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 March 31, 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.
- --------------------------------------------------------------------------------
(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
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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 April 29, 1998, there were 8,506,254 shares of common stock
outstanding.
<PAGE>
ITI TECHNOLOGIES, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 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 13
Item 5 -- Other Information 13
Item 6 -- Exhibits and Reports on Form 8-K 13
Signatures 14
<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 March 31, 1998, and the related
consolidated statements of operations and cash flows for the three-month periods
ended March 31, 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/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
April 28, 1998
<PAGE>
ITI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE
MONTHS ENDED
MARCH 31,
--------------------------
1998 1997
---------- ----------
(UNAUDITED)
Net sales ................................... $ 23,914 $ 23,740
Cost of goods sold .......................... 13,050 12,216
---------- ----------
Gross profit ................................ 10,864 11,524
Operating expenses:
Marketing, general and administrative 4,794 3,942
Research and development ............. 2,014 1,648
Amortization of intangible assets .... 353 228
---------- ----------
Operating income ............................ 3,703 5,706
Other income (expense):
Interest, net ........................ 180 264
Other, net ........................... 79 (19)
---------- ----------
Income before income tax expense ............ 3,962 5,951
Income tax expense .......................... 1,428 2,207
---------- ----------
Net income .................................. $ 2,534 $ 3,744
========== ==========
Per share amounts:
Basic ....................................... $ .30 $ .45
Weighted average shares outstanding - basic . 8,487 8,376
Diluted ..................................... $ .29 $ .44
Weighted average shares outstanding - diluted 8,863 8,556
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE>
ITI TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---------- ----------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents .............................. $ 10,031 $ 5,838
Accounts receivable .................................... 13,279 14,510
Inventories ............................................ 21,513 21,962
Deferred income taxes .................................. 1,300 1,300
Other current assets ................................... 1,322 1,721
---------- ----------
Total current assets ............................... 47,445 45,331
Property and equipment ...................................... 9,810 9,825
Excess of cost over net assets acquired ..................... 28,179 28,380
Other intangible assets ..................................... 20,042 18,834
Notes receivable, net of current portion .................... 1,591 1,589
---------- ----------
Total assets ....................................... $ 107,067 $ 103,959
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................... $ 4,883 $ 5,108
Accrued wages .......................................... 2,010 1,880
Other accrued expenses ................................. 2,566 2,007
---------- ----------
Total current liabilities .......................... 9,459 8,995
Income taxes ................................................ 7,263 7,263
---------- ----------
Total liabilities .................................. 16,722 16,258
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock ($0.01 par value; 30,000 shares authorized;
9,205 shares issued, 8,493 shares outstanding at
March 31, 1998; 9,190 shares issued, 8,478 shares
outstanding at December 31, 1997) .................. 92 92
Additional paid-in capital ............................. 74,685 74,575
Retained earnings ...................................... 24,629 22,095
Treasury stock, at cost (712 shares at March 31, 1998
and December 31, 1997) ............................. (9,061) (9,061)
---------- ----------
Total stockholders' equity ......................... 90,345 87,701
---------- ----------
Total liabilities and stockholders' equity ......... $ 107,067 $ 103,959
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE>
ITI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
---------------------------
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES: (UNAUDITED)
Net income ........................................ $ 2,534 $ 3,744
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of intangible assets ........... 378 250
Depreciation and amortization ............... 548 356
Provision for doubtful accounts ............. 59 150
Changes in operating assets and liabilities:
Accounts receivable ................... 1,172 1,577
Inventories ........................... 449 (599)
Other assets .......................... 397 666
Accounts payable ...................... (225) 1,087
Income taxes payable .................. 498 1,451
Accrued expenses ...................... 191 71
---------- ----------
Net cash provided by operating activities ......... 6,001 8,753
---------- ----------
INVESTING ACTIVITIES:
Additions to property and equipment ............... (533) (464)
Additions to other intangible assets .............. (1,385) (270)
Issuance of notes receivable ...................... (500)
---------- ----------
Net cash used in investing activities ............. (1,918) (1,234)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from exercise of common stock options .... 110
Payments for treasury stock ....................... (1,395)
---------- ----------
Net cash provided by (used in) financing activities 110 (1,395)
---------- ----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS ............................ 4,193 6,124
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD ...................... 5,838 13,352
---------- ----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD ............................ $ 10,031 $ 19,476
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited consolidated statements of operations for the
three-month periods ended March 31, 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, 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, 1997.
Coopers & Lybrand L.L.P., 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 $36.0 million for lost profits and royalties. In
addition, 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. Pittway Corporation has previously announced that it intends
to appeal the verdict. 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 March 31, 1998, the Company has
capitalized $4.5 million of costs related to this lawsuit, which are
included in other intangible assets on the consolidated balance
sheet.
<PAGE>
3. OTHER FINANCIAL STATEMENT DATA (IN THOUSANDS):
March 31, December 31,
1998 1997
---------- -----------
(UNAUDITED)
Accounts receivable:
Accounts receivable ..................... $ 14,324 $ 15,555
Allowance for doubtful accounts ......... (1,045) (1,045)
---------- ----------
Total .............................. $ 13,279 $ 14,510
========== ==========
Inventories:
Raw materials ........................... $ 9,207 $ 9,956
Allowance for obsolescence .............. (1,420) (1,660)
---------- ----------
7,787 8,296
Work-in-process ......................... 5,037 4,877
Finished goods .......................... 8,689 8,789
---------- ----------
Total .............................. $ 21,513 $ 21,962
========== ==========
Property and equipment:
Machinery and equipment ................. $ 10,462 $ 10,080
Furniture and fixtures .................. 4,032 3,881
Building and improvements ............... 1,751 1,751
---------- ----------
16,245 15,712
Accumulated depreciation and amortization (6,435) (5,887)
---------- ----------
Total .............................. $ 9,810 $ 9,825
========== ==========
Other intangible assets:
Trademarks and trade names .............. $ 13,829 $ 13,829
Technology and patents .................. 4,954 3,569
Customer lists .......................... 3,007 3,007
Other ................................... 616 616
---------- ----------
22,406 21,021
Accumulated amortization ................ (2,364) (2,187)
---------- ----------
Total .............................. $ 20,042 $ 18,834
========== ==========
Other accrued expenses:
Warranty ................................ $ 650 $ 650
Professional fees ....................... 436 493
Other ................................... 1,480 864
---------- ----------
Total .............................. $ 2,566 $ 2,007
========== ==========
<PAGE>
4. EARNINGS PER SHARE
Effective with year-end 1997, the Company adopted SFAS No. 128,
"Earnings per Share" ("EPS"), 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 dilutive earnings per share as
follows for the quarter ended March 31 (in thousands, except per
share data):
1998 1997
---- ----
Net income $2,534 $3,744
Weighted average shares outstanding:
Basic (actual shares outstanding) 8,487 8,376
Effect of dilutive options 376 180
------ ------
Diluted 8,863 8,556
====== ======
Per share amounts:
Basic $ .30 $ .45
Diluted $ .29 $ .44
<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 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.
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 $174,000, or 0.7%, from $23.7
million for the three months ended March 31, 1997, to $23.9 million for
the three months ended March 31, 1998. The increase in sales is primarily
attributable to business acquisitions and volume increases, as prices
remained relatively stable over these periods.
Excluding the effect of the acquisitions and sales to the Company's
1997 largest customer's branch operations, which decreased from
approximately 43% of total sales in the first quarter of 1997 to less than
1% in the first quarter of 1998, sales to all other customers increased
30% from the first quarter of 1997.
<PAGE>
GROSS PROFIT. Gross profit decreased $660,000 from the first quarter
of 1997 to $10.9 million for the first quarter of 1998 and decreased as a
percentage of net sales from 48.5% to 45.4%. The decrease in gross margin
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, and excess factory capacity at the Company's wireless
manufacturing facility due to the decrease in first quarter 1998 sales to
what was the Company's largest customer in 1997.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general
and administrative expenses increased from $3.9 million for the first
quarter of 1997 to $4.8 million for the first quarter of 1998. As a
percentage of net sales, marketing, general and administrative expenses
for the first quarter increased from 16.6% in 1997 to 20.0% in 1998. The
increase is primarily due to the addition of CADDX and costs associated
with additional sales personnel and product technical support for the
acquired Regency product line.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses
increased $366,000 to $2.0 million for the first quarter of 1998. As a
percentage of net sales, research and development expenses for the first
quarter increased from 6.9% in 1997 to 8.4% in 1998. The increase was
primarily due to the Company's continued emphasis on research and new
product development. 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.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of
acquisition-related intangible assets increased from $228,000 for the
first quarter of 1997 to $353,000 for the first quarter of 1998. The
increase is attributable to the Company's acquisitions in the second
quarter of 1997.
NET INTEREST INCOME. Net interest income decreased from $264,000 for
the first quarter of 1997 to $180,000 for the first quarter of 1998 as
previously invested cash and cash equivalents were used in the second
quarter 1997 acquisitions.
INCOME TAX EXPENSE. Income tax expense decreased from $2.2 million
for the first quarter of 1997 to $1.4 million for the first quarter 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. The effective tax
rate decreased from 37.1% for the first quarter of 1997 to 36.0% for the
first quarter of 1998 due to a higher portion of revenues taxed as foreign
sales income as well as increased research and development tax credits
resulting from increased product development spending.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily with cash from
operations. For the first three months of 1998, the Company generated net
cash from operating activities of $6.0 million. Net cash provided by
operating activities resulted primarily from $2.5 million in net income,
$926,000 in depreciation and amortization charges and $2.5 million from
changes in operating assets and liabilities, principally accounts
receivable.
During the first quarter of 1998, the Company invested $1.4 million
in other intangible assets, primarily capitalized costs associated with
the patent litigation, and $533,000 in equipment. For the year ended
December 31, 1998, the Company expects that purchases of property and
equipment will be approximately $4.0 million.
For the first three months of 1998, cash provided by the exercise of
stock options was $110,000.
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 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.
<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 $36.0 million for lost profits and royalties. In
addition, 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. Pittway Corporation has previously announced that it intends
to appeal the verdict. The Company's management will vigorously
defend any such appeal.
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.
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 March 31,1998, or during the period
from March 31, 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: May 8, 1998 ITI TECHNOLOGIES, INC.
By /s/ Jack A. Reichert
-----------------------------------
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 No. 33-89826, No. 333-08943, No. 333-08945, and No. 333-23751)
We are aware that our report dated April 28, 1998, on our reviews of interim
financial information of ITI Technologies, Inc. for the periods ended March 31,
1998 and 1997, and included in the Company's quarterly report on Form 10-Q for
the quarter ended March 31, 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/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
May 8, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 10,031
<SECURITIES> 0
<RECEIVABLES> 13,279
<ALLOWANCES> 1,045
<INVENTORY> 21,513
<CURRENT-ASSETS> 47,445
<PP&E> 9,810
<DEPRECIATION> 6,435
<TOTAL-ASSETS> 107,067
<CURRENT-LIABILITIES> 9,459
<BONDS> 0
0
0
<COMMON> 92
<OTHER-SE> 90,253
<TOTAL-LIABILITY-AND-EQUITY> 107,067
<SALES> 23,914
<TOTAL-REVENUES> 23,914
<CGS> 13,050
<TOTAL-COSTS> 13,050
<OTHER-EXPENSES> 7,161
<LOSS-PROVISION> 59
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> 3,962
<INCOME-TAX> 1,428
<INCOME-CONTINUING> 2,534
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,534
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.29
</TABLE>
