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 June 30, 1998
--------------------------------------------------
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
- --------------------------------------------------------------------------------
ITI Technologies, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1340453
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2266 North Second Street, North St. Paul, MN 55109
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(651) 777-2690
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(Registrant's telephone number, including area code)
Not applicable
- --------------------------------------------------------------------------------
(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 July 31, 1998, there were 8,566,574 shares of common stock
outstanding.
<PAGE>
ITI TECHNOLOGIES, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 1998
INDEX PAGE
----- ----
PART I -- FINANCIAL INFORMATION
Item 1 -- 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 14
Item 6 -- Exhibits and Reports on Form 8-K 15
Signatures 16
<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 June 30, 1998, and the related
consolidated statements of operations for the three-month and six-month periods
ended June 30, 1998 and 1997, and the consolidated statements of cash flows for
the six-month periods ended June 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
July 28, 1998
<PAGE>
ITI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
---------------- ---------------
1998 1997 1998 1997
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales ...................................... $ 27,139 $ 25,403 $ 51,053 $ 49,143
Cost of goods sold ............................. 14,721 13,511 27,771 25,727
Inventory purchase accounting adjustment ....... 725 725
-------- -------- -------- --------
Gross profit ................................... 12,418 11,167 23,282 22,691
Operating expenses:
Marketing, general and administrative ...... 4,973 4,764 9,767 8,706
Research and development ................... 1,980 1,834 3,994 3,482
Purchased research and development costs ... 5,200 5,200
Amortization of intangible assets .......... 353 296 706 524
-------- -------- -------- --------
Operating income (loss) ........................ 5,112 (927) 8,815 4,779
Other income (expense):
Interest, net .............................. 213 127 393 391
Other, net ................................. (16) (5) 63 (24)
-------- -------- -------- --------
Income (loss) before income tax expense ........ 5,309 (805) 9,271 5,146
Income tax expense ............................. 1,911 1,616 3,339 3,823
-------- -------- -------- --------
Net income (loss) .............................. $ 3,398 $ (2,421) $ 5,932 $ 1,323
======== ======== ======== ========
Per share amounts:
Basic .......................................... $ .40 ($ .29) $ .70 $ .16
Weighted average shares outstanding - basic .... 8,525 8,334 8,506 8,355
Diluted ........................................ $ .38 ($ .29) $ .67 $ .15
Weighted average shares outstanding - diluted .. 8,969 8,334 8,916 8,551
</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>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................. $ 8,610 $ 5,838
Accounts receivable ................................... 17,012 14,510
Inventories ........................................... 22,374 21,962
Deferred income taxes ................................. 1,300 1,300
Other current assets .................................. 1,786 1,721
--------- ---------
Total current assets .............................. 51,082 45,331
Property and equipment ................................... 10,549 9,825
Excess of cost over net assets acquired .................. 27,978 28,380
Other intangible assets .................................. 20,053 18,834
Notes receivable, net of current portion ................. 1,843 1,589
--------- ---------
Total assets ...................................... $ 111,505 $ 103,959
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 5,065 $ 5,108
Accrued wages ......................................... 1,974 1,880
Other accrued expenses ................................ 2,677 2,007
--------- ---------
Total current liabilities ......................... 9,716 8,995
Income taxes ............................................. 7,263 7,263
--------- ---------
Total liabilities ................................. 16,979 16,258
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock ($.01 par value; 30,000 shares authorized;
9,277 shares issued, 8,565 shares outstanding at
June 30, 1998; 9,190 shares issued, 8,478 shares
outstanding at December 31, 1997) ................. 93 92
Additional paid-in capital ............................ 75,467 74,575
Retained earnings ..................................... 28,027 22,095
Treasury stock, at cost (712 shares at June 30, 1998
and December 31, 1997) ............................ (9,061) (9,061)
--------- ---------
Total stockholders' equity ........................ 94,526 87,701
--------- ---------
Total liabilities and stockholders' equity ........ $ 111,505 $ 103,959
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
ITI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE SIX
MONTHS ENDED
JUNE 30,
------------------------
1998 1997
-------- -----------
OPERATING ACTIVITIES: ............................... (UNAUDITED)
Net income .......................................... $ 5,932 $ 1,323
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of intangible assets ................. 757 570
Depreciation and amortization ..................... 1,080 792
Provision for doubtful accounts ................... 170 222
Inventory purchase accounting adjustment .......... 725
Purchased in-process research and development costs 5,200
Changes in operating assets and liabilities:
Accounts receivable ............................ (2,672) 1,529
Inventories .................................... (412) (122)
Other assets ................................... (319) (971)
Accounts payable ............................... (43) (23)
Accrued expenses ............................... 764 788
-------- --------
Net cash provided by operating activities ........... 5,257 10,033
-------- --------
INVESTING ACTIVITIES:
Additions to property and equipment ................. (1,804) (1,463)
Additions to other intangible assets ................ (1,574) (947)
Issuance of notes receivable ........................ (946)
Acquisitions of businesses, net of cash acquired .... (20,476)
-------- --------
Net cash used in investing activities ............... (3,378) (23,832)
-------- --------
FINANCING ACTIVITIES:
Proceeds from revolving credit agreement ............ 5,375
Payment of revolving credit agreement ............... (3,500)
Proceeds from exercise of common stock options ...... 893 180
Payments for treasury stock ......................... (1,395)
-------- --------
Net cash provided by financing activities ........... 893 660
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS .................................. 2,772 (13,139)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD ............................ 5,838 13,352
-------- --------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD ............................... $ 8,610 $ 213
======== ========
The accompanying notes are an itnegral 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 six-month periods ended June 30, 1998 and 1997, reflect, in the
opinion of management of ITI Technologies, Inc. (the "Company" or
"ITI"), 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 limited reviews of the interim financial
information included herein. Their report on such reviews 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 ITI'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 appeal is estimated to take nine months to a year to
be resolved. Costs associated with this action and related appeal are
being capitalized as a patent asset associated with the related
technology. As of June 30, 1998, the Company has capitalized $4.7
million of costs related to this lawsuit, which are included in other
intangible assets on the consolidated balance sheet.
<PAGE>
2. LITIGATION (CONTINUED)
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.
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 quarter and six months ended June 30 (in thousands, except per
share data):
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
-------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $3,398 ($2,421) $5,932 $1,323
Weighted average shares outstanding:
Basic (actual shares outstanding) 8,525 8,334 8,506 8,355
Effect of dilutive options 444 410 196
------ ------ ------ ------
Diluted 8,969 8,334 8,916 8,551
====== ====== ====== ======
Per share amounts:
Basic $ .40 ($ .29) $ .70 $ .16
Diluted $ .38 ($ .29) $ .67 $ .15
</TABLE>
4. TREASURY SHARES
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 ITI's
common stock in the open market or in private transactions. The Board
also canceled the previous stock repurchase program authorized on
November 22, 1996, to repurchase up to 900,000 shares, under which ITI
had acquired 711,500 shares. To date, 33,000 shares have been
repurchased under the June 1998 repurchase authorization.
<PAGE>
5. OTHER FINANCIAL STATEMENT DATA (IN THOUSANDS):
June 30, December 31,
1998 1997
----------- ------------
(UNAUDITED)
Accounts receivable:
Accounts receivable ....................... $ 18,137 $ 15,555
Allowance for doubtful accounts ........... (1,125) (1,045)
-------- --------
Total ........................ $ 17,012 $ 14,510
======== ========
Inventories:
Raw materials ............................. $ 9,575 $ 9,956
Allowance for obsolescence ................ (1,488) (1,660)
-------- --------
8,087 8,296
Work-in-process ........................... 5,633 4,877
Finished goods ............................ 8,654 8,789
-------- --------
Total ........................ $ 22,374 $ 21,962
======== ========
Property and equipment:
Machinery and equipment ................... $ 11,584 $ 10,080
Furniture and fixtures .................... 4,171 3,881
Building and improvements ................. 1,751 1,751
-------- --------
17,506 15,712
Accumulated depreciation and amortization (6,957) (5,887)
-------- --------
Total ........................ $ 10,549 $ 9,825
======== ========
Other intangible assets:
Trademarks and trade names ................ $ 13,829 $ 13,829
Technology and patents .................... 5,138 3,569
Customer lists ............................ 3,007 3,007
Other ..................................... 621 616
-------- --------
22,595 21,021
Accumulated amortization .................. (2,542) (2,187)
-------- --------
Total ........................ $ 20,053 $ 18,834
======== ========
Other accrued expenses:
Warranty .................................. $ 650 $ 650
Professional fees ......................... 459 493
Other ..................................... 1,568 864
-------- --------
Total ........................ $ 2,677 $ 2,007
======== ========
<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 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.
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, a contingent payment of up to $800,000 will be
made.
RESULTS OF OPERATIONS:
NET SALES. Net sales increased by $1.7 million, or 6.8%, from $25.4
million for the three months ended June 30, 1997, to $27.1 million for the
three months ended June 30, 1998. Net sales increased by $1.9 million, or
3.9%, from $49.1 million for the six months ended June 30, 1997, to $51.1
million for the six months ended June 30, 1998. The increase in sales is
primarily attributable to volume increases and the Company's 1997
acquisitions as prices remained relatively stable over these periods.
<PAGE>
Excluding the effect of the acquisitions and sales to the Company's
1997 largest customer's branch operations, which decreased from
approximately 26% of total sales in the second quarter of 1997 to less than
1% in the second quarter of 1998, sales to all other customers in the
second quarter of 1998 increased approximately 32% from the second quarter
of 1997 and over 15% from the first quarter of 1998.
GROSS PROFIT. Gross profit increased from $11.2 million for the second
quarter of 1997 to $12.4 million for the second quarter of 1998, and
increased as a percentage of net sales from 44.0% to 45.8%. The 1997 gross
profit was reduced as result of a $725,000 non-recurring purchase
accounting adjustment 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 completing and sale. Gross margin for the second quarter
of 1997, excluding the $725,000 non-recurring purchase accounting charge,
was 46.8% compared to 45.8% in the second quarter in 1998. The decrease in
gross profit percentage is due to lower gross margins for CADDX sales that
are going through distributors rather than directly to dealers and excess
factory capacity at the Company's wireless manufacturing facility. Gross
profit increased from $22.7 million for the first six months of 1997 to
$23.3 million for the first six months of 1998 as the prior year was
impacted by the $725,000 purchase accounting charge.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and
administrative expenses increased from $4.8 million for the second quarter
of 1997 to $5.0 million for the second quarter of 1998, and increased from
$8.7 million for the first six months of 1997 to $9.8 million for the first
six months of 1998. 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 second quarter decreased from
18.8% in 1997 to 18.3% in 1998. In the second quarter of 1997, the Company
incurred a $300,000 charge for costs associated with a change in
distribution arrangements in Australia. For the first six months of the
year, sales, marketing, general and administrative expenses increased as a
percentage of sales from 17.7% in 1997 to 19.1% 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 to support the release of new product lines
scheduled for the second half of 1998.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased $146,000 to $2.0 million for the second quarter of 1998, and
increased $512,000 to $4.0 million for the first six months of 1998. The
increase 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 which 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
all of 1998 will be between 7.5% and 8% of net sales.
<PAGE>
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS. 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 $296,000 for the second quarter of 1997 to
$353,000 for the second quarter of 1998, and from $524,000 for the first
six months of 1997 to $706,000 for the first six months of 1998. The
increase is attributable to the Company's acquisitions in the second
quarter 1997.
NET INTEREST INCOME. Net interest income increased from $127,000 for
the second quarter of 1997 to $213,000 for the second quarter of 1998 due
primarily to an increase in cash available for placement in high quality,
short-term cash equivalents and increased demand for financing by dealers
under the Company's financing program. During the first six months of 1998,
net interest income totaled $393,000 compared to $391,000 for the first six
months of 1997.
INCOME TAX EXPENSE. Income tax expense increased from $1.6 million for
the second quarter of 1997 to $1.9 million for the second quarter of 1998,
and decreased from $3.8 million for the first six months of 1997 to $3.3
million for the first six months of 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 1997 effective tax rate was 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
The Company has funded its operations primarily with cash from
operations. For the first six months of 1998, the Company generated net
cash from operating activities of $5.3 million. Net cash provided by
operating activities resulted primarily from $5.9 million in net income and
$1.8 million in depreciation and amortization charges, less $2.5 million
from changes in operating assets and liabilities, principally accounts
receivable.
During 1998, the Company invested $1.8 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 $3.5 million.
For the first six months of 1998, cash provided by the exercise of
stock options was $893,000.
<PAGE>
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.
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.
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 ITI's common
stock in the open market or in private transactions. The Board also
canceled the previous stock repurchase program authorized on November 22,
1996, to repurchase up to 900,000 shares, under which ITI had acquired
711,500 shares. To date, 33,000 shares have been repurchased under the June
1998 repurchase authorization.
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.
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 identity 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. However, if such
modifications and conversions are performed incorrectly, or if such
modifications and conversions are not made by the Company's major customers and
suppliers, the Year 2000 issue could have a material adverse impact on the
financial conditions and results of operations of the Company.
<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 ITI'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 appeal is
estimated to take nine months to a year to be resolved. Costs
associated with this action are being capitalized as a patent
asset associated with the related technology.
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.
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.
Item 5. Other Information.
None.
<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 June 30, 1998, or
during the period from June 30, 1998, 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: August 11, 1998 ITI TECHNOLOGIES, INC.
By /s/ Jack A. Reicher
--------------------------------------
Jack A. Reichert
Vice President of Finance
(Chief Accounting Officer)
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 July 28, 1998, on our reviews of interim
financial information of ITI Technologies, Inc. for the periods ended June 30,
1998 and 1997, and included in the Company's quarterly report on Form 10-Q for
the quarter ended June 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
August 11, 1998
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