FORM 10-Q
UNITED STATES
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, 2000
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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
- -------------------------------------- ------------------------------------
(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 April 18, 2000, there were 8,536,592 shares of common stock
outstanding.
The accompanying notes are an integral part of the consolidated financial
statements.
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1
<PAGE>
ITI TECHNOLOGIES, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2000
INDEX PAGE
----- ----
PART I -- FINANCIAL INFORMATION
Item 1 -- Consolidated Financial Statements 3
Item 2 -- Management's Discussion and Analysis 10
of Financial Condition and Results
of Operations
PART II OTHER INFORMATION
Item 1 -- Legal Proceedings 14
Item 5 -- Other Information 14
Item 6 -- Exhibits and Reports on Form 8-K 14
Signatures 15
The accompanying notes are an integral part of the consolidated financial
statements.
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2
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
ITI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
---- ----
(UNAUDITED)
<S> <C> <C>
Net sales ........................................... $ 31,528 $ 27,829
Cost of goods sold .................................. 16,603 14,829
----------- -----------
Gross profit ........................................ 14,925 13,000
Operating expenses:
Marketing, general and administrative ......... 6,449 5,280
Research and development ...................... 2,341 1,983
Amortization of intangible assets ............. 353 353
----------- -----------
Operating income .................................... 5,782 5,384
Other income:
Interest, net ................................. 855 256
Other, net .................................... 6 5
----------- -----------
Income before income tax expense .................... 6,643 5,645
Income tax expense .................................. 2,455 2,034
----------- -----------
Net income .......................................... $ 4,188 $ 3,611
=========== ===========
Per share amounts:
Basic ............................................... $ .49 $ .43
Weighted average common shares
outstanding ................................... 8,534 8,420
Diluted ............................................. $ .47 $ .41
Weighted average common and common
equivalent shares outstanding ................. 8,902 8,853
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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3
<PAGE>
ITI TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 10,992 $ 9,741
Accounts receivable .................................... 20,397 20,038
Notes receivable, current portion ...................... 12,456 6,897
Inventories ............................................ 24,766 23,887
Deferred income taxes .................................. 1,950 1,950
Other current assets ................................... 1,017 1,580
------------ ------------
Total current assets ................................ 71,578 64,093
Notes receivable-dealer financing, net of current portion ... 8,060 12,673
Property and equipment ...................................... 12,696 13,108
Excess of cost over net assets acquired ..................... 26,571 26,772
Other intangible assets ..................................... 15,289 15,464
------------ ------------
Total assets ........................................ $ 134,194 $ 132,110
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................... $ 4,145 $ 5,652
Accrued wages .......................................... 1,838 2,104
Income taxes payable ................................... 1,860 2,420
Other accrued expenses ................................. 1,947 1,783
------------ ------------
Total current liabilities ........................... 9,790 11,959
Income taxes ................................................ 5,745 5,745
------------ ------------
Total liabilities ................................... 15,535 17,704
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock ($0.01 par value; 30,000 shares authorized;
9,493 shares issued, 8,536 shares outstanding at
March 31, 2000; 9,489 shares issued, 8,532 shares
outstanding at December 31, 1999) ................... 95 95
Additional paid-in capital ............................. 80,078 80,013
Retained earnings ...................................... 53,865 49,677
Treasury stock, at cost (957 shares at March 31, 2000
and December 31, 1999) .............................. (15,379) (15,379)
------------ ------------
Total stockholders' equity .......................... 118,659 114,406
------------ ------------
Total liabilities and stockholders' equity .......... $ 134,194 $ 132,110
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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4
<PAGE>
ITI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
-----------------------------
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES: (UNAUDITED)
Net income .................................................... $ 4,188 $ 3,611
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of intangible assets ........................ 414 379
Depreciation and amortization ............................ 720 600
Provision for doubtful accounts .......................... 262 207
Changes in operating assets and liabilities:
Accounts receivable ................................. (621) (1,711)
Inventories ......................................... (879) (412)
Notes receivable-dealer financing ................... (946) (1,577)
Other current assets ................................ 563 56
Accounts payable .................................... (1,507) (1,696)
Income taxes payable ................................ (560) 978
Accrued wages and other accrued expenses ............ (102) 296
------------ ------------
Net cash provided by operating activities ..................... 1,532 731
------------ ------------
INVESTING ACTIVITIES:
Additions to property and equipment ........................... (308) (1,962)
Additions to other intangible assets .......................... (38) (102)
Issuance of notes receivable related to dealer financing ...... (909)
------------ ------------
Net cash used in investing activities ......................... (346) (2,973)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from exercise of common stock options ................ 65 1,551
------------ ------------
Net cash provided by financing activities ..................... 65 1,551
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ......................................... 1,251 (691)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD ................................... 9,741 5,594
------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD ......................................... $ 10,992 $ 4,903
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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5
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements for the three-month
periods ended March 31, 2000 and 1999, 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, 1999, 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, 1999.
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.
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 stockholders 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 stockholders 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
stockholder'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. A
special stockholders meeting to consider and vote upon a proposal to
approve the merger is scheduled for May 2, 2000.
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6
<PAGE>
3. NOTES RECEIVABLE - DEALER FINANCING
The Company provides extended payment terms on product sales and other
financing to qualified dealers in the form of notes receivable. This
dealer financing is generally accomplished through the exchange of the
dealer customer trade account receivable for a secured note receivable.
These notes receivable are secured by a perfected security interest in
the dealers' monitoring contracts that have value in excess of the
underlying note receivable, as well as other collateral considerations.
All notes are issued at market interest rates adjusted for credit and
credit enhancements with varied repayment terms of between 9 and 72
months. The company accrues interest monthly and periodically reviews
the carrying value of these notes receivable for non-collectibility and
establishes appropriate allowances when necessary. Activity that
relates to loans to dealers that finance the cost of equipment 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 and
other costs of the dealer are treated as investing activities in the
accompanying consolidated statement of cash flows.
As of March 31, 2000, and December 31, 1999, one customer participating
in the Company's dealer financing program had a note receivable balance
due to the Company of $10.4 million and $10.7 million, respectively.
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 effect of all dilutive stock options outstanding during the
three-month periods ended March 31, 2000 and 1999, 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 periods ended March 31, 2000 and 1999. The
number of excluded stock options were approximately 340,000 for the
three months ended March 31, 2000.
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7
<PAGE>
5. OTHER FINANCIAL STATEMENT DATA (IN THOUSANDS):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Accounts receivable:
Accounts receivable ........................... $ 21,667 $ 21,033
Allowance for doubtful accounts ............... (1,270) (995)
------------ ------------
Total ................................ $ 20,397 $ 20,038
============ ============
Inventories:
Raw materials ................................. $ 11,707 $ 10,941
Allowance for obsolescence .................... (1,477) (1,435)
------------ ------------
10,230 9,506
Work-in-process ............................... 6,311 6,072
Finished goods ................................ 8,225 8,309
------------ ------------
Total ................................ $ 24,766 $ 23,887
============ ============
Property and equipment:
Machinery and equipment ....................... $ 15,294 $ 15,142
Furniture and fixtures ........................ 5,567 5,419
Land, building and improvements ............... 3,300 3,292
------------ ------------
24,161 23,853
Accumulated depreciation and amortization ..... (11,465) (10,745)
------------ ------------
Total ................................ $ 12,696 $ 13,108
============ ============
Other intangible assets:
Trademarks and trade names .................... $ 13,829 $ 13,829
Technology and patents ........................ 1,703 1,671
Customer lists ................................ 3,007 3,007
Other ......................................... 632 626
------------ ------------
19,171 19,133
Accumulated amortization ...................... (3,882) (3,669)
------------ ------------
Total ................................ $ 15,289 $ 15,464
============ ============
Other accrued expenses:
Warranty ...................................... $ 550 $ 550
Professional fees ............................. 461 404
Other ......................................... 936 829
------------ ------------
Total ................................ $ 1,947 $ 1,783
============ ============
</TABLE>
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8
<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.
A special stockholders meeting to consider and vote upon a proposal to
approve the merger is scheduled for May 2, 2000.
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9
<PAGE>
RESULTS OF OPERATIONS:
NET SALES. Net sales increased $3.7 million, or 13.3%, from $27.8
million for the three months ended March 31, 1999, to $31.5 million for the
three months ended March 31, 2000. Sales into the international markets, to
distributors and to the Company's traditional dealers increased 42.8%,
13.7% and 8.2%, respectively, over the first quarter of 1999. Sales into
the utility and commercial channels were flat compared to the prior year.
The recent successful release of the Concord Express product was a
contributor to the increase in dealer sales in the first quarter of 2000
over the first quarter of the prior year.
GROSS PROFIT. Gross profit increased $1.9 million from $13.0 million
the first quarter of 1999 to $14.9 million for the first quarter of 2000
and increased as a percentage of net sales from 46.7% to 47.3%. The
increase in gross margin is due primarily to the leveraging of fixed
manufacturing costs over the increased sales volume.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and
administrative expenses increased from $5.3 million for the first quarter
of 1999 to $6.4 million for the first quarter of 2000. The increase is
primarily due to increased employment related costs associated with
increased sales and customer service initiatives. In addition, the Company
incurred $175,000 of expenses related to the proposed merger transaction
with SLC.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses
increased $358,000 from the first quarter of 1999 to $2.3 million for the
first quarter of 2000. The increase for the period was primarily due to the
Company's continued emphasis on research and new product development. The
Company continued development on its Advent platform that is designed for
the commercial burglary and fire markets. The Company is committed to
maintaining a high level of product development efforts.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of acquisition-related
intangible assets remained constant at $353,000 for both the first quarter
of 1999 and 2000.
NET INTEREST INCOME. Net interest income increased from $256,000 for
the first quarter of 1999 to $855,000 for the first quarter of 2000. The
increase is primarily the result of additional participation in the dealer
financing program. Interest earned under this program increased from
$206,000 in 1999 to $667,000 in 2000. The Company's loan portfolio
increased from $7.5 million at March 31, 1999 to $20.5 million at March 31,
2000. The Company also earns interest on funds held as cash and cash
equivalents.
INCOME TAX EXPENSE. Income tax expense increased from $2.0 million for
the first quarter of 1999 to $2.5 million for the first quarter of 2000.
The Company's effective tax rate for these periods 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. The effective tax rate increased
from 36% of pretax income in the first quarter of 1999 to 37% in the first
quarter of 2000 due to certain non-deductible expenses related to the
proposed merger with SLC.
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10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations with cash from operations. For
the three-month period ended March 31, 2000, $5.3 million of cash from
operations was provided by net income and non-cash depreciation and
amortization charges. Cash used in operations during the three-month period
consisted primarily of a $1.5 million reduction in accounts payable,
$946,000 for funding of the Company's dealer financing program and $1.6
million used for changes in other operating assets and liabilities,
principally increases in accounts receivable and inventory.
During the first three months of 2000, the Company invested $308,000 in
property and equipment and had cash provided by the exercise of stock
options, including the related tax benefit, of $65,000.
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, as a stand-alone company, for the foreseeable
future. The proposed merger with SLC may impact future cash flow
requirements.
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.
FINANCIAL INSTRUMENTS
The only financial instruments the Company maintains are in accounts
receivable and notes receivable. The Company believes that the interest
rate risk related to these accounts is not significant. The Company manages
the risk associated with these accounts through periodic reviews of the
carrying value for non-collectability and establishment of appropriate
allowances in connection with the Company's internal controls and policies.
The Company does not enter into hedging or derivative instruments.
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.
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11
<PAGE>
Prior to December 31, 1999, the Company completed an assessment of the
Year 2000 and believed that existing software was compliant and that the
Year 2000 issue would not pose significant operational problems for its
computer systems or the Company. As of January 1, 2000, and through the
date of this filing, the Company has not experienced any significant Year
2000 issues related to internal operations or the operations of its key
suppliers, vendors or customers.
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12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company experiences routine litigation in the normal course of
its business. The Company does not believe that any of this routine
litigation will have a material adverse effect on the financial
condition or results of operations of the Company. Costs associated
with routine litigation are expensed in the period incurred.
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:
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, 2000, or during the period
from March 31, 2000, to the date of this Quarterly Report on
Form 10-Q.
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13
<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: April 24, 2000 ITI TECHNOLOGIES, INC.
By /s/ Jack A. Reichert
--------------------------------------
Jack A. Reichert
Vice President, Finance (principal
financial and accounting officer)
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14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 10,992
<SECURITIES> 0
<RECEIVABLES> 20,397
<ALLOWANCES> 1,270
<INVENTORY> 24,766
<CURRENT-ASSETS> 71,578
<PP&E> 12,696
<DEPRECIATION> 11,465
<TOTAL-ASSETS> 134,194
<CURRENT-LIABILITIES> 9,790
<BONDS> 0
0
0
<COMMON> 95
<OTHER-SE> 118,564
<TOTAL-LIABILITY-AND-EQUITY> 134,194
<SALES> 31,528
<TOTAL-REVENUES> 31,528
<CGS> 16,603
<TOTAL-COSTS> 16,603
<OTHER-EXPENSES> 9,143
<LOSS-PROVISION> 262
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> 6,643
<INCOME-TAX> 2,455
<INCOME-CONTINUING> 4,188
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,188
<EPS-BASIC> 0.49
<EPS-DILUTED> 0.47
</TABLE>
