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, 1999
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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
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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 July 30, 1999, there were 8,430,342 shares of common stock
outstanding.
<PAGE>
ITI TECHNOLOGIES, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 1999
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 4 -- Submission of Matters to a Vote of Security Holders 15
Item 5 -- Other Information 15
Item 6 -- Exhibits and Reports on Form 8-K 15
Signatures 16
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 June 30, 1999, and the related
consolidated statement of operations for the three-month and six-month periods
ended June 30, 1999 and 1998, and the consolidated statement of cash flows for
the six-month periods ended June 30, 1999 and 1998. 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 consolidated financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of ITI Technologies, Inc. and
Subsidiaries as of December 31, 1998, 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 23, 1999, 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
August 5, 1999
3
<PAGE>
ITI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales .................................. $ 29,462 $ 27,139 $ 57,291 $ 51,053
Cost of goods sold ......................... 15,671 14,721 30,500 27,771
---------- ---------- ---------- ----------
Gross profit ............................... 13,791 12,418 26,791 23,282
Operating expenses:
Marketing, general and administrative .. 5,366 4,973 10,646 9,767
Research and development ............... 2,115 1,980 4,098 3,994
Patent litigation costs ................ 4,104 4,104
Amortization of intangible assets ...... 353 353 706 706
---------- ---------- ---------- ----------
Operating income ........................... 1,853 5,112 7,237 8,815
Other income (expense):
Interest, net .......................... 357 213 613 393
Other, net ............................. (16) 5 63
---------- ---------- ---------- ----------
Income before income tax expense ........... 2,210 5,309 7,855 9,271
Income tax expense ......................... 796 1,911 2,830 3,339
---------- ---------- ---------- ----------
Net income ................................. $ 1,414 $ 3,398 $ 5,025 $ 5,932
========== ========== ========== ==========
Per share amounts:
Basic ...................................... $ .17 $ .40 $ .60 $ .70
Weighted average common shares
outstanding ............................ 8,430 8,525 8,425 8,506
Diluted .................................... $ .16 $ .38 $ .57 $ .67
Weighted average common and common
equivalent shares outstanding .......... 8,750 8,969 8,802 8,916
</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>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ..................................... $ 2,019 $ 5,594
Accounts receivable ........................................... 19,741 19,037
Notes receivable-dealer financing, current portion ............ 1,576 1,096
Inventories ................................................... 26,725 25,201
Deferred income taxes ......................................... 1,223 1,223
Other current assets .......................................... 2,460 1,738
------------ ------------
Total current assets ..................................... 53,744 53,889
Notes receivable, net of current portion .......................... 10,849 3,948
Property and equipment ............................................ 12,411 10,647
Excess of cost over net assets acquired ........................... 27,174 27,576
Other intangible assets ........................................... 15,770 19,897
------------ ------------
Total assets ............................................. $ 119,948 $ 115,957
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................. $ 5,187 $ 6,874
Accrued wages ................................................. 2,227 2,045
Other accrued expenses ........................................ 2,330 1,955
------------ ------------
Total current liabilities ................................ 9,744 10,874
Income taxes ...................................................... 6,199 7,676
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Total liabilities ........................................ 15,943 18,550
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Commitments and contingencies
Stockholders' equity:
Common stock ($.01 par value; 30,000 shares authorized;
9,387 shares issued, 8,430 shares outstanding at
June 30, 1999; 9,304 shares issued, 8,347 shares
outstanding at December 31, 1998) ....................... 94 93
Additional paid-in capital .................................... 77,940 76,368
Retained earnings ............................................. 41,350 36,325
Treasury stock, at cost (957 shares at June 30, 1999
and December 31, 1998) .................................. (15,379) (15,379)
------------ ------------
Total stockholders' equity .............................. 104,005 97,407
------------ ------------
Total liabilities and stockholders' equity .............. $ 119,948 $ 115,957
============ ============
</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)
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES: (UNAUDITED)
Net income .............................................. $ 5,025 $ 5,932
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of intangible assets .................. 754 757
Depreciation and amortization ...................... 1,238 1,080
Provision for doubtful accounts .................... 320 170
Patent litigation costs ............................ 4,104
Deferred income taxes .............................. (1,477)
Changes in operating assets and liabilities:
Accounts receivable ............................ (1,024) (2,672)
Inventories .................................... (1,524) (412)
Notes receivable-dealer financing .............. (6,472) (413)
Other current assets ........................... (395) 94
Accounts payable ............................... (1,687) (43)
Income taxes payable ........................... (327) 427
Accrued wages and other accrued expenses ....... 557 337
---------- ----------
Net cash (used in) provided by operating activities ..... (908) 5,257
---------- ----------
INVESTING ACTIVITIES:
Additions to property and equipment ..................... (3,002) (1,804)
Additions to other intangible assets .................... (329) (1,574)
Issuance of notes receivable ............................ (909)
---------- ----------
Net cash used in investing activities ................... (4,240) (3,378)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from exercise of common stock options .......... 1,573 893
---------- ----------
Net cash provided by financing activities ............... 1,573 893
---------- ----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS ...................................... (3,575) 2,772
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD ................................ 5,594 5,838
---------- ----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD ...................................... $ 2,019 $ 8,610
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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6
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements for the three-month and
six-month periods ended June 30, 1999 and 1998, 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, 1998, 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, 1998.
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. PATENT LITIGATION COSTS
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 infringed the Company's
Learn Mode patent. The Court awarded the Company damages of
approximately $36 million for lost profits and royalties as well as
prejudgment interest of approximately $3 million, bringing the total
judgment to approximately $39 million. Pittway Corporation appealed the
verdict.
On June 1, 1999, the United States Court of Appeals for the Federal
Circuit upheld the patent's validity but reversed the jury's finding of
infringement. The United States Court of Appeals has also denied the
Company's request for a rehearing of the case. As a result, the Company
recorded in the second quarter of 1999 a non-cash write-off of $4.1
million for certain litigation costs incurred in connection with the
patent litigation against Pittway that were previously capitalized.
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7
<PAGE>
2. LITIGATION (CONTINUED)
Pittway 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 and is currently pending. The Company is in
the process of consulting with its legal advisors and technical experts
regarding the impact the reversal of the verdict in the first suit may
have on this suit.
3. EARNINGS PER SHARE
The difference in the weighted average shares outstanding for
calculating basic and diluted earnings per share is attributable to the
assumed exercise of stock options under the Company's Stock Option
Incentive Plan.
The dilutive effect of all stock options outstanding during the
three-month and six-month periods ended June 30, 1999 and 1998, were
included in the calculation of the diluted per share earnings. Stock
options with exercise prices greater than the average market value of
the Company's common stock were excluded from the computation of
dilutive earnings per share for the three-month and six-month periods
ended June 30, 1999 and 1998. The number of excluded stock options were
as follows:
1999 1998
---- ----
Three months ended June 30 418,000 265,000
Six months ended June 30 210,000 150,000
4. NOTES RECEIVABLE-DEALER FINANCING
The Company provides financing to qualified dealers for their business
needs. Activity related to loans to dealers that finance the cost of
equipment and other costs of the dealer are treated as cash flows from
operations on the accompanying consolidated statement of cash flows.
Activity related to loans to dealers to purchase account portfolios in
an effort to expand their business are treated as investing activities
on the accompanying consolidated statement of cash flows. In both
cases, the Company receives a perfected security interest in the
dealers monitoring contacts as well as other collateral considerations.
All notes are made at market interest rates adjusted for credit and
collateral factors with varied repayment terms between 36 to 72 months.
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<PAGE>
5. SIGNIFICANT CUSTOMER
As of June 30, 1999, one customer participating in the Company's dealer
financing program had a note receivable balance due to the Company of
$6.5 million.
6. OTHER FINANCIAL STATEMENT DATA (IN THOUSANDS):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- --------
(UNAUDITED)
<S> <C> <C>
Accounts receivable:
Accounts receivable ...................... $ 21,079 $ 20,182
Allowance for doubtful accounts .......... (1,338) (1,145)
-------- --------
Total .......................... $ 19,741 $ 19,037
======== ========
Inventories:
Raw materials ............................ $ 13,275 $ 12,600
Allowance for obsolescence ............... (1,360) (1,360)
-------- --------
11,915 11,240
Work-in-process .......................... 5,784 5,615
Finished goods ........................... 9,026 8,346
-------- --------
Total .......................... $ 26,725 $ 25,201
======== ========
Property and equipment:
Machinery and equipment .................. $ 14,110 $ 12,433
Furniture and fixtures ................... 4,798 4,545
Building and improvements ................ 2,857 1,786
-------- --------
21,765 18,764
Accumulated depreciation and amortization (9,354) (8,117)
-------- --------
Total .......................... $ 12,411 $ 10,647
======== ========
Other intangible assets:
Trademarks and trade names ............... $ 13,829 $ 13,829
Technology and patents ................... 1,561 5,336
Customer lists ........................... 3,007 3,007
Other .................................... 626 626
-------- --------
19,023 22,798
Accumulated amortization ................. (3,253) (2,901)
-------- --------
Total .......................... $ 15,770 $ 19,897
======== ========
Other accrued expenses:
Warranty ................................. $ 650 $ 650
Professional fees ........................ 431 432
Other .................................... 1,249 873
-------- --------
Total .......................... $ 2,330 $ 1,955
======== ========
</TABLE>
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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.
RESULTS OF OPERATIONS:
NET SALES. Net sales increased by $2.3 million, or 8.6%, from $27.1
million for the three months ended June 30, 1998, to $29.5 million for the
three months ended June 30, 1999. Net sales increased by $6.2 million, or
12.2%, from $51.1 million for the six months ended June 30, 1998, to $57.3
million for the six months ended June 30, 1999. Sales into the utility
markets increased 34.4% in the second quarter of 1999 over the second
quarter of 1998. International and commercial product sales were flat to
slightly down from the second quarter of 1998. Sales into the domestic
distributor channel increased 19.2% while sales to the Company's
traditional large and small dealers increased 8.6% from the second quarter
of 1998. The increases in sales are primarily attributable to volume
increases.
GROSS PROFIT. Gross profit increased from $12.4 million for the second
quarter of 1998 to $13.8 million for the second quarter of 1999, and
increased as a percentage of net sales from 45.8% to 46.8%. Gross profit
increased from $23.3 million for the first six months of 1998 to $26.8
million for the first six months of 1999, and increased as a percentage of
net sales from 45.6% to 46.8%. The increase in gross margin is due
primarily to the leveraging of fixed manufacturing costs over the increased
sales volume. Margins were also favorably impacted by an increased volume
of higher margin wireless products being incorporated with the NX-hybrid
product offerings.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and
administrative expenses increased from $5.0 million for the second quarter
of 1998 to $5.4 million for the second quarter of 1999, and increased from
$9.8 million for the first six months of 1998 to $10.7 million for the
first six months of 1999. As a percentage of net sales, marketing, general
and administrative expenses for the second quarter decreased from 18.3% in
1998 to 18.2% in 1999. For the first six months of the year, marketing,
general and administrative expenses decreased as a percentage of sales from
19.1% in 1998 to 18.6% in 1999. The dollar increases are primarily due to
increased employment costs associated with the increased sales
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10
<PAGE>
volume and with the anticipated introduction in the second half of 1999 of
the new Advent(R) and Concord(TM) Express product lines.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased $135,000 to $2.1 million for the second quarter of 1999, and
increased $104,000 to $4.1 million for the first six months of 1999. As a
percentage of net sales, research and development expense for the second
quarter decreased from 7.3% in 1998 to 7.2% in 1999. For the first six
months of the year, research and development expense decreased as a
percentage of sales from 7.8% in 1998 to 7.2% in 1999. The Company
continues its emphasis on research and new product development. The Company
is expecting to release the Concord Express, a low cost hardwire panel
targeted to the hardwire mass market installers, in the third quarter of
1999. The Company also continues development on its Advent platform, which
is designed for the commercial burglary and fire market. Expenditures for
research and development activities for the year ended December 31, 1999,
are anticipated to be between 7% and 8% of net sales.
PATENT LITIGATION COST. During the second quarter of 1999, the Company
recorded a non-cash charge of $4.1 million related to certain litigation
costs incurred in connection with the patent litigation against Pittway
that were previously capitalized. This one-time charge, net of applicable
income tax benefits, impacted the earnings of the Company approximately
$2.6 million or $0.30 per diluted share.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of acquisition-related
intangible assets remained constant for both the second quarter of 1999 and
1998 and for the six-month periods ended June 30, 1999 and 1998 at $353,000
and $706,000, respectively.
NET INTEREST INCOME. Net interest income increased from $213,000 for
the second quarter of 1998 to $357,000 for the second quarter of 1999.
During the first six months of 1999, net interest income totaled $613,000
compared to $393,000 for the first six months of 1998. The increases are
the result of additional participation in the Company's dealer financing
program. Interest earned under this program increased from $84,000 in the
second quarter of 1998 to $314,000 in the second quarter of 1999 and
increased from $147,000 to $520,000 in the six-month periods ended June 30,
1998 and 1999, respectively.
INCOME TAX EXPENSE. Income tax expense decreased from $1.9 million for
the second quarter of 1998 to $796,000 million for the second quarter of
1999 and decreased from $3.3 million for the first six months of 1998 to
$2.8 million for the first six months of 1999. The Company's effective tax
rate remained constant for these periods and varied 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.
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11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily with cash from
operations. For the six months ended June 30, 1999, cash was provided by
net income, adjusted for the $2.6 million non-cash patent litigation
charge, including the related tax benefit, and $2.0 million of non-cash
depreciation and amortization charges. Cash used in operations during the
six-month period consisted primarily of $6.5 million for funding of the
Company's dealer financing program and $4.4 million used from changes in
other operating assets and liabilities, principally increased accounts
receivable and inventory and a reduction in accounts payable.
During the first six months of 1999, the Company has invested $3.0
million in property and equipment, $1.6 million of which related to the
plant and equipment expansion at the Company's Gladewater, Texas facility.
For the year ended December 31, 1999, the Company expects that purchases of
property and equipment will be approximately $4.0 million. The Company has
also invested $909,000 in notes receivable related to dealer financing for
account acquisitions.
For the first six months of 1999, cash provided by the exercise of
stock options, including the related tax benefit, was $1.6 million.
A substantial amount of the Company's working capital is invested in
accounts and notes receivable and inventories. The Company periodically
reviews accounts and notes receivable for noncollectibility and inventories
for obsolescence and establishes allowances it believes are appropriate.
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 of 1998.
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 along with any activity related to its stock
repurchase program at least through the end of 1999.
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 has not incurred and does not
anticipate that there will be a material effect on its operations as a
result of the conversion by eleven member states of the European Union to a
common currency which occurred on January 1, 1999.
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12
<PAGE>
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 infringed 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 appealed the verdict.
On June 1, 1999, the United States Court of Appeals for the
Federal Circuit upheld the patent's validity but reversed the
jury's finding of infringement. The United States Court of
Appeals has also denied the Company's request for a rehearing
of the case. As a result, the Company recorded in the second
quarter of 1999 a non-cash write-off of $4.1 million for
certain litigation costs incurred in connection with the
patent litigation against Pittway that were previously
capitalized.
Pittway 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 and
is currently pending. The Company is in the process of
consulting with its legal advisors and technical experts
regarding the impact the reversal of the verdict in the first
suit may have on this suit.
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.
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14
<PAGE>
Item 4. Submission of Matters to a Vote of Security
Holders
The registrant held its Annual Meeting of Stockholders on May
12, 1999, at which the following actions were taken:
(a) The re-election of five directors, consisting of
Thomas L. Auth, W. Wallace McDowell, Jr., Perry J.
Lewis, Sangwoo Ahn and Walter R. Barry, Jr., and the
election of Joe Hurst to fill the director's position
being vacated by William C. Ughetta, Jr. The proposal
to elect management's slate of directors described in
the proxy statement prepared in connection with the
Annual Meeting was carried by a margin of at least
99% of the shares voted on Proposal 1. Thus, the
proposal to elect the members of the Board of
Directors as proposed in the Proxy Statement was
approved.
(b) Shareholders ratified the appointment of
PricewaterhouseCoopers LLP, independent accountants,
to audit the Company's books and accounts for the
fiscal year ending December 31, 1999. The proposal
was carried by over 99% of the shares voted on
proposal 2.
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 June 30, 1999, or
during the period from June 30, 1999, to the date of
this Quarterly Report on Form 10-Q.
- --------------------------------------------------------------------------------
15
<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 10, 1999 ITI TECHNOLOGIES, INC.
By /s/ Jack A. Reichert
--------------------------------------
Jack A. Reichert
Vice President of Finance
(Chief Accounting Officer)
- --------------------------------------------------------------------------------
16
EXHIBIT 15 - LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 10549
Commissioners:
We are aware that our report dated August 5, 1999, on our reviews of interim
financial information of ITI Technologies, Inc. for the three and six-month
periods ended June 30, 1999 and 1998, and included in the Company's quarterly
report on Form 10-Q for the quarter ended June 30, 1999, is incorporated by
reference in the registration statements of ITI Technologies, Inc. on Form S-8
(Registrations Nos. 33-89826, 333-08943, 333-08945, 333-23751 and 333-58257).
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
August 10, 1999
- --------------------------------------------------------------------------------
17
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