<PAGE> 1
SLC TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998 AND 1997
TOGETHER WITH AUDITORS' REPORT
<PAGE> 2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SLC Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of SLC
Technologies, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of income, stockholder's
equity and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SLC Technologies, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/S/ Arthur Andersen LLP
Philadelphia, Pennsylvania
February 15, 2000
<PAGE> 3
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,983 $ 21,583
Receivables, less reserves of $2,560 in 1998 and $2,685
in 1999 71,532 78,197
Inventories 35,935 40,486
Prepaid expenses 3,414 4,663
Deferred income taxes 2,664 4,369
----------- -----------
Total current assets 125,528 149,298
PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated
depreciation 26,913 32,956
OTHER ASSETS 3,486 6,121
DEFERRED INCOME TAXES 1,246 386
INTANGIBLE ASSETS:
Patents and other deferred charges 2,272 15,015
Goodwill, net of accumulated amortization of $33,345 in
1998 and $42,089 in 1999 114,137 114,050
----------- -----------
$ 273,582 $ 317,826
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 237 $ --
Accounts payable 31,141 36,418
Accrued expenses 39,314 42,167
----------- -----------
Total current liabilities 70,692 78,585
LONG-TERM DEBT, less current portion 53,127 71,299
OTHER NONCURRENT LIABILITIES 2,260 1,083
----------- -----------
Total liabilities 126,079 150,967
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 14)
STOCKHOLDER'S EQUITY:
Common stock, par value $.005, 2,000,000 shares
authorized, 1,000,000 issued and outstanding 5 5
Paid-in capital 107,494 107,494
Retained earnings 41,528 67,264
Cumulative translation adjustment (1,524) (7,904)
----------- -----------
Total stockholder's equity 147,503 166,859
----------- -----------
$ 273,582 $ 317,826
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 4
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------
1997 1998 1999
------------ ----------- -----------
<S> <C> <C> <C>
SALES $ 326,026 $ 375,615 $ 427,778
COST OF SALES 184,557 206,247 240,769
------------ ----------- -----------
Gross profit 141,469 169,368 187,009
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 91,605 104,653 112,624
RESEARCH AND DEVELOPMENT EXPENSES 10,580 13,446 17,141
AMORTIZATION OF INTANGIBLE ASSETS 8,703 8,091 9,182
------------ ----------- -----------
Operating income 30,581 43,178 48,062
OTHER (INCOME) EXPENSE:
Interest expense, net 9,739 4,753 4,624
Other, net 391 833 (1,722)
------------ ----------- -----------
Income before income taxes 20,451 37,592 45,160
PROVISION FOR INCOME TAXES 10,309 16,926 19,424
------------ ----------- -----------
Net income $ 10,142 $ 20,666 $ 25,736
============ =========== ===========
EARNINGS PER SHARE:
Basic $ 10.14 $ 20.67 $ 25.74
Diluted $ 10.14 $ 20.62 $ 25.58
WEIGHTED AVERAGE SHARES OUTSTANDING:
(in thousands)
Basic 1,000 1,000 1,000
Diluted 1,000 1,002 1,006
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 5
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Common Stock
---------------------------
Capital Cumulative Total
Number Stock, $.005 Paid-in Retained Translation Stockholder's
of Shares Par Value Capital Earnings Adjustment Equity
--------- ------------ ---------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 1,000,000 $ 5 $ 49,009 $ 14,220 $ 241 $ 63,475
Comprehensive income-
Net income -- -- -- 10,142 -- 10,142
Cumulative translation adjustment -- -- -- -- (4,491) (4,491)
---------
Total comprehensive income 5,651
---------
Capital contribution (Note 1) -- -- 58,485 -- -- 58,485
--------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 1,000,000 5 107,494 24,362 (4,250) 127,611
Comprehensive income-
Net income -- -- -- 20,666 -- 20,666
Cumulative translation adjustment -- -- -- -- 2,726 2,726
---------
Total comprehensive income 23,392
---------
Dividend ($3.50 per share) -- -- -- (3,500) -- (3,500)
--------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1998 1,000,000 5 107,494 41,528 (1,524) 147,503
Comprehensive income-
Net income -- -- -- 25,736 -- 25,736
Cumulative translation adjustment -- -- -- -- (6,380) (6,380)
---------
Total comprehensive income 19,356
--------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1999 1,000,000 $ 5 $ 107,494 $ 67,264 $ (7,904) $ 166,859
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 6
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,142 $ 20,666 $ 25,736
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization 16,322 16,640 19,489
Deferred income tax provision 1,223 1,053 (830)
Gain on the sale of capital assets (10) (69) (767)
Changes in assets and liabilities, net
of effects from acquisitions--
Accounts receivable (4,965) (9,753) (3,129)
Inventories 5,479 (2,572) (1,022)
Prepaid expenses (225) (829) (1,106)
Other assets 2,337 2,790 (2,587)
Accounts payable 1,937 8,714 3,042
Accrued expenses 6,440 1,866 (2,507)
-------- -------- --------
Net cash provided by operating activities 38,680 38,506 36,319
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of subsidiaries, net of cash acquired of $132, $166
and $603 (19,663) (610) (22,020)
Proceeds from sale of capital assets 80 687 1,091
Capital expenditures (8,380) (12,763) (17,093)
Other, net (1,858) (877) (3,337)
-------- -------- --------
Net cash used in investing activities (29,821) (13,563) (41,359)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 92,505 2,532 59,799
Repayment of long-term debt (16,791) (30,899) (43,442)
Net borrowing (repayment) from Berwind (71,005) -- --
Dividends paid -- (3,500) --
-------- -------- --------
Net cash provided by (used in) financing activities 4,709 (31,867) 16,357
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (952) 958 (1,717)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 12,616 (5,966) 9,600
CASH AND CASH EQUIVALENTS,
Beginning of period 5,333 17,949 11,983
-------- -------- --------
CASH AND CASH EQUIVALENTS,
End of period $ 17,949 $ 11,983 $ 21,583
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 7
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations
SLC Technologies, Inc. and subsidiaries (the "Company") is a global integrated
communications technology company focused on security, life safety, loss
prevention, facility control and related services. The Company designs,
develops, manufactures and distributes system components, software and services,
including the following:
- Intrusion and fire protection sensors, detectors, control panels and user
interfaces;
- Electronic access and facility integration control systems;
- Key management and remote access systems and services;
- Fiber optic transmission and reception equipment;
- CCTV, digital video and surveillance equipment; and
- Video multiplexing and digital storage media products and systems.
Prior to October 10, 1997, the Company was a wholly owned subsidiary of Berwind
Industries, Inc. ("BII"), which was a wholly owned subsidiary of Berwind
Corporation ("Berwind"). On October 9, 1997, BII was merged into Berwind. On
October 10, 1997, Berwind distributed the stock of the Company to Berwind Group
Partners in a non-taxable spin-off. Berwind Group Partners is the sole
shareholder of Berwind. Prior to the spin-off, the Company entered into a credit
agreement (see Note 11), the proceeds from which were used to repay a portion of
the intercompany obligation to BII. The balance of the intercompany obligation
of $58,485,000 was contributed by BII to the Company, and was recorded as a
contribution to paid-in capital.
Proposed Merger
On September 28, 1999, the Company and ITI Technologies, Inc. ("ITI"), a public
company, entered into a Merger Agreement (the "Agreement"). Under the terms of
the Agreement, Berwind Group Partners will contribute the stock of the Company
to ITI in exchange for 15.2 million shares of ITI. In addition, pursuant to the
Agreement, the shareholders of ITI will have the option to elect to receive
$36.50 in cash at closing for each share of ITI common stock owned, subject to
the limitation that no more than 50% of the total number of shares of ITI common
stock outstanding immediately prior to the closing will be exchanged for cash.
If ITI stockholders elect to exchange more than 50% of the outstanding shares of
ITI common stock for cash, then the shares to be exchanged will be reduced on a
pro rata basis, so that 50% of the outstanding shares of ITI common stock
immediately prior to the closing are exchanged for cash. If the maximum number
of shares are redeemed, the total cash cost, including transaction expenses,
estimated to be $182,000,000 would be funded by a new credit facility (see Note
11). Subsequent to the transaction,
<PAGE> 8
-2-
Berwind Group Partners will be the majority shareholder, with an ownership of
approximately 78%, assuming the maximum number of shares are exchanged for cash.
Berwind Group Partners' ultimate ownership interest will be dependent upon the
number of ITI shares redeemed.
In accordance with generally accepted accounting principles, the merger
transaction will be accounted for under the purchase method of accounting as a
reverse merger since Berwind Group Partners will obtain a controlling interest
in ITI. As a result, ITI will be treated as being acquired by the Company for
accounting purposes. The estimated purchase price of the acquisition will be
based on: (1) the fair market value of the ITI stock at closing for the shares
retained, (2) the cash cost of the redemption of the ITI shareholders, and (3)
the direct expenses of the transaction. Under the purchase method of accounting,
the purchase price will be allocated to ITI's assets acquired and liabilities
assumed based upon their estimated fair values. The results of ITI's operations
will be included in the Company's financial statements commencing upon the
closing of the transaction.
The merger is subject to approval by ITI's shareholders, approval by regulatory
authorities, and customary closing conditions. The transaction is expected to
close in the second quarter of 2000.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of SLC
Technologies, Inc. and its subsidiaries. All significant intercompany accounts
and transactions are eliminated.
Fiscal Year-End
The Company operates on a fiscal year ending on December 31. Quarterly periods
end on the closest Saturday following the calendar quarter-end. The first,
second, and third quarters of 1999 ended on April 3, July 3, and October 2,
1999, respectively. All interim quarters include 13 weeks.
Revenue Recognition
Revenue from sales of products and system components is recognized when product
is shipped. In accordance with AICPA Statement of Position 97-2, revenue from
the one-time fee for licensed software is recognized when the program is shipped
with a deferral for post-contract customer support ("PCS"). The deferred revenue
for PCS is earned over the support period. Service revenue is recognized over
the related contractual period or as the services are provided by the Company.
Revenue is reduced to provide a reserve for estimated customer returns and
allowances.
<PAGE> 9
-3-
Foreign Currency Translation
Foreign subsidiaries translate their assets and liabilities into U.S. dollars at
current exchange rates in effect at the end of the fiscal period. The gains or
losses that result from this process are shown as cumulative translation
adjustments in the stockholder's equity section of the balance sheet. The
revenue and expense accounts of foreign subsidiaries are translated into U.S.
dollars at the average exchange rates that prevailed during the period.
Some transactions of the Company and its subsidiaries are made in currencies
different from their own. In 1997, 1998 and 1999, losses from these foreign
currency transactions are $162,000, $386,000 and $866,000, respectively, and are
generally included in income as they occur.
Cash Equivalents
For purposes of reporting cash flows, the Company considers all highly liquid
debt instruments purchased with a maturity of three months or less to be cash
equivalents.
Inventories
Inventories are valued at the lower of average cost or market on a first-in,
first-out (FIFO) basis.
Property, Plant and Equipment
The Company provides depreciation over the estimated useful lives of assets
using the straight-line method as follows:
<TABLE>
<S> <C>
Buildings 30 - 40 years
Machinery and equipment 7 - 12 years
Furniture and fixtures 5 - 10 years
Capitalized software costs 5 years
</TABLE>
The Company is implementing an enterprise-wide information system. External
direct costs of materials and services on development of the software are
capitalized. Training costs and costs to reengineer the business are expensed as
incurred.
Depreciation for tax purposes is provided using various accelerated methods.
Repair and maintenance costs are expensed as incurred. Fully depreciated assets
are relieved from the accounts when no longer in service.
<PAGE> 10
-4-
Intangibles
When a company is acquired, the difference between the fair value of its net
assets and the purchase price is charged to goodwill. Goodwill is amortized over
20 years. Patents and other deferred charges are amortized over their useful
lives, which range from three to seventeen years.
Impairment of Long-Lived Assets
Long-lived assets and certain intangibles held and used by an entity are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If the sum of the
undiscounted expected future cash flows, excluding interest charges, from the
use of the asset and its eventual disposition is less than the carrying amount
of the asset, an impairment loss is recognized. The impairment loss is measured
based on the fair value of the asset. Long-lived assets and certain identifiable
intangibles to be disposed of are reported at the lower of carrying amount or
fair value less cost to sell.
Research and Development
Research and development costs are expensed as incurred.
Financial Instruments and Hedging Activities
The Company's financial instruments recorded on the balance sheet include cash
and cash equivalents, accounts receivable, accounts payable and debt. Because of
their short maturities, the carrying amount of cash and cash equivalents,
accounts receivable and accounts payable approximates fair value. The carrying
amount of long-term debt approximates fair value because the interest rates on
these obligations are reset frequently at market rates.
The Company uses derivative financial instruments primarily to hedge interest
rate and foreign currency risks. The fair value of these derivative instruments
is not recognized in the financial statements. The counterparties to these
contracts are major financial institutions. The Company is exposed to credit
loss in the event of nonperformance by the counterparty; however, management
believes the risk of incurring losses related to credit risk is remote.
Financial instruments are not used for trading purposes.
Gains and losses on hedges of existing assets or liabilities are included in the
carrying amounts of those assets or liabilities and are ultimately recognized in
income as part of those carrying amounts. Gains and losses related to qualifying
hedges of firm commitments or anticipated transactions are deferred and are
recognized in income or as adjustments of carrying amounts of the related item
when the hedged transaction occurs.
<PAGE> 11
-5-
Income Taxes
The Company records income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." SFAS No.
109 requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the financial
statement carrying amounts and the tax bases of assets and liabilities.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This
pronouncement requires that derivatives, including interest rate swaps and
forward exchange contracts, be recorded on the balance sheet as an asset or
liability based on its fair value. Changes in the fair value of the instrument
are recognized currently in earnings unless specific hedge criteria is met. SFAS
No. 133 will be adopted by the Company in 2001. The Company has not yet
quantified the impact of adoption of this statement on its financial position or
results of the operation.
Estimates and Assumptions
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. ACQUISITIONS:
The Company has acquired numerous businesses during the periods presented. In
1997, the Company acquired Kalatel, Inc., a manufacturer of closed circuit
television products, CCTV Corp. and GBC Europe Ltd., companies which manufacture
closed circuit television products, and TVX, a developer and manufacturer of
digital image captive products. In 1998, the Company acquired Sectro, a
distributor of electronic security, fire detection and closed circuit television
systems. In 1999, the Company acquired Impac Technologies, Inc., a designer and
manufacturer of computerized video processing equipment, Cosmotron AB, a
designer and manufacturer of vault sensor equipment, and Tecom Systems Pty Ltd,
a designer and manufacturer of integrated intrusion and access control products.
<PAGE> 12
-6-
All the related acquisitions have been accounted for under the purchase method
of accounting. The total costs of the acquired businesses were $19,795,000,
$776,000, and $22,623,000 in 1997, 1998, and 1999, respectively, with the
purchase prices allocated as follows:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------------
1997 1998 1999
------------------ ------------------ ------------------
<S> <C> <C> <C>
Current assets $ 6,719,000 $ 610,000 $ 8,395,000
Property, plant and equipment 797,000 31,000 747,000
Other assets 16,000 2,000 12,592,000
Goodwill 15,692,000 454,000 7,015,000
Liabilities assumed (3,429,000) (321,000) (6,126,000)
------------------ ------------------ ------------------
Cash paid $ 19,795,000 $ 776,000 $ 22,623,000
================== ================== ==================
</TABLE>
The operating results of all of these businesses were included in the Company's
consolidated results of operations from the date of acquisition.
The following unaudited pro forma information presents the results of the
Company as if the acquisitions had taken place on January 1 of the year prior to
the acquisition (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------
1997 1998 1999
--------------- ------------- -------------
<S> <C> <C> <C>
Sales $ 335,583 $ 395,883 $ 431,910
Net income 10,775 20,709 26,563
Earnings per share:
Basic 10.77 20.70 26.56
Diluted 10.77 20.67 26.40
</TABLE>
These pro forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisition occurred on the date
indicated, or which may result in the future.
3. INVENTORY:
Inventory is comprised of:
<TABLE>
<CAPTION>
December 31
------------------------------------
1998 1999
--------------- -----------------
<S> <C> <C>
Raw materials $ 20,578,000 $ 21,572,000
Work-in-process 3,072,000 5,476,000
Finished goods 15,473,000 17,061,000
--------------- -----------------
39,123,000 44,109,000
Less- Inventory reserve 3,188,000 3,623,000
--------------- -----------------
$ 35,935,000 $ 40,486,000
=============== =================
</TABLE>
<PAGE> 13
-7-
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is comprised of:
<TABLE>
<CAPTION>
December 31
----------------------------------
1998 1999
--------------- ---------------
<S> <C> <C>
Land $ 435,000 $ 288,000
Buildings 2,239,000 950,000
Machinery and equipment 37,673,000 47,758,000
Furniture, fixtures and other 22,163,000 26,938,000
--------------- ---------------
62,510,000 75,934,000
Less- Accumulated depreciation 35,597,000 42,978,000
--------------- ---------------
$ 26,913,000 $ 32,956,000
=============== ===============
</TABLE>
5. EARNINGS PER SHARE:
Basic EPS is computed by dividing net income available to common shareholders by
the actual weighted average number of common shares outstanding for the period.
Diluted EPS is computed also assuming the conversion or exercise of all dilutive
securities, which only includes stock options for the Company.
The following table summarizes the differences between basic weighted average
shares outstanding and diluted weighted average shares outstanding used to
compute diluted EPS (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------
1997 1998 1999
------------ ------------- ------------
<S> <C> <C> <C>
Net income $ 10,142 $ 20,666 $ 25,736
============ ============= ============
Earnings per common share:
Basic $ 10.14 $ 20.67 $ 25.74
Diluted 10.14 20.62 25.58
Weighted average shares outstanding:
Basic 1,000 1,000 1,000
Dilutive impact of options -- 2 6
------------ ------------- ------------
Diluted 1,000 1,002 1,006
============ ============= ============
</TABLE>
<PAGE> 14
-8-
6. INCOME TAXES:
Through October 10, 1997, the date of the spin-off, the Company participated in
the filing of a consolidated federal tax return with Berwind and all of
Berwind's U.S. subsidiaries. The Company's share of the consolidated federal
income tax was computed pursuant to the terms of the tax sharing agreement
between the Company and Berwind entered into effective March 31, 1991, as
amended. The agreement provided for the Company to pay Berwind an amount equal
to its share of the consolidated federal income tax determined by multiplying
its separate taxable income for the year by the highest federal corporate income
tax rate applicable to such year. In the event the Company has a taxable loss,
Berwind would pay the Company in a similar fashion. Berwind also agreed to pay
the Company for any tax credits generated.
Effective October 10, 1997, the Company began to file separate company tax
returns. However, the Company will continue to be subject to the tax sharing
agreement with Berwind for any additional tax obligations or refunds for any
periods prior to October 10, 1997.
The following table shows the components of income before income taxes and the
provision for income taxes:
Income Before Income Taxes
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------
1997 1998 1999
--------------- ---------------- ---------------
<S> <C> <C> <C>
Domestic $ 9,944,000 $ 25,630,000 $ 29,354,000
Foreign 10,507,000 11,962,000 15,806,000
--------------- ---------------- ---------------
$ 20,451,000 $ 37,592,000 $ 45,160,000
=============== ================ ===============
</TABLE>
<PAGE> 15
-9-
Provision for Income Taxes
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Federal:
Current $ 3,774,000 $ 9,318,000 $ 12,529,000
Deferred 1,223,000 1,053,000 (765,000)
------------ ------------ ------------
4,997,000 10,371,000 11,764,000
------------ ------------ ------------
State:
Current 1,314,000 2,011,000 2,155,000
Deferred -- -- --
------------ ------------ ------------
1,314,000 2,011,000 2,155,000
------------ ------------ ------------
Foreign:
Current 3,972,000 4,518,000 5,570,000
Deferred 26,000 26,000 (65,000)
------------ ------------ ------------
3,998,000 4,544,000 5,505,000
------------ ------------ ------------
$ 10,309,000 $ 16,926,000 $ 19,424,000
============ ============ ============
</TABLE>
Major differences between the Federal statutory rate and the effective tax rate
are:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
United States federal statutory rate 35.0% 35.0% 35.0%
State taxes, net of federal tax benefit 4.2 3.5 3.1
Impact of foreign income tax rates (1.3) 0.2 0.1
Non-tax deductible goodwill amortization 10.0 5.9 5.1
Other 2.5 0.4 (0.2)
------ ------ ------
Effective tax rate 50.4% 45.0% 43.1%
====== ====== ======
</TABLE>
<PAGE> 16
-10-
The significant components of deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
December 31
-----------------------------
1998 1999
------------- -------------
<S> <C> <C>
Gross deferred tax assets:
Warranty reserves $ 1,077,000 $ 1,838,000
Inventory and receivables reserve 840,000 908,000
Net operating loss carryforwards 1,882,000 1,275,000
Foreign tax credits 779,000 1,176,000
Other accruals and miscellaneous 1,961,000 2,912,000
Valuation allowance (1,654,000) (2,051,000)
------------- -------------
Deferred tax assets 4,885,000 6,058,000
------------- -------------
Gross deferred tax liabilities:
Plant and equipment 380,000 191,000
Other 595,000 1,112,000
------------- -------------
Deferred tax liabilities 975,000 1,303,000
------------- -------------
Net deferred income tax asset $ 3,910,000 $ 4,755,000
============= =============
</TABLE>
The deferred tax asset at December 31, 1998 and 1999 includes $1,882,000 and
$1,275,000, respectively, of federal net operating loss credit carryforwards.
These carryforwards expire in various years through 2009. A valuation allowance
has been provided for those net operating loss carryforwards which are now
estimated to expire before they are utilized. This valuation allowance relates
to tax benefits existing at the time of a business combination. If subsequently
realized, the related tax benefit will be credited to goodwill. In addition, the
Company has available unutilized foreign tax credits of approximately $1,176,000
as of December 31, 1999, which may be available to offset future U.S. taxes. A
valuation allowance has been provided for those foreign tax credits which are
now estimated to expire before they are utilized. These credits begin to expire
in 2001.
The Company does not pay or record U.S. income taxes on the undistributed
earnings of its foreign subsidiaries as all of these earnings are considered
permanently reinvested. The net accumulated earnings of the Company's foreign
subsidiaries at December 31, 1998, and 1999 amounted to $41,296,000 and
$46,237,000, respectively. As of December 31, 1998 and 1999, an estimated
$700,000 and $1,821,000, respectively, of income and foreign withholding taxes
would be due, after consideration of foreign tax credits, if these earnings were
remitted as dividends.
7. STOCK OPTION PLAN:
Under the 1997 Stock Incentive Plan ("1997 Plan"), the Company is authorized to
grant options for up to 50,000 common shares, of which, 25,000 were granted on
January 1, 1998. Options outstanding under the Company's stock option plan have
been granted with an exercise price equal to the fair market value at the date
of issuance. These options vest over a two year period, and expire 10 years
after the grant date. As of January 1, 2000, the
<PAGE> 17
-11-
25,000 granted options will be fully vested. None of the options issued have
been exercised or forfeited.
In March of 1998, the Company issued 17,500 options to executives which begin to
vest in the event that the Company becomes a public company. The exercise price
on these options will be equal to 50% of the fair market value of the Company's
stock on the date the Company becomes public which is considered the grant date
for compensation purposes. The Company has committed to issue 7,500 options in
2000 to executives at a discount of approximately $1,000,000 from fair market
value. Compensation expense for each of the above grants will be equal to the
difference between the fair market value of the stock and the exercise price
will be recorded over the three year vesting period subsequent to the grant
dates.
The Company accounts for stock options under the intrinsic value model
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Had compensation expense for the Company's stock-options
been determined based upon fair value at the grant date for awards under the
plan in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below (dollars in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Net income:
As reported $ 10,142 $ 20,666 $ 25,736
Pro forma 10,142 18,237 23,147
Earnings per share:
As reported-
Basic 10.14 20.67 25.74
Diluted 10.14 20.62 25.58
Pro forma-
Basic 10.14 18.28 23.15
Diluted 10.14 18.24 23.00
</TABLE>
For disclosure purposes, the fair value of the options was estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions:
<TABLE>
<S> <C>
Dividend yield 0.00%
Expected volatility 34.25%
Risk free interest rates 6.196%
Expected lives (years) 8.25 years
</TABLE>
<PAGE> 18
-12-
8. PENSION AND BENEFIT PLANS:
The Company has various retirement plans which cover substantially all full-time
employees. The plan benefits are based primarily on years of service and
employee compensation near retirement. The funding policy is to contribute an
amount within the range that can be deducted for federal income tax purposes.
Plan assets of $1,276,000 consist primarily of listed stocks, fixed income
securities, cash and cash equivalents. The net periodic benefit cost is
immaterial to the financial statements. At December 31, 1999, one of the
Company's pension plans had an unfunded pension liability in the amount of
$262,000.
During 1997, 1998 and 1999, the Company recorded expense of $719,000, $679,000,
and $1,092,000, respectively, associated with 401(k) and defined contribution
plans.
9. SEGMENT REPORTING:
The Company operates its business on a geographic basis with two reportable
segments which include the Americas (North, Central and South America) and
Europe and Africa. Included in the All Other category, are: (1) the sales of the
Asia Pacific segment which are not significant, (2) intersegment eliminations,
and (3) costs related to the corporate function which are not allocated to the
segments.
The accounting policies of the operating segments are the same as those
described in Note 1. The Company evaluates the performance of its operating
segments based on operating profit, excluding intercompany royalties and other
special charges. Sales are determined based on the geographic segment within
which the customer is located. Long-lived assets include property, plant and
equipment, patents and trademarks, and goodwill.
<PAGE> 19
-13-
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------
1997 1998 1999
--------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C>
SALES:
Americas-
Customer $ 198,789 $ 229,150 $ 270,179
Intersegment 24,844 26,177 27,927
Europe and Africa-
Customer 116,506 136,217 142,305
Intersegment 1,496 1,299 899
All other (15,609) (17,228) (13,532)
--------- --------- ---------
Total sales $ 326,026 $ 375,615 $ 427,778
========= ========= =========
OPERATING INCOME (a):
Americas $ 34,812 $ 37,391 $ 43,761
Europe 16,955 21,773 20,332
All other (2,756) (3,918) (1,548)
--------- --------- ---------
Total operating income $ 49,011 $ 55,246 $ 62,545
========= ========= =========
DEPRECIATION:
Americas $ 4,884 $ 5,457 $ 7,010
Europe 2,167 2,987 3,045
All other 48 105 252
--------- --------- ---------
Total depreciation $ 7,099 $ 8,549 $ 10,307
========= ========= =========
CAPITAL EXPENDITURES:
Americas $ 5,011 $ 9,016 $ 13,452
Europe 3,231 3,600 3,443
All other 138 147 198
--------- --------- ---------
Total capital expenditures $ 8,380 $ 12,763 $ 17,093
========= ========= =========
TOTAL ASSETS:
Americas $ 170,388 $ 170,077 $ 188,625
Europe 61,619 72,622 81,860
All other 38,509 30,883 47,341
--------- --------- ---------
Total assets $ 270,516 $ 273,582 $ 317,826
========= ========= =========
</TABLE>
<PAGE> 20
-14-
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------
1997 1998 1999
------------ ------------ ------------
(dollars in thousands)
<S> <C> <C> <C>
SALES BY MAJOR COUNTRY:
United States $ 191,779 $ 220,713 $ 252,347
The Netherlands 17,466 24,663 20,877
France 17,201 19,375 19,900
Italy 10,493 13,035 14,261
Germany 10,911 11,870 11,227
All other foreign 78,176 85,959 109,166
------------ ------------ ------------
Total sales $ 326,026 $ 375,615 $ 427,778
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31
---------------------------------------
1997 1998 1999
----------- ----------- ------------
(dollars in thousands)
<S> <C> <C> <C>
REVENUES BY MARKET
CHANNEL:
Residential $ 70,791 $ 74,642 $ 73,202
Commercial 189,638 211,649 240,479
Enterprise Solutions 65,597 89,324 114,097
----------- ----------- ------------
Total sales $ 326,026 $ 375,615 $ 427,778
=========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
December 31
---------------------------------------
1997 1998 1999
----------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C>
LONG-LIVED ASSETS BY
MAJOR COUNTRY:
United States $ 122,700 $ 120,624 $ 131,112
The Netherlands 16,024 17,849 22,630
All other foreign 5,323 4,849 8,279
----------- ----------- -----------
Total long-lived assets $ 144,047 $ 143,322 $ 162,021
=========== =========== ===========
</TABLE>
<PAGE> 21
-15-
a) Segment operating income does not include amortization expense, management
fees, intercompany commissions on foreign sales, and corporate charges. A
reconciliation of segment operating income to operating income reported in
the consolidated statements of income is as follows (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Reconciliation:
Segment operating income $ 49,011 $ 55,246 $ 62,545
Amortization expense (8,704) (8,091) (9,182)
Management fees and intercompany commission
on foreign sales (6,174) (6,574) (5,275)
Other expenses and corporate charges (3,552) 2,597 (26)
-------- -------- --------
Operating income reported $ 30,581 $ 43,178 $ 48,062
======== ======== ========
</TABLE>
10. RELATED-PARTY TRANSACTIONS:
Berwind provides certain services for the benefit of the Company, principally in
the areas of legal, business development, tax compliance and consultation,
accounting and treasury functions and in obtaining various insurance coverages.
In consideration for these services, management fees of $5,265,000, $2,698,000,
and $2,835,000 for the years ended December 31, 1997, 1998, and 1999,
respectively, have been charged to the Company and included in Selling, General
and Administrative expenses. In addition, $897,000, $960,000 and $464,000 for
the years ended December 31, 1997, 1998 and 1999, respectively, have been paid
to Berwind for premiums on casualty, liability and workmen's compensation
insurance coverages.
A subsidiary of Berwind Group Partners charged the Company a commission of
$909,000, $3,876,000, and $2,440,000, during the years ended December 31, 1997,
1998, and 1999, respectively, for services associated with certain export sales.
This charge is included in selling, general and administrative expenses.
At December 31, 1996, the Company had a payable of $129,490,000 to BII. From
January 1, 1997 to the date of the spin-off transaction (Note 1), this payable
balance had increased to $139,485,000. With the proceeds from the third party
financing, the Company repaid $81,000,000 of the payable with the balance being
contributed to capital by BII (Note 1). Interest expense charged at a rate of
6.5% on the payable to BII was $7,974,000 during 1997.
<PAGE> 22
-16-
11. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31
-----------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revolving credit facility,
due 2002 $77,403,000 $53,127,000 $69,285,000
All other 3,688,000 237,000 2,014,000
----------- ----------- -----------
81,091,000 53,364,000 71,299,000
Less- Current portion 1,319,000 237,000 --
----------- ----------- -----------
Total long-term debt $79,772,000 $53,127,000 $71,299,000
=========== =========== ===========
</TABLE>
In October 1997, the Company entered into a Credit Agreement with several banks
that provided for a revolving credit facility of $125,000,000. The proceeds from
this borrowing were used to refinance a portion of the Company's intercompany
debt with Berwind (see Note 10). The revolving credit facility expires in 2002.
The weighted average interest rate on long-term debt, including the effect of
interest rate swap contracts, was 6.34%, 5.68%, and 6.35% at December 31, 1997,
1998, and 1999, respectively. The effective interest rate during 1997, 1998 and
1999 was 6.35%, 6.58% and 6.43%, respectively.
The Company may borrow under the revolving credit facility in U.S. dollars,
Belgian francs, German marks, Dutch guilders, French francs, Italian Lire or
Pounds Sterling. At December 31, 1999, $2,285,000 of borrowings were denominated
in Dutch guilders. The remaining balance outstanding is denominated in U.S.
dollars. The revolving credit facility shall bear interest, at the discretion of
the Company, at either: (a) the greater of the Prime Rate, or the Federal Funds
Effective Rate plus 0.5%; or (b) Libor plus the Applicable Margin. The
Applicable Margin will vary from 0.30% to 0.65% based on the Company's leverage
ratio.
Under the provisions of the Credit Agreement, the Company is required, among
other things, to maintain specified interest coverage and leverage ratios and a
minimum of approximately $123,000,000 in net worth, adjusted for a percentage of
future net income. The Credit Agreement contains certain restrictions on
borrowings, disposal of assets, transactions with affiliates, mergers and
acquisitions, and dividends.
In addition to the borrowings under the Credit Agreement, the Company has other
lines of credit aggregating $4,054,000. No portion of these lines were in use at
December 31, 1999.
Interest expense related to third party debt was $1,765,000, $4,713,000 and
$4,580,000 during 1997, 1998 and 1999, respectively.
Pursuant to a Credit Agreement dated November 17, 1999, the Company entered into
a $325,000,000 senior, secured facility which provides (i) a revolving facility
("The New Revolver") in the amount of $225,000,000 and (ii) a term facility
("The Term Facility") in the
<PAGE> 23
-17-
amount of $100,000,000. This Credit Agreement will not become effective until
the consummation of the merger transaction discussed in Note 1. The new credit
facility will be reduced in the event the shareholders of ITI do not elect to
receive cash for the entire 50% of the outstanding capital stock of ITI. In such
an event, the reduced amount of the cash election consideration from the amount
otherwise available if such an election had been made in full shall be applied
to reduce, first, the Term Facility, and second, the New Revolver, in no event;
however, shall the aggregate reduction in the combined facilities exceed
$125,000,000.
The New Revolver and the Term Facility shall bear interest, at the discretion of
the Company, at either: (a) the greater of the Prime Rate, or the Federal Funds
Effective Rate plus 0.5%, or (b) Libor plus the Applicable Margin.
New Revolver proceeds will be used to finance the cash election consideration
(See Note 1), to refinance the Company's existing credit facility, to provide
for working capital and general corporate purposes and to finance in part the
fees and expenses arising from the transactions. The New Revolver is due on the
fifth anniversary of the funding date. Under the provisions of the New Credit
Agreement, the Company will be required to maintain certain financial covenants.
The Term Facility will be made available in a single borrowing. The Term
Facility proceeds will be used to finance the cash election consideration (See
Note 1), and to refinance the Company's existing credit facility. The Term
Facility will begin to be amortized in equal quarterly installments (with the
remaining outstanding principal amount of the fifth anniversary of the financing
date) in the following aggregate percentages of the initial principal amount of
the Term Facility for each year:
<TABLE>
<CAPTION>
Annual
Percentage of Initial
Year Principal Amount
---- ---------------------
<S> <C>
1 10%
2 15
3 20
4 25
5 30
</TABLE>
12. DERIVATIVE FINANCIAL INSTRUMENTS:
The notional amounts of derivatives do not represent amounts exchanged by the
parties and, thus, are not a measure of the exposure of the Company through its
use of derivatives. The amounts exchanged are calculated on the basis of the
notional amounts and the other terms of the derivatives, which relate to
interest rates, exchange rates, securities prices, or financial or other
indices.
<PAGE> 24
-18-
The Company entered into interest rate swap contracts to manage interest rate
risk. At December 31, 1999, the notional amount of interest rate swaps was
$30,000,000. The weighted-average interest rates on swaps in which the Company
receives floating rate amounts is 6.03% in exchange for fixed-rate interest
payments at 5.86%. Average variable rates are based on rates implied in the
yield curve at the reporting date. These rates may change, affecting future cash
flows. The Company's swap contracts, effective as of December 31, 1999, mature
in 2005. The net unrealized gain, which equals their fair value, on the interest
rate swaps at December 31, 1999 was $1,406,000.
The Company periodically enters into various types of foreign exchange contracts
in managing its foreign exchange risk. Deferred realized and unrealized gains
and losses from hedging firm purchase or sale commitments as of December 31,
1999 and 1998 are not material. The Company has no derivative contracts which
are designated as hedges of anticipated, but not yet committed sales
transactions.
13. SUPPLEMENTARY DATA:
Components of accrued expenses:
<TABLE>
<CAPTION>
December 31
-----------------------------
1998 1999
----------- -----------
<S> <C> <C>
Accrued compensation $ 8,182,000 $ 9,189,000
Accrued taxes 6,488,000 8,784,000
Accrued incentives 5,251,000 6,690,000
Deferred revenue 4,089,000 4,860,000
Accrued warranty 2,076,000 1,921,000
Other accruals 13,228,000 10,723,000
----------- -----------
Total accrued expenses $39,314,000 $42,167,000
=========== ===========
</TABLE>
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
CASH PAID DURING THE PERIOD FOR:
Interest $ 9,891,000 $ 4,791,000 $ 5,307,000
=========== =========== ===========
Income taxes, net, including
$534,000 paid to Berwind in
1997 $ 5,565,000 $16,100,000 $17,937,000
=========== =========== ===========
</TABLE>
<PAGE> 25
-19-
14. COMMITMENTS AND CONTINGENCIES:
The Company has long-term operating leases with remaining terms of one year or
longer for certain property, plant and equipment. Total rental expense for these
leases was $4,270,000, $4,878,000, and $5,399,000 in 1997, 1998 and 1999,
respectively, and the aggregate future rentals are approximately $67,349,000.
Rentals are due as follows beginning on January 1, 2000:
<TABLE>
<S> <C>
2000 $ 6,936,000
2001 5,988,000
2002 5,211,000
2003 4,902,000
2004 5,001,000
2005 and thereafter 39,311,000
</TABLE>
The Company has sold product to certain customers under financing arrangements
with a third party bank. The bank subsequently leased the product to the
Company's customers. Pursuant to this transaction, the Company has agreed to
guarantee 15% of the unamortized obligation of individual customers to the bank.
At December 31, 1999, the remaining guarantee under these arrangements was
$7,296,000. This guarantee is secured by a $4,500,000 letter of credit under the
Company's revolving credit facility. The Company will record an accrual
associated with this guarantee if it is considered that a loss is probable. No
accrual for any loss has been recorded in the accompanying financial statements.
The Company has agreed to make additional future payments to former owners of
businesses acquired. These payments are generally contingent on operating
performance of the acquired entities. Further payments under the terms of the
various purchase agreements may be required. These payments are not expected to
be material to the consolidated financial statements.
Other contingencies may exist with respect to taxing authorities' examinations,
litigation, claims, etc., against the Company and certain subsidiaries. In the
opinion of management, any settlement of these items will not have a material
effect on the Company's consolidated financial position or results of
operations.
