseminated to the public materially false and misleading reports, including registration statements and periodic reports, that misstated quarterly financial results and falsely stated that the company recognized revenue upon shipment. According to the Complaint, Assaf signed annual reports and permitted quarterly reports to be filed with the Commission, and he knew or was generally aware that these reports were false and misleading because, among other things, they misstated Sensormatic's quarterly earnings by including improperly recognized revenue. As a result, according to the Complaint, investors could not rely on the quarterly financial information reported by the company.

The Complaint also alleges that to conceal the improper recognition of revenue from Sensormatic's independent auditors and shareholders, defendants Simmons and Pardue caused Sensormatic's accounting records to be falsified, made false statements to the independent auditors, and intentionally circumvented the company's internal accounting controls. According to the Complaint, by allowing the company's improper recognition of revenue, Assaf also caused Sensorrnatic's accounting records to be falsified.

The Commission alleges that by engaging in such conduct, Pardue and Simmons each violated provisions of the federal securities laws that prohibit fraud, falsifying accounting records, and making misrepresentations to auditors; and Assaf aided and abetted Sensormatic's reporting violations and caused the falsification of accounting records. Specifically, Pardue and Simmons each violated Section 17(a) of the Securities Act, Sections 10(b) and 13(b) (5) of the Exchange Act, and Exchange Act Rules lOb-5, 13b2-1, and 13b2-2, and Assaf aided and abetted violations of Section 13(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, and 13a-13 and violated Exchange Act Rule 13b2-1.

Simultaneous with the filing of the Commission's Complaint, Assaf, Pardue and Simmons, without admitting or denying the allegations of the Complaint, each consented to the entry of Final Judgments permanently enjoining them from violating the relevant provisions of the federal securities laws and ordering Assaf, Pardue and Simmons to pay civil money penalties of $50,000, $40,000 and $50,000, respectively. As part of his settlement, Simmons also agreed to settle administrative proceedings pursuant to Rule 102(e) of the Commission's Rules of Practice, to be instituted after entry of the injunction, which will deny him the privilege of appearing or

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practicing before the Commission as an accountant, with the right to apply to resume appearing or practicing after five years.

OTHER PROCEEDINGS

The Commission also instituted and simultaneously settled proceedings pursuant to Section 21C of the Exchange Act and Rule 102(e) of the Commission's Rules of Practice against Joy Lynn Schneider Green ("Schneider"), Sensormatic's Controller of U.S. Operations during the relevant period of time. Without admitting or denying the findings contained in the Order, Schneider consented to the issuance of the Order which finds, among other things, that she was aware that shipping documents had been backdated and that revenue was improperly and prematurely recorded based on the documents. The Order also finds that Schneider knew that Sensormatic prepared its financial statements using the improperly recorded revenue and that she knew or should have known that, due to the improper recognition of revenue, the financial statements were not in conformity with GAAP and misstated Sensorrnatics earnings. The Order further finds that Schneider permitted this conduct to continue and failed to report it to the Audit Committee of Sensormatic's Board of Directors or the independent auditors. In addition, Schneider knew that documents had been withheld from the independent auditors during the fiscal year 1994 audit, but did not report this to auditors. Finally, during the fiscal year 1995 audit, Schneider hid in her desk a document containing information requested by the auditors and discussed it with her superior, but did not reveal its contents to auditors.

Based on the foregoing, the Commission Order finds that Schneider: willfully violated Exchange Act Rules 13b2-1 and 13b2-2; caused Sensormatic's violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder; caused and willfully aided and abetted Sensormatic's violations of Section 13(b) (2) (A) and 13(b) (2) (B) of the Exchange Act; and engaged in improper professional conduct. In view of the foregoing, the Commission is ordering Schneider to cease and desist from committing or causing any violation, and any future violation, of the above listed provisions of the federal securities laws and denies her the privilege of appearing or practicing before the Commission as an accountant, with the right to apply for reinstatement after three years.

In the final administrative proceedings instituted today, the Commission issued a cease-and-desist order, by consent, against Thomas H. Pike, Sensormatic's former Director of Management Information Systems, pursuant to Section 21C of the Exchange Act based upon his conduct that allegedly violated Exchange Act Rule 13b2-1 and caused Sensormatic's violations of Sections 13(a), 13(b) (2(A) and 13(b) (2) (B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. Without admitting or denying the findings contained therein, Pike consented to the issuance of the Order that finds, among other things, that Pike caused the falsification of accounting records and Sensormatic's reporting violations by supervising employees who reset the computer clock in order to falsify dates on shipping records and prematurely recognize revenue.

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SECURITIES AND EXCHANGE COMMISSION Washington, D.C.

Securities Act of 1933 Release No. 7528 / April 27, 1998

Securities Exchange Act of 1934 Release No. 39916 / April 27, 1998

Accounting and Auditing Enforcement Release No. 1027 / April 27, 1998

Administrative Proceeding File No. 3-9586

In the Matter of ALBERT GLENN YESNER, CPA

On April 27, 1998, the Commission issued an Order instituting administrative proceedings against Albert Glenn Yesner ("Yesner") of Coral Springs, Florida. In the Order, the Division of Enforcement and the Office of the Chief Accountant allege that Yesner, who is a certified public accountant and who was Sensormatic Electronics Corporation's ("Sensormatic") Controller and then Director of Business Controls, violated, and aided and abetted and caused Sensormatic's violations of, various provisions of the federal securities laws, including the antifraud, reporting, internal controls, books and records, and representation-to-auditors provisions, and that he engaged in improper professional conduct.

The Order alleges that, from at least July 1993 through July 1995, Sensormatic, a manufacturer and marketer of electronic security systems, improperly recognized revenue in order to manipulate its quarterly revenue and earnings to reach its budgeted earnings goals and thereby meet analysts' quarterly earnings projections. One of the methods Sensormatic used to improperly recognize revenue involved turning back the computer clock that dated and recorded shipments in order to prematurely recognize revenue on shipments made past the end of the quarter. As a result of its improper revenue recognition practices, Sensormatic misstated its quarterly earnings in financial statements contained in periodic reports and registration statements filed with the Commission. In addition, Sensorrnatic issued a press release that inflated its preliminary estimates of earnings relating to fiscal year 1995.

The Order alleges, among other things, that Yesner participated in Sensormatic's improper revenue recognition because, although he was aware that shipping documents were backdated to prematurely and improperly record shipments and revenue and knew that recognizing revenue on post-period shipments was not in conformity with generally accepted accounting principles or the company's stated revenue recognition policy, he failed to inform the Audit Committee of Sensormatic's Board of Directors or the independent auditors about these and other practices. The Order also alleges that, during the audit for fiscal year 1994, Yesner learned that a Sensormatic employee had been instructed to withhold from the auditors documents that would have


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disclosed the improper recognition of revenue on out-of-period shipments, and that Yesner told the employee that his choices were essentially to follow orders or quit.

Based on the foregoing, the Order alleges that Yesner willfully violated Exchange Act Rules 13b2-1 and 13b2-2; caused and willfully aided and abetted Sensormatic's violations of Section 13(b) (2) (A) and (B) of the Exchange Act; and caused Sensormatic's violations of Section 17(a) of the Securities Act, Sections 10(b) and 13(a) of the Exchange Act, and Rules lOb-5, 12b-20, 13a-1, and 13a-13 thereunder.

A hearing will be held to determine whether the staff allegations are true, to afford Yesner an opportunity to establish any defenses, and to determine whether the Commission should issue a cease and desist order against Yesner and what, if any, remedial action against Yesner is appropriate pursuant to Rule 102(e) of the Commission's Rules of Practice.

1

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EXHIBIT C


I"

Sensormatic log of

securing today's business

TO: Distribution

FROM: -

DATE: September 5, 2000

SUBJECT: Softgoods FY00 Sales Report

Attached are softgoods FY00 sales results, analysis and an action plan. When reviewing these materials, keep the following points in mind:

1. This data reflects product revenue only and does not include maintenance 2. Figures are for U.S. sales only 3. This report covers all U.S. softgoods accounts, not just those managed by the softgoods

sales team

You will see in the attached that Sensormatic's sales to the softgoods market are declining. While this segment has been our company's bread and butter for many years, the environment in which our customers operate is undergoing tremendous changes. We need creative approaches and new products if we hope to increase sales to the softgoods market.

Please contact me with your input, particularly regarding the action plan on pages 10-11.

Distribution: Jerry Kendall Chris Davell Don Taylor Pete Schmidt Lisa Ciappetta Bill Stewart Mig Paredes/B-8 Carmen Dickson Sergio del Lupo/B-8 Thomas Colon/B-8 Bob Clucas John Ray Luciano Garrido

John Zambiasi/Field Bill Bussa/Field Brian Driscoll/Field Dave Friedman/Field Michelle Graffis/Field Larry Howell/Field Dennis Moss/Field Tony Peralo/Field Carl Rysdon/Field Mike Slevin/Field

Ed Foley/Field Tim Hickey/Field Tom Meade/Field Doug Thomas/Field Gary Fraser/Field Bill Woodall/Field Debbie Fisher/Field Sean Ryan/Field Ruth Cyrus/C-42 Jim Wyatt/C-42

Steve Watson/Field Russ Tate/Field Ty Shriver/Field Will Ford/Field Robert Kodweis/Field Scott Zornig/Field Dennis Colligan/Field Scott Dixon/Field Stephanie Brush/C-7


-2.-

$140

$120

$100

$80

$60

$40

$20

$0 FY97 FY98 FY99 FY00

(millions)


-3-

$70.0

$60.0

$50.0

$40.0

$30.0

$20.0

$10.0

$0.0 FY97 FY98 FY99 FY00

(miffions)

$70.0

$60.0

$50.0

$40.0

$30.0

$20.0

$10.0

$0.0 FY97 FY98 FY99 F00

(millions)


-4-

$3.5

$3.0

$2.5

$2.0

$1.5

$1.0

$0.5

$0.0 FY97 FY98 FY99 F00

(millions)

$12.0

$10.0

$8.0

$6.0

$4.0

$2.0

$0.0

Sporting Goods Gross Revenue Down 12%

*Nh... 112

FY97

FY98

FY99

FY00

(millions)


-5-

$70.0

$60.0

$50.0

$40.0

$30.0

$20.0

$10.0

$0.0

-

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-

I ••?

iiIiiiIiIiIiIIiIII I Ben. Denial

Benefit Denial Microwave CCTV Ultra-Max

Microwave CCTV UltraMax

0 FY97 0 FY98 0 FY99 0 FY00

$20.2 $12.8 $7.9 $6.3 $21.5 $32.1 $30.4 $26.2 $28.5 $31.0 $31.2 $21.7 $44.2 $53.9 $69.7 $60.4

• CCTV sales are down 30% compared to FY99

• Ultra-Max sales are down 13% compared to FY99

• Microwave sales are down 14% compared to FY99

• Benefit denial sales are down 20% compared to FY99. This represents sales to softgoods accounts only. When looking at all U.S. customers, benefit denial sales are up about $40,000 compared to FY99. In previous years, sales were down 37%.


-6-

Top 10 Softgoods Customers

FY98

$11.2 Sears

$ 8.9 MarMaxx

$ 6.5 JCPenney

$ 6.2 Macy's East

$ 5.3 Vict. Secret

$ 3.8 Gap

$ 3.4 Saks 5" Ave

$ 3.3 May D&C

$ 1.7 Banana Rep.

$ 1.4 Macy's West

FY99

$9.5 Macy's East

$8.5 MarMaxx

$7.6 Macy's West

$7.0 Sears

$5.8 Gap

$4.6 Charming Sh.

$4.3 JCPenney

$3.4 Lord & Taylor

$3.2 Famous Barr

$2.8 Gap Kids

iLtII]

$4.9 Aber. & Fitch

$4.3 Gap

$4.2 MarMaxx

$3.8 Sears

$3.3 Macy's East

$3.3 Macy's West

$3.0 Charming Shop

$2.9 Old Navy

$2.9 Victoria's Secret

$2.6 Belk

(Millions)

Trends regarding the top 10 softgoods customers:

• Sales volume: In FY98, our #1 softgoods customer spent $11.2 million. In FY00, our #1 softgoods customer spent only $4.9 million.

• Mix of customers: In FY98 and FY99, 6 of the top 10 customers were department stores. In FY00, only 4 of the top 10 were department stores.

• Sears: Sales have declined significantly. The company has severely cut its LP budget.

• JCPenney: While ranked #3 in FY98, the company did not make the top 10 list in FY00. Like Sears, JCPenney has severely cut its LP budget.

• Macy's: Both divisions had a spike in FY99, but sales have declined due to decreased funding from Federated.


-7-

CHALLENGES AFFECTING SOFTGOODS CUSTOMERS

Sensormatic's sales are directly tied to the success of our customers. In recent years, many of our softgoods customers have struggled. Here are some of their challenges:

Business casual. A golf shirt, dockers and casual shoes cost less than a suit and dress shoes. The wide adoption of business casual has impacted apparel sales.

Credit card proliferation. Prior to the 1960s, department stores were one of the few places to offer credit. Shoppers were loyal to their favorite chain and card. MasterCard and Visa changed the retail landscape by providing credit anywhere. A generation of loyal department store shoppers is dying off, and younger consumers prefer other retail formats.

Competition. In 1999, discounters for the first time sold more apparel than department stores. Mass has changed its image from "cheap clothes at cheap prices" to "brand names for less." Why buy brands at a department store when you can get the same items for less at W al*Mart?

Higher gas prices. When you spend more on gas, you have less to spend on other purchases such as apparel.

Internet. No one knows to what extent sales via the Internet will impact brick-and-mortar retailers. Our customers are investing heavily to have a presence on the Internet with little or no return on this investment to date.

Lackluster sports. There has been a reduced interest in sports that impacts sporting goods retailers. Experts blame this in part on the baseball strike, the NBA lockout, Michael Jordan's retirement and the Internet. Many youngsters are opting for mouse pads instead of knee pads.

New shopping venues. Since 1996, the percentage of shoppers who bought at department stores dropped from 85% to 72%. In the last two years, the percentage of shoppers who bought at malls dropped from 76% to 57%. There are many new shopping venues available to today's consumers.

Time is at a premium. Many people feel pressed for time with work and family demands. They have little free time to spend browsing, and buying, at the mall.


IMPACT ON SOFTGOODS SEGMENTS

In analyzing the softgoods market, it appears that our major challenge is with department stores. Three major customers -- Sears, JCPenney and Federated -- have significantly reduced their loss prevention expenditures in recent years. As an example, Federated spent about $25 million on Sensormatic products in FY99 and only $9 million in FY00.

Some retail experts predict that the department store format will disappear. Consumers prefer mass merchandisers, club stores and category killers for items such as toasters, televisions, and other products department stores continue to carry. Department stores are struggling to redefine and reinvent themselves to attract young shoppers, many of whom prefer to buy clothing at specialty apparel stores.

Specialty apparel stores have seen their share of upheaval, with a continual string of mergers and bankruptcies. But they have important advantages over other retail formats: -

• Vertically integrated -- can respond quicker to the latest trend • Located near the consumer, not just at the mall • A clear brand that shoppers know and trust • Higher initial markups and lower markdowns lead to larger gross margins

Shoe stores are struggling to compete with Payless ShoeSource, which owns 30 percent of all stores in the top 25 shoe chains and continues to expand. Shoe stores many of us grew up with such as Kinney and Thom McAn have disappeared. Families are shopping for bargains and finding them at Payless and mass merchandisers.

Sporting goods stores are in the midst of a shakeout due to competition from mass merchandisers and others. In recent years, apparel has accounted for 27 percent of sporting goods sales. But there's been a lifestyle change away from apparel with Nike and other sports logos. Today's young shoppers more often wear branded clothing from Bebe, Gap, Old Navy, J.Crew and other specialty apparel stores.


-9-

LOSS PREVENTION ISSUES FOR SOFTGOODS

It is evident that our softgoods customers are facing severe challenges. The retail environment is truly in a state of flux, to put it mildly. Below are ways in which our customers' difficulties are impacting Sensormatic sales:

Softgoods chains are more cost conscious than ever. As a result, some customers have severely cut their loss prevention budgets.

2. Because chains are more cost conscious, some customers are sending every purchase out for competitive bids. This is particularly true for CCTV. In many cases, we are not the lowest bidder.

3. We do not have a "good-better-best" platform with low-end products available for cost-conscious customers. As a result, some customers are buying knock-off products and inferior tags rather than pay a premium for Sensormatic products.

4. At a number of chains, we have installed Ultra-Max in stores referred to as "low-hanging fruit," meaning stores with high shrink levels. Our high-priced products do not meet ROT requirements for stores with lower shrink rates. The need for a low-priced proximity deactivator, for example, is critical for department stores that have many cashwraps.

5. Our traditional department store customers are not building new stores in significant numbers. This limits our opportunities for new installations.

6. With fully depreciated microwave systems that continue to perform adequately, our financially challenged customers have little incentive to upgrade to Ultra-Max.

7. Many stores, particularly department stores, are saturated with cameras.

8. Department stores and specialty apparel stores are saturated with benefit denial products that tend to last many years.


-10-

ACTION PLAN

Below are action items for sales, marketing and product development. Many of you are already taking these types of actions. We would appreciate your additional ideas for improving our softgoods business.

Approach all areas within a chain. For example, IT, Operations and Merchandising have their own budgets we could tap into with products such as Intellex, off-site monitoring and access control. With the reduced price on Intellex, it's even more attractive as a management tool.

2. Sell remote CCTV to specialty apparel chains. They are good candidates for remote CCTV because they typically don't have a security person at each store to monitor cameras. Now that our affiance with EyeCast is formalized, we can offer customers video access over the Internet with VioStar.

3. Promote source tagging as a way to cut labor costs, increase sales and enhance customer service.

4. Utilize resources such as CCTV Specialists, Global Source Tagging and SensorlD to help make presentations to customers.

5. Approach every potential customer, not just the larger chains. The mom-and-pop store you sell to today could be the hot new chain tomorrow.

6. If stores are saturated, look elsewhere in the account for business. Examples include CCTV and access control at distribution centers and headquarters.

7. Explore all possibilities at every account. If a chain isn't buying EAS, try selling CCTV or benefit denial.

8. Share success stories and selling strategies. Let others know how you got around a sticky issue or turned the tide at an account. Corporate Marketing will distribute your success story if you give us the details. Help other sales reps to learn through your success.

9. Encourage customers to share their experiences in an application brief. We could publish several briefs every month if we had retail candidates. Application briefs make great selling tools. Contact Corporate Marketing, and we'll do the rest.


-11-

10. Bring customers to Boca for a tour. This is a great way to showcase current and upcoming programs and help retailers understand what our technologies can do for them now and in the future. Include IT, Operations and Merchandising executives as well as Loss Prevention.

11. Target down-market retailers for direct mail and other marketing programs.

12. Develop lower-priced products that will help our systems meet ROT requirements. Our most pressing needs are for low-priced proximity deactivation, hard tags and cameras.

13. Introduce a truly concealed Ultra-Max system for current microwave users. There are a number of retailers that use microwave and will not upgrade to Ultra-Max until we have a concealed system that is less expensive than FloorMax to install in existing stores. Some of these chains have a "no pedestals" philosophy, while others have stores in malls that will not permit tenants to install pedestals.


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marvin markowitz, et al. v. sensormatic electronics...

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