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, 1998
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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.
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(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)
(651) 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, 1998, there were 8,323,174 shares of common stock
outstanding.
<PAGE>
ITI TECHNOLOGIES, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
INDEX PAGE
----- ----
PART I -- FINANCIAL INFORMATION
Item 1 -- Consolidated Financial Statements 3
Item 2 -- Management's Discussion and Analysis 10
of Financial Condition and Results
of Operations
PART II -- OTHER INFORMATION
Item 1 -- Legal Proceedings 14
Item 5 -- Other Information 15
Item 6 -- Exhibits and Reports on Form 8-K 16
Signatures 17
2
<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, 1998, and the related
consolidated statement of operations for the three-month and nine-month periods
ended September 30, 1998 and 1997, and the consolidated statement of cash flows
for the nine-month periods ended September 30, 1998 and 1997. These financial
statements are the responsibility of the Company's management.
We conducted our reviews 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 reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated 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, 1997, 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 March 9, 1998, 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/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
October 29, 1998
3
<PAGE>
ITI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales ................................. $ 29,326 $ 26,468 $ 80,379 $ 75,611
Cost of goods sold ........................ 16,021 14,516 43,792 40,243
Inventory purchase accounting adjustment .. 725
-------- -------- -------- --------
Gross profit .............................. 13,305 11,952 36,587 34,643
Operating expenses:
Marketing, general and administrative .. 4,917 4,727 14,684 13,433
Research and development ............... 2,047 1,982 6,041 5,464
Purchased research and development costs 5,200
Amortization of intangible assets ...... 353 352 1,059 876
-------- -------- -------- --------
Operating income .......................... 5,988 4,891 14,803 9,670
Other income (expense):
Interest, net .......................... 204 75 597 466
Other, net ............................. (13) 5 50 (19)
-------- -------- -------- --------
Income before income tax expense .......... 6,179 4,971 15,450 10,117
Income tax expense ........................ 2,223 1,782 5,562 5,605
-------- -------- -------- --------
Net income ................................ $ 3,956 $ 3,189 $ 9,888 $ 4,512
======== ======== ======== ========
Per share amounts:
Basic ..................................... $ .47 $ .38 $ 1.16 $ .54
Weighted average common shares outstanding 8,498 8,409 8,503 8,373
Diluted ................................... $ .45 $ .36 $ 1.11 $ .52
Weighted average common and common
equivalent shares outstanding .......... 8,880 8,846 8,904 8,649
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE>
ITI TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................... $ 5,502 $ 5,838
Accounts receivable ..................................... 17,088 14,510
Inventories ............................................. 23,609 21,962
Deferred income taxes ................................... 1,300 1,300
Other current assets .................................... 1,922 1,721
--------- ---------
Total current assets ................................. 49,421 45,331
Property and equipment ..................................... 10,421 9,825
Excess of cost over net assets acquired ................. 27,777 28,380
Other intangible assets ................................. 19,911 18,834
Notes receivable, net of current portion ................ 2,538 1,589
--------- ---------
Total assets ........................................ $ 110,068 $ 103,959
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................ $ 5,296 $ 5,108
Accrued wages ........................................... 2,713 1,880
Other accrued expenses .................................. 2,606 2,007
--------- ---------
Total current liabilities ............................ 10,615 8,995
Income taxes ............................................... 7,263 7,263
--------- ---------
Total liabilities .................................... 17,878 16,258
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock ($.01 par value; 30,000 shares authorized;
9,280 shares issued, 8,323 shares outstanding at
September 30, 1998; 9,190 shares issued, 8,478 shares
outstanding at December 31, 1997) .................... 93 92
Additional paid-in capital .............................. 75,493 74,575
Retained earnings ....................................... 31,983 22,095
Treasury stock, at cost (957 shares at September 30, 1998
and 712 shares at December 31, 1997) ................. (15,379) (9,061)
--------- ---------
Total stockholders' equity ........................... 92,190 87,701
--------- ---------
Total liabilities and stockholders' equity ........... $ 110,068 $ 103,959
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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5
<PAGE>
ITI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES: (UNAUDITED)
Net income ............................................. $ 9,888 $ 4,512
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ....................... 2,791 2,236
Provision for doubtful accounts ..................... 282 209
Inventory purchase accounting adjustment ............ 725
Purchased in-process research and development costs . 5,200
Changes in operating assets and liabilities:
Accounts receivable .............................. (2,860) 1,581
Inventories ...................................... (1,647) 146
Other assets ..................................... (1,150) (647)
Accounts payable ................................. 188 1,011
Income taxes payable ............................. 469 1,440
Accrued expenses ................................. 963 847
---------- ----------
Net cash provided by operating activities .............. 8,924 17,260
---------- ----------
INVESTING ACTIVITIES:
Additions to property and equipment .................... (2,250) (2,222)
Additions to other intangible assets ................... (1,611) (1,225)
Issuance of notes receivable ........................... (998)
Acquisitions of businesses, net of cash acquired ....... (20,522)
---------- ----------
Net cash used in investing activities .................. (3,861) (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 ......... 919 1,069
Payments for treasury stock ............................ (6,318) (1,395)
---------- ----------
Net cash used in financing activities .................. (5,399) (326)
---------- ----------
NET DECREASE IN CASH AND
CASH EQUIVALENTS .................................... (336) (8,033)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD .............................. 5,838 13,352
---------- ----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD .................................... $ 5,502 $ 5,319
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE>
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited consolidated statement of operations for the three-month and
nine-month periods ended September 30, 1998 and 1997, reflect, in the
opinion of management of ITI Technologies, Inc. (the "Company"), all
normal, recurring 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, 1997, was derived
from audited consolidated financial statements but does 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 included in
the Company's Annual Report on Form 10-K for the year ended December 31,
1997. PricewaterhouseCoopers LLP, the Company's independent accountants,
have performed reviews of the interim consolidated financial statements
included herein and their review report thereon 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.
2. 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. On March
9, 1998, the jury found that the Ademco VISTA Plus/5800 family of wireless
security systems infringes the Company's Learn Mode patent and awarded the
Company damages of approximately $36 million for lost profits and
royalties. On April 9, 1998, the Court entered an injunction prohibiting
Pittway Corporation from manufacturing and marketing the Ademco 5800 series
wireless products that infringe the Company's Learn Mode patent and awarded
the Company prejudgment interest of approximately $3 million, bringing the
total judgment to approximately $39 million. Pittway Corporation has
appealed the verdict. The Company anticipates that the appeal will be
resolved during the first half of 1999.
Pittway has announced that in 1997 it had "introduced an improved method of
enrolling transmitters in its VISTA series of control panels." Pittway
calls this new method "QED." While the Company has maintained that
Pittway's QED products also infringe the Company's Learn Mode patent, the
judge would not allow the Company to add Pittway's QED products to the
action commenced in August of 1995 to avoid any additional complication and
delay. Accordingly, the Company commenced a second patent infringement
lawsuit against Pittway and Ademco Distribution, Inc. on August 3, 1998,
for infringement of the Company's Learn Mode patent. The suit was also
filed in the United States District Court for the District of Minnesota.
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<PAGE>
2. LITIGATION (CONTINUED)
Costs associated with these actions and related appeal are being
capitalized as a patent asset associated with the related technology. As of
September 30, 1998, the Company has capitalized $4.7 million of costs
related to these lawsuits, which are included in other intangible assets on
the consolidated balance sheet.
3. EARNINGS PER SHARE
Effective with year-end 1997, the Company adopted Statement of Financial
Accounting Standard No. 128, "Earnings per Share", and has retroactively
presented basic and diluted earnings per share in accordance with this
standard. A dilutive effect on earnings results from the assumed exercise
of stock options outstanding under the Company's Stock Option Incentive
Plan.
The Company calculated basic and diluted earnings per share as follows for
the third quarter and nine months ended September 30 (in thousands, except
per share data):
Third Quarter Nine Months Ended
--------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
Net income $3,956 $3,189 $9,888 $4,512
Weighted average shares outstanding:
Basic (actual shares outstanding) 8,498 8,409 8,503 8,373
Effect of dilutive options 382 437 401 276
------ ------ ------ ------
Diluted 8,880 8,846 8,904 8,649
====== ====== ====== ======
Per share amounts:
Basic $ .47 $ .38 $ 1.16 $ .54
Diluted $ .45 $ .36 $ 1.11 $ .52
4. TREASURY STOCK
On June 18, 1998, the Board of Directors of the Company authorized the
repurchase, from time to time, of up to 1,000,000 shares of the Company's
common stock in the open market or in private transactions. Total
repurchases under this authorization of 245,200 shares occurred during the
third quarter. The Board also canceled the previous stock repurchase
program authorized on November 22, 1996, to repurchase up to 900,000
shares, under which the Company had acquired 711,500 shares.
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8
<PAGE>
5. OTHER FINANCIAL STATEMENT DATA (IN THOUSANDS):
September 30, December 31,
1998 1997
------------ ------------
(UNAUDITED)
Accounts receivable:
Accounts receivable ..................... $ 18,343 $ 15,555
Allowance for doubtful accounts ......... (1,255) (1,045)
-------- --------
Total .............................. $ 17,088 $ 14,510
======== ========
Inventories:
Raw materials ........................... $ 11,800 $ 9,956
Allowance for obsolescence .............. (1,555) (1,660)
-------- --------
10,245 8,296
Work-in-process ......................... 4,969 4,877
Finished goods .......................... 8,395 8,789
-------- --------
Total .............................. $ 23,609 $ 21,962
======== ========
Property and equipment:
Machinery and equipment ................. $ 11,891 $ 10,080
Furniture and fixtures .................. 4,269 3,881
Building and improvements ............... 1,784 1,751
-------- --------
17,944 15,712
Accumulated depreciation and amortization (7,523) (5,887)
-------- --------
Total .............................. $ 10,421 $ 9,825
======== ========
Other intangible assets:
Trademarks and trade names .............. $ 13,829 $ 13,829
Technology and patents .................. 5,170 3,569
Customer lists .......................... 3,007 3,007
Other ................................... 626 616
-------- --------
22,632 21,021
Accumulated amortization ................ (2,721) (2,187)
-------- --------
Total .............................. $ 19,911 $ 18,834
======== ========
Other accrued expenses:
Warranty ................................ $ 650 $ 650
Professional fees ....................... 443 493
Other ................................... 1,513 864
-------- --------
Total .............................. $ 2,606 $ 2,007
======== ========
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
When used in this discussion, the words "believes," "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 filed with the Securities and Exchange Commission.
GENERAL:
On June 18, 1998, the Board of Directors of the Company authorized
the repurchase, from time to time, of up to 1,000,000 shares of the
Company's common stock in the open market or in private transactions.
Total repurchases under this authorization of 245,200 shares at a total
cost of $6.3 million occurred during the third quarter. The Board also
canceled the previous stock repurchase program authorized on November 22,
1996, to repurchase up to 900,000 shares, under which the Company had
acquired 711,500 shares.
In the second quarter of 1997, the Company purchased all of the
outstanding stock of CADDX-CADDI Controls, Inc. ("CADDX") for $19.0
million in cash (the "Acquisition"). CADDX, located in Gladewater, Texas,
designs, manufactures and markets hardwire electronic security systems.
Additionally, 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.
RESULTS OF OPERATIONS:
NET SALES. Net sales increased by $2.9 million, or 10.8%, from $26.5
million for the three months ended September 30, 1997, to $29.3 million
for the three months ended September 30, 1998. Net sales increased by $4.8
million, or 6.3%, from $75.6 million for the nine months ended September
30, 1997, to $80.4 million for the nine months ended September 30, 1998.
The increase in sales for both the quarter and nine-month period is
primarily attributable to volume increases reflecting the successful
introduction of the Company's new products designed for the mass-market
portion of the industry.
Excluding sales to the Company's former largest customer's branch
operations, sales to all other customers increased over 17% from the third
quarter of 1997. Sales to the Company's former largest customer's branch
operations declined from $1.5 million of total sales in the third quarter
of 1997 to less than $200,000 in the third quarter of 1998. No single
customer accounted for more than 5% of total sales during the third
quarter of 1998.
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<PAGE>
GROSS PROFIT. Gross profit increased $1.4 million from $12.0 million
in the third quarter of 1997 to $13.3 million for the third quarter of
1998 and increased as a percentage of net sales from 45.2% to 45.4% for
the respective three-month periods. The increase in gross margin
percentage is due primarily to the leveraging of fixed manufacturing cost
over the increased sales volume. This benefit has been partially offset by
the Company's introduction of lower priced, lower margin products designed
for 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 $34.6 million for
the first nine months of 1997 to $36.6 million for the first nine months
of 1998. This increase was primarily due to increased sales volume and
the effect of a $725,000 non-recurring purchase accounting adjustment in
the second quarter of 1997 that 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 $4.7 million for the third
quarter of 1997 to $4.9 million for the third quarter of 1998, and
increased from $13.4 million for the first nine months of 1997 to $14.7
million for the first nine months of 1998. The dollar increase in expenses
for the nine month period is primarily due to the addition of CADDX, which
was only included for a period of five months in 1997. As a percentage of
net sales, marketing, general and administrative expenses for the third
quarter decreased from 17.9% in 1997 to 16.8% in 1998. This decrease is
due to the higher level of sales during the quarter combined with the
relatively fixed nature of these expenses. For the first nine months of
the year, these expenses increased from 17.8% of net sales in 1997 to
18.3% in 1998. This increase was the result of added cost associated with
additional sales personnel and product technical support for the Company's
commercial product lines, and marketing expenses incurred during the first
six months of the year to support the release of new product lines
scheduled for the second half of 1998.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
for the quarter and nine-month periods ended September 30, 1998, increased
$65,000 from the third quarter of 1997 and increased $577,000 from the
first nine months of 1997, respectively. The increase for both periods was
primarily due to the Company's continued emphasis on research and new
product development and the addition of CADDX. New products scheduled to
be introduced in 1998 include Concord(TM), a modular hybrid control panel
that allows dealers to start with a low-cost hardwire platform with the
ability to add wireless sensors, and the release of upgrades to the
feature content of the Company's traditional control panels. The Company
also continues development on its Advent(TM) platform, which is designed
for the commercial burglary and fire market. The Company anticipates that
expenditures for research and development activities for the year ended
December 31, 1998, will be between 7% and 8% of net sales.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS. During the
second quarter of 1997, in conjunction with the Acquisition, the Company
recorded a $5.2 million non-recurring charge to operations for the value
assigned at the Acquisition date to purchased technology under
development.
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11
<PAGE>
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of
acquisition-related intangible assets was approximately $350,000 for both
the third quarter of 1997 and 1998, and increased from $876,000 for the
first nine months of 1997 to $1.1 million for the first nine months of
1998. The increase is attributable to the Company's second quarter 1997
acquisitions.
NET INTEREST INCOME. Net interest income increased from $75,000 for
the third quarter of 1997 to $204,000 for the third quarter of 1998, and
increased from $466,000 during the first nine months of 1997 to $597,000
for the first nine months of 1998. The prior year's amount was impacted by
the use of cash and cash equivalents for the second quarter 1997
acquisitions. In the third quarter of 1998, the Company repurchased under
its June 18, 1998 stock repurchase program 245,200 shares of its common
stock for a total of $6.3 million. Due to this use of cash, the Company
expects interest income in the fourth quarter of 1998 to decrease from the
third quarter amount.
INCOME TAX EXPENSE. Income tax expense increased from $1.8 million
for the third quarter of 1997 to $2.2 million for the third quarter of
1998, and remained constant at $5.6 million for the first nine months of
both 1997 and 1998. 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 effective tax rate for the nine months ended September
30, 1997, was negatively impacted by the non-deductibility for income tax
purposes of the $5.2 million non-recurring second quarter charge for
purchased technology under development.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily with cash from
operations. For the first nine months of 1998, the Company generated net
cash from operating activities of $8.9 million. Net cash provided by
operating activities resulted primarily from $9.9 million in net income,
$2.8 million in non-cash depreciation and amortization charges, less $4.0
million from changes in operating assets and liabilities, principally
accounts receivable, inventory and funding of the Company's dealer
financing program.
During 1998, the Company invested $2.3 million in property and
equipment and $1.6 million in other intangible assets, primarily
capitalized costs associated with the patent litigation. For the year
ended December 31, 1998, the Company expects that purchases of property
and equipment will be approximately $3.0 million.
For the first nine months of 1998, net cash used in financing
activities was $5.4 million. Cash totaling $6.3 million was used to
repurchase 245,200 shares of the Company's common stock which was
partially offset by the proceeds from the exercise of stock options of
$919,000.
A substantial amount of the Company's working capital is invested in
accounts receivable, notes receivable and inventories. The Company
periodically reviews accounts receivable and notes receivable for
noncollectibility and inventories for obsolescence and establishes
allowances it believes are appropriate.
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<PAGE>
The Company believes that its current cash position, along with 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 1998.
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.
Currently, the Company does not conduct any transactions or maintain any
accounting records in any European currency. As such, the Company
anticipates that there will be no material effect on its operations as a
result of the scheduled conversion by eleven member states of the European
Union to a common currency on January 1, 1999.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the inability of many computer programs to
correctly identify dates occurring after December 31, 1999, because they
use two digits rather than four digits to identify years. This could cause
a computer system failure or miscalculations, resulting in disruptions of
operations including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.
The Company's assessment of the Year 2000 issue is substantially
complete. The Company believes that with modifications to existing
software and conversions to new software, the Year 2000 issue will not
pose significant operational problems for its computer systems or the
Company and the cost of such modifications to be immaterial.
In addition to internal Year 2000 remediation activities, the
Company is in contact with key suppliers and customers to ensure no
interruption in the relationship between the Company and these important
third parties from the Year 2000 issue. A comprehensive survey of all
vendors and customers has not been, nor will one be, undertaken. All
efforts thus far have been focused on key vendors and customers. If these
third parties do not convert their systems in a timely manner and in a way
that is compatible with the Company's systems, the Year 2000 issue could
have a material adverse effect on Company operations. The Company believes
that its actions with key suppliers and customers will minimize these
risks.
The vast majority of the Company's products are not date-sensitive.
The Company has collected information on current and discontinued
date-sensitive products. This information is available to customers as of
the date of this filing.
At this time, the Company does not have in place a comprehensive,
global contingency plan relative to potential Year 2000 disruptions.
Rather, each significant system either has been repaired and tested, or is
being reworked. For systems currently being reworked, contingency plans
exist to address unforeseen problems.
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13
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
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. On March 9, 1998, the jury found that the
Ademco VISTA Plus/5800 family of wireless security systems infringes
the Company's Learn Mode patent and awarded the Company damages of
approximately $36 million for lost profits and royalties. On April 9,
1998, the Court entered an injunction prohibiting Pittway Corporation
from manufacturing and marketing the Ademco 5800 series wireless
products that infringe the Company's Learn Mode patent and awarded the
Company prejudgment interest of approximately $3 million, bringing the
total judgment to approximately $39 million. Pittway Corporation has
appealed the verdict. The Company anticipates that the appeal will be
resolved during the first half of 1999.
Pittway has announced that in 1997 it had "introduced an improved
method of enrolling transmitters in its VISTA series of control
panels." Pittway calls this new method "QED." While the Company has
maintained that Pittway's QED products also infringe the Company's
Learn Mode patent, the judge would not allow the Company to add
Pittway's QED products to the action commenced in August of 1995 to
avoid any additional complication and delay. Accordingly, the Company
commenced a second patent infringement lawsuit against Pittway and
Ademco Distribution, Inc. on August 3, 1998, for infringement of the
Company's Learn Mode patent. The suit was also filed in the United
States District Court for the District of Minnesota. Costs associated
with these actions are being capitalized as a patent asset associated
with the related technology.
In addition, the Company experiences routine litigation in the normal
course of its business. The Company does not believe that any of this
routine litigation will have a material adverse effect on the
financial condition or results of operations of the Company. Costs
associated with routine litigation are expensed in the period
incurred.
- --------------------------------------------------------------------------------
14
<PAGE>
Item 5. Other Information.
Under the Securities Exchange Act of 1934 ("Exchange Act"), the
Company's stockholders may submit proposals to be considered at an
annual stockholders' meeting. Rule 14a-8 under the Exchange Act sets
forth the procedure and requirements for requesting that the Company
include these proposals in its proxy statement. However, a stockholder
may submit proposals to be voted on at an annual meeting without
having the proposals included in the Company's proxy statement. These
proposals are known as "non-Rule 14a-8 proposals."
Rule 14a-4(c)(1) under the Exchange Act states when the proxies named
by a company for an annual meeting may exercise their discretionary
voting powers for proposals not included in the company's proxy
statement, including non-Rule 14a-8 stockholder proposals. Rule
14a-4(c)(1) was recently amended to provide that proxies named by a
company to vote at an annual meeting may be given discretionary
authority to vote all proxies with respect to any non-Rule 14a-8
proposals that properly come before the annual meeting for a vote of
the stockholders if (i) the company has not received advance notice of
the proposal at least 45 days before the date on which the company
first mailed its proxy materials for the prior year's annual
stockholders' meeting, and (ii) stockholders have been notified by the
company of this 45-day advance notice requirement.
The Company hereby notifies its stockholders that for the annual
meeting of stockholders expected to be held in May 1999, the deadline
for notifying the Company of any non-Rule 14a-8 stockholder proposals
is February 16, 1999. Notice of any such proposal must be given in
writing to the Secretary of the Company, Mr. Charles A. Durant, ITI
Technologies, Inc., 2266 Second Street North, North St. Paul,
Minnesota 55109. Therefore, the Company's proxies will be able to
exercise their discretionary voting authority with respect to any
non-Rule 14a-8 proposal not submitted to the Company or submitted to
the Company after February 16, 1999.
The notification deadline for stockholders wishing to have a Rule
14a-8 proposal considered for inclusion in the Company's proxy
solicitation materials for the Annual Meeting of Stockholders to be
held in 1999 is December 5, 1998, as set forth in the Company's Proxy
Statement dated April 3, 1998. Such proposals must be set forth in
writing and received by the Secretary of the Company, Mr. Charles A.
Durant, at the above address on or before December 5, 1998.
- --------------------------------------------------------------------------------
15
<PAGE>
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:
15. Letter regarding unaudited interim financial information.
27.1 Financial data schedule (for electronic filing purposes
only).
(b) No Current Reports on Form 8-K were filed by the Company during
the quarter ended September 30, 1998, or during the period from
September 30, 1998, to the date of this Quarterly Report on Form
10-Q.
- --------------------------------------------------------------------------------
16
<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 11, 1998 ITI TECHNOLOGIES, INC.
By /s/ Jack A. Reichert
-----------------------------
Jack A. Reichert
Vice President of Finance
(Chief Accounting Officer)
- --------------------------------------------------------------------------------
17
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 Nos. 33-89826, 333-08943, 333-08945, 333-23751 and 333-58257)
We are aware that our report dated October 29, 1998, on our reviews of interim
consolidated financial information of ITI Technologies, Inc. and subsidiaries
for the three-month and nine-month periods ended September 30, 1998 and 1997,
and included in the Company's quarterly report on Form 10-Q for the quarter
ended September 30, 1998, 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/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
November 11, 1998
- --------------------------------------------------------------------------------
18
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