FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______________________to_________________________
Commission file number 0-24900
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ITI Technologies, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1340453
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2266 North Second Street, North St. Paul, MN 55109
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(Address of principal executive offices)
(Zip Code)
(612) 777-2690
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(Registrant's telephone number, including area code)
Not applicable
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No ____
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of October 31, 1997, there were 8,450,280 shares of common stock
outstanding.
<PAGE>
ITI TECHNOLOGIES, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1997
INDEX PAGE
PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements 3
Item 2 -- Management's Discussion and Analysis 11
of Financial Condition and Results
of Operations
PART II OTHER INFORMATION
Item 5 -- Other Information 16
Item 6 -- Exhibits and Reports on Form 8-K 16
Signatures 17
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of ITI Technologies, Inc.
We have reviewed the accompanying consolidated balance sheet of ITI
Technologies, Inc. and Subsidiaries as of September 30, 1997, and the related
consolidated statements of operations for the three-month and nine-month periods
ended September 30, 1997, and the consolidated statement of cash flows for the
nine-month period ended September 30, 1997. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying 1997 financial statements for them to be in
conformity with generally accepted accounting principles.
We have audited, in accordance with generally accepted auditing standards, the
consolidated balance sheet of ITI Technologies, Inc. and Subsidiaries as of
December 31, 1996, and the related consolidated statements of operations, cash
flows and stockholders' equity for the year then ended (not presented herein);
and in our report dated February 18, 1997, we expressed an unqualified opinion
on those consolidated financial statements. In our opinion, the information set
forth in the accompanying consolidated financial statements is fairly stated, in
all material respects, in relation to the consolidated financial statements from
which it has been derived.
\s\ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
October 27, 1997
<PAGE>
ITI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1996 1997 1996 1997
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales .................................. $ 24,441 $ 26,468 $ 69,869 $ 75,611
Cost of goods sold ......................... 12,525 14,516 36,282 40,243
Inventory purchase accounting adjustment ... 725
--------- --------- --------- ---------
Gross profit ............................... 11,916 11,952 33,587 34,643
Operating expenses:
Marketing, general and administrative . 4,065 4,727 11,020 13,433
Research and development .............. 1,574 1,982 4,649 5,464
Purchased research and development cost 5,200
Amortization of intangible assets ..... 228 352 684 876
--------- --------- --------- ---------
Operating income ........................... 6,049 4,891 17,234 9,670
Other income (expense):
Interest, net ......................... 215 75 535 466
Other, net ............................ 6 5 2 (19)
--------- --------- --------- ---------
Income before income tax expense ........... 6,270 4,971 17,771 10,117
Income tax expense ......................... 2,336 1,782 6,629 5,605
--------- --------- --------- ---------
Net income ................................. $ 3,934 $ 3,189 $ 11,142 $ 4,512
========= ========= ========= =========
Primary and fully diluted earnings per share $ 0.41 $ 0.35 $ 1.17 $ 0.51
========= ========= ========= =========
Weighted average shares outstanding ........ 9,604 9,103 9,510 8,811
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
ITI TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
---------- ----------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents .............................. $ 13,352 $ 5,319
Accounts receivable .................................... 14,593 14,980
Inventories ............................................ 16,627 19,087
Deferred income taxes .................................. 1,384 1,362
Other current assets ................................... 2,147 1,974
---------- ----------
Total current assets ................................ 48,103 42,722
Property and equipment ..................................... 7,647 9,769
Excess of cost over net assets acquired .................... 23,398 28,581
Other intangible assets .................................... 10,646 18,237
Notes receivable, net of current portion ................... 1,415
---------- ----------
Total assets ........................................ $ 89,794 $ 100,724
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................... $ 2,981 $ 4,749
Accrued wages .......................................... 1,586 2,635
Income taxes payable ................................... 1,440
Other accrued expenses ................................. 1,489 1,864
---------- ----------
Total current liabilities ........................... 6,056 10,688
Income taxes ............................................... 4,412 6,524
---------- ----------
Total liabilities ................................... 10,468 17,212
---------- ----------
Commitments
Stockholders' equity:
Common stock ($0.01 par value; authorized 30,000
shares; issued 9,036, outstanding 8,414 shares at
December 31, 1996; issued 9,162, outstanding
8,450 shares at September 30, 1997) ................. 90 92
Additional paid-in capital ............................. 72,411 73,478
Retained earnings ...................................... 14,491 19,003
Treasury stock, at cost (622 shares at December 31, 1996
and 712 shares at September 30, 1997) ............... (7,666) (9,061)
---------- ----------
Total stockholders' equity .......................... 79,326 83,512
---------- ----------
Total liabilities and stockholders' equity .......... $ 89,794 $ 100,724
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
ITI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1997
--------- ---------
OPERATING ACTIVITIES: (UNAUDITED)
<S> <C> <C>
Net income ............................................. $ 11,142 $ 4,512
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of intangible assets ................. 855 946
Depreciation and amortization ..................... 834 1,290
Provision for bad debt expense .................... 100 (25)
Inventory purchase accounting adjustment .......... 725
Purchased in-process research and development costs 5,200
Changes in operating assets and liabilities:
Accounts receivable ........................... (1,027) 1,815
Inventories ................................... (3,835) 146
Other current assets .......................... 315 (647)
Accounts payable .............................. (112) 1,011
Income taxes payable .......................... 1,537 1,440
Accrued expenses .............................. 1,302 847
--------- ---------
Net cash provided by operating activities .............. 11,111 17,260
--------- ---------
INVESTING ACTIVITIES:
Additions to property and equipment .................... (3,005) (2,222)
Additions to other intangible assets ................... (998) (1,225)
Issuance of notes receivable ........................... (998)
Acquisitions of businesses, net of cash acquired ....... (20,522)
--------- ---------
Net cash used in investing activities .................. (4,003) (24,967)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from revolving credit agreement ............... 6,310
Payment of revolving credit agreement .................. (6,310)
Proceeds from exercise of common stock options ......... 572 1,069
Payments for treasury stock ............................ (1,395)
--------- ---------
Net cash provided by (used in) financing activities .... 572 (326)
--------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS .............................. 7,680 (8,033)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD ............................ 9,937 13,352
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD .................................. $ 17,617 $ 5,319
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited consolidated statements of operations for the three-month
and nine-month periods ended September 30, 1997 and 1996, reflect, in
the opinion of management of ITI Technologies, Inc. (the "Company"),
all adjustments necessary for a fair statement of the results of
operations for the interim periods. The results of operations for any
interim period are not necessarily indicative of results for the full
year. The consolidated balance sheet data as of December 31, 1996, were
derived from audited consolidated financial statements but do not
include all disclosures required by generally accepted accounting
principles. The unaudited consolidated financial statements should be
read in conjunction with the consolidated financial statements and
notes thereto incorporated in the Company's Annual Report on Form 10-K
for the year ended December 31, 1996. Coopers & Lybrand L.L.P., the
Company's independent accountants, have performed a limited review of
the 1997 interim financial information included herein. Their report on
such review accompanies this filing.
The unaudited consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, a new standard for earnings per share (EPS)
calculations. Statement No. 128 requires presentation of "basic"
instead of "primary" and "diluted" instead of "fully diluted" EPS.
Basic EPS includes only actual weighted average common shares
outstanding during the period. Basic EPS would have been $0.44, or
$0.03 higher, and $0.38, or $0.03 higher in the third quarter of 1996
and 1997, respectively. Basic EPS would have been $1.25, or $0.08
higher, and $0.54, or $0.03 higher, for the nine months ended September
30, 1996 and 1997, respectively. There is no significant difference
between the Company's diluted and fully diluted EPS. The new standard
must be adopted in the fourth quarter of 1997.
2. ACQUISITIONS
On April 30, 1997, the Company purchased all of the outstanding stock
of CADDX-CADDI Controls, Inc. ("CADDX") for $19.0 million in cash (the
"Acquisition"). In conjunction with the Acquisition, the Company also
purchased from the majority shareholder of CADDX the manufacturing
facility leased by CADDX for $530,000. Immediately following the
Acquisition, the corporate name was changed to CADDX Controls, Inc.
CADDX, located in Gladewater, Texas, designs, manufactures and markets
hardwire electronic security systems in the United States and certain
international locations.
The Acquisition was accounted for using the purchase method of
accounting and, accordingly, the results of operations of CADDX have
been included in these financial statements from the effective date,
April 30, 1997. The Acquisition cost has been allocated to the assets
acquired and liabilities assumed based on their estimated fair values
at the Acquisition date, including $4.0 million to net current assets,
$1.2 million to property and
<PAGE>
2. ACQUISITIONS CONTINUED
equipment, $1.25 million to customer lists, principally related to
CADDX customers outside the United States, $2.1 million to net
long-term deferred tax liabilities, $3.75 million to trade names, and
$5.2 million to technology under development, leaving a $5.7 million
excess of cash paid (including transaction costs) over net assets
acquired. The values assigned to the various identifiable intangible
assets were determined based on anticipated discounted after-tax cash
flows for the period estimated to encompass the remaining life of the
technology existing at the Acquisition date and the expected life cycle
of the next generation of technology under development at the
Acquisition date. Depreciation periods for property and equipment and
amortization periods for trade names and the excess of cash paid over
net assets acquired are consistent with ITI's existing policies. The
customer list will be amortized over 15 years.
At the time of the Acquisition, CADDX had under development technology
related to the NX-8 security system. It is not currently clear whether
any of this technology will be commercially acceptable or whether it
will function correctly. The development of the NX-8 requires several
design and engineering innovations, including the creation of special
telecom and power interfaces that would be acceptable under any
country's regulations anywhere in the world, the development of
software to drive these interfaces and a buss structure to allow high
speed transmissions over long lines without loss of signal, all within
the specified physical space and cost structure contemplated. It is not
certain that these design innovations can be accomplished, and failure
to achieve any one of these innovations will cause the NX-8 project to
fail. As a result, in May 1997, the Company made a $5.2 million
non-recurring charge to operations for the value assigned to NX-8
technology in process at the time of the Acquisition. Also, subsequent
to the Acquisition, the Company included in cost of goods sold in the
second quarter of 1997, a $725,000 non-recurring purchase accounting
adjustment which resulted from the sale of inventory which had been
written up to reflect estimated selling price less the sum of estimated
costs of completion and sale at the time of the Acquisition.
The following are unaudited pro forma consolidated results of
operations for the nine-month periods ended September 30, 1996 and
1997, as if the Acquisition had occurred as of the beginning of each
period. The unaudited pro forma consolidated results of operations have
been adjusted to eliminate the effect of the $5.2 million non-recurring
charge to operations for the value assigned to the in-process NX-8
technology and the $725,000 non-recurring purchase accounting
adjustment which resulted from the sale of the purchased inventory. The
pro forma information also includes adjustments for additional
depreciation and amortization, the reduction of compensation expense
for a non-active majority shareholder, the reduction of interest
income, additional interest expense due to the reduction of cash used
for the Acquisition and the impact on the tax provision due to these
adjustments. The unaudited proforma consolidated results of operations
do not purport to
<PAGE>
2. ACQUISITIONS CONTINUED
represent what the Company's results of operations could actually have
been if the Acquisition had, in fact, occurred on that date.
Pro Forma
Nine Months Ended
September 30,
------------------------
1996 1997
--------- ---------
(Unaudited)
Net sales, in thousands $ 83,532 $ 81,551
Net income, in thousands 12,153 10,636
Primary earnings per share $ 1.28 $ 1.21
On May 22, 1997, the Company also completed the cash purchase of the
Regency product line and dealer program from the Silent Knight Division
of Willknight, Inc., located in Minneapolis, Minnesota, for $1.8
million. In the event sales of Regency products over the 36-month
period ending May 2000 exceed certain levels, then a contingent payment
of up to $800,000 will be made. This product line allows the Company to
offer an established product that integrates intrusion protection, fire
protection and access control. The Regency dealer program consists of
over 100 Regency dealers throughout North America. The purchase price
was allocated to the estimated fair value of the assets acquired,
primarily to customer lists, which will be amortized over its expected
useful life of 10 years.
3. LITIGATION
On August 17, 1995, the Company commenced an action for patent
infringement against Pittway Corporation and its subsidiary, Ademco
Distribution, Inc., in the United States District Court for the
District of Minnesota. The Company intends to vigorously protect its
patented technology from infringement. Costs associated with this
action are being capitalized as a patent asset associated with the
related technology. As of September 30, 1997, the Company has
capitalized $2.4 million of costs related to this lawsuit.
4. CREDIT FACILITY
On April 30, 1997, the Company entered into an unsecured $15.0 million
bank revolving credit facility. The facility provides for interest
calculated, at the Company's option, at LIBOR plus 1.0% or a commercial
bank's base rate less 1.25%. In addition, the facility requires a
commitment fee of 0.1% per annum on the unused portion of the facility.
The agreement allows for payment of annual dividends equal to 25% of
the Company's net income for the immediately preceding fiscal year and
requires the maintenance of specified ratios and minimum net worth. No
borrowings were outstanding under the credit facility as of September
30, 1997.
5. INCREASE IN THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
At the Company's Annual Meeting of Stockholders on May 22, 1997, the
Company received approval to increase the number of shares of Common
Stock which the Company is authorized to issue from 15,000,000 shares
to 30,000,000 shares.
<PAGE>
6. OTHER FINANCIAL STATEMENT DATA (IN THOUSANDS):
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
---------- ----------
(UNAUDITED)
<S> <C> <C>
Accounts receivable:
Accounts receivable ........................ $ 15,493 $ 15,990
Allowance for doubtful accounts ............ (900) (1,010)
---------- ----------
Total ............................. $ 14,593 $ 14,980
========== ==========
Inventories:
Raw materials .............................. $ 7,358 $ 8,234
Allowance for obsolescence ................. (1,400) (1,553)
---------- ----------
5,958 6,681
Work-in-process ............................ 3,519 4,788
Finished goods ............................. 7,150 7,618
---------- ----------
Total ............................. $ 16,627 $ 19,087
========== ==========
Property and equipment:
Machinery and equipment .................... $ 8,178 $ 9,900
Furniture and fixtures ..................... 2,949 3,547
Building and improvements .................. 668 1,698
---------- ----------
11,795 15,145
Accumulated depreciation and amortization (4,148) (5,376)
---------- ----------
Total ............................. $ 7,647 $ 9,769
========== ==========
Other intangible assets:
Trademarks and trade names ................. $ 10,079 $ 13,829
Technology and patents ..................... 1,591 2,793
Customer lists ............................. 3,007
Other ...................................... 590 613
---------- ----------
12,260 20,242
Accumulated amortization ................... (1,614) (2,005)
---------- ----------
Total ............................. $ 10,646 $ 18,237
========== ==========
Other accrued expenses:
Warranty ................................... $ 400 $ 550
Professional fees .......................... 416 439
Other ...................................... 673 875
---------- ----------
Total ............................. $ 1,489 $ 1,864
========== ==========
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
When used in this discussion, the words "believe", "anticipates" and
similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties which could
cause actual results to differ materially from those projected. Readers are
cautioned not to place undue reliance on these forward-looking statements
which speak only as of the date hereof. The Company undertakes no
obligation to publish revised forward-looking statements to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events. Readers are also urged to carefully review and
consider the various disclosures made by the Company which attempt to
advise interested parties of the factors which affect the Company's
business, not only in this report, but also in the Company's periodic
reports on Forms 10-K, 10-Q and 8-K filed with the Securities and Exchange
Commission.
GENERAL:
On April 30, 1997, the Company purchased all of the outstanding stock
of CADDX-CADDI Controls, Inc. ("CADDX") for $19.0 million in cash (the
"Acquisition"). In conjunction with the Acquisition, the Company also
purchased from the majority shareholder of CADDX the manufacturing facility
leased by CADDX for $530,000. Immediately following the Acquisition, the
corporate name was changed to CADDX Controls, Inc. CADDX, located in
Gladewater, Texas, designs, manufactures and markets hardwire electronic
security systems.
The Acquisition was accounted for using the purchase method of
accounting and, accordingly, the results of operations of CADDX have been
included in the financial statements from the effective date, April 30,
1997. The Acquisition cost has been allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the Acquisition
date, including $4.0 million to net current assets, $1.2 million to
property and equipment, $1.25 million to customer lists, principally
related to CADDX customers outside the United States, $2.1 million to net
long-term deferred tax liabilities, $3.75 million to trade names, and $5.2
million to technology under development, leaving a $5.7 million excess of
cash paid over net assets acquired. The values assigned to the various
identifiable intangible assets were determined based on anticipated
discounted after-tax cash flows for the period estimated to encompass the
remaining life of the technology existing at the Acquisition date and the
expected life cycle of the next generation of technology under development
at the Acquisition date.
At the time of the Acquisition, CADDX had under development technology
related to the NX-8 security system. It is not currently clear whether any
of this technology will be commercially acceptable or whether it will
function correctly. The development of the NX-8 requires several design and
engineering innovations, including the creation of special telecom and
power interfaces that would be acceptable under any country's regulations
anywhere in the world, the development of software to drive these
interfaces and a buss structure to allow high speed transmissions over long
lines without loss of signal, all within the specified
<PAGE>
physical space and cost structure contemplated. It is not certain that
these design innovations can be accomplished, and failure to achieve any
one of these innovations will cause the NX-8 project to fail. As a result,
in May 1997, the Company made a $5.2 million non-recurring charge to
operations for the value assigned to NX-8 technology in process at the time
of the Acquisition. Also, subsequent to the Acquisition, the Company
included in cost of goods sold in the second quarter of 1997, a $725,000
non-recurring purchase accounting adjustment which resulted from the sale
of inventory which had been written up to reflect estimated selling price
less the sum of estimated costs of completion and sale at the time of the
Acquisition.
On May 22, 1997, the Company also completed the cash purchase of the
Regency product line and dealer program from the Silent Knight Division of
Willknight, Inc., located in Minneapolis, Minnesota, for $1.8 million. In
the event sales of Regency products over the 36 month period ending May
2000 exceed certain levels, then a contingent payment of up to $800,000
will be made. This product line allows the Company to offer an established
product that integrates intrusion protection, fire protection and access
control. The Regency dealer program consists of over 100 Regency dealers
throughout North America. The purchase price was allocated to the estimated
fair value of the assets acquired, primarily to customer lists.
RESULTS OF OPERATIONS:
NET SALES. Net sales increased by $2.0 million, or 8.3%, from $24.4
million for the three months ended September 30, 1996, to $26.5 million for
the three months ended September 30, 1997. Net sales increased by $5.7
million, or 8.2%, from $69.9 million for the nine months ended September
30, 1996, to $75.6 million for the nine months ended September 30, 1997.
The increase in sales is primarily attributable to volume increases, as
prices remained relatively stable over these periods.
Third quarter 1997 net sales include a full quarter of revenue for the
CADDX acquisition and the Regency product line. Excluding the effect of the
acquisitions and sales to the Company's largest customer's branch
operations, sales to all other customers increased over 35% from the third
quarter of 1996. Sales to the Company's largest customer's branch
operations declined from 41.7% of total sales in the third quarter of 1996
to 5.8% of total sales in the third quarter of 1997 and are expected to
continue to decline in both dollar and percentage terms through the
remainder of 1997.
GROSS PROFIT. Gross profit increased $26,000 from the third quarter of
1996 to almost $12 million for the third quarter of 1997, but decreased as
a percentage of net sales from 48.8% to 45.2%. The decrease in gross margin
percentage is due to a combination of inherently lower gross margins on
CADDX sales, as those sales are made through distribution rather than
directly to dealers, excess factory capacity due to the decrease in sales
to the Company's largest customer, pricing pressure for products sold into
the highly competitive mass market portion of the industry, and additional
material and start-up expenses associated with the manufacture of new
product offerings. Gross profit increased from $33.6 million for the first
nine months of 1996 to $34.6 million for the first nine months of 1997.
These increases were primarily due to increased sales volume and were
partially
<PAGE>
offset by a $725,000 non-recurring purchase accounting adjustment in the
second quarter which resulted from the write-up of CADDX inventory at the
acquisition date to reflect estimated selling price less the sum of
estimated costs of completion and sale.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and
administrative expenses increased from $4.1 million for the third quarter
of 1996 to $4.7 million for the third quarter of 1997, and increased from
$11.0 million for the first nine months of 1996 to $13.4 million for the
first nine months of 1997. The dollar increase in expenses is primarily due
to the addition of the CADDX subsidiary. As a percentage of net sales,
marketing, general and administrative expenses for the third quarter
increased from 16.6% in 1996 to 17.9% in 1997, and for the first nine
months of the year from 15.8% in 1996 to 17.8% in 1997, due to increased
employment costs in the sales and marketing areas, costs associated with
new product introductions, and a $300,000 second quarter 1997 charge for
anticipated costs associated with a change in distribution arrangements in
Australia.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses
increased $408,000 to $2.0 million for the third quarter of 1997, and
increased $815,000 to $5.5 million for the first nine months of 1997. The
increase was primarily due to the Company's continued emphasis on research
and new product development. New products introduced in 1997 include the
Quick Bridge family, a group of wireless receivers equipped with interfaces
that add on to other manufactures' hardwired panels, thus broadening the
market opportunities for ITI Learn Mode sensors. Third quarter additions to
the Quick Bridge family included the interfaces to Prince's HomeLink(R)
System and to CADDX's new NX-8 security system. Additionally, the Company
has launched its Simon security system, an entry-level wireless system
aimed at those in the industry looking for a low-cost wireless solution for
mass marketing programs. The Company anticipates that it will continue this
high level of development activity through the remainder of 1997.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT COST. During the second
quarter of 1997, in conjunction with the Acquisition, the Company made a
$5.2 million non-recurring charge to operations for value assigned at the
Acquisition date to purchased technology under development.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of acquisition-related
intangible assets increased from $228,000 for the third quarter of 1996 to
$352,000 for the third quarter of 1997, and from $684,000 for the first
nine months of 1996 to $876,000 for the first nine months of 1997. The
increase is attributable to the Company's second quarter 1997 acquisitions.
NET INTEREST INCOME. Net interest income decreased from $215,000 for
the third quarter of 1996 to $75,000 for the third quarter of 1997, and
decreased from $535,000 during the first nine months of 1996 to $466,000
for the first nine months of 1997 as cash and cash equivalents were used to
purchase the Company's common stock through its stock re-purchase program
and for the second quarter 1997 acquisition.
INCOME TAX EXPENSE. Income tax expense decreased from $2.3 million for
the third quarter of 1996 to $1.8 million for the third quarter of 1997,
and from $6.6 million for the
<PAGE>
first nine months of 1996 to $5.6 million for the first nine months of
1997. The Company's effective tax rate for these periods varies from the
federal statutory rate primarily due to state income taxes, net of federal
benefit, and the non-deductibility for income tax purposes of the
amortization of excess of cost over net assets acquired. Additionally, the
1997 effective tax rate was negatively impacted by the non-deductibility
for income tax purposes of the $5.2 million non-recurring charge for
purchased technology under development.
LIQUIDITY AND CAPITAL RESOURCES
On April 30, 1997, the Company entered into an unsecured $15.0 million
bank revolving credit facility. The facility provides for interest
calculated, at the Company's option, at LIBOR plus 1.0% or the commercial
bank's base rate less 1.25%. In addition, the facility requires a
commitment fee of 0.1% per annum on the unused portion of the facility. The
agreement allows for payment of annual dividends equal to 25% of the
Company's net income for the immediately preceding fiscal year and requires
the maintenance of specified financial ratios and minimum net worth.
The Company has funded its operations primarily with cash from
operations. For the first nine months of 1997, the Company generated net
cash from operating activities of $17.3 million. Net cash provided by
operating activities resulted primarily from $10.2 million in net income
excluding non-cash acquisition-related adjustments, $2.2 million in
depreciation and amortization charges, and $4.6 million from changes in
operating assets and liabilities, principally accounts receivable, accounts
payable and income taxes payable.
During 1997, the Company invested $20.5 million in acquisitions of
businesses, net of cash acquired. Additionally, the Company made purchases
of property and equipment totaling $2.2 million. For the year ended
December 31, 1997, the Company expects that purchases of property and
equipment will be approximately $3.0 million.
For the first nine months of 1997, net cash used in financing
activities was $326,000. This was the net result of proceeds from the
exercise of stock options of $1.1 million, less the purchase of 90,000
additional shares of the Company's common stock for $1.4 million. In
addition, the Company received proceeds from the revolving credit facility
totaling $6.3 million. All borrowings during the year have been paid. No
amounts were outstanding under this facility at September 30, 1997.
A substantial amount of the Company's working capital is invested in
accounts receivable and inventories. The Company periodically reviews
accounts receivable for noncollectibility and inventories for obsolescence
and establishes allowances it believes are appropriate. In addition, the
Company periodically assesses the recoverability of intangible assets based
on undiscounted cash flows.
The Company believes that cash flows from operations and funds
available through the Company's credit facility will be adequate to fund
its working capital and capital expenditure requirements at least through
the end of 1997.
<PAGE>
EFFECT OF INFLATION AND FOREIGN CURRENCY TRANSACTIONS
The Company believes that inflation and foreign currency fluctuations
have not had a significant effect on its operations.
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this
Quarterly Report on Form 10-Q:
11. Statement regarding computation of per share
earnings.
15. Letter regarding unaudited interim financial
information.
27.1 Financial data schedule (EDGAR filing only).
(b) No Current Reports on Form 8-K were filed by the
Company during the quarter ended September 30, 1997,
or during the period from September 30, 1997, to the
date of this Quarterly Report on Form 10-Q.
<PAGE>
SIGNATURES
Pursuant to the Requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 12, 1997 ITI TECHNOLOGIES, INC.
By /s/ Jack A. Reichert
------------------------------------
Jack A. Reichert
Vice President of Finance
(Chief Accounting Officer)
EXHIBIT 11 - STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1996 1997 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Per Share Data:
Net income $ 3,934 $ 3,189 $ 11,142 $ 4,512
========= ========= ========= =========
Net income per common and common
equivalent shares, primary $ 0.41 $ 0.35 $ 1.17 $ 0.51
========= ========= ========= =========
Net income per common and common
equivalent shares, fully diluted $ 0.41 $ 0.35 $ 1.17 $ 0.51
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON
EQUIVALENT SHARES:
Primary:
Weighted average number of
common shares outstanding 8,991 8,409 8,943 8,373
Common equivalent shares:
Options 613 694 567 438
--------- --------- --------- ---------
9,604 9,103 9,510 8,811
========= ========= ========= =========
Fully diluted:
Weighted average number of
common shares outstanding 8,991 8,409 8,943 8,373
Common equivalent shares:
Options 637 723 593 457
--------- --------- --------- ---------
9,628 9,132 9,536 8,830
========= ========= ========= =========
</TABLE>
EXHIBIT 15 - LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 10549
RE: ITI Technologies, Inc. Registration Statements on Form S-8
(Registrations No. 33-89826, No. 333-08943, No. 333-08945, and No. 333-23751)
We are aware that our report dated October 27, 1997, on our review of interim
financial information of ITI Technologies, Inc. for the period ended September
30, 1997, and included in the Company's quarterly report on Form 10-Q for the
quarter ended September 30, 1997, is incorporated by reference in these
registration statements. Pursuant to Rule 436 (c) under the Securities Act of
1933, this report should not be considered a part of the registration statements
prepared or certified by us within the meaning of Sections 7 and 11 of that Act.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
November 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,319
<SECURITIES> 0
<RECEIVABLES> 14,980
<ALLOWANCES> 1,010
<INVENTORY> 19,087
<CURRENT-ASSETS> 42,722
<PP&E> 9,769
<DEPRECIATION> 5,376
<TOTAL-ASSETS> 100,724
<CURRENT-LIABILITIES> 10,688
<BONDS> 0
0
0
<COMMON> 92
<OTHER-SE> 83,420
<TOTAL-LIABILITY-AND-EQUITY> 100,724
<SALES> 75,611
<TOTAL-REVENUES> 75,611
<CGS> 40,243
<TOTAL-COSTS> 40,968
<OTHER-EXPENSES> 24,992
<LOSS-PROVISION> 110
<INTEREST-EXPENSE> 16
<INCOME-PRETAX> 10,117
<INCOME-TAX> 5,605
<INCOME-CONTINUING> 4,512
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,512
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.51
</TABLE>
