FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 ____________________
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 November 2, 1999, there were 8,529,542 shares of common stock
outstanding.
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1
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ITI TECHNOLOGIES, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
INDEX PAGE
----- ----
PART I -- FINANCIAL INFORMATION
Item 1 -- Consolidated Financial Statements 3
Item 2 -- Management's Discussion and Analysis 11
of Financial Condition and Results
of Operations
PART II -- OTHER INFORMATION
Item 1 -- Legal Proceedings 15
Item 5 -- Other Information 16
Item 6 -- Exhibits and Reports on Form 8-K 16
Signatures 17
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of ITI Technologies, Inc.:
We have reviewed the accompanying consolidated balance sheet of ITI
Technologies, Inc. and Subsidiaries as of September 30, 1999, and the related
consolidated statement of operations for the three-month and nine-month periods
ended September 30, 1999 and 1998, and the consolidated statement of cash flows
for the nine-month periods ended September 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
November 3, 1999
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ITI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales .................................................. $ 31,435 $ 29,326 $ 88,726 $ 80,379
Cost of goods sold ........................................ 16,563 16,021 47,063 43,792
---------- ---------- ---------- ----------
Gross profit ............................................... 14,872 13,305 41,663 36,587
Operating expenses:
Marketing, general and administrative ................. 6,003 4,917 16,649 14,684
Research and development .............................. 2,246 2,047 6,344 6,041
Patent litigation costs ............................... 4,104
Amortization of intangible assets ..................... 353 353 1,059 1,059
---------- ---------- ---------- ----------
Operating income ........................................... 6,270 5,988 13,507 14,803
Other income (expense):
Interest, net ......................................... 526 204 1,139 597
Other, net ............................................ (8) (13) (3) 50
---------- ---------- ---------- ----------
Income before income tax expense ........................... 6,788 6,179 14,643 15,450
Income tax expense ......................................... 2,445 2,223 5,275 5,562
---------- ---------- ---------- ----------
Net income ................................................. $ 4,343 $ 3,956 $ 9,368 $ 9,888
========== ========== ========== ==========
Per share amounts:
Basic ...................................................... $ .51 $ .47 $ 1.11 $ 1.16
Weighted average common shares
outstanding ........................................... 8,434 8,498 8,428 8,503
Diluted .................................................... $ .50 $ .45 $ 1.07 $ 1.11
Weighted average common and common
equivalent shares outstanding ......................... 8,727 8,880 8,777 8,904
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statement.
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ITI TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 3,880 $ 5,594
Accounts receivable ........................................... 20,727 19,037
Notes receivable-dealer financing, current portion ............ 6,162 1,096
Inventories ................................................... 24,959 25,201
Deferred income taxes ......................................... 1,223 1,223
Other current assets .......................................... 1,581 1,738
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Total current assets ..................................... 58,532 53,889
Notes receivable, net of current portion ............................ 11,629 3,948
Property and equipment .............................................. 13,408 10,647
Excess of cost over net assets acquired ............................. 26,973 27,576
Other intangible assets ............................................. 15,608 19,897
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Total assets ............................................. $ 126,150 $ 115,957
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................. $ 5,323 $ 6,874
Accrued wages ................................................. 2,839 2,045
Income taxes payable .......................................... 1,148
Other accrued expenses ........................................ 2,162 1,955
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Total current liabilities ................................ 11,472 10,874
Income taxes ........................................................ 6,199 7,676
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Total liabilities ........................................ 17,671 18,550
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Commitments and contingencies
Stockholders' equity:
Common stock ($.01 par value; 30,000 shares authorized;
9,395 shares issued, 8,438 shares outstanding at
September 30, 1999; 9,304 shares issued, 8,347 shares
outstanding at December 31, 1998) ........................ 94 93
Additional paid-in capital .................................... 78,071 76,368
Retained earnings ............................................. 45,693 36,325
Treasury stock, at cost (957 shares at September 30, 1999
and December 31, 1998) .................................. (15,379) (15,379)
------------- -------------
Total stockholders' equity ............................... 108,479 97,407
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Total liabilities and stockholders' equity ............... $ 126,150 $ 115,957
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statement.
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<PAGE>
ITI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ............................................... $ 9,368 $ 9,888
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of intangible assets ................... 1,161 1,137
Depreciation and amortization ....................... 1,908 1,654
Provision for doubtful accounts ..................... 433 282
Patent litigation costs ............................. 4,104
Deferred income taxes ............................... (1,477)
Changes in operating assets and liabilities:
Accounts receivable ............................ (2,123) (2,860)
Inventories .................................... 242 (1,647)
Notes receivable-dealer financing .............. (11,838) (1,279)
Other current assets ........................... (610) 129
Accounts payable ............................... (1,551) 188
Income taxes payable ........................... 1,915 469
Accrued wages and other accrued expenses ....... 1,001 963
------------ ------------
Net cash provided by operating activities ................ 2,533 8,924
------------ ------------
INVESTING ACTIVITIES:
Additions to property and equipment ...................... (4,669) (2,250)
Additions to other intangible assets ..................... (373) (1,611)
Issuance of notes receivable ............................. (909)
------------ ------------
Net cash used in investing activities .................... (5,951) (3,861)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from exercise of common stock options ........... 1,704 919
Payments for treasury stock .............................. (6,318)
------------ ------------
Net cash provided by (used in) financing activities ...... 1,704 (5,399)
------------ ------------
NET DECREASE IN CASH AND CASH
EQUIVALENTS ......................................... (1,714) (336)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD .............................. 5,594 5,838
------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD .................................... $ 3,880 $ 5,502
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statement.
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<PAGE>
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements for the three-month and
nine-month periods ended September 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 financial position and 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. PROPOSED MERGER
On September 28, 1999, the Company entered into a definitive agreement
to merge with SLC Technologies, Inc. ("SLC"). SLC, headquartered in
Portland, Oregon, is a global integrated communications technology
company with products for commercial security, fire protection, CCTV,
electronic access control and fiber optic communication systems. SLC
has sales and technical support organizations in 27 countries and
manufacturing and logistics organizations in the United States, the
Netherlands, Ireland, Australia and China.
The transaction, which will be treated as a purchase of the Company by
SLC for accounting purposes, is structured as a stock-for-stock merger
of SLC into the Company, with the Company issuing approximately 15.2
million shares to SLC. In addition, the Company's shareholders will
have the right to elect to receive from the newly merged company $36.50
in cash at closing for each share of the Company's common stock,
subject to the limitation that no more than 50% of the total number of
shares of the Company's common stock issued and outstanding immediately
prior to the closing be exchanged for cash. As a result of the
transaction, SLC shareholders will have an approximate 63.5% ownership
position in the new company on an equivalent share basis calculated
under the treasury stock method without giving effect to the cash
election. Assuming that 50% of the Company's outstanding common stock
outstanding immediately prior to the closing is exchanged for cash, SLC
shareholder's percentage of ownership would increase to approximately
78%. The merger has been approved by the Board of Directors of both
companies and is subject to approval by the Company's shareholders,
receipt by SLC of a supplemental federal tax ruling, approval by
regulatory authorities, and other customary closing conditions.
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3. 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.
On October 6, 1999, the Company filed a petition for a Writ of
Certiorari with the United States Supreme Court asking the Court to
review the ruling by the Federal Circuit Court of Appeals. The United
States Supreme Court has not yet acted on the Company's petition.
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.
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<PAGE>
4. 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 nine-month periods ended September 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 diluted earnings per share for the three-month and nine-month
periods ended September 30, 1999 and 1998. The number of excluded stock
options were as follows:
1999 1998
---- ----
Three months ended September 30 413,000 416,000
Nine months ended September 30 278,000 258,000
5. 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 in 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
in the accompanying consolidated statement of cash flows. In both
cases, the Company receives a perfected security interest in the
dealer's 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
12 to 72 months.
6. SIGNIFICANT CUSTOMER
As of September 30, 1999, and December 31, 1998, one customer
participating in the Company's dealer financing program had a note
receivable balance due to the Company of $10.8 million and $2.3
million, respectively.
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<PAGE>
7. OTHER FINANCIAL STATEMENT DATA (IN THOUSANDS):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Accounts receivable:
Accounts receivable ............................. $ 22,047 $ 20,182
Allowance for doubtful accounts ................. (1,320) (1,145)
------------- -------------
Total .................................... $ 20,727 $ 19,037
============= =============
Inventories:
Raw materials ................................... $ 12,332 $ 12,600
Allowance for obsolescence ...................... (1,360) (1,360)
------------- -------------
10,972 11,240
Work-in-process ................................. 5,881 5,615
Finished goods .................................. 8,106 8,346
------------- -------------
Total .................................... $ 24,959 $ 25,201
============= =============
Property and equipment:
Machinery and equipment ......................... $ 15,043 $ 12,433
Furniture and fixtures .......................... 5,141 4,545
Building and improvements ....................... 3,249 1,786
------------- -------------
23,433 18,764
Accumulated depreciation and amortization ....... (10,025) (8,117)
------------- -------------
Total .................................... $ 13,408 $ 10,647
============= =============
Other intangible assets:
Trademarks and trade names ...................... $ 13,829 $ 13,829
Technology and patents .......................... 1,605 5,336
Customer lists .................................. 3,007 3,007
Other ........................................... 626 626
------------- -------------
19,067 22,798
Accumulated amortization ........................ (3,459) (2,901)
------------- -------------
Total .................................... $ 15,608 $ 19,897
============= =============
Other accrued expenses:
Warranty ........................................ $ 650 $ 650
Professional fees ............................... 416 432
Other ........................................... 1,096 873
------------- -------------
Total .................................... $ 2,162 $ 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.
GENERAL:
On September 28, 1999, the Company entered into a definitive agreement
to merge with SLC Technologies, Inc. ("SLC"). SLC, headquartered in
Portland, Oregon, is a global integrated communications technology company
with products for commercial security, fire protection, CCTV, electronic
access control and fiber optic communication systems. SLC has sales and
technical support organizations in 27 countries and manufacturing and
logistics organizations in the United States, the Netherlands, Ireland,
Australia and China.
The transaction, which will be treated as a purchase of the Company by
SLC for accounting purposes, is structured as a stock-for-stock merger of
SLC into the Company, with the Company issuing approximately 15.2 million
shares to SLC. In addition, the Company's shareholders will have the right
to elect to receive from the newly merged company $36.50 in cash at closing
for each share of the Company's common stock, subject to the limitation
that no more than 50% of the total number of shares of the Company's common
stock issued and outstanding immediately prior to the closing be exchanged
for cash. As a result of the transaction, SLC shareholders will have an
approximate 63.5% ownership position in the new company on an equivalent
share basis calculated under the treasury stock method without giving
effect to the cash election. Assuming that 50% of the Company's outstanding
common stock outstanding immediately prior to the closing is exchanged for
cash, SLC shareholder's percentage of ownership would increase to
approximately 78%. The merger has been approved by the Board of Directors
of both companies and is subject to approval by the Company's shareholders,
receipt by SLC of a supplemental federal tax ruling, approval by regulatory
authorities, and other customary closing conditions.
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<PAGE>
RESULTS OF OPERATIONS:
NET SALES. Net sales increased by $2.1 million, or 7.2%, from $29.3
million for the three months ended September 30, 1998, to $31.4 million for
the three months ended September 30, 1999. Net sales increased by $8.3
million, or 10.4%, from $80.4 million for the nine months ended September
30, 1998, to $88.7 million for the nine months ended September 30, 1999.
Sales to the Company's traditional dealers increased 7.3% and 26.0% over
the third quarter of 1998 and from the nine months ended September 30,
1998, respectively. Sales into the utility channel increased 28.4% and
21.1% over the third quarter of 1998 and over the nine months ended
September 30, 1998, respectively. Sales into the international markets in
the third quarter of 1999 increased 11.4% over the third quarter of 1998
and increased 10.7% over the nine-month period ended September 30, 1998.
During the quarter ended September 30, 1999, CADDX Controls, Inc., a wholly
owned subsidiary of the Company, moved into its new facility in Gladewater,
Texas. This caused temporary production problems that in turn affected
sales for the quarter. As a result, domestic distribution and commercial
product sales for the third quarter of 1999 and nine months ended September
30, 1999, were flat to slightly down from the same periods during 1998.
This transition is now complete and CADDX will be shipping at normal levels
in the fourth quarter of 1999. The increases in sales are primarily
attributable to volume increases.
GROSS PROFIT. Gross profit increased $1.6 million from $13.3 million
in the third quarter of 1998 to $14.9 million for the third quarter of 1999
and increased as a percentage of net sales from 45.4% to 47.3% for the
respective three-month periods. Gross profit increased from $36.6 million
for the first nine months of 1998 to $41.7 million for the first nine
months of 1999, and increased as a percentage of net sales from 45.5% to
47.0% for the respective nine-month periods. The increase in gross margin
is due primarily to the leveraging of fixed manufacturing costs over the
increased sales volumes. Margins were also favorably impacted by an
increased mix of higher margin wireless products being sold with the
NX-hybrid product offerings.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and
administrative expenses increased from $4.9 million for the third quarter
of 1998 to $6.0 million for the third quarter of 1999, and increased from
$14.7 million for the first nine months of 1998 to $16.6 million for the
first nine months of 1999. The increases are primarily due to expenses
related to the proposed merger transaction with SLC and increased
employment costs associated with the increased sales volume and the
anticipated introduction in the second half of 1999 of the new Advent(R)
and Concord(TM) Express product lines.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
for the three-month and nine-month periods ended September 30, 1999,
increased $199,000 from the third quarter of 1998 and $303,000 from the
first nine months of 1998, respectively. The increase for both periods was
primarily due to the Company's continued emphasis on research and new
product development. The Company released the Concord Express security
system in the third quarter of 1999. The Concord Express is a very low cost
control panel aimed directly at the hardwire installation market. The
Company also continues development on its Advent platform, which is
designed for the commercial burglary and fire market. The Company
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12
<PAGE>
anticipates that expenditures for research and development activities for
the year ended December 31, 1999, will be between 7% and 8% of net sales.
PATENT LITIGATION COSTS. 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 for the nine months
ended September 30, 1999.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of acquisition-related
intangible assets remained constant for both the third quarter of 1999 and
1998 and for the nine-month periods ended September 30, 1999 and 1998 at
$353,000 and $1.1 million, respectively.
NET INTEREST INCOME. Net interest income increased from $204,000 for
the third quarter of 1998 to $526,000 for the third quarter of 1999, and
increased from $597,000 during the first nine months of 1998 to $1.1
million for the first nine months of 1999. The increases are the result of
additional participation in the Company's dealer financing program. The
Company's loan portfolio increased from $3.3 million at September 30, 1998
to $17.8 million at September 30, 1999.
INCOME TAX EXPENSE. Income tax expense increased from $2.2 million for
the third quarter of 1998 to $2.4 million for the third quarter of 1999,
and decreased from $5.6 million for the first nine months of 1998 to $5.3
million for the first nine months of 1999. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily with cash from
operations. For the nine months ended September 30, 1999, cash from
operations was provided by net income, adjusted for the $2.6 million
non-cash patent litigation charge, including the related tax benefit, and
$3.1 million of non-cash depreciation and amortization charges. Cash used
in operations during the nine-month period consisted primarily of $11.8
million for funding of the Company's dealer financing program and $1.1
million used from changes in other operating assets and liabilities,
principally increased accounts receivable and a reduction in accounts
payable.
During the first nine months of 1999, the Company has invested $4.7
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 $5.5 million. The Company has
also invested $909,000 in notes receivable related to dealer financing for
account acquisitions.
For the first nine months of 1999, cash provided by the exercise of
stock options, including the related tax benefit, was $1.7 million.
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<PAGE>
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.
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 that occurred on January 1, 1999.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the inability of many computer programs to
correctly identify dates occurring after December 31, 1999, because they
use two digits rather than four digits to identify years. This could cause
a computer system failure or miscalculations, resulting in disruptions of
operations including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.
The Company's assessment of the Year 2000 issue is substantially
complete. The Company believes that with modifications to existing software
and conversions to new software, the Year 2000 issue will not pose
significant operational problems for its computer systems or the Company
and the cost of such modifications to be immaterial.
In addition to internal Year 2000 remediation activities, the Company
is in contact with key suppliers and customers to ensure no interruption in
the relationship between the Company and these important third parties from
the Year 2000 issue. A comprehensive survey of all vendors and customers
has not been, nor will 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.
- --------------------------------------------------------------------------------
14
<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.
On October 6, 1999, the Company filed a petition for a Writ of
Certiorari with the United States Supreme Court asking the Court to
review the ruling by the Federal Circuit Court of Appeals. The United
States Supreme Court has not yet acted on the Company's petition.
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.
- --------------------------------------------------------------------------------
15
<PAGE>
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) The following Current Reports on Form 8-K were filed by the
Company during the quarter ended September 30, 1999, or during
the period from September 30, 1999, to the date of this Quarterly
Report on Form 10-Q:
(i) A Current Report on Form 8-K was filed by the Company on
September 30, 1999, to report the information contained in
the Company's press release dated September 29, 1998,
regarding the merger agreement entered into by the Company
and SLC.
(ii) An Amendment No. 1 to Current Report was filed by the
Company on Form 8-K/A-1 on October 12, 1999, to amend the
Current Report on Form 8-K filed on September 30, 1999, for
the purpose of filing additional financial information
included in the investor presentations, Exhibit 99.2.
- --------------------------------------------------------------------------------
16
<PAGE>
SIGNATURES
Pursuant to the Requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 8, 1999 ITI TECHNOLOGIES, INC.
By /s/ Jack A. Reichert
---------------------------------------
Jack A. Reichert
Vice President of Finance
(Chief Accounting Officer)
- --------------------------------------------------------------------------------
17
EXHIBIT 15 - LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 10549
Commissioners:
We are aware that our report dated November 3, 1999, on our reviews of interim
financial information of ITI Technologies, Inc. for the three and nine-month
periods ended September 30, 1999 and 1998, and included in the Company's
quarterly report on Form 10-Q for the quarter ended September 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
November 8, 1999
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