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SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. 4)
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement. [ ] Confidential, for use of the
Commission only (as permitted by
Rule 14a-6(e)(2).
[x] Definitive proxy statement.
[ ] Definitive additional materials.
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12.
ITI Technologies, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
Not Applicable
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of filing fee (check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
SLC Technologies, Inc. Common Stock, $.005 par value
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
1,000,000 shares of SLC Technologies, Inc. Common Stock
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
The Registrant will receive shares of common stock of SLC Technologies,
Inc. valued at $161,400,000 based on the book value of such shares as
of October 2, 1999, the date of the most recent balance sheet of SLC
Technologies, Inc.
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$161,400,000 (see above for an explanation of the calculation)
- --------------------------------------------------------------------------------
(5) Total fee paid:
$32,280
- --------------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[X] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
$32,280
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
Schedule 14A
- --------------------------------------------------------------------------------
(3) Filing Party:
ITI Technologies, Inc.
- --------------------------------------------------------------------------------
(4) Date Filed:
November 26, 1999
- --------------------------------------------------------------------------------
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[ITI LOGO]
March 27, 2000
Dear ITI Stockholder:
We invite you to attend a special meeting of the stockholders of ITI
Technologies, Inc. to be held at 9:00 a.m., Central time, on May 2, 2000, at The
Saint Paul Hotel, 350 Market Street, Saint Paul, Minnesota 55102.
At the special meeting, we will ask you to approve the merger of SLC
Technologies, Inc. into ITI. Upon completion of the merger, ITI will issue
approximately 15.2 million shares of its common stock to Berwind Group Partners,
the sole stockholder of SLC. As a result, Berwind Group Partners will own a
majority of ITI's common stock and will control all decisions regarding ITI that
require stockholder approval.
As a holder of ITI common stock, you may elect to have any shares you hold
before the special meeting exchanged for cash, provided that stockholders in the
aggregate may exchange no more than 50% of ITI's common stock for cash. If you
elect to exchange any shares you hold for cash, and if ITI stockholders elect to
exchange more than this amount, the number of shares for which you receive cash
will be reduced proportionately with the other stockholders who exercised the
cash election. The cash exchange price will be $36.50 per share. IF YOU DO NOT
EXERCISE THIS ELECTION TO EXCHANGE YOUR SHARES FOR CASH, YOU WILL RETAIN ALL OF
YOUR SHARES OF ITI COMMON STOCK AND NOT RECEIVE ANY CASH FOR YOUR SHARES.
As described in the proxy statement, if you elect to receive cash in
exchange for your shares of ITI common stock, you will recognize a gain or loss
for tax purposes on the shares exchanged. You will not incur federal income tax
as a result of the merger if you do not exchange your shares for cash.
We are excited about this merger, which will bring together ITI's
leadership in the North American market for wireless residential security
systems with SLC's significant global position in the commercial market. The
merger will provide ITI with expanded access to international markets and the
opportunity to bring our wireless technology into access control, video
surveillance systems and other high-growth areas of the industry. At the same
time, the merger will allow SLC to strengthen its residential controls and
wireless systems offerings. We believe the resultant company will be a
technology leader that will provide quality integrated solutions to the global
marketplace.
ITI's board of directors has unanimously approved and adopted the proposed
terms of the merger and the merger agreement and recommends that you vote FOR
approval and adoption of the merger and the merger agreement.
At the special meeting, we will also ask you to consider and vote upon a
proposal to approve a new stock incentive plan for ITI. This plan provides for
the grant of the stock options and other stock-based awards to directors,
officers, employees, consultants and independent contractors providing services
to ITI and its subsidiaries. Our board of directors recommends that you vote FOR
approval of this stock incentive plan.
This proxy statement is first being mailed to stockholders on or about
March 29, 2000. Please give it your careful attention. It is important that your
shares be represented and voted at the special meeting, regardless of the size
of your holdings. Accordingly, whether or not you plan to attend the special
meeting, please promptly mark, sign and date the enclosed proxy and return it in
the enclosed postage-paid envelope to assure that your shares will be
represented at the special meeting.
Your prompt cooperation is greatly appreciated during this important and
exciting time for ITI.
Sincerely,
Thomas L. Auth
Chairman, President and
Chief Executive Officer
<PAGE> 3
ITI TECHNOLOGIES, INC.
2266 SECOND STREET NORTH
NORTH SAINT PAUL, MINNESOTA 55109
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 2, 2000
To the Stockholders of ITI Technologies, Inc.:
A special meeting of the stockholders of ITI Technologies, Inc., a Delaware
corporation, will be held on Tuesday, May 2, 2000 at 9:00 a.m., Central time, at
The Saint Paul Hotel, 350 Market Street, Saint Paul, Minnesota 55102, for the
following purposes:
- To consider and vote upon a proposal to approve and adopt an Agreement
and Plan of Merger and Reorganization, dated as of September 28, 1999, as
amended March 9, 2000, between ITI and SLC Technologies, Inc., a Delaware
corporation, and the merger of SLC into ITI. By approving and adopting
the merger and the merger agreement, you will be approving an amendment
to ITI's Amended and Restated Certificate of Incorporation to change the
name of ITI to Interlogix, Inc., to increase the number of authorized
shares of ITI common stock to 60,000,000 and to opt out of Section 203 of
the Delaware General Corporation Law.
- To consider and vote upon a proposal to approve a new stock incentive
plan for 1,500,000 shares of common stock.
- To consider and transact any other business that may properly come before
the special meeting or any adjournment or postponement of the special
meeting.
The close of business on March 27, 2000 has been selected as the record
date for determining stockholders entitled to notice of, and to vote at, the
special meeting or any postponements or adjournments of the special meeting.
Approval of the merger and the merger agreement will require the
affirmative vote of a majority of the shares of ITI's common stock outstanding
on the record date. Approval of the stock incentive plan will require the
affirmative vote of a majority of the shares of ITI common stock present and
entitled to vote at the special meeting.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" APPROVAL
AND ADOPTION OF THE MERGER AND THE MERGER AGREEMENT. THE BOARD OF DIRECTORS ALSO
UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF THE STOCK INCENTIVE
PLAN.
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE FILL IN THE
ATTACHED PROXY AND DATE, SIGN AND MAIL IT AS PROMPTLY AS POSSIBLE IN ORDER TO
SAVE ITI FURTHER SOLICITATION EXPENSE. IF YOU ATTEND THE SPECIAL MEETING, YOU
MAY THEN WITHDRAW YOUR PROXY AND VOTE IN PERSON.
March 27, 2000
By Order of the Board of Directors
CHARLES A. DURANT
Secretary
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY..................................................... 1
The Parties to the Merger Agreement....................... 1
The Special Meeting....................................... 1
The Merger................................................ 2
Market Price of ITI Common Stock.......................... 4
Summary Consolidated Financial Data of ITI................ 5
Summary Consolidated Financial Data of SLC................ 7
Unaudited Summary Pro Forma Combined Condensed Financial
Information............................................ 8
Comparative Per Share Data................................ 9
RISK FACTORS AND OTHER CONSIDERATIONS....................... 11
The Combined Company Will Be Controlled by Berwind Group
Partners............................................... 11
The Combined Company May Not Realize Expected Revenue
Increases.............................................. 11
The Combined Company May Not Realize Expected Cost
Savings................................................ 11
Integration of the Two Companies May Disrupt Business..... 12
A Single Customer of the Combined Company Accounted for
More Than 10% of Revenues.............................. 12
The Combined Company Will Have an Increased Exposure to
Risks Involved in International Operations,
Particularly Foreign Exchange Rates.................... 12
ITI May Lose Key Employees as a Result of the Merger...... 12
Officers and Directors of ITI May Have Different Interests
from Other ITI Stockholders............................ 13
Having to Pay a Termination Fee Could Have a Negative
Impact on Our Financial Condition...................... 13
Your Equity Interest in the Company Will Be Diluted....... 13
Liquidity of the Common Stock Will Decrease and Price
Volatility May Increase................................ 14
You Have No Appraisal Rights.............................. 14
There Are Risks in Connection With Electing or Not
Electing to Exchange Your Shares for Cash.............. 14
FORWARD-LOOKING STATEMENTS.................................. 15
THE SPECIAL MEETING......................................... 16
General................................................... 16
Matters to be Considered.................................. 16
Record Date; Quorum; Voting at the Special Meeting........ 16
Communications by ITI Stockholders with ITI............... 17
THE MERGER.................................................. 18
Background of the Merger.................................. 18
Reasons for the Merger.................................... 25
Recommendation of the Board of Directors; Fairness of the
Transactions........................................... 27
Opinion of Financial Advisor to ITI....................... 29
Interests of Persons in the Merger........................ 36
</TABLE>
i
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<TABLE>
<S> <C>
Accounting Treatment of the Merger........................ 40
Supplemental IRS Ruling................................... 41
Financing................................................. 41
The Voting Agreement...................................... 42
The Voting Support Agreements............................. 43
Amendment to Rights Agreement............................. 43
Material Changes in Stockholders' Right................... 44
Federal Income Tax Consequences........................... 44
No Appraisal Rights....................................... 46
THE CASH ELECTION........................................... 47
General................................................... 47
Considerations in Exercising the Cash Election............ 47
TRADING IN ITI COMMON STOCK PRIOR TO THE EFFECTIVE TIME..... 48
STOCK OPTIONS............................................... 49
THE MERGER AGREEMENT........................................ 49
Effective Time............................................ 49
The Merger................................................ 49
Merger Consideration; Conversion of Shares................ 50
Representations and Warranties............................ 50
Conduct of Business Pending the Merger.................... 51
No Solicitation of Proposals.............................. 52
ITI Stock Option Plan..................................... 53
Indemnification; Directors and Officers Insurance......... 53
Other Covenants........................................... 53
Conditions to the Merger.................................. 54
Termination............................................... 55
Fees and Expenses; Termination Fee........................ 56
Amendment................................................. 57
Waiver.................................................... 57
INDUSTRY OVERVIEW........................................... 58
BUSINESS OF ITI............................................. 59
Overview.................................................. 59
History of ITI............................................ 59
Intrusion and Fire Protection Systems..................... 60
Monitored Wireless Security Systems Marketed Under the
ITI(R) Trademark....................................... 60
System Features and Components of ITI Wireless Security
Systems................................................ 61
Hardwire and Hybrid Security Systems Marketed Under the
CADDX(TM) Trademark.................................... 63
Fire Protection Systems................................... 64
Access Control............................................ 64
Other Products............................................ 65
Sales and Marketing....................................... 66
</TABLE>
ii
<PAGE> 6
<TABLE>
<S> <C>
International Sales....................................... 66
Sales to a Significant Customer........................... 67
Product Development....................................... 67
Competition............................................... 68
Manufacturing............................................. 68
Intellectual Property..................................... 68
Government Regulation..................................... 69
Employees................................................. 69
SELECTED CONSOLIDATED FINANCIAL DATA OF ITI................. 70
BUSINESS OF SLC............................................. 72
Overview.................................................. 72
Business Strategy of SLC.................................. 72
History of SLC............................................ 73
Principal Products and Services........................... 73
SLC Markets............................................... 77
Product Development....................................... 81
Intellectual Property..................................... 81
Competition............................................... 81
Properties................................................ 82
Employees................................................. 83
Legal Proceedings......................................... 83
SELECTED CONSOLIDATED FINANCIAL DATA OF SLC................. 84
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF SLC.......................... 86
Overview.................................................. 86
Results of Operations..................................... 86
Nine Months Ended October 2, 1999 and October 3, 1998..... 87
Year Ended December 31, 1998 Compared to Year Ended
December 31, 1997...................................... 89
Year Ended December 31, 1997 Compared to Year Ended
December 31, 1996...................................... 90
Segment Analysis.......................................... 92
Quarterly Results of Operations........................... 94
Liquidity, Capital Resources and Other Financial Data..... 96
Capital Expenditures...................................... 97
Financing and Capital Structure........................... 97
Working Capital........................................... 98
New Accounting Standards.................................. 98
Quantitative and Qualitative Disclosures About Market
Risk................................................... 98
Interest Rate Risk........................................ 99
Foreign Currency Exchange Rate Risk....................... 99
Inflation................................................. 99
Year 2000 Disclosure...................................... 99
</TABLE>
iii
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<TABLE>
<S> <C>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS................................................ 101
RECENT DEVELOPMENTS......................................... 119
DIRECTORS OF THE COMBINED COMPANY........................... 122
SECURITY OWNERSHIP OF ITI MANAGEMENT AND BENEFICIAL OWNERS
OF ITI COMMON STOCK....................................... 124
EXECUTIVE OFFICERS.......................................... 126
Current Executive Officers of ITI......................... 126
Executive Officers of the Combined Company................ 127
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 128
PRICE RANGE OF ITI COMMON STOCK AND DIVIDENDS............... 129
AMENDMENTS TO ITI'S CERTIFICATE OF INCORPORATION............ 129
Opt Out of Section 203 of Delaware General Corporation
Law.................................................... 130
Increase Authorized Common Stock.......................... 130
PROPOSAL TO APPROVE STOCK INCENTIVE PLAN.................... 132
General................................................... 132
Summary of the Stock Incentive Plan....................... 132
Federal Tax Consequences.................................. 135
Recommendation of the Board............................... 136
INDEPENDENT ACCOUNTANTS..................................... 136
FUTURE STOCKHOLDER PROPOSALS................................ 136
WHERE YOU CAN FIND MORE INFORMATION ON ITI.................. 137
CONSOLIDATED FINANCIAL STATEMENTS OF SLC TECHNOLOGIES, INC.
AND SUBSIDIARIES.......................................... F-1
APPENDIX A -- Agreement and Plan of Merger and
Reorganization................................ A-1
Amendment to Agreement and Plan of
Merger and Reorganization..................... A-49
APPENDIX B -- Opinion of Goldman Sachs...................... B-1
APPENDIX C -- Amendments to ITI's Restated Certificate of
Incorporation............................................. C-1
APPENDIX D -- 2000 Stock Incentive Plan..................... D-1
</TABLE>
iv
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SUMMARY
The following summary highlights selected information contained in this
proxy statement and may not contain all of the information that is important to
you. For additional information, you should read this entire proxy statement,
including the appendices, and the other documents we refer to or incorporate by
reference into this proxy statement.
THE PARTIES TO THE MERGER AGREEMENT
ITI TECHNOLOGIES, INC. ITI designs, manufactures and markets electronic
security systems, both intrusion and fire protection, as well as electronic
access control systems. Electronic security systems account for approximately
98% of ITI's sales. ITI designs and manufactures wireless systems for the
wireless residential security systems market. ITI has recently introduced new
products which incorporate its wireless technology, directed at the commercial
intrusion and fire protection markets. ITI, headquartered in North St. Paul,
Minnesota, has manufacturing facilities in North St. Paul, Minnesota,
Gladewater, Texas, and Navajoa, Mexico, and employs approximately 690 people.
ITI's sales were $121,600,000 in 1999, with operating income of $19,000,000. See
"RECENT DEVELOPMENTS" on page 119.
SLC TECHNOLOGIES, INC. SLC provides electronic and communication
technology focused on security, fire protection, loss prevention and access
control. SLC designs, develops, manufactures and distributes components and
software for the following:
- intrusion and fire protection systems;
- access control systems, which monitor traffic through, and regulate
access to, buildings and other restricted areas;
- video surveillance systems, which use closed circuit television to
monitor activities from a distance; and
- integrated systems, which link independent electronic systems to a
central communication and control point.
SLC serves a broad customer base, ranging from residential and commercial
users to large multinational companies. SLC provides products and services
through an array of channels, including wholesale distribution, direct sales and
system integrators, which are companies that buy independent electronic systems
and link them to a central communication and control point.
SLC employs approximately 2,500 individuals, has sales and technical
support operations in 27 countries and has manufacturing and logistics
operations in the United States, Europe, South Africa, Australia and China.
SLC's sales were $427,800,000 in 1999, with operating income of $48,100,000. See
"RECENT DEVELOPMENTS" on page 119.
THE SPECIAL MEETING
TIME, DATE AND PLACE. The special meeting will be held on Tuesday, May 2,
2000, at 9:00 a.m., Central time, at The Saint Paul Hotel, 350 Market Street,
Saint Paul, Minnesota 55102.
PURPOSE OF THE MEETING. The purpose of the special meeting is to consider
and vote upon (a) the merger and the merger agreement, (b) a new stock incentive
plan, and (c) any other business that properly comes before the special meeting.
By approving and adopting the merger and the merger agreement you will be
approving an amendment to ITI's certificate of incorporation to change the name
of ITI to Interlogix, Inc., to increase the number of authorized shares of ITI
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<PAGE> 9
common stock to 60,000,000 and to opt out of Section 203 of the Delaware General
Corporation Law. See "THE SPECIAL MEETING -- Matters to Be Considered" on page
16.
RECORD DATE FOR VOTING; VOTE REQUIRED. The record date for stockholders of
ITI entitled to vote at the special meeting is March 27, 2000. The approval of
the merger agreement will require the affirmative vote of a majority of the
shares of ITI common stock outstanding on the record date. The approval of the
stock incentive plan will require the affirmative vote of a majority of shares
of ITI common stock present and entitled to vote at the special meeting.
THE MERGER
EFFECTS OF THE MERGER. When the merger becomes effective, SLC will merge
into ITI and all of the outstanding shares of SLC common stock will be converted
into shares of ITI common stock. As a result, there will be approximately 15.2
million additional shares of ITI common stock outstanding after the merger, and
your ownership interest in ITI will be significantly diluted. As discussed
below, however, you may elect to exchange all or some of your shares for cash.
SLC currently has 1,000,000 shares of issued and outstanding common stock,
all of which are owned by Berwind Group Partners. Each of these shares will be
converted into 15.17064 shares of ITI common stock in the merger. Immediately
after the merger, Berwind Group Partners and SLC management will together own
approximately 63.5% of the shares of common stock of the combined company,
taking into account options to purchase common stock of the combined company and
assuming that ITI stockholders do not exercise the cash election option
discussed below. Assuming full exercise of the cash election option, Berwind
Group Partners and SLC management will own approximately 78% of the common stock
of the combined company. Berwind Group Partners and SLC management will
therefore control all decisions regarding ITI that require stockholder approval
following the merger, and the current ITI stockholders will no longer have a
controlling influence over ITI's future direction.
DIRECTORS OF THE COMBINED COMPANY. Immediately after the merger, nine
individuals will serve on ITI's board of directors. Two of these individuals
will be Thomas L. Auth and Perry J. Lewis, current directors of ITI. The
remaining seven will be the following individuals selected by the board of
directors of SLC: C.G. Berwind, Jr., Edward F. Kosnik, Kenneth L. Boyda, Jan P.
Brantjes, Lawrence C. Karlson, Richard W. Oliver and Donald L. Seeley. Mr. Auth
will be Chairman of the Board of the combined company and Mr. Boyda will be
President and Chief Executive Officer of the combined company. For two years
following the merger, Mr. Auth's and Mr. Lewis' membership on the combined
company's board of directors will be determined in accordance with a voting
agreement among Berwind Group Partners, MLGA Fund II, L.P. and Mr. Auth. See
"THE MERGER -- The Voting Agreement" on page 42.
CASH ELECTION. If you are a record holder of ITI common stock prior to the
special meeting, you may elect to receive cash equal to $36.50 per share for all
or some of your shares, provided that no more than 50% of the total number of
outstanding shares of ITI common stock may be exchanged for cash. If ITI
stockholders elect to receive cash for more than 50% of the outstanding shares
of ITI common stock, then the number of shares for which each electing
stockholder will receive cash will be reduced on a pro rata basis.
We are in the process of mailing election forms to ITI stockholders. See
"THE CASH ELECTION" on page 47. In order for your election form to be effective,
you must properly complete and sign the form and the exchange agent must
actually receive it no later than 5:00 p.m. Central time, on May 1, 2000. If you
wish to withdraw an election to receive cash, you may do so by delivering
written notice to the exchange agent. The exchange agent must receive your
written notice no later than 5:00 p.m., Central time, on May 1, 2000.
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IF YOU DO NOT EXERCISE THE OPTION TO RECEIVE CASH FOR YOUR SHARES, YOU WILL
RETAIN ALL OF YOUR SHARES OF ITI COMMON STOCK AND NOT RECEIVE ANY CASH. TO THE
EXTENT YOU DO EXCHANGE YOUR SHARES OF ITI COMMON STOCK FOR CASH, YOU WILL NO
LONGER HAVE AN OWNERSHIP INTEREST IN ITI AND YOU WILL NOT PARTICIPATE IN ANY
POTENTIAL INCREASES OR DECREASES IN THE PRICE OF ITI COMMON STOCK AFTER THE
MERGER. THE CLOSING PRICE PER SHARE OF ITI COMMON STOCK WAS $26.125 AS OF
SEPTEMBER 28, 1999, THE LAST TRADING DAY BEFORE THE ANNOUNCEMENT OF THE MERGER,
AND $28.5625 AS OF MARCH 22, 2000. WE URGE YOU TO OBTAIN CURRENT MARKET
QUOTATIONS FOR ITI COMMON STOCK PRIOR TO DETERMINING WHETHER TO EXERCISE THE
CASH ELECTION.
STOCK OPTIONS. Each holder of options to purchase ITI common stock will
have the right to elect to receive a cash payment for up to 50% of the number of
shares of ITI common stock covered by the options in exchange for cancellation
of those options exchanged. The cash payment will be equal to $36.50 times the
number of shares covered by the options, minus the aggregate exercise price of
the options. At the time of the merger, options to purchase SLC common stock
will be converted into options to purchase ITI common stock. See "STOCK OPTIONS"
on page 49 and "THE MERGER -- Interests of Persons in the Merger -- SLC
Management" on page 40.
NO APPRAISAL RIGHTS. Under Delaware law, holders of ITI common stock have
no right to an appraisal of the value of their shares in connection with the
merger. See "THE MERGER -- No Appraisal Rights" on page 46.
RECOMMENDATION OF THE BOARD REGARDING THE MERGER. On September 28, 1999,
the board of directors of ITI unanimously approved and adopted the proposed
terms of the merger and the merger agreement and recommended that the ITI
stockholders approve and adopt the merger and the merger agreement.
OPINION OF ITI'S FINANCIAL ADVISOR. ITI received an opinion from its
financial advisor, Goldman, Sachs & Co. The full text of this opinion, dated
September 28, 1999, is attached as Appendix B to this proxy statement. You
should read the entire opinion carefully.
CONDITIONS TO THE MERGER. The completion of the merger depends on meeting
a number of conditions, including the following:
- obtaining ITI stockholder approval of the merger agreement;
- delivering to SLC and ITI letters from accountants and lawyers, as
specified in the merger agreement; and
- the continued accuracy of the representations and warranties contained in
the merger agreement.
A complete list of conditions to the merger appears under "THE MERGER
AGREEMENT -- Conditions to the Merger" on page 54.
TERMINATION OF THE MERGER AGREEMENT; TERMINATION FEE. ITI and SLC may
mutually agree to terminate the merger agreement at any time prior to the
merger's effectiveness. The merger agreement may also be terminated under a
number of other circumstances, as set forth under "THE MERGER
AGREEMENT -- Termination" on page 55. If the merger agreement is terminated
under some circumstances, ITI is required to pay SLC a fee of $10,000,000. These
circumstances include:
- the failure to obtain ITI stockholder approval of the merger agreement if
ITI enters into a business combination agreement with another entity
within one year of the termination;
- ITI's entering into a merger, acquisition or similar agreement with a
third party;
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<PAGE> 11
- the commencement of a tender or exchange offer for ITI common stock which
the ITI board of directors does not recommend against; or
- the withdrawal by the board of directors of ITI of its recommendation of
the merger agreement.
See "THE MERGER AGREEMENT -- Termination" on page 55 and " -- Fees and Expenses;
Termination Fee" on page 56.
AMENDMENTS TO ITI'S CERTIFICATE OF INCORPORATION. Following the merger,
SLC will cease to exist as a separate corporation and ITI will survive and
continue to exist as a Delaware corporation. The certificate of incorporation
and bylaws of the combined company will be those of ITI. When the merger becomes
effective, ITI will amend its certificate of incorporation to:
- change the name of the corporation from "ITI Technologies, Inc." to
"Interlogix, Inc.;"
- opt out of Section 203 of the Delaware General Corporation Law; and
- increase the authorized number of shares of ITI common stock to a total
of 60,000,000.
See "AMENDMENTS TO ITI'S CERTIFICATE OF INCORPORATION" on page 129.
FEDERAL INCOME TAX CONSEQUENCES. For federal income tax purposes, the sole
SLC stockholder will not recognize any gain or loss when its SLC common stock is
exchanged for ITI common stock in the merger. Any ITI stockholder who receives
cash in exchange for shares of ITI common stock will recognize a gain or loss
for tax purposes. See "THE MERGER -- Federal Income Tax Consequences" on page
44. We urge you to consult with your own tax advisor as to the federal income
tax consequences of the merger and electing to exchange your shares for cash, as
well as to any state, local, foreign or other tax consequences.
ACCOUNTING TREATMENT. The merger will be treated as a purchase of ITI by
SLC for accounting purposes. As a result, the financial statements of SLC will
become the historical financial statements of the combined company. See "THE
MERGER -- Accounting Treatment of the Merger" on page 40.
MARKET PRICE OF ITI COMMON STOCK
ITI common stock is listed on the Nasdaq National Market under the symbol
"ITII." The symbol "ILXI" has been reserved for use after the merger to reflect
the name change. The closing price per share of ITI common stock was $26.125 as
of September 28, 1999, the last trading day before the announcement of the
merger, and $28.5625 as of March 22, 2000. Past prices of ITI's common stock are
not indicative of the market price of the combined company's common stock.
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<PAGE> 12
SUMMARY CONSOLIDATED FINANCIAL DATA OF ITI
The following should be read in conjunction with the Consolidated Financial
Statements and related notes, and Management's Discussion and Analysis of
Financial Condition, set forth in ITI's Annual Report on Form 10-K for the year
ended December 31, 1998 and ITI's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, both of which have been incorporated by reference into
this proxy statement.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------- -------------------------
1994(D) 1995 1996 1997(A)(B) 1998 1998 1999(C)
------- ----- ----- ---------- ------ ----------- -----------
(UNAUDITED) (UNAUDITED)
(TABLE IN MILLIONS, EXCEPT PER SHARE AND EMPLOYEE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................ $59.1 $79.0 $93.3 $101.0 $109.0 $ 80.4 $ 88.7
Gross profit:
$............................... 26.7 36.9 45.1 46.6 50.2 36.6 41.7
%............................... 45% 47% 48% 47% 46% 46% 47%
Operating income......................... 9.6 17.8 22.9 14.3 21.4 14.8 13.5
Income before extraordinary item......... 3.4 11.4 15.1 7.6 14.2 9.9 9.4
Net income............................... $ 2.6 $11.4 $15.1 $ 7.6 $ 14.2 $ 9.9 $ 9.4
Income per share before extraordinary
item:
Basic:................................. $ .61 $1.31 $1.69 $ .91 $ 1.68 $ 1.16 $ 1.11
Diluted:............................... $ .52 $1.26 $1.63 $ .87 $ 1.61 $ 1.11 $ 1.07
Earnings per share:
Basic.................................. $ .46 $1.31 $1.69 $ .91 $ 1.68 $ 1.16 $ 1.11
Diluted................................ $ .40 $1.26 $1.63 $ .87 $ 1.61 $ 1.11 $ 1.07
Weighted average shares outstanding:
Basic:................................. 5.6 8.7 8.9 8.4 8.5 8.5 8.4
Diluted:............................... 6.5 9.0 9.2 8.7 8.9 8.9 8.8
BALANCE SHEET DATA:
Working capital.......................... $19.1 $34.9 $42.0 $ 36.3 $ 43.0 $ 38.8 $ 47.1
Total assets............................. 64.5 80.1 89.8 104.0 116.0 110.1 126.2
Total debt, including capital leases..... 4.5 -- -- -- -- -- --
Stockholders' equity..................... $49.8 $70.1 $79.3 $ 87.7 $ 97.4 $ 92.2 $108.5
OTHER DATA:
EBITDA (e)............................... $11.6 $19.6 $25.2 $ 17.3 $ 25.2 $ 17.6 $ 16.6
Cash flows from operating activities..... 4.0 8.0 14.3 18.0 9.4 8.9 2.5
Cash flows from investing activities..... (1.8) (2.7) (5.0) (26.3) (5.1) (3.9) (6.0)
Cash flows from financing activities..... $(2.1) $ 4.4 $(5.9) $ 0.8 $ (4.5) $ (5.4) $ 1.7
Number of employees...................... 455 456 477 641 645 649 677
</TABLE>
- -------------------------
(a) In 1997, ITI recorded a non-recurring purchase accounting adjustment to cost
of goods sold of $725,000, which resulted from the sale of inventory which
had been written-up to reflect estimated selling price less the sum of
estimated costs of completion and selling at the time of the CADDX
acquisition. Both 1997 gross profit and operating income include the effects
of this charge; however, for comparative purposes, the gross profit
percentage excludes the effects of this item.
(b) In 1997, ITI recorded a non-recurring purchase accounting adjustment, which
resulted from the write-off of $5,200,000 for the value assigned to
technology in process at the time of the CADDX acquisition. This charge is
not deductible for income tax purposes and, as such, no related tax benefit
has been recorded as a part of ITI's income tax expense. 1997 operating
income includes the effects of this charge.
5
<PAGE> 13
(c) In 1999, ITI recorded a non-cash charge of $4,104,000 related to certain
litigation costs incurred in connection with a patent litigation case
against a competitor that were previously capitalized. In addition, through
September 30, 1999 ITI incurred expenses of $275,000 associated with the
merger. Operating income for the nine-month period ended September 30, 1999
includes the effects of these charges.
(d) In 1994, ITI incurred an extraordinary charge of $825,000, or $.12 per
share, related to the write-off of unamortized discount and deferred
financing charges, net of related income tax benefits of $462,000, in
connection with the conversion of all outstanding warrants and retirement of
debt subsequent to its November 24, 1994, initial public offering. All 1994
data presented excludes the impact of this extraordinary item.
(e) ITI calculated EBITDA by adding: (1) income before income taxes and (2)
depreciation and amortization, less net interest income. ITI included data
concerning EBITDA because management believes it is a measure of operating
performance before leverage and ITI understands that investors use it to
evaluate historical performance and the value of the company. EBITDA is not
determined in accordance with U.S. GAAP. EBITDA is not indicative of net
income or cash flows from operating, investing or financing activities
determined in accordance with GAAP, and you should not consider EBITDA in
isolation, or as an alternative to, or more meaningful than, measures of
performance determined in accordance with U.S. GAAP. In addition, EBITDA, as
defined here, may not be comparable to similarly titled measures used by
other companies.
6
<PAGE> 14
SUMMARY CONSOLIDATED FINANCIAL DATA OF SLC
The following should be read in conjunction with the Consolidated Financial
Statements and related notes, and MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SLC, included elsewhere in this
proxy statement.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------
YEAR ENDED DECEMBER 31, OCTOBER 3, OCTOBER 2,
-------------------------------------------------- ----------- -----------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ------ ------ ------ ----------- -----------
(UNAUDITED) (UNAUDITED)
(TABLE IN MILLIONS, EXCEPT PER SHARE AND EMPLOYEE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................... $175.1 $225.2 $275.7 $326.0 $375.6 $269.1 $309.2
Gross profit:
$.................................. 62.8 90.2 113.8 141.4 169.4 118.5 134.8
%.................................. 35.9% 40.1% 41.3% 43.4% 45.1% 44.0% 43.6%
Operating income before management
fees...................................... 13.4 24.7 28.0 36.7 49.8 30.5 36.2
Net income (loss)........................... $ (0.5) $ 6.0 $ 7.5 $ 10.1 $ 20.7 $ 11.5 $ 17.3
Earnings per share:
Basic..................................... $ (.48) $ 6.04 $ 7.50 $10.14 $20.67 $11.52 $17.35
Diluted................................... $ (.48) $ 6.04 $ 7.50 $10.14 $20.62 $11.50 $17.28
Cash dividend per share..................... $ -- $ -- $ -- $ -- $ 3.50 $ 3.50 $ --
Weighted average shares outstanding:
Basic..................................... 1.000 1.000 1.000 1.000 1.000 1.000 1.000
Diluted................................... 1.000 1.000 1.000 1.000 1.002 1.002 1.004
BALANCE SHEET DATA:
Working capital............................. $ 44.8 $ 42.3 $ 50.0 $ 58.5 $ 54.8 $ 64.9 $ 80.0
Total assets................................ 180.0 182.4 248.3 270.5 273.6 272.8 318.8
Total debt, including related party debt and
capital leases(b)......................... 95.3 89.0 133.1 79.8 53.1 72.3 87.8
Stockholders equity(b)...................... $ 50.4 $ 58.3 $ 63.5 $127.6 $147.5 $138.9 $161.4
OTHER DATA:
EBITDA(a)................................... $ 18.9 $ 29.6 $ 37.4 $ 46.5 $ 59.0 $ 37.7 $ 48.6
Cash flows from operating activities........ 12.3 15.0 20.6 38.7 38.5 14.2 8.0
Cash flows from investing activities........ (30.5) (7.4) (60.7) (29.8) (13.5) (9.4) (37.8)
Cash flows from financing activities........ $ 19.8 $ (5.7) $ 43.7 $ 4.7 $(31.9) $(11.3) $ 32.5
Number of employees......................... 1,381 1,672 1,721 2,162 2,251 2,213 2,485
</TABLE>
- -------------------------
(a) SLC has calculated EBITDA by adding: (1) income before income taxes, (2)
interest expense, net and (3) depreciation and amortization. SLC has
included data concerning EBITDA because management believes it is a measure
of operating performance before leverage and SLC understands that investors
use it to evaluate historical performance and the value of the company.
EBITDA is not determined in accordance with U.S. GAAP. EBITDA is not
indicative of net income or cash flows from operating, investing or
financing activities determined in accordance with GAAP, and you should not
consider EBITDA in isolation, or as an alternative to, or more meaningful
than, measures of performance determined in accordance with U.S. GAAP. In
addition, EBITDA, as defined here, may not be comparable to similarly titled
measures used by other companies.
(b) On October 10, 1997, Berwind Corporation distributed the stock of SLC to its
parent, Berwind Group Partners, in a non-taxable spin-off transaction. At
the same time, SLC obtained a credit facility, the proceeds from which were
used to repay a portion of the intercompany debt to Berwind Industries, Inc.
The balance of this intercompany obligation of $58,485,000 was recorded as a
capital contribution to SLC and credited to paid-in capital.
7
<PAGE> 15
UNAUDITED SUMMARY PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION
The summary unaudited pro forma combined condensed financial information of
the combined company has been derived from the unaudited pro forma combined
condensed financial statements included elsewhere in this proxy statement. This
data is not necessarily indicative of the combined results of operations or
financial position that would have occurred if the merger had occurred at the
beginning of each period presented or on the dates indicated, nor is it
necessarily indicative of the future operating results or financial position of
the combined company. See "UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS."
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
1998 OCTOBER 2, 1999
---------------- ---------------------
(TABLE IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C>
SELECTED INCOME STATEMENT DATA:
Sales.............................................. $484.6 $397.9
Income before income taxes......................... 34.2 25.5
Net income......................................... 16.9 12.5
Earnings per share:
Basic............................................ $ 0.87 $ 0.65
Diluted.......................................... $ 0.86 $ 0.64
</TABLE>
<TABLE>
<CAPTION>
AT OCTOBER 2,
1999
-------------
<S> <C> <C>
SELECTED BALANCE SHEET DATA:
Working capital........................................ $135.1
Total assets........................................... 660.6
Long term debt......................................... 269.4
Total stockholders' equity............................. 260.0
</TABLE>
It should be noted that the 1999 interim results of ITI include a
$4,104,000 (after-tax amount of $2,626,000) charge associated with the write-off
of patent defense costs. In addition, 1999 interim and 1998 annual results of
SLC include $2,126,000 (after-tax amount of $1,360,000) and $2,698,000
(after-tax amount of $1,727,000), respectively, of management fees charged by
Berwind Corporation. SLC and ITI management believe that the expenses associated
with the management fees will cease after the merger, as the combined company
has the organization in place to provide the services formerly provided by
Berwind Corporation. The unaudited pro forma combined condensed financial
statements for the nine months ended October 2, 1999 and the year ended December
31, 1998 include non-cash expenses for amortization of goodwill and identifiable
intangible assets, with diluted earnings per share effects of $.75 and $.98,
respectively.
8
<PAGE> 16
COMPARATIVE PER SHARE DATA
Set forth below are historical net earnings per share and book value per
share data of ITI and SLC, and unaudited pro forma combined per share data of
the combined company. The data set forth below should be read in conjunction
with the ITI and SLC audited financial statements and unaudited interim
financial statements, including the notes thereto, which are included elsewhere
in this proxy statement or incorporated herein by reference. The data should
also be read in conjunction with the unaudited pro forma combined condensed
financial statements, including the notes thereto, included elsewhere in this
proxy statement or incorporated herein by reference.
<TABLE>
<CAPTION>
ITI SLC
-------------------------------- --------------------------------
YEAR ENDED NINE MONTHS ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, OCTOBER 2,
1998 1999 1998 1999
------------ ----------------- ------------ -----------------
<S> <C> <C> <C> <C>
HISTORICAL DATA:
Earnings per share:
Basic........................... $ 1.68 $ 1.11 $ 20.67 $ 17.35
Diluted......................... $ 1.61 $ 1.07 $ 20.62 $ 17.28
Book value per share, at end of
period:
Basic........................... $11.67 $12.86 $147.50 $161.41
Diluted......................... $11.14 $12.35 $147.21 $160.76
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, OCTOBER 2,
1998 1999
------------ -----------------
<S> <C> <C>
PRO FORMA COMBINED(A):
Earnings per share:
Basic..................................................... $ 0.87 $ 0.65
Diluted................................................... $ 0.86 $ 0.64
Book value per share, at end of period:
Basic..................................................... N/A $ 13.41
Diluted................................................... N/A $ 13.25
PRO FORMA EQUIVALENTS(B):
Earnings per share:
Basic..................................................... $13.20 $ 9.86
Diluted................................................... $13.04 $ 9.71
Book value per share:
Basic..................................................... N/A $203.44
Diluted................................................... N/A $201.01
</TABLE>
- -------------------------
(a) The unaudited pro forma combined selected income statement data was derived
from the respective historical consolidated statements of operations for the
year ended December 31, 1998
9
<PAGE> 17
and the nine months ended September 30, 1999 for ITI and the consolidated
statements of income for the year ended December 31, 1998 and the nine
months ended October 2, 1999 for SLC, and the effects of the merger as if it
had occurred on January 1, 1998. The unaudited pro forma selected balance
sheet data was derived from the historical balance sheets of ITI as of
September 30, 1999, and of SLC as of October 2, 1999 and the effects of the
merger as if it had occurred on those dates. The unaudited pro forma
combined financial statements assume that the ITI stockholders elect to
exchange the aggregate of 50% of ITI common stock outstanding for cash at
$36.50 per share.
(b) Pro forma equivalents represent the unaudited pro forma combined earnings
per share and book value per share calculated on the basis of a 1 to
15.17064 exchange ratio. The unaudited combined pro forma data included
above have been computed assuming the ITI stockholders exchange the
aggregate of 50% of ITI common stock outstanding for cash at $36.50 per
share.
10
<PAGE> 18
RISK FACTORS AND OTHER CONSIDERATIONS
In addition to the other information contained in this proxy statement, you
should consider the following factors carefully in evaluating the proposed
merger.
THE COMBINED COMPANY WILL BE CONTROLLED BY BERWIND GROUP PARTNERS
Immediately after the merger, Berwind Group Partners, the sole stockholder
of SLC, and SLC management will together own approximately 63.5% of the shares
of the common stock of the combined company, taking into account options to
purchase the common stock of the combined company and assuming that no shares of
ITI common stock are exchanged for cash. Assuming that 50% of the outstanding
shares of ITI common stock are exchanged for cash and that each holder of
options to purchase ITI common stock elects to exchange 50% of his or her
options for cash, Berwind Group Partners and SLC management will own
approximately 78% of the combined company's common stock. In addition, seven of
the nine members of the board of directors of the combined company will be
selected by the board of directors of SLC. See "THE MERGER -- The Voting
Agreement" on page 42. Berwind Group Partners will have the power to control the
outcome of substantially all matters requiring stockholder approval, including
the election of directors. Berwind Group Partners's equity ownership will have
the effect of making certain corporate actions impossible without its support.
THE COMBINED COMPANY MAY NOT REALIZE EXPECTED REVENUE INCREASES
We have announced publicly that the combined company will be able to
increase revenues through sales opportunities that are not currently available
to the two companies standing alone. In making this announcement, we relied in
part on our expectation that we could increase revenues for ITI's current
products by selling them through SLC's European distribution channels. However,
we may not achieve these additional sales, or they may be delayed due to greater
product customization than we anticipated. For example, ITI products may need
customization in some countries to comply with transmission protocols and
language capabilities. The timing for country product approvals may also result
in delayed revenues in Europe. In addition, retraining sales and technical
support personnel in order to market new wireless products and convert existing
hardwire products will require our customers to invest significant resources and
may have an adverse effect on sales. If we do not realize these expected revenue
increases, the future financial performance of the combined company will not be
as good as management currently anticipates.
THE COMBINED COMPANY MAY NOT REALIZE EXPECTED COST SAVINGS
We have announced publicly that management expects to achieve cost savings
as a result of combining the two companies of at least $10,000,000 during the
first 12 months following the merger. We anticipate the majority of these
savings to come from reducing engineering staff, from reducing the cost of
purchased components through volume leverage, and by reducing general and
administrative costs. See "THE MERGER -- Reasons for the Merger" on page 25.
We cannot be sure that we will achieve the cost savings in the amount or
time frame anticipated, if at all. In particular, we may not be able to reduce
engineering and overhead expenses sufficiently to meet these goals without
sacrificing important business functions, such as product development programs.
In addition, we may not succeed in negotiating more favorable terms for our
purchased components, despite added volume leverage, due to changing economic
conditions affecting our suppliers. If we do not achieve the expected cost
savings, our future financial performance will not be as strong as we
anticipated when we agreed to the merger. Even if our financial performance is
not materially affected by our failure to achieve cost savings, the price of the
combined company's stock may decline as a result of our not meeting the
expectations of the market.
11
<PAGE> 19
INTEGRATION OF THE TWO COMPANIES MAY DISRUPT BUSINESS
Following the merger, management of ITI and SLC plan to integrate the two
companies strategically, operationally and technically. The integration of the
two companies will be complex and time consuming and may disrupt the combined
company's business. The timing and manner of the implementation of decisions
made with respect to the ongoing business of the combined company following the
merger will materially affect the operations of the combined company. The
combined company may encounter substantial difficulties, costs and delays
involved in integrating common information and communication systems, operating
procedures, financial controls and human resources practices, including:
- potential incompatibility of business cultures;
- the loss of key employees; and
- the diversion of the attention of management from other business
concerns.
If the integration of the two companies goes poorly and disrupts the
combined company's business, the future financial performance of the combined
company may not be as strong as we anticipated when we agreed to the merger.
A SINGLE CUSTOMER OF THE COMBINED COMPANY ACCOUNTED FOR MORE THAN 10% OF
REVENUES
ADT Security Systems, Inc., a customer of both ITI and SLC, accounted for
slightly more than 10% of the combined company's revenues in 1999 on a pro forma
basis. There is no agreement that obligates ADT to purchase products from either
ITI or SLC. Moreover, the products ADT purchases from ITI and SLC could be
provided by other suppliers. If we do not maintain competitive pricing and/or
product features, we could lose the ADT business. A significant reduction or
loss in the ADT business could harm the financial performance of the combined
company.
THE COMBINED COMPANY WILL HAVE AN INCREASED EXPOSURE TO RISKS INVOLVED IN
INTERNATIONAL OPERATIONS, PARTICULARLY FOREIGN EXCHANGE RATES
The combined company will be exposed to greater risks in international
operations, particularly risks due to fluctuations in foreign exchange rates,
than ITI currently experiences due to an increased proportion of international
operations. Currently, ITI conducts nearly all of its foreign transactions in
U.S. dollars. As a result of the merger, the combined company will include SLC's
foreign operations, which conduct transactions in local currencies and whose
financial results are translated into U.S. currency. Therefore, the effect of
changes in exchange rates may have an adverse effect on the combined company's
results of operations. For example, in 1998, SLC had approximately $115,700,000,
or 31%, of its total revenues denominated in foreign currencies. A strengthening
of the U.S. dollar against the Dutch guilder in 1998 had the effect of reducing
total sales reported in 1998 by $1,700,000 due to translation adjustments.
ITI MAY LOSE KEY EMPLOYEES AS A RESULT OF THE MERGER
There is a risk that ITI will lose key employees upon closing the merger.
The following factors may increase this risk:
- Employees of ITI have the right to exchange their shares of common stock
for cash. They also have the right to receive cash for stock options they
hold. As a result of these cash election rights, key employees may
receive significant amounts of cash upon the closing of the merger that
could allow them to pursue other career opportunities.
- In many cases, the roles of key ITI employees and their compensation
arrangements following the merger have not yet been determined or
communicated to the employees.
12
<PAGE> 20
- The merger may result in a change in ITI's business culture that some of
ITI's current employees may not like.
- The economy is strong and unemployment is at low levels.
ITI's employees have significantly contributed to ITI's past financial
performance. The loss of key employees may adversely affect the combined
company's business operations and financial performance.
OFFICERS AND DIRECTORS OF ITI MAY HAVE DIFFERENT INTERESTS FROM OTHER ITI
STOCKHOLDERS
In considering the board of directors' recommendation that you vote in
favor of the merger, you should be aware that some executive officers and
directors of ITI have interests in the merger that are in addition to their
interests as stockholders of ITI generally. These interests include the
following:
- Thomas L. Auth, President, Chief Executive Officer and a director of ITI,
and Perry J. Lewis, a director of ITI, will be directors of the combined
company under the terms of a voting agreement entered into with SLC.
- ITI entered into a new employment agreement with Mr. Auth, which is
conditioned upon the closing of the merger, that provides, among other
things, for an annual salary of approximately $400,000 and the issuance
of options to acquire 20,000 shares of the combined company's common
stock.
- ITI will pay bonuses to Mr. Auth and two other executive officers of ITI,
Joseph Hurst and Charles E. Briskey, upon the closing of the merger.
- In connection with the merger, ITI changed or entered into new severance
arrangements with a number of executive officers.
- As of the date of the merger agreement, executive officers of ITI held
options to purchase a total of 984,259 shares of ITI common stock. Under
the merger agreement, these executive officers will have the right to
receive a cash payment for up to 50% of the number of shares of ITI
common stock covered by their options equal to $36.50 per share minus the
aggregate exercise price of the options.
These factors create a potential conflict of interest that you should be aware
of in considering the merger. See "THE MERGER -- Interests of Persons in the
Merger" on page 36.
HAVING TO PAY A TERMINATION FEE COULD HAVE A NEGATIVE IMPACT ON OUR FINANCIAL
CONDITION
Under the merger agreement, there are situations in which we would have to
pay SLC a termination fee of $10,000,000 if the merger agreement were
terminated. See "THE MERGER AGREEMENT -- Fees and Expenses; Termination Fee" on
page 56. In some of these situations, such as if the ITI board of directors felt
it necessary to withdraw its recommendation of the merger, we would not
necessarily have another buyer to help fund the payment. Having to make this
payment under circumstances where another buyer was not helping to fund it could
have a negative impact on our financial condition as a stand-alone company.
YOUR EQUITY INTEREST IN THE COMPANY WILL BE DILUTED
In the merger, the outstanding shares of SLC common stock will be converted
into approximately 15.2 million shares of ITI common stock. As a result, each
share of ITI common stock that you retain will represent a smaller percentage
ownership interest in the combined company than
13
<PAGE> 21
you currently hold in ITI. Upon the merger taking effect, the current ITI
stockholders will retain 22% to 36.5% of the common stock of ITI, depending upon
the number of shares for which a cash election is made.
LIQUIDITY OF THE COMMON STOCK WILL DECREASE AND PRICE VOLATILITY MAY INCREASE
In connection with the merger and the possible exchange of 50% of ITI's
common stock for cash, the public float of the common stock of the combined
company will be substantially diminished. As a result, liquidity will decrease
and the volatility of our stock price may increase. In addition, the lack of
float may adversely affect institutional investors' interest and the scope of
coverage of the combined company by research analysts. If institutional
investors' interest and analysts' coverage diminish, it could adversely affect
the stock price of the combined company.
YOU HAVE NO APPRAISAL RIGHTS
In some mergers, stockholders who oppose the merger have the right to
dissent and have the value of their shares appraised and paid to them in cash.
This is known as having "appraisal rights." However, because of the way the
merger is structured and because ITI common stock is traded on the NASDAQ
National Market, you are not entitled to appraisal rights under Delaware law. If
the merger is approved, the only way you will be able to receive cash for your
shares of ITI common stock will be to:
- exercise your option to receive $36.50 per share of ITI common stock
(subject to proration if ITI stockholders elect to receive cash for more
than 50% of the outstanding shares of ITI common stock), or
- sell your shares of ITI common stock in the open market at the then
prevailing prices.
You will not have the opportunity to have your shares appraised if this merger
is completed.
THERE ARE RISKS IN CONNECTION WITH ELECTING OR NOT ELECTING TO EXCHANGE YOUR
SHARES FOR CASH
If the cash consideration to be paid in exchange for shares of ITI common
stock exceeds the intrinsic value of those shares, you will be in a better
position if you elect to exchange your shares for cash. You are urged to obtain
current market quotations for ITI common stock prior to deciding whether to
exchange your shares for cash. In obtaining current market quotations for ITI
common stock, however, you should be aware that there is a risk that the market
price may be artificially inflated by individuals buying common stock with the
intention of exercising the cash election option. There is also a risk that the
market price will be lower than the intrinsic value of the ITI common stock and
will not adequately reflect the prospects of the combined company. To the extent
you exchange your shares for cash, you will no longer have an ownership interest
in ITI and you will not participate in any potential increases or decreases in
the price of ITI common stock.
If you decide to exchange your shares for cash, you should consider how the
acceptance of your shares for exchange will be reduced if ITI stockholders, in
the aggregate, elect to exchange more than 50% of the ITI common stock. If you
desire to exchange the maximum number of shares possible for cash, you should
make an election to receive cash for all of your shares. Keep in mind, however,
that you will not know immediately the number of shares accepted for exchange,
and you will not be able to sell shares of ITI common stock that are not
accepted for a period of time. See "THE CASH ELECTION -- Considerations in
Exercising the Cash Election Option" on page 47.
14
<PAGE> 22
FORWARD-LOOKING STATEMENTS
This proxy statement, including information included or incorporated by
reference in this proxy statement, contains forward-looking statements relating
to the financial condition, results of operations, plans, objectives, future
performance and business of each of ITI and SLC, as well as forward-looking
statements relating to the merger and the combined company. These statements
include, without limitation, statements preceded by, followed by or that include
the words "believes," "expects," "anticipates," "estimates" or similar
expressions. These forward-looking statements involve risks and uncertainties.
Actual results may differ materially from those contemplated by the
forward-looking statements due to the considerations set forth in the "RISK
FACTORS AND OTHER CONSIDERATIONS" section on page 11 and other considerations,
including among others, the following:
- uncertainties in realizing synergies of the merger;
- increases in competitive pressures among intrusion, fire protection,
access control and integrated system companies;
- changes in or unexpected unfavorable general economic conditions in the
states or countries in which ITI or SLC is doing business;
- legislative or regulatory changes that adversely affect the businesses in
which ITI or SLC are engaged;
- difficulties in the technical, operational and/or strategic integration
of ITI and SLC; and
- obsolescence of the technology of the combined company.
15
<PAGE> 23
THE SPECIAL MEETING
GENERAL
We are furnishing this proxy statement to ITI stockholders in connection
with the solicitation of proxies by the ITI board of directors for use at the
special meeting to be held on Tuesday, May 2, 2000, at The Saint Paul Hotel, 350
Market Street, Saint Paul, Minnesota 55102, commencing at 9:00 a.m., Central
time, and at any adjournments or postponements of the meeting.
MATTERS TO BE CONSIDERED
We are holding the special meeting for the following purposes:
- To consider and vote upon a proposal to approve and adopt the merger of
SLC into ITI and the merger agreement. If you approve and adopt the
merger and the merger agreement you will also be approving an amendment
to ITI's certificate of incorporation to change the name of ITI to
Interlogix, Inc., to increase the number of shares of ITI common stock to
60,000,000 and to opt out of Section 203 of the Delaware General
Corporation Law.
- To consider and vote upon a proposal to approve a new stock incentive
plan.
- To consider and transact any other business that may properly come before
the special meeting or any adjournment or postponement of the special
meeting.
THE ITI BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AND ADOPTED THE MERGER
AGREEMENT AND THE MERGER. THE BOARD OF DIRECTORS BELIEVES THAT THE TERMS OF THE
MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF, ITI AND ITS STOCKHOLDERS AND
UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER
AND THE MERGER AGREEMENT. THE BOARD OF DIRECTORS ALSO UNANIMOUSLY RECOMMENDS
THAT YOU VOTE "FOR" THE APPROVAL OF THE STOCK INCENTIVE PLAN.
RECORD DATE; QUORUM; VOTING AT THE SPECIAL MEETING
The ITI board of directors has fixed the close of business on March 27,
2000, as the record date. Only holders of record of ITI common stock as of the
close of business on the record date will be entitled to notice of and to vote
at the special meeting or any postponement or adjournment of the special
meeting. On the record date there were 8,536,642 shares of ITI common stock
issued and outstanding. Each holder of record of ITI common stock on the record
date is entitled to cast, either in person or by properly executed proxy, one
vote per share on each matter properly coming before the special meeting. The
presence, in person or by properly executed proxy, of a majority of all
outstanding shares of ITI common stock entitled to vote at the special meeting
constitutes a quorum for the transaction of business at the special meeting.
The approval and adoption of the merger and the merger agreement will
require the affirmative vote, in person or by proxy, of a majority of the shares
of ITI common stock outstanding on the record date. The approval of the stock
incentive plan will require the affirmative vote, in person or by proxy, of a
majority of shares of ITI common stock present and entitled to vote at the
special meeting.
A form of proxy card for your use at the special meeting accompanies this
proxy statement. All properly executed proxies that are received prior to or at
the special meeting and not revoked will be voted at the special meeting in the
manner specified. If you execute and return a proxy but do not specify how to
vote on a proposal, the proxy will be voted FOR that proposal. If you abstain,
your shares will be treated as shares that are present at the special meeting
for purposes of determining the presence of a quorum and as voted for purposes
of determining the number of shares voting on a particular proposal. If a broker
or other nominee of a holder indicates on the proxy card that it does
16
<PAGE> 24
not have discretionary authority to vote the shares for which it is the holder
of record on a particular proposal, those shares will not be considered as voted
for purposes of determining the number of shares of ITI common stock that have
voted for or against the proposal. Accordingly, abstentions and broker non-
votes will have the same practical effect as votes against a proposal.
Our directors, officers and employees may solicit proxies by mail, personal
interview, telephone and telecopy on a part-time basis and for no additional
compensation. We will also make arrangements with brokerage firms and other
custodians, nominees and fiduciaries who are the record holders of ITI common
stock to forward proxy solicitation materials to the beneficial owners of the
stock. We have retained Georgeson Shareholder Communications Inc. to assist in
the solicitation of proxies and in the distribution of proxies and accompanying
materials to brokerage houses and institutions for an estimated fee of $10,500,
plus reasonable out-of-pocket expenses.
You may revoke a proxy at any time prior to the special meeting by
delivering to our Secretary a written statement revoking it or be delivering a
duly executed proxy bearing a later date. You may also revoke a proxy by
attending the special meeting and voting in person.
We do not know of any matters to be presented at the special meeting other
than those described in this proxy statement. However, if other matters properly
come before the special meeting, the persons named in the accompanying proxy
will have the discretion to vote on those matters according to their best
judgment.
COMMUNICATIONS BY ITI STOCKHOLDERS WITH ITI
You should address any written revocation of a proxy or other communication
in connection with this proxy statement, and any requests for additional copies
of this proxy statement or the proxy card, to Georgeson Shareholder
Communications Inc., 17 State Street, New York, NY 10004. If you have any
questions or need further assistance in voting your shares, please call
Georgeson Shareholder Communications Inc. at (800) 223-2064.
17
<PAGE> 25
THE MERGER
BACKGROUND OF THE MERGER
GENERAL. Since shortly after ITI's initial public offering in 1994, ITI
has considered various strategic alliances within the consolidating but
expanding security industry. ITI acquired CADDX Controls, Inc. in April 1997 and
completed another small acquisition in May 1997. The number of acquisitions by
ITI's largest competitors over the last several years has suggested to ITI that
combining businesses may be beneficial to competing effectively in the security
industry. Conventions and other trade meetings often provide a forum for
informal discussions of the possibility of a strategic alliance with other
industry participants.
Through mid 1998, ITI or its representatives had discussions with various
companies concerning possible strategic alliances or acquisitions. Among those
with whom ITI had discussions during this time were Honeywell Inc. and Pittway
Corporation. During the course of the discussions with various parties, ITI's
investment banking firm, Piper Jaffray, Inc., met with ITI's board of directors
on a number of occasions to review the strategic alternatives available to ITI
or to present analyses of particular transactions. Each of these discussions
terminated without ITI's entering into any agreement concerning a transaction.
In connection with ITI's patent infringement litigation against Pittway, in
January 1998 the Chief Executive Officer of Pittway initiated settlement
discussions that included a proposal to merge Pittway and ITI. ITI terminated
these discussions within several days.
Kenneth L. Boyda, the Chief Executive Officer of SLC, Edward F. Kosnik,
President and Chief Executive Officer of Berwind Group Partners and Mr. Auth
knew each other from industry contacts. In March 1998, Messrs. Boyda, Kosnik and
Auth met to discuss potential strategic alliances, and during that month the ITI
board of directors discussed potential strategic alliances. In April there were
two meetings between representatives of SLC and ITI and, on April 22, 1998, ITI
and SLC signed a confidentiality agreement.
At the May 1998 meeting of ITI's board of directors, potential strategic
alliances were discussed. In late May 1998, Mr. Auth and Perry Lewis, an ITI
director, met with Messrs. Kosnik and Boyda in Philadelphia to discuss a
possible strategic alliance. At that meeting, SLC representatives presented a
discussion outline of the terms of a potential merger of SLC and ITI. In June
1998, discussions were terminated, but the parties agreed to talk again in the
future.
In July 1998, Piper made a presentation to ITI management regarding a
possible strategic alliance with SLC or Honeywell, and ITI then retained Piper
with respect to Honeywell negotiations. Late in that month, there was a meeting
between representatives of ITI and those of Honeywell with respect to a
potential strategic alliance. The ITI board of directors discussed potential
strategic alliances in July 1998.
On September 22, 1998, Honeywell and ITI signed a confidentiality
agreement. On October 6, ITI management made a presentation to Honeywell and
provided information to Honeywell. On November 10, the CEO of Honeywell sent a
letter to Mr. Auth indicating an interest in a possible strategic alliance.
Mr. Auth visited SLC's facility in Portland in July 1998, and there was a
meeting between representatives of ITI and SLC at an industry conference in
early September 1998. In late November or early December, Mr. Kosnik telephoned
Mr. Auth to renew discussions. At meetings in Philadelphia on December 9 and 10
between representatives of SLC and ITI, merger models were exchanged. At a
meeting on December 14, the ITI board of directors discussed strategic
alliances.
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<PAGE> 26
Mr. Auth met with a representative of Honeywell on December 15, 1998 to
discuss a possible strategic alliance. There were further discussions on
December 21, 1998.
On December 22, 1998, Mr. Kosnik sent a letter to Mr. Auth outlining a
proposal for a merger between SLC and ITI. On December 23, 1998, a
representative of Honeywell sent a letter indicating an interest in a strategic
alliance between ITI and Honeywell. Mr. Auth requested additional information
from Honeywell on December 23, 1998. On January 7, 1999, ITI and SLC confirmed
in writing that discussions and information shared were covered by the April 22,
1998 confidentiality agreement. On January 12, 1999, in a letter to Mr. Auth,
Mr. Kosnik addressed certain concerns regarding the December 22, 1998 proposal.
At an ITI board of directors meeting on January 12, 1999, Piper made a
presentation on the possible strategic alliances with Honeywell and SLC. Mr.
Auth was authorized to negotiate with Goldman Sachs and one other investment
banker to act as co-advisor with Piper with respect to a strategic alliance. On
January 21, 1999, the ITI board of directors authorized the retention of Piper
and Goldman Sachs, and engagement letters were entered into with each of Piper
and Goldman Sachs on January 29, 1999. On January 25, 1999, Honeywell entered
into an addendum to the confidentiality agreement and on the following days
conducted due diligence of ITI. Representatives of Piper and Goldman Sachs
participated in a meeting of the ITI board of directors on February 1, 1999, and
Goldman Sachs was authorized to identify and contact potential strategic
partners, including SLC, Honeywell and certain other industry participants.
In February 1999, Goldman Sachs identified and eventually contacted 30
potential strategic partners with respect to their interest in ITI. ITI received
signed confidentiality agreements from six potential partners and furnished a
confidential memorandum regarding ITI's operations and prospects to those six
potential partners as well as to SLC and Honeywell. SLC and Honeywell submitted
indications of interest in pursuing a strategic alliance with ITI, each dated
March 18.
The ITI board of directors met on March 22 to consider the results of the
process that had been followed. The Board determined that Goldman Sachs should
continue to attempt to elicit interest from those already contacted, that
Honeywell would not be invited into additional discussions and that SLC should
be solicited with respect to alternatives to its proposal. The ITI board was
concerned that the Honeywell indication of interest did not meet its
expectations. The Honeywell indication of interest proposed a purchase of ITI at
a net purchase price of $301 million in cash, or $30.28 per share of ITI common
stock as estimated by Goldman Sachs, to be received by ITI stockholders. At the
time of the meeting, the price offered by Honeywell of $30.28 on a per share
basis was less than the trading price of the ITI common stock of $30.50 per
share. The Honeywell proposal also required that ITI sell its manufacturing
business to its management. The ITI board of directors determined that
Honeywell's indication of interest did not compare favorably to that of SLC and
that further discussions with Honeywell would not be fruitful.
On March 29, 1999, representatives of Goldman Sachs met with
representatives of SLC to review SLC's indication of interest. In light of the
interest shown by Honeywell in the past, Mr. Auth met with a representative of
Honeywell on April 5 to explain ITI's point of view. One of the parties who had
signed a confidentiality agreement conducted due diligence on ITI on April 16,
but did not submit a proposal.
At a meeting on May 4, SLC made a presentation to ITI. Representatives of
the investment bankers for each of ITI and SLC also participated. Through a
series of conference calls in mid-to-late May, ITI and SLC developed a mutually
acceptable due diligence schedule.
19
<PAGE> 27
At meetings of the ITI board of directors on May 12 and May 26, 1999, the
board authorized Goldman Sachs to assist ITI in its negotiations with SLC. The
board also requested that Goldman Sachs complete its due diligence and report
back to the board of directors.
On June 3, 1999, SLC and ITI signed an agreement by which ITI agreed that
for the period from June 3, 1999 to June 24, 1999 it would not initiate or
participate in negotiations with respect to the sale of ITI or any significant
part of ITI or a similar extraordinary transaction. SLC and ITI also amended the
confidentiality agreement on that date to extend the standstill provisions to
June 24. On June 24, SLC and ITI signed a similar "no shop" agreement and
extended the standstill provisions to July 8.
In June, representatives of ITI and SLC carried out various due diligence
activities. ITI management made a presentation to SLC and its representatives on
June 10. ITI and Goldman Sachs conducted due diligence at certain SLC
facilities.
On June 30, counsel for ITI circulated to SLC and its representatives a
draft merger agreement.
On July 8, ING Barings, SLC's investment bank, presented to Goldman Sachs a
term sheet, reflecting the principal terms on which SLC was prepared to engage
in a strategic alliance with ITI. On July 22 the ITI board of directors met.
Goldman Sachs presented the process followed to date, information on SLC and the
SLC proposal, certain pro forma information and certain alternatives available
to ITI. The ITI board of directors determined that Goldman Sachs should contact
representatives of SLC's sole stockholder and review certain topics, which would
be the basis of an agenda between the respective CEOs of ITI and SLC and their
bankers. On July 27, representatives of Goldman Sachs met with SLC and its
investment banker to discuss the term sheet.
On July 27, Mr. Auth met with a representative of Honeywell to discuss a
potential strategic alliance, and the next day, other representatives of
Honeywell and ITI met on the same topic. In late July, the CEO of Pittway
telephoned Mr. Auth and on July 28 they met to discuss a potential strategic
alliance. Pittway terminated further discussions several days later.
On August 2, ITI's board of directors discussed possible strategic
alliances with Pittway, Honeywell or SLC. The board of directors created a
negotiating committee to negotiate a merger agreement with SLC, subject to
approval of the full board of directors. On August 12, there was a conference
telephone call between representatives of ITI and representatives of SLC to
discuss moving negotiations forward. At a meeting of the ITI board of directors
on August 17, there was a report on the status of discussions. Following a
conference call regarding the merger agreement, ITI and SLC held a face-to-face
negotiating session on August 23. On August 24 we executed a new no-shop
agreement and amended the confidentiality agreement to extend the standstill
provisions to September 7.
Beginning on August 17 through September 21 representatives of SLC and ITI,
including lawyers, accountants and investment bankers, participated in a series
of visits and conference calls to discuss due diligence matters.
Throughout late August and into September, there were a series of
conference calls and meetings to discuss the terms of the merger and the merger
agreement.
At a regular meeting of ITI's board of directors on September 22, 1999,
there were reports by ITI's outside legal and financial advisors on the status
of the merger discussions and the terms of the proposed merger and merger
agreement. Another meeting of the ITI board of directors was held on September
25 to discuss the projections used to analyze the merger. On September 28, the
ITI board of directors approved the merger and the merger agreement, and it was
signed that evening. A press release concerning the merger was issued early on
September 29.
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<PAGE> 28
DEVELOPMENT OF FINANCIAL ANALYSES AND PROJECTIONS. During the course of
the discussions regarding potential transactions in 1999, management of ITI
prepared a series of financial projections over the course of the year. ITI
management prepared a set of projections in February 1999 and furnished it to
Goldman Sachs for use in a confidential memorandum. These projections are
summarized below:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
----------------------------------------------
1999 2000 2001 2002 2003
------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net sales.............................. $141.2 $173.0 $202.2 $238.2 $280.9
Gross margin........................... 65.9 81.3 94.9 112.0 132.5
Operating income....................... 34.3 44.0 54.8 66.5 80.6
Net income............................. 22.7 29.4 36.6 44.5 54.0
</TABLE>
The above projections assumed, among other matters, the following:
- Revenues were projected to increase 29% in 1999 over 1998 primarily due
to anticipated increases in sales of ITI's lower priced high volume
systems coupled with the expected release of ITI's new Concord and Advent
systems early in 1999.
- Projected revenue growth for periods 2000 through 2003 was based upon
management's estimated unit sales on a product-by-product basis, which
was supported by market research conducted by management and third
parties.
- Gross margins were assumed to remain at historical levels of
approximately 47% of revenues, with pricing pressures in the marketplace
being offset by cost reductions and plant efficiencies gained by revenue
increases.
ITI management revised these projections in June and July to reflect
changes to assumptions used to prepare the earlier projections, reflecting lower
expectations for ITI and resulting in substantially lower revenues and operating
income. These projections are summarized below:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
----------------------------------------------
1999 2000 2001 2002 2003
------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net sales.............................. $125.5 $151.7 $181.2 $215.1 $253.3
Gross margin........................... 59.8 71.2 85.1 101.2 119.3
Operating income....................... 28.3 36.9 45.5 56.0 58.0
Net income............................. 19.0 24.9 31.0 38.1 46.3
</TABLE>
The assumptions used for these projections changed from those used for the
projections contained in the confidential memorandum as follows:
- The sales forecast for 1999 was reduced due to the fact that ITI lost two
significant customers in early 1999 due to industry consolidation. In
addition, delays in introducing the Concord and Advent products required
a further adjustment to 1999 projected revenue.
- Revenue projections for years 2000 through 2003 were also revised
downward based upon the above facts.
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<PAGE> 29
During the course of the discussions between SLC and ITI that led to the
execution of the merger agreement, SLC provided ITI's representatives with the
following information about SLC and its financial performance:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
--------------------------
1999 2000 2001
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net sales................................................. $441.3 $527.7 $630.0
Gross margin.............................................. 194.9 236.5 283.9
Operating income.......................................... 59.7 79.8 101.8
Net income................................................ 32.3 45.4 59.6
</TABLE>
In preparing these projections, SLC assumed, among other matters, the following:
- That market growth rates would continue to be high (15%) for electronic
access control and video surveillance offerings within the corporate
enterprises market.
- That European growth rates would increase in the residential market due
to the entry of mass marketers.
- That revenues from two development projects, focused on the management of
assets and digital fiber optic communications, would result in first year
revenues of $6 million in 1999, growing to $30 million in 2001.
- That there would be a reduction in manufacturing costs due to plant
consolidations and converting the assembly of printed circuit boards from
a third party to in-house assembly.
- That the financial results from European operations would be converted
into U.S. currency at a rate of 2.03 Dutch guilders to 1.00 U.S. dollar.
- The projections excluded the impact of any new acquisitions after June
1999.
On September 17, 1999, ITI management prepared a further set of projections
for ITI and adjusted the SLC projections, including reductions in projected net
income for years 1999, 2000 and 2001. ITI management included in the ITI and SLC
projections additional cases for year 2000, which ITI management characterized
as "conservative" and "high." Mr. Auth furnished these projections to the ITI
board of directors, along with certain financial analyses. Based on these
projections, Mr. Auth expressed concern on September 17, 1999, about the
proposed transaction. These projections are summarized below:
<TABLE>
<CAPTION>
ITI SLC
---------------------------------- ----------------------------------
YEAR ENDING DECEMBER 31, YEAR ENDING DECEMBER 31,
---------------------------------- ----------------------------------
2000 2000 2000 2000
1999 HIGH CONSER. 2001 1999 HIGH CONSER. 2001
------ ------ ------- ------ ------ ------ ------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales....................... $123.1 $153.7 $147.7 $187.9 $425.0 $508.3 $478.0 $606.9
Gross profit.................... 57.7 71.4 68.6 87.4 184.3 227.7 214.1 263.2
Operating income................ 25.7 35.3 32.6 45.6 49.0 76.5 65.9 84.2
Net income...................... 17.5 25.0 22.2 32.2 26.1 43.4 37.2 48.2
</TABLE>
22
<PAGE> 30
The above revised projections for ITI assumed, among other matters, the
following:
- The 1999 projections were revised to reflect actual results through
August 31, 1999 (excluding a non-recurring charge related to the Pittway
litigation of $2.6 million, net of applicable income tax benefits).
- The "high" projections for 2000 used the same base assumptions that were
used to produce the previous projections for ITI, but were adjusted for
expected revenues from ITI's new Concord Express and other changes in the
industry environment.
- The "conservative" projections for 2000 reflected a possible reduction in
sales due to the risk of additional delays in getting ITI's wireless fire
system through regulatory approval and into production.
- The projections for 2001 reflect updated projections based upon the above
facts and ITI management's best estimates.
The above revised projections for SLC assumed, among other matters, the
following:
- 1999 projections were revised by ITI's management to reflect actual
results through August 31, 1999, and ITI management's projection for
SLC's revenues for the balance of 1999 based on such year-to-date
results.
- The "high" projections for 2000 used SLC's projected 2000 growth rate
applied to ITI's 1999 projection for SLC.
- The "conservative" projections for SLC for 2000 were based upon ITI's
revised projections for SLC for 1999 and an assumed growth rate of 9%.
- The 2001 projections for SLC reflect SLC's original projected growth rate
applied to ITI's "high" SLC 2000 projection.
After discussing these September 17 projections with the ITI board of
directors and its investment bankers, ITI management on September 24 revised
projections of ITI and SLC. Management recommended the "conservative"
alternative for ITI (for which net income was 11% lower than the "high"
alternative) for the year 2000 and the "high" alternative for SLC (for which
income was 14% greater than the "conservative" alternative but less than the SLC
prepared projections) for the year 2000 and adjusted year 2001 net income for
SLC upward. As a result of these adjustments, SLC net income for years 1999,
2000 and 2001 was 10%, 4% and 11%, respectively, less than projections prepared
by SLC. Management, including Mr. Auth, advised the board of directors and its
investment bankers that these analyses were the management's best estimate as of
that date, and the ITI board of directors instructed Goldman Sachs to utilize
these
23
<PAGE> 31
projections in its analysis as the best estimate of ITI as to the future
financial performance of ITI and SLC. These projections are summarized below:
<TABLE>
<CAPTION>
ITI
---------------- SLC
YEAR ENDING --------------------------
DECEMBER 31, YEAR ENDING DECEMBER 31,
---------------- --------------------------
1999 2000 1999 2000 2001
------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net sales...................................... $123.1 $147.7 $425.0 $508.3 $606.9
Gross profit................................... 57.7 68.6 187.9 227.7 271.9
Operating income............................... 25.7 32.6 54.7 76.5 92.9
Net income..................................... 17.5 22.2 29.1 43.4 53.3
</TABLE>
The above projections assumed, among other factors, the following:
- The ITI projections for 1999 remained unchanged from the September 17,
1999, projections, with the ITI 2000 projections reflecting the
"conservative" projections that were developed on September 17, 1999 for
review by ITI's board.
- The 1999 revenue projection for SLC remained unchanged from the September
17, 1999 projections, but projected gross profit, operating income and
net income were increased.
- The "high" 2000 estimate for SLC prepared by ITI on September 17, 1999,
was used as the 2000 SLC projection.
- The 2001 projections for revenue for SLC were the same as the projections
prepared on September 17, 1999, but projected 1999 gross profit,
operating income and net income were increased.
If ITI's management had developed other analyses, the estimated future
performance of the combined company might have varied significantly from the
projections which ITI's board of directors considered in approving the merger.
Likewise, if the board had relied on one of the other analyses prepared by
management, it might have reached a different conclusion about the anticipated
benefits of the merger to ITI stockholders.
Neither SLC nor ITI makes public as a matter of course any projections as
to future performance or earnings, and the projections set forth above are
included in this proxy statement only because the information was provided to
the management of ITI and ITI's board of directors in considering the proposed
merger. Neither ITI nor the combined company if the merger is completed intends
to publish updated forward looking financial information. The information
provided included financial projections for SLC and ITI as independent
companies, without regard to the impact on ITI or SLC of the merger or any of
the potential effects of the transactions contemplated by the merger agreement.
The foregoing projections were not prepared with a view to public
disclosure or compliance with the published guidelines of the Securities and
Exchange Commission or the guidelines established by the American Institute of
Certified Public Accountants regarding projections or forecasts. SLC's internal
operating projections are, in general, prepared solely for internal use and
capital budgeting and other management decisions and are subjective in many
respects and thus susceptible to various interpretations and periodic revision
based on actual experience and business developments. All of the foregoing
projections were based on a number of assumptions, which were described in
detail above. Some of the assumptions upon which earlier projections were based
were not realized, resulting in the
24
<PAGE> 32
revision of those projections. Similarly, all of the assumptions underlying the
projections utilized by Goldman Sachs are subject to significant uncertainties
and contingencies that may be beyond the control of ITI and SLC, and some of
those assumptions may not be realized.
The actual results will vary from those described above, and those
variations may be material. Our independent accountants have not examined or
compiled the financial projections and accordingly do not provide any form of
assurance with respect to the projections. The inclusion of this information
should not be regarded as an indication that ITI or anyone who received this
information then considered, or now considers, it a reliable prediction of
future events, and this information should not be relied on as such. In light of
the uncertainties inherent in any projected data, stockholders are cautioned not
to place undue reliance on the projections. See "FORWARD-LOOKING STATEMENTS" on
page 15. FINALLY, YOU SHOULD NOTE THAT BECAUSE THE PROJECTIONS WERE PREPARED
MANY MONTHS AGO, THEY ARE NOT AN INDICATION OF ITI'S OR SLC'S MANAGEMENT'S
CURRENT VIEWS ABOUT THE ANTICIPATED RESULTS OF OPERATIONS OF ITI, SLC OR THE
COMBINED COMPANY IF THE MERGER IS COMPLETED.
REASONS FOR THE MERGER
The merger of ITI and SLC is designed to create a global systems, software
and communications company focused on security, fire protection, loss prevention
and access control. The board of directors and management of ITI and SLC believe
that this merger will benefit ITI, its stockholders and its customers for the
following reasons:
- SLC is a leader in the electronic and communications technology sector of
the security industry. We estimate that this sector of the industry
involves annual revenues in the United States of approximately
$10,000,000,000. SLC Americas' revenues have grown at an average annual
rate of 20.3% over the period beginning January 1, 1997 and ending
September 30, 1999. SLC Europe's revenues have grown at an average annual
rate of 16.5% over that period, excluding the effects of converting the
European results from Dutch guilders into U.S. dollars.
- Management of ITI and SLC view the electronic and communications
technology sector of the industry as evolving into three distinct
markets:
- RESIDENTIAL MARKET. The residential market primarily purchases
intrusion and fire protection components and systems for single family
homes and multi-family dwellings.
- COMMERCIAL MARKET. The commercial market purchases mainly intrusion
systems, fire systems and access control products and systems for small-
to medium-sized structures.
- CORPORATE ENTERPRISES MARKET. The corporate enterprises market
purchases powerful systems that provide an "enterprise solution" -- the
integration of several independent systems, such as intrusion and fire
protection systems and an access control management system.
As a result of ITI's leadership position in the North American residential
wireless market and SLC's global presence in the commercial and corporate
enterprises markets, the combined company will be able to target all three
markets more effectively than SLC or ITI independently. Because these
three markets tend to react differently to various economic cycles, the
combined company should be more stable and less sensitive to the impact of
these economic cycles than either SLC or ITI, standing alone.
- Management of ITI and SLC expect the combined company will generate
significant opportunities to increase revenues through sales
opportunities that are not currently available to the two companies
standing alone. ITI and SLC have complementary distribution channels,
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<PAGE> 33
which presents the opportunity to sell each company's product through the
other's distribution channel. For example, ITI hopes to increase its
ability to distribute its wireless systems by utilizing SLC's existing
European distribution market. While ITI currently has a strong
distributor in Italy and a large direct customer in Ireland for its ITI
branded wireless systems, ITI does not sell a significant quantity of its
ITI branded wireless systems in other parts of Europe. SLC's European
resources include an extensive sales and technical support organization
located in 21 countries. Management expects to use SLC's European
distribution channels to sell ITI wireless products, taking advantage of
SLC's market penetration in the European residential and commercial
market.
- The combined company will have the opportunity to utilize ITI's wireless
technology in the following high growth areas of the industry:
- ACCESS CONTROL. In access control applications, wireless networking
capability can provide for a reduction in installation and upgrade
costs.
- VIDEO SURVEILLANCE SYSTEMS. In video surveillance applications,
wireless technology can reduce the requirement to connect multi-building
installations with wired connections.
- THE INTEGRATION OF SEPARATE ELECTRONIC SYSTEMS. Wireless technology
facilitates linking intrusion, fire protection, asset control and video
surveillance systems to form an integrated system.
- Management of ITI and SLC expect to achieve cost savings as a result of
combining the two companies of at least $10,000,000 during the first 12
months following the merger. Management hopes to achieve these cost
savings by:
- eliminating duplicate engineering resources for intrusion control panel
development;
- reducing the cost of purchased components through volume leverage;
- reducing overhead support expenses associated with general and
administrative expenses; and
- ITI utilizing security system components that are currently manufactured
by SLC, rather than having to purchase them from ITI's current third
party suppliers. The difference between the price that a third party
would charge to ITI and the manufacturing cost that SLC would incur to
supply the components will result in significant cost savings.
In addition, the implementation of common information systems should
provide the ability to reduce current working capital levels. Also,
manufacturing economies of scale and streamlined plant operations are
expected to produce additional cost reductions beginning the second year
after the merger is completed.
- As a result of the above factors, management of ITI and SLC expect the
combined company to be a technology leader that will provide quality
integration solutions to the global marketplace and serve as a strong
foundation for growth within the industry.
The number of acquisitions by ITI's largest competitors over the last
several years has suggested to ITI that combining businesses may be beneficial
to competing effectively in the security industry. ITI's largest and most direct
competitor is the Ademco Security Group, a division of Pittway Corporation. ITI
management believes that a merger of SLC and ITI will allow the combined to
better compete with companies like Pittway. This belief was strengthened by the
February 2000 acquisition of Pittway by Honeywell International for about $2.2
billion in cash and debt. Honeywell's stated reason for the acquisition was "to
strengthen its position in the rapidly growing market for fire
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<PAGE> 34
and burglar alarms." The combined strengths of SLC and ITI will allow the
combined company to better compete with competitors like Honeywell that have
significantly greater resources than ITI alone.
The directors of ITI considered alternatives to a merger with SLC,
including a possible sale of ITI to Honeywell, and engaged Goldman Sachs to look
into alternatives. See "-- Background of the Merger" on page 18. Goldman Sachs
identified and eventually contacted 30 potential strategic partners regarding
their interest in ITI. Goldman's efforts yielded indications of interest from
SLC and Honeywell. For the reasons discussed under "-- Background of the
Merger," the directors eventually determined that future discussions with
Honeywell would not be fruitful and decided to pursue further negotiations with
SLC.
RECOMMENDATION OF THE BOARD OF DIRECTORS; FAIRNESS OF THE TRANSACTIONS
On September 28, 1999, the board of directors of ITI
- unanimously determined that the merger is advisable and fair to, and in
the best interest of, ITI and the stockholders of ITI;
- approved and adopted the proposed terms of the merger and the merger
agreement; and
- recommended that the ITI stockholders approve and adopt the merger and
the merger agreement.
The ITI board of directors has considered possible strategic transactions
involving ITI since July 1996, considered proposals by SLC since December 1998
and considered the terms of the merger and the merger agreement at its meetings
on September 22, September 25 and September 28, 1999. As part of this process,
the board of directors considered the advice of its outside financial and legal
advisors regarding the fairness of the terms of the merger and the merger
agreement to ITI stockholders. In reaching its decision, the board of directors
considered a number of positive factors relating to the merger, including the
following:
- Based on various assumptions and on management forecasts for the combined
company, and depending upon the trading value of the ITI stock after the
merger becomes effective, the implied value of the SLC offer represents a
premium of between 16.9% and 50.7% over the average closing price for ITI
common stock during the 30 day trading period ending September 17, 1999,
and a premium of between 1.5% and 30.8% over the closing price of ITI
common stock on September 27, 1999. See "-- Opinion of Financial Advisor
to ITI -- Review of Implied Transaction Premium" on page 31.
- Based on estimates of ITI's earnings per share for 1999 and 2000 that
have been published by stock analysts, and based on management forecasts
for the combined company, the merger would reduce ITI's earnings per
share in 1999 and increase earnings per share in 2000 on a generally
accepted accounting principles (GAAP) basis. On a GAAP basis adjusted for
goodwill amortization, the merger would increase ITI's earnings per share
in each of 1999 and 2000. See "-- Opinion of Financial Advisor to
ITI -- Pro Forma Merger Analysis" on page 35.
- The merger will allow ITI stockholders to exchange their shares for cash
at a price of $36.50 per share, subject to the limitation that no more
than 50% of the outstanding shares of ITI common stock, in the aggregate,
may be exchanged for cash.
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<PAGE> 35
- The merger also will allow ITI stockholders to retain their shares of
common stock, thereby giving them the opportunity to participate in the
potential growth opportunities of the combined company.
- The Board considered the favorable results of the due diligence review of
SLC and its subsidiaries conducted by ITI and the fact that ITI's
management and its advisors have from time to time solicited, and engaged
in discussions with, a number of other significant industry participants
regarding a possible business combination.
In the course of its deliberations, the ITI board of directors reviewed
with ITI management and outside advisors a number of additional factors relevant
to the merger, including:
- Historical information concerning ITI's and SLC's financial performance
and condition, operations and competitive position, which formed the
basis for management's expectations that:
- the combined company will generate significant opportunities to increase
revenues through sales opportunities that are not currently available to
the two companies standing alone, and
- the combined company will achieve cost savings of at least $10,000,000
during the first twelve months following the merger.
See "-- Reasons for the Merger" on page 25;
- Historical market prices and trading information with respect to ITI
common stock, which indicated that, for the period from November 24, 1994
to September 24, 1999, the price of ITI common stock had fluctuated from
a low of $11.374 on November 18, 1996 to a high of $36.875 on January 27,
1999, and had declined since that time to $27.125 on September 27, 1999,
which was a 25.7% discount from the cash election price of $36.50;
- The analysis prepared by Goldman Sachs and presented to ITI's board of
directors and the oral opinion of Goldman Sachs, subsequently confirmed
in writing, that, the aggregate of the cash consideration paid to ITI
stockholders pursuant to cash elections, assuming the cash election is
fully subscribed, and the retained shares of ITI common stock which
remain issued and outstanding after the merger were, in the aggregate,
fair from a financial point of view to the holders of ITI common stock,
as explained more fully in the text of the entire opinion attached as
Appendix B to this proxy statement;
- The terms and conditions of the merger agreement, including the
expectation that the transaction will be tax-free to ITI stockholders,
except for those shares of ITI common stock that ITI stockholders elect
to exchange for cash; and
- The ability of ITI's board of directors to enter into discussions with
another party in response to an unsolicited offer to merge or enter into
a business combination if the board believes in good faith, after
consultation with its financial advisors, outside counsel and other
advisors, that the unsolicited offer is more favorable to ITI
stockholders than the merger.
ITI's board of directors also identified and considered a variety of
potential negative factors in its deliberations concerning the merger, including
the following:
- The combined company will be controlled by Berwind Group Partners and the
ownership interest of current ITI stockholders will be significantly
diluted;
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<PAGE> 36
- The risk of fluctuations in the price of ITI common stock prior to the
merger, including the potential effects of the public announcement of the
merger on the trading price of ITI common stock;
- The substantial management time and effort that will be required to
consummate the merger and integrate the operations of the two companies;
- The risk that the potential benefits sought in the merger might not be
fully realized, including the risks that the combined company may not
realize expected revenue increases and expected cost savings; and
- The uncertainties and delay associated with completing the merger,
including obtaining a supplemental tax ruling and obtaining the financing
necessary for the cash election.
After due consideration ITI's board of directors concluded that the risks
associated with the proposed merger were outweighed by the potential benefits of
the merger.
The board evaluated the factors described above in light of their knowledge
of the business and operations of ITI and their business judgment. In view of
the number and variety of factors considered in its evaluation of the merger and
the merger agreement, the ITI board of directors did not find it practicable to,
and did not, quantify or otherwise attempt to assign relative weights to the
factors. Rather, the ITI board of directors based its determination on the
totality of the information presented to and considered by it.
OPINION OF FINANCIAL ADVISOR TO ITI
On September 28, 1999, Goldman Sachs delivered its oral opinion to the ITI
board of directors that, as of that date, the aggregate of the cash
consideration paid to ITI stockholders pursuant to cash elections, assuming that
the cash election is fully subscribed, and the retained shares of ITI common
stock which remain issued and outstanding after the merger were, in the
aggregate, fair from a financial point of view to the holders of ITI common
stock. This opinion was subsequently confirmed by the written opinion of Goldman
Sachs and is based upon and subject to the various qualifications and
assumptions described in the opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF GOLDMAN SACHS, DATED SEPTEMBER 28,
1999, IS ATTACHED AS APPENDIX B TO THIS PROXY STATEMENT AND IS INCORPORATED INTO
THIS PROXY STATEMENT BY REFERENCE. THE WRITTEN OPINION SETS FORTH THE
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION. HOLDERS OF ITI COMMON STOCK
SHOULD READ THE OPINION IN ITS ENTIRETY.
In connection with its opinion, Goldman Sachs reviewed, among other things:
- the merger agreement;
- the annual reports on Form 10-K of ITI for the five years ended December
31, 1998;
- interim reports to stockholders and quarterly reports on Form 10-Q of
ITI;
- other communications from ITI to its stockholders;
- the audited consolidated financial statements of SLC for the three years
ended December 31, 1998;
- additional financial and other information pertaining to SLC;
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<PAGE> 37
- internal financial analyses and forecasts for SLC prepared by the
management of SLC; and
- internal financial analyses and forecasts for ITI and SLC prepared by the
management of ITI, including cost savings and operating synergies
projected by the management of ITI to result from the merger.
Goldman Sachs also held discussions with members of the senior management
of ITI and SLC regarding the strategic rationale for, and the potential benefits
of, the merger and the past and current business operations, financial condition
and future prospects of their respective companies. In addition, Goldman Sachs:
- reviewed the reported price and trading activity of ITI common stock;
- reviewed the financial terms of certain recent business combinations in
the security industry specifically and in other industries generally; and
- performed other studies and analyses as Goldman Sachs considered
appropriate.
Goldman Sachs relied upon the accuracy and completeness of all of the
financial and other information reviewed by it and has assumed such accuracy and
completeness for purposes of rendering its opinion. Prior to preparation of the
forecasts utilized by Goldman Sachs in its analysis, ITI's management prepared
other forecasts which indicated future financial performance by ITI superior to
that indicated in the forecasts which were utilized. Goldman Sachs discussed
with ITI ITI's view regarding the risks and uncertainties inherent in preparing
forecasts of the future financial performance of ITI and SLC. In that regard,
ITI's board of directors stated to Goldman Sachs that the forecasts and
synergies utilized by Goldman Sachs in its analysis were, as of the date of the
opinion, the best currently available estimates of ITI as to the future
financial performance of ITI and SLC and instructed Goldman Sachs to utilize
these forecasts and synergies in rendering its opinion. In addition, Goldman
Sachs did not make an independent evaluation or appraisal of the assets and
liabilities of ITI or SLC or any of their respective subsidiaries and Goldman
Sachs was not furnished with any such evaluation or appraisal. The advisory
services and opinion were provided for the information and assistance of ITI's
board of directors in connection with its consideration of the merger and the
opinion does not constitute a recommendation as to how any holder of ITI common
stock should vote with respect to the merger. Inasmuch as the particular
circumstances of each stockholder may vary and the market value of the ITI
shares as of the cash election deadline was not determinable at the time the
opinion was delivered, Goldman Sachs' opinion does not constitute a
recommendation as to whether any individual stockholder should make an election
to receive the cash consideration pursuant to the terms of the merger agreement.
However, in rendering its opinion, Goldman Sachs assumed, with the consent of
ITI's board of directors, that the maximum aggregate amount of cash
consideration available to be paid pursuant to the merger agreement will be
paid. In addition, Goldman Sachs did not express an opinion as to the prices at
which ITI common stock will trade following the merger.
The following is a summary of the principal financial analyses presented to
the ITI board of directors by Goldman Sachs in connection with providing its
written opinion on September 28, 1999, and does not purport to be a complete
description of the analyses performed by Goldman Sachs.
PROSPECTIVE MERGER PARTNERS CONTACTED. Goldman Sachs reviewed the results
of efforts by ITI and its advisors to solicit indications of interest and
proposals from third parties with respect to a business combination with ITI.
From this process, ITI and its advisors ultimately contacted thirty parties, and
of these thirty parties, eight parties received a confidential information
memorandum. ITI in turn received two proposals from the recipients of the
confidential information memoranda. In addition, ITI's chief executive officer
held preliminary discussions with the management of a direct
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<PAGE> 38
competitor of ITI. ITI eventually evaluated the two proposals, one of which was
from SLC, before deciding to enter into the merger agreement with SLC. See
"-- Background of the Merger" on page 18.
REVIEW OF IMPLIED TRANSACTION PREMIUM. Goldman Sachs calculated the
average value which would be received and retained by ITI stockholders with
respect to each share of ITI common stock, as implied by the SLC offer. This
analysis assumed that the cash election would be fully subscribed and that,
therefore, 50% of the shares of ITI common stock would be converted into cash.
This calculation was done by taking the average of the amount of cash to be
received by ITI stockholders for each share of ITI common stock and the value,
based on various assumptions, of each ITI share of common stock retained by
ITI's stockholders. These assumptions used a range of projected year 2000 price
to earnings ratios of 7x to 13x and the ITI projection for year 2000 earnings
per share for the combined company.
Prior to the announcement of the transaction, ITI was trading at
approximately 10x consensus analysts' estimates of ITI's projected year 2000
earnings per share. The range of 7x to 13x was chosen for illustrative purposes
to consider the implied value of SLC's offer to ITI's shareholders at multiples
both higher than and lower than ITI's current multiple. The implied value
calculated in this manner ranged from $27.53 to $35.48 per share. Using the same
assumptions and the ITI share price of $23.54 based on an average of ITI's
common stock closing prices for the 30-day period ending September 17, 1999,
Goldman Sachs calculated the premium to that share price which the implied value
of the SLC offer represented and which ranged from 16.9% to 50.7%. Using the
same assumptions and the per share price based on the $27.125 ITI common stock
closing price on September 27, 1999, Goldman Sachs calculated the premium to
that recent closing price which ranged from 1.5% to 30.8%.
The following table sets forth Goldman Sachs' analysis of the implied value
of the SLC offer:
<TABLE>
<CAPTION>
COMBINED COMPANY 2000 P/E MULTIPLE
------------------------------------------------------------
7X 8X 9X 10X 11X 12X 13X
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
The Combined Company 2000E
EPS(a)................................ $ 2.65 $ 2.65 $ 2.65 $ 2.65 $ 2.65 $ 2.65 $ 2.65
Implied Value of Combined Company
Stock................................. 18.55 21.20 23.85 26.50 29.15 31.80 34.45
Value of Cash Portion................... 36.50 36.50 36.50 36.50 36.50 36.50 36.50
Implied Value of SLC Offer(b)........... $27.53 $28.85 $30.18 $31.50 $32.83 $34.15 $35.48
Premium to Pre-Deal Share Price(c)...... 16.9% 22.6% 28.2% 33.8% 39.4% 45.1% 50.7%
Premium to Recent Close(d).............. 1.5% 6.4% 11.2% 16.1% 21.0% 25.9% 30.8%
</TABLE>
- -------------------------
(a) Projected earnings based on ITI's projections for ITI and SLC, with
transaction adjustments of $19,700,000 after tax and $10,000,000 of pre-tax
synergies.
(b) Assumes that the cash election is fully subscribed.
(c) Pre-deal share price of $23.54 based on an average of ITI common stock
closing prices for the 30-day period ending September 17, 1999.
(d) Based on $27.125 ITI common stock closing price on September 27, 1999.
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<PAGE> 39
HISTORICAL STOCK TRADING ANALYSIS. Goldman Sachs reviewed the historical
trading prices and volumes for the ITI common stock from November 25, 1994 to
September 24, 1999. During that period, ITI's stock price fluctuated from a low
of $11.375 on November 18, 1996 to a high of $36.875 on January 27, 1999 and the
stock price had declined since then to its current levels. Goldman Sachs also
analyzed the relationship between movements in the closing prices of the ITI
common stock and movements in the closing prices of the common stock of Pittway
Corporation, a competitor of ITI, and in the closing value of the Russell 2000
Index for the corresponding periods. The analyses were done for:
- the period from November 30, 1994, the date of the initial public
offering of ITI, to August 31, 1999, using a monthly index,
- the three-year period from September 20, 1996 to September 17, 1999,
using a weekly index,
- the one-year period from September 17, 1998 to September 17, 1999, using
a daily index and
- the year-to-date period from January 1, 1999 to September 17, 1999, using
a daily index.
The analysis indicated that ITI's stock price had underperformed Pittway's stock
and the Russell 2000 Index for each of these periods.
SELECTED COMPANIES ANALYSIS. Goldman Sachs reviewed financial, operating
and stock market information relating to ITI and compared it with corresponding
financial information, ratios and public market multiplies for the following
four publicly traded companies in the security equipment industry:
- Checkpoint Systems, Inc.;
- Detection Systems, Inc.;
- Pittway Corporation; and
- Sensormatic Electronics Corporation.
This analysis showed the public market trading multiples of ITI common
stock relative to other similar publicly traded companies in the security
equipment industry. Goldman Sachs selected these companies because they are
publicly traded security equipment companies with operations that may be
considered similar to ITI. Goldman Sachs also calculated and compared various
financial multiples and ratios. The multiples and ratios were calculated using
an average of ITI common stock closing prices for the 30-day period ending
September 17, 1999 and the closing prices for each of the selected companies on
September 27, 1999. Except as otherwise indicated below, the analyses were based
on the most recent publicly available information. Goldman Sachs' analyses of
the selected companies compared the following to the results for ITI:
- closing share price on September 27, 1999 as a percentage of fifty-two
week high share price;
- levered market capitalization, which is the market value of common equity
plus the book value of debt less cash, as a multiple of last 12 months
sales;
- levered market capitalization as a multiple of last 12 months earnings
before interest, taxes, depreciation and amortization, or EBITDA;
- levered market capitalization as a multiple of last 12 months earnings
before interest and taxes, or EBIT;
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<PAGE> 40
- 1998 and estimated 1999 and 2000 price/earnings ratios (provided by
Institutional Brokers Estimate System, commonly referred to as IBES);
- estimated 1999 price/earnings ratios to earnings per share growth rate
(provided by IBES); and
- estimated five-year earnings per share growth rate (provided by IBES).
The results of these analyses are summarized as follows:
SELECTED PUBLICLY TRADED
SECURITY EQUIPMENT COMPANIES
<TABLE>
<CAPTION>
RATIO/MULTIPLE RANGE MEDIAN MEAN ITI(A)
- -------------- ----------- ------ ----- ------
<S> <C> <C> <C> <C>
September 27, 1999 Share Price as Percentage of
52-Week High Share Price.......................... 62.9%-83.3% 80.0% 77.2% 63.8%
Levered Market Capitalization as a Multiple of Last
12 Months Sales................................... 0.5x-1.5x 1.0x 1.0x 1.8x
Levered Market Capitalization as a Multiple of Last
12 Months EBITDA.................................. 6.2x-10.3x 7.6x 7.9x 7.3x
Levered Market Capitalization as a Multiple of Last
12 Months EBIT.................................... 8.2x-18.7x 11.6x 12.5x 8.4x
1998 Price/Earnings Ratio........................... 16.3x-46.6x 20.8x 26.1x 14.5x
Estimated 1999 Price/Earnings Ratio................. 12.9x-23.3x 15.6x 16.9x 12.1x
Estimated 2000 Price/Earnings Ratio................. 10.7x-15.2x 12.9x 12.9x 10.3x
Estimated 1999 Price/Earnings Ratio to Earnings Per
Share Growth Rate................................. 0.5x-1.3x 0.8x 0.8x 1.1x
Estimated Five-Year Growth Rate..................... 18.0%-25.0% 21.0% 21.3% 11.3%
</TABLE>
- -------------------------
(a) The ratios and multiples pertaining to ITI are based on an average of ITI
common stock closing prices for the 30-day period ending September 17, 1999.
This analysis indicated that the ITI's price/earnings ratio and estimated
five-year growth rate were below those of the other companies, and that the
levered market capitalization as a multiple of last 12 months EBITDA and EBIT
were below the median and mean of the other companies.
SELECTED COMPARABLE TRANSACTIONS ANALYSIS. As background information,
Goldman Sachs reviewed and analyzed the implied transaction multiples paid in
the selected merger and acquisition transactions since 1988 in the security
equipment industry. With respect to these selected transactions, Goldman Sachs
calculated, where data were available for the selected transactions, the
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<PAGE> 41
transaction levered consideration as a multiple of latest twelve months sales,
latest twelve months EBIT and latest twelve months EBITDA. The results of these
analyses are summarized below:
<TABLE>
<CAPTION>
RANGE
---------------
<S> <C>
Transaction levered consideration........................... $1.8M-$2,102.6M
Levered consideration as a multiple of latest twelve months
sales..................................................... 0.5x-2.7x
Levered consideration as a multiple of latest twelve months
EBIT...................................................... 6.4x-27.2x
Levered consideration as a multiple of latest twelve months
EBITDA.................................................... 5.8x-11.9x
</TABLE>
CONTRIBUTION ANALYSIS. Goldman Sachs reviewed selected historical and
estimated future operating and financial information, including EBITDA, EBIT and
net income for ITI, SLC and the pro forma results (not including purchase
accounting adjustments or synergies) for the combined entity. The historical and
future operating and financial information was based on publicly available
information for ITI, historical financial information provided by SLC and the
ITI management forecasts for ITI and SLC. Goldman Sachs also analyzed the
relative dollar and percentage contribution by ITI and SLC to the combined
company on a pro forma basis.
A contribution analysis demonstrates the parties' respective historical and
projected contributions, on a percentage basis, to projected income statement
items of the pro forma combined entity and compares such contributions to the
parties' stockholders' relative projected equity interests in the pro forma
combined entity following the merger.
The results of these analyses are summarized as follows:
<TABLE>
<CAPTION>
% CONTRIBUTION TO
PRO FORMA
COMBINED ENTITY
------------------
ITI SLC
------- -------
<S> <C> <C>
EBITDA
Last Twelve Months ("LTM")................................ 28.4% 71.6%
1999...................................................... 28.9% 71.1%
LTM (debt adjusted)....................................... 32.1% 67.9%
1999 (debt adjusted)...................................... 32.4% 67.6%
EBIT
LTM....................................................... 30.9% 69.1%
1999...................................................... 32.0% 68.0%
LTM (debt adjusted)....................................... 34.2% 65.8%
1999 (debt adjusted)...................................... 35.1% 64.9%
Net Income
LTM....................................................... 36.7% 63.3%
1999...................................................... 37.6% 62.4%
2000...................................................... 37.4% 62.6%
</TABLE>
By way of comparison, immediately after the merger, Berwind Group Partners
and members of SLC management will together own approximately 63.5% of the
shares of common stock of the combined company, taking into account options to
purchase common stock of the combined
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<PAGE> 42
company, and assuming no cash elections are made. Assuming full exercise of the
cash election and taking options into account, Berwind Group Partners and SLC
management will own approximately 78% of the shares of common stock of the
combined company.
PRO FORMA MERGER ANALYSIS. Goldman Sachs analyzed the effect of the merger
on earnings per share from the perspective of ITI stockholders. In this
analysis, Goldman Sachs assumed that the cash election would be fully
subscribed. Consequently, the analysis relates only to the portion of the value
to be retained by ITI stockholders after the merger, aside from the cash
consideration that they will receive in the merger as a result of making cash
elections.
Goldman Sachs prepared pro forma analyses of the financial impact of the
merger using the ITI management forecasts for ITI and SLC and IBES estimates for
ITI. For each of the years 1999 and 2000, Goldman Sachs compared the projected
earnings per share of ITI common stock, on a stand alone basis, to the projected
earnings per share of the common stock for the combined company on a pro forma
basis. Goldman Sachs performed this analysis using an ITI share price of $23.54,
the average of ITI common stock closing prices for the 30-day period ending
September 17, 1999, and considered pro forma transaction adjustments of
$19,700,000 after tax and $10,000,000 of pre-tax first year cost synergies. The
pro forma transaction adjustments, which relate primarily to increased
depreciation, amortization, financing cost and interest expense, decrease the
projected earnings of the combined company while the synergies increase the
projected earnings.
Using both the IBES and management estimates for ITI and the management
forecasts for the combined company, Goldman Sachs calculated that:
- on a generally accepted accounting principles ("GAAP") basis, the
proposed transaction would reduce ITI's earnings per share in 1999 and
increase it in 2000, and
- on a GAAP basis adjusted for goodwill amortization, the proposed
transaction would increase ITI's earnings per share in each of 1999 and
2000.
<TABLE>
<CAPTION>
MANAGEMENT
IBES CASE CASE
--------- ----------
<S> <C> <C>
1999 ESTIMATES
GAAP basis................................................ (13.3)% (16.5)%
GAAP basis adjusted for goodwill amortization............. 24.5% 20.2%
2000 ESTIMATES
GAAP basis................................................ 16.4% 3.5%
GAAP basis adjusted for goodwill amortization............. 47.2% 31.9%
</TABLE>
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Goldman Sachs' opinion. In arriving at its fairness determination,
Goldman Sachs considered the results of all the analyses, and did not attribute
any particular weight to any analysis or factor considered by it, nor, except as
set forth above, did it derive any value from, or draw any conclusion with
respect to fairness based on, any particular analysis. Rather, Goldman Sachs
made its determination as to fairness on the basis of its experience and
professional judgment, after considering the results of all such analyses. No
company or transaction used in the above analyses as a comparison is directly
comparable to ITI or SLC or the merger. The analyses were prepared solely for
purposes of Goldman Sachs' providing its opinion to the ITI board of directors
as to the fairness of the aggregate of the cash consideration paid to ITI
stockholders pursuant to cash elections and the
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<PAGE> 43
retained shares of ITI common stock which remain issued and outstanding after
the merger, in the aggregate, from a financial point of view to the ITI
stockholders. In addition, these analyses do not purport to be appraisals or
necessarily reflect the prices at which businesses or securities actually may be
sold. Analyses based upon forecasts or future results are not necessarily
indicative of actual future results, which may be significantly more or less
favorable than suggested by such analyses. Because such analyses are inherently
subject to uncertainty, being based upon numerous factors or events beyond the
control of the parties or their respective advisors, none of ITI, SLC, Goldman
Sachs or any other person assumes responsibility if future results are
materially different from those forecast. As described above, Goldman Sachs'
opinion to the ITI board of directors was one of many factors taken into
consideration by the ITI board of directors in making its determination to
approve the merger agreement and the merger. The foregoing summary does not
purport to be a complete description of the analysis performed by Goldman Sachs
and is qualified by reference to the written opinion of Goldman Sachs set forth
in Appendix B to this proxy statement.
Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. Goldman Sachs may also
provide investment banking services to the combined company in the future. The
ITI board of directors selected Goldman Sachs as its financial advisor because
it is a nationally recognized investment banking firm that has substantial
experience in transactions comparable to the merger. Goldman Sachs is familiar
with ITI, having acted as its financial advisor in connection with, and having
participated in some of the negotiations leading to, the merger agreement.
Goldman Sachs provides a full range of financial advisory and securities
services and in the course of its normal trading activities may, from time to
time, effect transactions and hold positions in securities, including derivative
securities, of ITI for its own account or for the accounts of customers.
Pursuant to a letter agreement dated January 29, 1999, the ITI board of
directors engaged Goldman Sachs as its financial advisor and to render an
opinion with respect to the fairness of the consideration in the merger, from a
financial point of view, to the stockholders of ITI. Pursuant to the terms of
the Goldman Sachs engagement letter, ITI agreed to pay a customary fee to
Goldman Sachs. ITI also agreed to reimburse Goldman Sachs for its reasonable
out-of-pocket expenses, including attorneys' fees, and to indemnify Goldman
Sachs against liabilities it incurs, including liabilities under the federal
securities laws.
INTERESTS OF PERSONS IN THE MERGER
ITI DIRECTORS AND OFFICERS. In considering the recommendations of the ITI
board of directors, ITI stockholders should be aware that certain members of
ITI's management and ITI's board of directors have interests in the merger in
addition to those of ITI stockholders generally. The ITI board of directors was
aware of these interests when it considered and approved the merger and the
merger agreement.
The merger agreement provides that Thomas L. Auth and Perry J. Lewis will
be directors of the combined company. Mr. Auth is currently a director and the
President and Chief Executive Officer of ITI. Mr. Lewis is a director of ITI.
Berwind Group Partners has agreed to vote all of its shares of ITI common stock
in favor of electing Mr. Auth as a director for the first two years following
the closing of the merger. Berwind Group Partners has also agreed to vote all of
its shares of ITI common stock in favor of electing Mr. Lewis as a director for
the first two years following the closing of the merger, but only so long as he,
together with MLGA Fund II, L.P., MLGAL Partners, L.P.,
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<PAGE> 44
Sangwoo Ahn and John A. Morgan, continues to maintain ownership of at least 25%
of the ITI common stock they owned as of September 28, 1999. See "-- The Voting
Agreement" on page 42.
Mr. Auth and Joseph Hurst, who are both directors and executive officers of
ITI, are parties to existing compensation agreements with ITI. These
compensation agreements have no term and provide stated minimums for their
annual base salaries, as well as severance pay in an amount equal to six months'
base salary if employment is terminated without cause or if the executive
suffers a reduction in status or duties. Charles E. Briskey and Charles A.
Durant, who are both executive officers of ITI, also have existing compensation
agreements with ITI that provide for severance pay in an amount equal to six
months' base salary if employment is terminated without cause or if the
executive suffers a reduction in status or duties. These existing arrangements
with Mr. Hurst and Mr. Durant have been left unchanged. In the case of Mr. Auth,
ITI entered into a new employment agreement with Mr. Auth that is conditioned
upon the closing of the merger. This new employment agreement will cancel and
replace Mr. Auth's existing compensation agreement with ITI. The company has
also agreed to modify its severance obligations with respect to Mr. Briskey upon
the closing of the merger. These new arrangements with Mr. Auth and Mr. Briskey
are discussed in more detail below.
After ITI and SLC had agreed upon the principal terms and conditions of the
merger, Mr. Auth negotiated with SLC management for new compensation
arrangements for himself and modifications of the compensation arrangements of
many of the other executive officers of ITI. The new compensation arrangement
for Mr. Auth was documented in an employment agreement entered into between Mr.
Auth and ITI on the date the merger agreement was approved by the ITI board of
directors. The new compensation arrangements for the other officers involved
were approved by the ITI board of directors at the same time the merger
agreement was approved. All of these arrangements are conditioned upon the
closing of the merger and are intended to retain key ITI employees prior to and
following the merger. The changes to the existing severance arrangements with
Mr. Auth and Mr. Briskey reflect, in part, the company's obligation to make
severance payments to these executives upon a reduction of their duties.
Mr. Auth's new employment agreement with ITI provides for a three-year term
beginning on the date of closing. The principal terms of this employment
agreement are:
- a monthly salary of $33,333, which amounts to $399,996 annually;
- the issuance to Mr. Auth, on the date of closing, of options to acquire
20,000 shares of the combined company's common stock at an exercise price
equal to the fair market value on the date of grant;
- continuing to pay the operating costs of a company furnished automobile;
- standard group benefits; and
- the right to elect to waive the last $40,000 in salary payable under the
agreement in exchange for health insurance coverage for Mr. Auth and his
spouse until Mr. Auth reaches the age of 65.
In addition to the employment agreement, ITI has agreed to pay Mr. Auth a
bonus upon the closing of the merger equal to one-twelfth of his target 1999
bonus for each calendar month or portion thereof of calendar year 2000 that
precedes the closing. The board of directors of ITI also determined that any
unvested options held by Mr. Auth under ITI's current long-term stock incentive
plan will immediately vest following the term of the employment agreement.
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<PAGE> 45
ITI agreed to pay Mr. Briskey an amount equal to six months of his current
base salary upon termination of his employment, for whatever reason, as a final
severance payment. This agreement changes Mr. Briskey's current severance
agreement with ITI and is conditioned upon Mr. Briskey remaining employed with
ITI through the closing and his reasonable cooperation in the pre-closing
integration process. Although the exact meaning of the phrase "reasonable
cooperation in the pre-closing integration process" was not documented, ITI and
SLC management expect that Mr. Briskey will cooperate with the joint integration
team established to explore possible cost savings that may be obtained through
manufacturing economies of scale. In addition, ITI has agreed to pay Mr. Briskey
a bonus upon the closing of the merger equal to one-twelfth of his target 1999
bonus for each calendar month or portion thereof of calendar year 2000 that
precedes the closing. The board of directors of ITI also determined that any
unvested options held by Mr. Briskey under ITI's current long-term stock
incentive plan will immediately vest upon termination of his employment.
ITI has agreed to pay a bonus to Mr. Hurst upon the closing of the merger
equal to one-twelfth of his target 1999 bonus for each calendar month or portion
thereof of calendar year 2000 that precedes the closing. The board of directors
of ITI also determined that any unvested stock options granted to Mr. Hurst
under ITI's current long-term stock incentive plan will vest on the earlier of
the date they would vest under the applicable employee stock option agreement or
termination of Mr. Hurst's employment with ITI.
ITI has also agreed to pay to Reed G. Grothe, Gerald U. Klasen, Duane
Paulson, Jack A. Reichert and Brian K. Seemann, executive officers of ITI,
severance payments equal to six months' base salary in the event their
employment with ITI is terminated without cause within two years of the closing.
None of these officers have existing severance arrangements with ITI.
The merger agreement also provides that each holder of options to purchase
ITI common stock will be given the right to elect to receive a cash payment for
up to 50% of the number of shares of ITI common stock covered by those options
in exchange for the cancellation of those options to the extent of the exchange
of the underlying shares for cash. See "STOCK OPTIONS" on page 49. As of the
date of the merger agreement, the executive officers of ITI held options to
purchase a total of 984,259 shares of ITI common stock.
The following table summarizes for each ITI director and executive officer
the aggregate consideration that he is entitled to receive, at closing or in the
future, as a result of the merger of SLC and ITI. In addition, each director and
officer will have the right to elect to receive cash for his outstanding shares
of ITI common stock, subject to the 50% aggregate cap. The number of shares of
ITI common stock owned by each director and officer as of December 31, 1999 is
listed in the table.
<TABLE>
<CAPTION>
MAXIMUM SHARES OF ITI
STOCK OPTION COMMON
CASH SEVERANCE STOCK
NAME ELECTION(1) BONUSES(2) PAYMENT OTHER OWNED(3)
- ---- ------------ ---------- --------- -------------- -------------
<S> <C> <C> <C> <C> <C>
OUTSIDE DIRECTORS:
Sangwoo Ahn............... $ 153,750 -- -- -- 35,656
Walter R. Barry, Jr....... $ 153,750 -- -- -- 0
Perry J. Lewis............ $ 153,750 -- -- -- 47,656
W. Wallace McDowell,
Jr...................... $ 153,750 -- -- -- 46,000
</TABLE>
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<PAGE> 46
<TABLE>
<CAPTION>
MAXIMUM SHARES OF ITI
STOCK OPTION COMMON
CASH SEVERANCE STOCK
NAME ELECTION(1) BONUSES(2) PAYMENT OTHER OWNED(3)
- ---- ------------ ---------- --------- -------------- -------------
<S> <C> <C> <C> <C> <C>
EXECUTIVE OFFICERS:
Thomas L. Auth............ $8,874,184 $66,667 -- Employment 240,604
Agreement(4);
Special option
treatment(5)
Charles E. Briskey........ $1,558,125 $26,667 $87,500(6) Special option 6,909
treatment(7)
Charles A. Durant......... $ 416,969 -- -- -- 1,085
Reed G. Grothe............ $ 373,750 -- $62,500(8) -- 1,200
Joe Hurst................. $ 752,656 $33,333 -- Special option 0
treatment(8)
Gerald U. Klasen.......... $ 223,750 -- $60,000(8) -- 1,842
Duane Paulson............. $ 325,350 -- $60,000(8) -- 417
Jack A. Reichert.......... $ 316,675 -- $47,000(8) -- 551
Brian K. Seemann.......... $ 280,000 -- $55,000(8) -- 1484
</TABLE>
- -------------------------
(1) This number assumes that the option holder elects to receive cash for
50% of his options, the maximum allowable under the merger agreement,
and that the option holder chooses to exchange those options with the
lowest exercise price in order to maximize the cash to be received at
closing.
(2) By agreement as discussed above, ITI will pay Mr. Auth, Mr. Briskey and
Mr. Hurst a bonus upon the closing of the merger equal to one-twelfth
of his target 1999 bonus for each calendar month or portion thereof of
calendar year 2000 that precedes the closing. The numbers set forth on
the table assume a closing on May 1, 2000.
(3) Each director and officer will have the right to elect to receive cash
for his outstanding shares of ITI common stock, subject to the 50%
aggregate cap. The number of shares shown in the table is as of
December 31, 1999, and includes shares held directly and indirectly.
The number of shares is derived from reports filed by each director and
officer with the SEC and, in the case of those officers who hold stock
in the ITI 401(k) plan, from reports from the trustee of the ITI 401(k)
plan.
(4) ITI entered into an employment agreement with Mr. Auth that is
conditioned upon the closing. The principal terms of this employment
agreement are discussed above.
(5) Conditioned upon the closing of the merger, any unvested options held
by Mr. Auth under ITI's current long-term stock incentive plan will
immediately vest following the term of his employment agreement.
(6) ITI agreed to pay Mr. Briskey an amount equal to six months of his
current base salary upon termination of his employment, for whatever
reason, as a final severance payment.
(7) Conditioned upon the merger, the board of directors of ITI determined
that any unvested options held by Mr. Briskey under ITI's current
long-term stock incentive plan will immediately vest upon termination
of his employment.
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<PAGE> 47
(8) ITI agreed to pay this executive officer a severance payment equal to
six months' base salary in the event his employment with ITI is
terminated without cause within two years following the closing.
(9) Conditioned upon the merger, the board of directors of ITI also
determined that any unvested stock options granted to Mr. Hurst under
ITI's current long-term stock incentive plan will vest upon the earlier
of the date they would vest under the applicable employee stock option
agreement or termination of Mr. Hurst's employment with ITI.
DIRECTORS AND OFFICERS OF BOTH SLC AND ITI. ITI has agreed to provide an
insurance and indemnification policy covering ITI's and SLC's directors and
officers for events occurring prior to the closing. ITI has agreed that this
policy will be substantially similar, with respect to limits and deductibles, to
ITI's existing policy or, if substantially equivalent insurance is unavailable,
the best available coverage. This obligation to provide insurance coverage runs
for six years.
SLC MANAGEMENT. SLC is authorized to grant options for up to 50,000 shares
of SLC common stock under SLC's existing stock option plan. In December of 1997,
SLC granted options on 25,000 shares of SLC common stock at an exercise price
equal to the fair market value at the date of issuance. Kenneth L. Boyda, who
will be the President and Chief Executive Officer of the combined company,
received 13,750 of these options. These options vest over a two-year period and
expire 10 years after the grant date. None of these options have been exercised.
SLC issued 17,500 additional options to executives in March 1998 with an
exercise price equal to 50% of the fair market value of SLC's stock in the event
that SLC becomes a public company through a public offering or as a result of
the merger of SLC into ITI. Seven thousand of these options were granted to Mr.
Boyda.
SLC has also committed to issue 7,500 more options to executives at a
discount from fair market value. Mr. Boyda will receive none of these options.
The shares of SLC common stock subject to options, including Mr. Boyda's
options, will be converted into options to purchase shares of ITI common stock
when the merger is completed. In total, current SLC management will hold options
upon completion of the merger covering 758,532 shares of ITI common stock at an
estimated weighted average exercise price of $16.53 per share. See "STOCK
OPTIONS" on page 49.
ACCOUNTING TREATMENT OF THE MERGER
In accordance with GAAP, the combined company will account for the merger
using the purchase method of accounting as a reverse merger, since Berwind Group
Partners, the stockholder of SLC, will obtain a controlling interest in ITI. As
a result, ITI is treated as being acquired by SLC for accounting purposes.
Immediately after the merger, Berwind Group Partners and SLC management will
together own a minimum of approximately 63.5% or up to a maximum of
approximately 78% of the shares of the combined company, depending on the number
of shares of ITI common stock and options exchanged for cash, and taking into
account options to purchase the common stock of the combined company. As
described in more detail in the notes to the unaudited pro forma combined
condensed financial statements, the total estimated purchase price of ITI of
$312,200,000 was computed based on:
- an estimate of the fair market value of 50% of the outstanding shares of
ITI common stock on the date of the merger, based on the current trading
price,
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<PAGE> 48
- the cost of the exchange of ITI common stock and options based on a cash
price of $36.50 per share, and
- the estimated direct expenses of the transaction.
Under the purchase method of accounting, we will allocate the purchase price to
the assets and liabilities of ITI that are acquired and assumed by the combined
company based upon their estimated fair values. Goodwill and other intangible
assets will be capitalized and a non-recurring charge relating to the write-off
of the fair value of in-process research and development projects will be
recorded in the quarter the merger is completed. The financial statements of SLC
will become the historical financial statements of the combined company. The
results of ITI's operations will be included in SLC's results commencing on the
date of the merger.
The unaudited summary pro forma combined condensed financial statements
appearing on page 101 of this proxy statement are based upon certain assumptions
and an allocation of the purchase price to the assets acquired and liabilities
assumed based upon preliminary estimates of their respective fair values. The
unaudited pro forma adjustments and combined amounts are included for
informational purposes only. If the merger is completed, the combined company's
financial statements will reflect effects of acquisition adjustments only from
the date of the merger. The actual allocation of the purchase price may differ
significantly from the allocation reflected in the unaudited summary pro forma
combined condensed financial statements. The amortization of goodwill and other
intangibles after the merger will reduce the earnings of the combined company.
SUPPLEMENTAL IRS RULING
Berwind Corporation is the common parent of an affiliated group of
corporations that previously included SLC. The common stock of Berwind
Corporation is owned by Berwind Group Partners. Berwind Corporation desired to
separate SLC from Berwind Corporation's other subsidiaries in order to achieve
cost savings. Accordingly, in October 1997, Berwind Corporation distributed all
of the stock of SLC to Berwind Group Partners in a tax-free spin-off. Prior to
the spin-off, Berwind Corporation and SLC obtained a letter ruling from the IRS
addressing the tax-free status of the spin-off. In order to obtain this letter
ruling from the IRS, it was necessary to represent to the IRS, among other
matters, that SLC intended to engage in an initial public offering of its common
stock within three years of the spin-off and that the dilution to Berwind Group
Partners from the initial public offering and the exercise of employee stock
options would not exceed 20%. Berwind Corporation and SLC have received a
supplemental letter ruling that the merger will satisfy the representations of
Berwind Corporation and SLC to the IRS.
FINANCING
SLC entered into a $325 million credit agreement on November 17, 1999. The
purposes of the credit agreement are the following:
- to provide financing for the cash to be paid to ITI stockholders and
option holders who exercise the cash election;
- to refinance existing debt of SLC;
- to provide working capital for the combined company; and
- to finance fees and other expenses incurred in negotiating and completing
the merger.
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<PAGE> 49
Although ITI is not currently a party to the credit agreement, the combined
company will become the principal borrower upon the completion of the merger.
The loans under the credit agreement include a revolving facility in the amount
of $225 million and a five-year term loan in the amount of $100 million. The
aggregate amount of money that can be borrowed under the term loan decreases if
the cash election is not fully exercised. This decrease will equal the
difference between the amount of cash actually needed to fulfill the cash
elections and the amount that would have been required if all stockholders and
optionholders had elected to receive the maximum amount of cash permitted. See
"THE CASH ELECTION" on page 47.
The combined company will grant to the lenders a lien on all of the capital
stock of each domestic subsidiary of the combined company and 65% of the stock
of each first tier foreign subsidiary of the combined company as security for
the loans. The credit agreement also contains customary representations and
warranties, covenants (including maintaining financial ratios) and conditions.
The lenders will make the loans described above as soon as practicable following
the completion of the merger unless SLC and ITI fail to satisfy the credit
agreement's conditions to making the loans.
THE VOTING AGREEMENT
At the time of the merger, Berwind Group Partners, MLGA Fund II, L.P. and
Thomas L. Auth, all of whom are stockholders of ITI, will enter into a voting
agreement regarding the election of directors of the combined company. The
merger agreement provides that, immediately after the merger, there will be a
total of nine people on the board of directors of the combined company, unless
ITI and SLC agree otherwise. Two of these nine directors will be Mr. Auth and
Perry J. Lewis, current directors of ITI. The remaining seven directors will be
selected by the board of directors of SLC. For two years following the merger,
membership on the board of directors of the combined company will be determined
according to the voting agreement.
Berwind Group Partners will own a majority of the issued and outstanding
shares of ITI common stock immediately after the merger. In the voting
agreement, Berwind Group Partners will agree to vote all of its shares of ITI
common stock for the following individuals as directors of the combined company
until the second anniversary of the merger:
- Mr. Auth, who will serve as chairman of the board of directors of the
combined company; and
- Mr. Lewis, but only so long as he and his affiliates MLGA Fund II, MLGAL
Partners, L.P., John A. Morgan and Sangwoo Ahn, collectively retain at
least 25% of the shares of ITI common stock owned by them on September
28, 1999.
If Mr. Auth or Mr. Lewis vacates his board position within two years after
the merger, Berwind Group Partners will:
- fill a vacancy on the board caused by Mr. Auth's departure by an
individual designated by a majority of the individuals who were directors
of ITI immediately prior to the merger; and
- fill a vacancy on the board caused by Mr. Lewis' departure with an
individual designated by MLGA Fund II, but only if Mr. Lewis and his
affiliates listed above collectively retain at least 25% of the shares of
ITI common stock owned by them as of the date the voting agreement was
executed.
Nothing in the voting agreement prevents Berwind Group Partners from
removing any director for cause. However, Berwind Group Partners may only remove
Mr. Auth or Mr. Lewis as a director of the combined company if a majority of the
entire board of directors of the combined company
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<PAGE> 50
affirmatively determines in good faith that he was guilty of the type of conduct
that would constitute cause for removal.
Berwind Group Partners may not transfer any shares of ITI common stock it
receives in connection with the merger without causing the transferee to be
bound by this voting agreement. The voting agreement will terminate on the
second anniversary of the merger.
THE VOTING SUPPORT AGREEMENTS
SLC has entered into voting support agreements, each dated September 28,
1999, with Thomas L. Auth, the Auth Family Limited Partnership, the MLGA Fund
II, L.P., Perry J. Lewis and Sangwoo Ahn. These stockholders together have the
power to direct the voting of 18.8% of the shares of ITI common stock issued and
outstanding as of March 20, 2000. Each stockholder has agreed to vote all of
that stockholder's shares of ITI common stock, including shares acquired after
the date of the voting support agreement, as follows:
- in favor of the merger;
- against any action or agreement that would result in a material breach of
the merger agreement by ITI; and
- against any action that would impede, interfere with, delay, postpone or
attempt to discourage the merger.
Each voting support agreement provides that the stockholder and its
affiliates will not:
- solicit, encourage, recommend or approve any proposal for a merger or
other business combination involving ITI, other than the merger;
- solicit, encourage, recommend or approve any proposal or offer to acquire
a substantial portion of the voting securities or assets of ITI, other
than in connection with the merger agreement;
- transfer the stockholder's shares of ITI common stock unless the
transferee agrees to be bound by the terms of the voting support
agreement.
Each voting support agreement will terminate upon the earlier of the
merger, the termination of the merger agreement or when SLC notifies the
stockholder of the voting support agreement's termination.
AMENDMENT TO RIGHTS AGREEMENT
ITI and Norwest Bank Minnesota, National Association are parties to a
rights agreement, dated as of November 27, 1996. In connection with this rights
agreement, in November 1996, ITI's board of directors declared a dividend
distribution of one common stock purchase right for each outstanding share of
ITI common stock, payable to stockholders of record at the close of business on
December 9, 1996. Each common stock purchase right entitles the holder to
purchase from ITI one-half of a share of ITI common stock, or a combination of
securities and assets of equivalent value, subject to adjustment, at a purchase
price of $25.00. Under this rights agreement, the common stock purchase rights
only become exercisable on the tenth business day following:
- the public announcement that a person or group has acquired, or obtained
the right to acquire, 20% or more of ITI's common stock;
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<PAGE> 51
- the public announcement of a tender or exchange offer that would result
in ownership of 20% or more of ITI's common stock, unless ITI's board of
directors has determined that the tender or exchange offer is fair to
ITI's stockholders and in the best interests of ITI and its stockholders;
or
- a determination by ITI's board of directors that an adverse person has
acquired beneficial ownership of at least 15% of ITI's common stock.
Prior to becoming exercisable, the common stock purchase rights are
redeemable at the discretion of ITI's board of directors and will expire at the
close of business on November 26, 2006.
In connection with negotiation of the merger agreement, the board of
directors of ITI amended the rights agreement as of September 28, 1999. This
amendment provides that the common stock purchase rights will not be adjusted or
become exercisable as a result of the execution of the merger agreement, the
completion of the merger, or the completion of the other transactions
contemplated in the merger agreement and the voting support agreements.
MATERIAL CHANGES IN STOCKHOLDERS' RIGHT
At the time of the merger, the Restated Certificate of Incorporation of ITI
will be amended so that the provisions of Section 203 of the Delaware General
Corporation Law will not apply to the combined company. This is discussed under
"AMENDMENTS TO ITI'S CERTIFICATE OF INCORPORATION -- Opt Out of Section 203 of
Delaware General Corporation Law" on page 130. This amendment will not be
effective until 12 months after its adoption.
FEDERAL INCOME TAX CONSEQUENCES
INTRODUCTION. The following is a summary of the principal federal income
tax consequences resulting from the merger and the exchange of ITI common stock
for cash.
This summary is based upon the existing provisions of the Internal Revenue
Code, the regulations issued under the Code, published administrative positions
of the IRS contained in revenue rulings, revenue procedures and other
administrative pronouncements, and judicial decisions in effect as of the date
of this proxy statement. These authorities may change and changes may apply
retroactively. Any change in these authorities may affect this summary. This
summary applies generally to those stockholders who hold ITI common stock as a
capital asset. However, this summary does not consider the individual facts and
circumstances of each stockholder's tax situation. In particular, this summary
does not address federal income tax consequences applicable to ITI stockholders
who are subject to special treatment under federal income tax law, such as
stockholders who are foreign persons, financial institutions, dealers in
securities, insurance companies, tax-exempt entities, holders who acquired their
shares of stock through the exercise of an employee stock option or right or
otherwise as compensation and holders who hold their stock as part of a hedge,
straddle or conversion transaction. In addition, this summary does not include
tax consequences under applicable foreign, state, local or other tax laws.
THE MERGER. It is a condition to SLC's and ITI's obligation to complete
the merger that each party receive an opinion from its counsel that the merger
will be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code. If the merger is treated in this manner,
neither SLC nor ITI will recognize gain or loss as a result of the merger.
TAX CONSEQUENCES TO STOCKHOLDERS. If you do not exchange your shares of
ITI common stock for cash, the merger will not be a taxable event for you for
federal income tax purposes.
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<PAGE> 52
If you exchange ITI common stock for cash you will have a taxable event.
Generally, an ITI stockholder who receives cash in exchange for ITI common stock
will, depending on that stockholder's particular circumstances, be treated
either as having sold the stockholder's ITI common stock or as having received a
dividend distribution from ITI. An exchange treated as a sale will generally
result in capital gain or capital loss treatment. An exchange treated as a
dividend will generally result in ordinary income. Thus, it is important for
each ITI stockholder to determine whether its exchange of ITI common stock for
cash will be treated as a sale or as a dividend.
EXCHANGE TREATED AS A SALE. An ITI stockholder who exchanges ITI common
stock for cash pursuant to the merger agreement will be treated as having sold
that ITI common stock if any of the three following tests is met:
- The exchange results in a "complete termination" of the stockholder's
equity interest in ITI. An ITI stockholder who exchanges all shares of
ITI common stock owned by that stockholder for cash pursuant to the
merger agreement will be treated as having completely terminated that
stockholder's equity interest in ITI.
- The exchange is "not essentially equivalent to a dividend" with respect
to the stockholder. An ITI stockholder will satisfy this test if the
reduction in that stockholder's proportionate interest in ITI constitutes
a "meaningful reduction" given the stockholder's particular facts and
circumstances. The IRS has indicated in published rulings that any
reduction in the percentage interest of a stockholder who holds a minimal
percentage interest in a publicly held corporation and who exercises no
control over corporate affairs should constitute such a "meaningful
reduction."
- The exchange is "substantially disproportionate" with respect to the
stockholder. An exchange will be "substantially disproportionate" with
respect to an ITI stockholder if the exchange reduces the stockholder's
percentage ownership in the combined company by more than 20%.
If an ITI stockholder satisfies any one of the above sale tests, the ITI
stockholder will recognize gain or loss equal to the difference between the
amount of cash received by the stockholder in exchange for ITI common stock, and
the stockholder's tax basis in the exchanged ITI common stock. Any such gain or
loss will be capital gain or loss and will be a long-term capital gain or loss
if the holding period for the exchanged ITI common stock is greater than one
year at the time of the exchange.
When applying the sale tests, the IRS will consider both the ITI common
stock actually owned by the ITI stockholder and the ITI common stock
constructively owned by the ITI stockholder. Generally, the constructive
ownership rules set forth in the Code will attribute to a stockholder the
ownership of shares that are actually owned by certain members of that
stockholder's family or by certain other individuals, trusts, partnerships or
corporations. For example an ITI stockholder whose daughter owns ITI common
stock will be treated as constructively owning the daughter's ITI common stock.
In addition, the constructive ownership rules treat a person who holds an option
to acquire stock as owning that stock.
In applying the three sale tests, the IRS will look at the ITI common stock
exchanged for cash under the merger agreement and any other sales or purchases
of ITI common stock made by an ITI stockholder, or by a person whose shares are
constructively owned by an ITI stockholder, near the time of the merger.
EXCHANGE TREATED AS A DIVIDEND. If a stockholder's exchange of ITI common
stock for cash pursuant to the merger agreement does not satisfy any of the
three sale tests, then the entire amount of cash received by the ITI stockholder
will be treated as a dividend. The stockholder may not offset the amount of cash
received with the stockholder's basis in the shares exchanged. The dividend will
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<PAGE> 53
constitute ordinary income rather than capital gain. Furthermore, no loss will
be recognized upon the receipt of a dividend, even if the shares of stock
exchanged were purchased at a price higher than the amount received.
If the ITI stockholder is a corporation and cash received in exchange for
ITI common stock is treated as a dividend, the stockholder may be eligible for a
dividends received deduction, subject to applicable limitations and
requirements, and may be subject to the "extraordinary dividend" provisions of
the Code.
This discussion of federal income tax consequences is not binding on the
IRS and we cannot assure you that the IRS will not take a position contrary to
one or more positions reflected in this discussion. Additionally, we cannot
assure you that the positions reflected will be upheld by the courts if
challenged by the IRS. WE URGE YOU TO CONSULT YOUR OWN TAX ADVISOR AS TO THE
FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OF ITI COMMON STOCK FOR CASH,
AND ALSO AS TO ANY STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES, BASED ON
YOUR OWN PARTICULAR FACTS AND CIRCUMSTANCES.
NO APPRAISAL RIGHTS
In some mergers, stockholders have the right to dissent from the merger and
have the value of their shares appraised and paid to them in cash. This is known
as having "appraisal rights." Under Delaware law, ITI stockholders are not
entitled to appraisal rights in connection with the merger because ITI common
stock is traded on the Nasdaq National Market and ITI stockholders are not
required to exchange their shares. It is important that stockholders who do not
agree with the terms of the merger vote against it.
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THE CASH ELECTION
GENERAL
Each record holder of ITI common stock prior to the close of business on
May 1, 2000 will be entitled to elect to receive cash for all or some of the
holder's shares of ITI common stock. However, no more than 50% of the
outstanding shares of ITI common stock may be exchanged for cash. If ITI
stockholders in the aggregate elect to receive cash for more than 50% of the
outstanding shares, the number of shares for which each electing ITI stockholder
will receive cash will be reduced on a pro rata basis. Subject to this
possibility of proration, each share of ITI common stock for which the cash
election is properly made will be exchanged for $36.50.
We have designated Norwest Bank, N.A. to act as the exchange agent in
connection with the cash election procedures. We are in the process of mailing
cash election forms that explain the procedures for exercising the cash election
to current record holders of ITI common stock and will also mail the election
form to those subsequently becoming record holders. TO BE EFFECTIVE, AN ELECTION
FORM MUST BE PROPERLY COMPLETED, SIGNED AND ACTUALLY RECEIVED BY NORWEST BANK NO
LATER THAN 5:00 P.M., CENTRAL TIME ON MAY 1, 2000, AND MUST BE ACCOMPANIED
EITHER BY THE CERTIFICATES REPRESENTING ALL THE SHARES OF ITI COMMON STOCK FOR
WHICH YOU ARE ELECTING TO RECEIVE CASH OR AN APPROPRIATE GUARANTEE OF DELIVERY
BY AN ELIGIBLE ORGANIZATION. You may revoke a cash election by delivering a
written notice of revocation to the exchange agent prior to 5:00 p.m., Central
time on May 1, 2000. A cash election will be binding on a transferee of ITI
common stock unless it has been properly revoked.
IF YOU DO NOT EXERCISE THE CASH ELECTION, YOU WILL RETAIN ALL OF YOUR
SHARES OF ITI COMMON STOCK AND NOT RECEIVE ANY CASH FOR YOUR SHARES. WE URGE YOU
TO OBTAIN CURRENT MARKET QUOTATIONS FOR ITI COMMON STOCK PRIOR TO DETERMINING
WHETHER TO EXERCISE THE CASH ELECTION.
CONSIDERATIONS IN EXERCISING THE CASH ELECTION
In determining whether to elect to receive cash for your shares of ITI
common stock, you may wish to consider the following:
- In approving the merger, the ITI board of directors received a fairness
opinion from Goldman Sachs. That opinion was based in part on an analysis
indicating that, for various trading prices as a multiple of earnings,
the value of the cash to be received by ITI stockholders exceeded the
value of the ITI common stock to be retained by ITI stockholders. The
opinion also assumed that 50% of the ITI common stock would be exchanged
for $36.50. If the cash to be received upon exercise of the cash election
exceeds the inherent value of the ITI common stock, those stockholders
exercising the cash election will be relatively better off than ITI
stockholders not exercising the cash election.
- Unlike many mergers where a cash election price represents an
approximation of the trading value of the stock to be sold, the cash
election price in the merger was determined through negotiations between
representatives of SLC and ITI. The aggregate cash consideration to be
paid in connection with the exercise of the cash election by ITI
stockholders was determined in the context of the aggregate consideration
for the merger and was not intended to relate independently to either the
trading value or a projected inherent value of ITI common stock.
- Since the announcement of the merger through March 22, 2000, the trading
price of the ITI common stock has ranged from $25.5625 to $31.625. You
should consider carefully the trading prices of ITI common stock prior to
determining whether to exercise the cash election.
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- In exercising the cash election, you should carefully consider how the
number of shares for which you receive cash will be reduced on a pro rata
basis if more than 50% of the total number of outstanding shares of ITI
common stock exercise the cash election. The proportion of shares for
which you will receive cash will be based on the ratio of 50% (the
maximum percentage of shares that may be exchanged) to the total
percentage of outstanding shares for which ITI stockholders elect to
receive cash. For example, assume that cash elections are made for 75% of
the outstanding shares. In that case, only 66 2/3% of the shares for
which you make a cash election will be accepted (50% divided by 75%). If
you had elected to receive cash for all of your shares, you would receive
cash for 66 2/3% of them. If you had elected to receive cash for only 50%
of your shares, you receive cash for 33 1/3% of them (66 2/3% of 50%).
Accordingly, if you want to assure that the maximum number of your shares
of ITI common stock is exchanged for cash, you should make a cash
election for all of your shares.
- If you wish to exchange your shares of ITI common stock for cash, you
must strictly observe the time deadlines associated with exercising the
cash election. ITI common stock owned after expiration of the deadline
for making a cash election may decline in value. See "TRADING IN ITI
COMMON STOCK PRIOR TO THE EFFECTIVE TIME" below.
- Because of the mechanics of the cash election, you will not know
immediately the number of shares accepted for exchange, although we
intend to make a public announcement once that information is available.
Accordingly, if you tender your shares for cash, you will not be able to
sell any shares that are not accepted for a period of time. Further,
processing and mailing certificates for ITI common stock not accepted may
take several days beyond the time that you would be permitted to make
good delivery of ITI common stock upon sale.
- You should consider that the inherent value of the ITI common stock may
not be reflected in the current trading price and that based on the
prospects of the combined company you may want to continue your full
investment in the ITI common stock by not exercising the cash election.
All ITI stockholders should consider carefully their right to elect to
receive cash for their shares and should make a decision based upon the
information provided in this proxy statement and their own situation.
TRADING IN ITI COMMON STOCK PRIOR TO THE EFFECTIVE TIME
Based upon the current trading price for each share of ITI common stock as
of the date of this proxy statement, we believe that the ITI common stock may be
viewed as having two components: (1) the right to exercise the cash election at
$36.50 per share, as that price may be adjusted, and (2) the right to continue
as a stockholder of ITI. The trading price of each share of ITI common stock
should represent a blend of the value of these two components. Because the cash
election price exceeds the current trading price of the ITI common stock, the
right to continue as a stockholder of ITI may have a value less than the current
trading price of the ITI common stock. However, once the deadline to make the
cash election expires, the ITI common stock will represent only the right to
continue to participate as a stockholder of ITI. Accordingly, assuming that the
trading price of the ITI common stock remains below $36.50, the trading price
for the ITI common stock may decline after the cash election deadline expires.
Further, because trading markets operate on the basis of delivery of securities
within three business days, any decline may precede by three days the actual
deadline. Any ITI stockholder planning to sell ITI common stock prior to the
merger may wish to consider this timing issue. Because of the unusual nature of
the cash election and arbitrage inherent
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in the trading markets prior to the merger, trading may occur in volumes and at
prices that ITI is unable to predict.
STOCK OPTIONS
Each holder of options to purchase ITI common stock will have the right to
elect to receive a cash payment for up to 50% of the number of shares of ITI
common stock covered by those options in exchange for the cancellation of the
options. The cash payment will be equal to the cash paid for one share of ITI
common stock, as discussed above, multiplied by the number of shares underlying
the options, minus the aggregate exercise price of the options. Any option to
purchase ITI common stock which is not exchanged for cash will remain
outstanding and its terms will remain unchanged.
At the effective time of the merger, all outstanding options to purchase
SLC common stock will be converted into and become rights to purchase 758,532
shares of ITI common stock at an estimated weighted average price of $16.53 per
share. From and after the effective time of the merger:
- each SLC option assumed by ITI may be exercised only for shares of ITI
common stock;
- the number of shares of ITI common stock covered by each SLC option will
be equal to the number of shares of SLC common stock covered by that SLC
option immediately prior to the effective time of the merger multiplied
by 15.17064, rounded up to the nearest whole share; and
- the per share exercise price under each SLC option will be adjusted by
dividing the per share exercise price under that SLC option by 15.17064
and rounding up to the nearest cent. Each SLC option assumed by ITI will
be further adjusted to reflect any stock split, stock dividend, reverse
stock split, reclassification, recapitalization or other similar
transaction prior to the merger.
THE MERGER AGREEMENT
The following section summarizes the material terms of the merger
agreement. We urge you to read the entire agreement, a copy of which is included
in this proxy statement as Appendix A, for more detailed information on the
terms and conditions of the merger.
EFFECTIVE TIME
It is anticipated that, if the merger agreement is approved by ITI's
stockholders and all other conditions to the merger have been fulfilled or
waived, the merger will be closed as soon as practicable following stockholder
approval. The merger will become effective upon the filing of a certificate of
merger with the Secretary of State of the State of Delaware, or at a later time
specified in the certificate of merger.
THE MERGER
At the effective time of the merger, SLC will merge with and into ITI.
Following the merger, SLC will cease to exist as a separate corporation and ITI
will survive and continue to exist as a Delaware corporation. The certificate of
incorporation and bylaws of the combined company will be the certificate of
incorporation and bylaws of ITI in effect immediately prior to the merger;
except that the certificate of incorporation will be amended to change ITI's
name, to increase the number of
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authorized shares of ITI common stock and to have opt out of Section 203 of the
Delaware General Corporation Law. See "AMENDMENTS TO ITI'S CERTIFICATE OF
INCORPORATION" on page 129.
MERGER CONSIDERATION; CONVERSION OF SHARES
At the effective time of the merger, each share of SLC common stock, other
than shares owned by SLC or any wholly owned subsidiary of SLC, will
automatically be converted into 15.17064 shares of ITI common stock. Any shares
owned by SLC or its subsidiaries will be canceled.
Each record holder of ITI common stock prior to the special meeting will be
entitled to elect to receive $36.50 per share for the shares of ITI common stock
held by that record holder, subject to reduction if stockholders elect to
receive cash for more than 50% of the ITI common stock.
All shares of ITI common stock not exchanged for cash will remain issued
and outstanding.
REPRESENTATIONS AND WARRANTIES
The merger agreement includes representations and warranties by each party
regarding a number of matters, including the following:
- its capitalization, organization and similar corporate matters;
- its authorization, execution and delivery of, the merger agreement;
- the fact that the merger agreement will not violate its charter
documents, applicable law and material agreements;
- the accuracy of its financial statements, tax returns, minute books and,
in the case of ITI, filings with the SEC;
- the absence of material undisclosed liabilities and of undisclosed legal
or regulatory actions or proceedings;
- the absence of undisclosed material contracts, employment and severance
agreements, and stock option and other plans;
- the absence of defaults under its material contracts;
- its employee benefit plans and related matters;
- its labor matters and practices;
- its intellectual property;
- its possession of required licenses, permits and other governmental
approvals and its compliance with any worker safety and environmental
laws and regulations;
- its compliance with its organizational documents, with applicable law,
and with governmental orders, decrees or judgments;
- actions taken or not taken that would jeopardize the contemplated tax
treatment of the merger or SLC's receipt of the supplemental tax ruling
referred to above;
- in the case of ITI, the receipt of a fairness opinion from its financial
advisor; and
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- in the case of SLC, the receipt of an executed commitment for financing
of the payment of the maximum aggregate cash necessary for the exchanged
ITI common stock.
CONDUCT OF BUSINESS PENDING THE MERGER
ITI and SLC have agreed in the merger agreement that, until the effective
time of the merger, they will conduct their business only in the ordinary course
consistent with past practice, use all reasonable efforts to preserve their
business organizations, keep available the services of their current officers
and employees and preserve their relationships with customers, suppliers and
other third parties.
In addition, each party has agreed not take any of the following actions
without the other party's written consent, except as otherwise expressly
contemplated by the merger agreement:
- declare, set aside or pay dividends;
- split, combine or reclassify its stock, or issue or authorize the
issuance of any other securities;
- purchase, redeem or acquire any of its stock or securities convertible
into its stock;
- amend or waive any of its rights under, or take any action to permit the
acceleration, vesting or repricing under any stock option plan, any ITI
stock option agreement or any restricted stock purchase agreement;
- grant or award any options, warrants, conversion rights or other rights
to acquire any shares of its stock;
- issue, deliver, sell, pledge, dispose of or otherwise encumber any shares
of its stock or securities convertible into its stock, other than the
issuance of shares of common stock upon the exercise of employee stock
options outstanding on the date of the merger agreement;
- amend its charter or by-laws;
- acquire or agree to acquire any business, corporation, partnership or
other organization or any assets, other than transactions that are not
material and are in the ordinary course of business;
- dispose or agree to dispose of any of its assets, other than in
transactions that are in the ordinary course of business;
- incur or guarantee any debt or enter into any financing obligation, other
than in connection with acquisitions allowed by the terms of the merger
agreement;
- change any existing employee benefit plans, except as required by
applicable law and except as permitted by the merger agreement;
- change the compensation or benefits to its directors, officers, employees
or consultants, except for increases in the ordinary course of business
consistent with past practice;
- grant any severance or termination pay to, or enter into any stay put,
termination, severance or similar agreement or arrangement with, any
director or officer;
- enter into or amend any employment or consulting agreement with any
director, officer, employee or consultant, except that ITI and SLC can
enter into employment contracts with newly hired employees and can enter
into or amend consulting agreements for a term of less than one year or
in substitution for existing employment agreements;
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- enter into or amend any material agreement, except in the ordinary course
of business consistent with past practices;
- in the case of ITI, make or agree to make any new capital expenditures
which exceed $1,000,000 individually and $10,000,000 in the aggregate;
- in the case of SLC, make or agree to make any new capital expenditures
which exceed $5,000,000 individually and $20,000,000 in the aggregate;
- enter into any contract that, after the effective time of the merger,
would materially interfere with the conduct of the combined company's
business.
NO SOLICITATION OF PROPOSALS
In the merger agreement, ITI has agreed that it will not, directly or
indirectly, initiate, solicit or encourage the submission of any proposal for a
merger or other business combination involving ITI or any of its subsidiaries or
any proposal or offer to acquire a substantial equity interest in, a substantial
portion of the voting securities of, or a substantial portion of the assets of
ITI or any of its subsidiaries. This type of proposal is referred to in the
proxy statement as an "ITI takeover proposal." ITI has also agreed that it will
not:
- enter into any agreement regarding an ITI takeover proposal;
- participate in any discussions or negotiations regarding, furnish any
information relating to or take any other action to facilitate an ITI
takeover proposal; or
- approve, endorse or recommend any ITI takeover proposal.
ITI may, however, at any time prior to the special meeting, furnish nonpublic
information to or enter into discussions with a third party in response to an
unsolicited ITI takeover proposal if:
- a majority of the board of directors of ITI, in its reasonable good faith
judgment, based on the advice of financial advisors, outside counsel and
other advisors selected by it, determines that the proposal is more
favorable to ITI stockholders than the terms of the merger;
- the negotiation of the proposal is consistent with the ITI board's
fiduciary obligations to the ITI stockholders;
- neither ITI nor any of its representatives will have violated any of the
restrictions in the merger agreement prohibiting the solicitation of
proposals;
- prior to furnishing nonpublic information to, or entering into
discussions with, the third party making the takeover proposal, ITI gives
SLC written notice of ITI's intention to do so and the third party
executes a customary confidentiality agreement; and
- prior to furnishing any nonpublic information to the third party, ITI
furnishes the nonpublic information to SLC.
We will refer in this proxy statement to any takeover proposal that meets
the first two requirements stated above as a "superior proposal."
The merger agreement requires ITI to immediately advise SLC of:
- any ITI takeover proposal that is made or submitted;
- the identity of the person making or submitting the ITI takeover proposal
and its terms; and
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- any discussion or negotiation with respect to an ITI takeover proposal
that changes the proposal's terms.
However, if SLC reasonably determines that a person who has made a superior
proposal is a direct competitor of ITI with a market share in wireless security
systems that is comparable to or larger than ITI's market share, SLC can
prohibit ITI from providing nonpublic information to that person.
ITI has agreed in the merger agreement that its board of directors will not
withdraw its approval of the merger, the merger agreement and the transactions
contemplated by the merger agreement unless two conditions are satisfied. The
first is that a superior proposal is made to ITI and is not withdrawn, and the
second is that ITI has not breached the merger agreement covenants prohibiting
solicitation of a takeover proposal. See " -- Other Covenants" on page 53.
ITI STOCK OPTION PLAN
The merger agreement requires ITI to submit a proposal to its stockholders
to approve an omnibus stock plan with terms substantially equivalent to those
customarily used by publicly held corporations and acceptable to SLC, covering
1,500,000 shares of ITI common stock. This proposal is presented on page 132
under "PROPOSAL TO APPROVE STOCK INCENTIVE PLAN."
INDEMNIFICATION; DIRECTORS AND OFFICERS INSURANCE
The merger agreement requires ITI, for six years following the merger, to
indemnify and hold harmless all past and present officers and directors of SLC
and its subsidiaries to the same extent as they were indemnified by SLC on the
date of the merger agreement. In addition, for six years following the merger,
ITI will provide ITI's and SLC's directors and officers with insurance coverage
for events occurring prior to the merger. This policy will be substantially
similar to ITI's existing policy. If substantially equivalent insurance coverage
is unavailable, ITI will provide the best available coverage, provided that the
annual premiums for that coverage will not exceed 200% of the annual premiums
currently paid by SLC.
OTHER COVENANTS
The merger agreement contains, among others, the following additional
covenants:
- SLC will take no action, and will use its reasonable best efforts to
prevent the occurrence of any event or condition, that would be
inconsistent with its May 13, 1997 tax-free spin-off IRS ruling or any
supplemental IRS ruling concerning the tax-free spin-off.
- Prior to the effective time of the merger, ITI will not redeem its
shareholder rights plan or implement or adopt any other so-called
"poison-pill," shareholder rights plan or other similar plan.
- ITI has agreed that its board of directors will not withdraw its approval
of the merger, the merger agreement and the transactions contemplated by
the merger agreement unless (1) a superior proposal is made to ITI and is
not withdrawn and (2) the merger agreement covenants prohibiting
solicitation of an ITI takeover proposal have not been breached or
violated.
- Each party has agreed to use its reasonable best efforts to consummate
the merger and the other transactions contemplated by the merger
agreement.
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- SLC will use its reasonable best efforts to obtain the financing to pay
the maximum aggregate amount of cash payable for the exchange of ITI
common stock.
- ITI will use its reasonable best efforts to cause the shares of ITI
common stock issuable in connection with the merger to be approved for
listing on the Nasdaq National Market.
- ITI will file with the SEC within 15 business days after the effective
time of the merger a registration statement to register the shares of ITI
common stock issuable upon exercise of the SLC options.
- After the merger agreement has been duly adopted by the ITI stockholders,
ITI will not redeem the Shareholder Rights Plan in connection with any
transaction other than the transactions contemplated by the merger
agreement.
- At the effective time of the merger, except as otherwise agreed, all
agreements, arrangements or understandings between Berwind Group Partners
or its affiliates and SLC or its subsidiaries requiring the payment of
money by SLC or its subsidiaries will terminate.
CONDITIONS TO THE MERGER
The parties' respective obligations to complete the merger are subject to a
number of conditions, including the following:
- ITI stockholder approval of the merger agreement;
- the authorization for listing on the Nasdaq Stock Market of the ITI
common stock issuable in connection with the merger;
- expiration, which has occurred, of the waiting period applicable to the
completion of the merger under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended;
- all material authorizations, consents, orders, declarations or approvals
of, or filings with, or terminations or expirations of waiting periods
imposed by, any governmental entity will have been obtained, made or
occurred; and
- no court or other governmental entity shall have issued any law, rule,
regulation or order which has the effect of prohibiting the merger or any
of the transactions contemplated by the merger agreement.
The obligations of ITI to complete the merger are also subject to a number
conditions, including the following
- SLC will have performed its obligations under the merger agreement in all
material respects;
- SLC's representations and warranties will be accurate as of the effective
time of the merger, other than those inaccuracies or misrepresentations
which, when taken together with all other inaccuracies or
misrepresentations of SLC, would not have a material adverse effect on
SLC;
- ITI will have received an opinion of Dorsey & Whitney LLP relating to tax
matters;
- there will have been no material adverse change in the business of SLC or
its subsidiaries; and
- Berwind Group Partners and SLC will have entered into an indemnification
agreement relating to federal income tax liability resulting from tax
sharing arrangements existing prior to the spin-off of SLC and setting
forth their respective rights with regard to ERISA liabilities and
obligations.
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The obligations of SLC to complete the merger are also subject to a number
conditions, including the following:
- ITI will have performed its obligations under the merger agreement in all
material respects;
- ITI's representations and warranties will be accurate as of the effective
time of the merger, other than those inaccuracies or misrepresentations
which, when taken together with all other inaccuracies or
misrepresentations of ITI, would not have a material adverse effect on
ITI;
- SLC will have received an opinion of Dechert Price & Rhoads relating to
tax matters;
- there will have been no material adverse change in the business of ITI;
- the receipt, which has occurred, from the IRS of a supplemental ruling to
its May 13, 1997 tax-free spin-off ruling to the effect that the
transactions contemplated by the merger agreement are consistent with the
prior ruling, and no event or condition has occurred that would be
inconsistent with the original or supplemental IRS ruling;
- ITI or its assignees will have entered into a registration rights
agreement granting Berwind Group Partners registration rights with
respect to the shares of ITI common stock acquired by Berwind Group
Partners pursuant to the merger agreement; and
- there will not have occurred an international or domestic calamity,
crisis or change in political, financial or economic conditions, the
effect of which would be to make it impossible for ITI to obtain
financing on terms and in amounts substantially similar to the terms set
forth in the financing commitment obtained by SLC to pay the maximum
aggregate amount of cash payable for the exchange of ITI common stock.
TERMINATION
The merger agreement may be terminated at any time before the effective
time of the merger, whether before or after ITI stockholder approval of the
merger:
- by mutual written consent of ITI and SLC;
- by either ITI or SLC if the merger has not closed on or before the
six-month anniversary of the date of the merger agreement. However, this
right to terminate the merger agreement will not be available to any
party whose failure to fulfill any of its obligations contained in the
merger agreement has been the cause of the failure to close the merger
before the six month anniversary. Furthermore, either ITI or SLC may
extend the date when the merger agreement could be terminated up to two
times in the aggregate for an additional one-month period each time;
- by either ITI or SLC if
- a statute, rule, regulation or executive order has been enacted
prohibiting the completion of the merger or
- an order, decree, ruling or injunction has been entered permanently
prohibiting the completion of the merger and that order, decree,
ruling or injunction is final and non-appealable, provided that the
party seeking to terminate the merger agreement has used its
reasonable best efforts to remove the injunction, order or decree;
- by either ITI or SLC if ITI stockholders do not approve the merger;
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- by ITI or SLC if ITI enters into an agreement to effect a superior
proposal or the board of directors of ITI resolves to do so. However, ITI
may not terminate the merger agreement in this situation unless
- ITI has delivered to SLC a written notice of ITI's intent to enter
into an agreement to effect the Superior Proposal;
- five business days have elapsed following delivery to SLC of that
written notice by ITI;
- during that five business day period ITI has fully cooperated with SLC
in order to enable SLC to agree to a modification of the terms and
conditions of the merger agreement so that the merger may be effected;
- ITI has considered in good faith any modification of the terms of the
merger agreement proposed by SLC;
- at the end of the five business day period the board of directors of
ITI continues reasonably to believe that the ITI takeover proposal is
a superior proposal;
- prior to termination of the merger agreement, ITI pays to SLC the
termination fee described below under " -- Fees and Expenses;
Termination Fee;" and
- simultaneously with termination of the merger agreement, ITI enters
into a definitive acquisition, merger or similar agreement to effect
the superior proposal;
- by SLC if a tender offer or exchange offer for 20% or more of the
outstanding shares of capital stock of ITI is commenced prior to the
special meeting, and the board of directors of ITI fails to recommend
against acceptance of that tender offer or exchange offer;
- by SLC if the board of directors of ITI at any time withdraws, modifies
or revokes its recommendation of the merger, or, upon a request by SLC,
does not confirm its recommendation and support for the merger;
- by ITI or SLC if there has been a material breach by the other of the
merger agreement and that breach will not be cured within 30 days after
notice was received by the party alleged to be in breach;
- by ITI or SLC if SLC withdraws the request for a supplemental IRS ruling
as permitted by the merger agreement; or
- by SLC if there is a material breach of any of the Voting Support
Agreements by any of the other parties to those agreements.
FEES AND EXPENSES; TERMINATION FEE
Regardless of whether the merger is consummated, with a few exceptions, all
costs incurred in connection with the merger agreement and the transactions
contemplated by it will be paid by the party incurring those costs. However, all
printing expenses and all filing fees will be divided equally between ITI and
SLC.
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ITI has agreed to pay SLC a termination fee of $10,000,000 if the merger
agreement is terminated at any time by ITI or SLC because:
- ITI stockholders failed to approve the merger;
- ITI has entered into, or its board of directors has resolved to enter
into, an agreement to effect a superior proposal;
- a tender offer or exchange offer for more than 20% of ITI's stock has
been commenced and the ITI board of directors has not recommended against
acceptance of the offer; or
- the ITI board of directors has withdrawn or refused to confirm its
recommendation of the merger.
However, in the case of a termination resulting from the failure of ITI
stockholders to approve the merger, this fee will be payable only if ITI enters
into a definitive agreement relating to an ITI takeover proposal within one year
of the termination.
If ITI terminates the merger agreement because the merger has not closed on
or before the six-month anniversary of the date of the agreement, SLC may be
required to reimburse ITI for its reasonable out-of-pocket expenses (not to
exceed $2,000,000) if some of the conditions to SLC's obligations to effect the
merger have not been satisfied or waived, including the condition that SLC
receive the supplemental IRS ruling.
AMENDMENT
The merger agreement may be amended by ITI and SLC, or by action of their
respective boards of directors, at any time before the effective time of the
merger. However, after the merger is approved by the stockholders of ITI, no
amendment may be made which by law requires further approval by ITI
stockholders, without obtaining that approval.
WAIVER
The merger agreement provides that, at any time prior to the effective time
of the merger, ITI and SLC may
- extend the time for the performance of any obligations of the other party
under the merger agreement,
- waive any inaccuracies in the representations and warranties of the other
party contained in the merger agreement or in any document delivered
pursuant to the merger agreement, and
- waive compliance by the other party with any of the agreements or
conditions contained in the merger agreement that may legally be waived.
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INDUSTRY OVERVIEW
The security industry involves the protection of people and property. SLC
and ITI participate in the sector of the security industry that focuses on
electronic and communications technology. SLC and ITI estimate that this sector
of the industry involves annual revenues in the United States of approximately
$10,000,000,000. This estimate includes revenues in the traditional residential
and commercial security industry, as well as the emerging corporate enterprises
market. Products sold to the corporate enterprises market integrate independent
systems in the areas of intrusion, electronic access control, video surveillance
and asset protection. These systems are beginning to be integrated with the
overall information technology structure of a corporation. The trend toward
systems integration has increased the importance of communications among systems
and components, compatibility of systems and components, and information
processing, moving the industry into the communications arena.
In light of this trend, ITI and SLC see the industry evolving into three
distinct markets as follows:
RESIDENTIAL MARKET. The residential market primarily purchases security
and fire protection components and systems for single-family homes and
multi-family dwellings. The users of residential security systems typically
desire low-cost intrusion and fire systems that are easy and convenient to use.
However, there is an emerging market in home automation and home networking
products that provides opportunities to expand traditional offerings into more
technologically sophisticated systems.
COMMERCIAL MARKET. The commercial market purchases intrusion systems, fire
systems, access control products and systems, video surveillance products and
systems for small to medium size structures (under 200,000 square feet) such as
institutional, industrial, retail, office, and government and military
buildings. The users and buyers of commercial systems seek a practical,
low-maintenance intrusion and fire solution with the ability to expand the
system to include other applications such as access control.
CORPORATE ENTERPRISES MARKET. The corporate enterprises market purchases
powerful systems that provide an "enterprise solution" -- the integration of
several independent systems, such as intrusion and fire protection systems,
access management systems, video surveillance, and asset tracking. These
complex, integrated systems are purchased primarily by large companies,
institutions and governmental entities through companies that specialize in
integrating these systems. These "system integrators" typically operate on a
regional and national level.
SLC currently competes primarily in the corporate enterprise and commercial
markets, whereas ITI currently competes primarily in the residential market. The
combined company will maintain a more balanced position across all three
markets.
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BUSINESS OF ITI
OVERVIEW
ITI and its wholly owned subsidiaries design, manufacture and market
electronic intrusion and fire protection systems as well as electronic access
control systems. Intrusion and fire protection systems account for approximately
98% of ITI's sales. ITI currently competes in the intrusion alarm market, the
electronic access control market and the commercial fire detection market.
ITI believes that several factors contribute to a favorable outlook for
growth in the electronic security system market. These include increasing use of
wireless security systems, increasing growth in international demand for
intrusion alarm systems, increasing concern about crime, low penetration of
security systems in United States households, improved technology and product
features, lower-cost systems and the availability of insurance discounts to
homeowners who purchase security systems.
HISTORY OF ITI
ITI's wholly owned subsidiary, Interactive Technologies, Inc, was
incorporated in January 1980 under the laws of the State of Minnesota. In
January 1985, Interactive Technologies incorporated a foreign international
sales corporation, ITI International, Inc., as a wholly owned subsidiary under
the laws of the United States Virgin Islands.
ITI Technologies, Inc. was incorporated in February 1992 under the laws of
the State of Delaware for the purpose of acquiring Interactive Technologies. On
May 11, 1992, ITI acquired Interactive Technologies from a United States holding
company controlled by ADIA S.A. of Switzerland and certain members of ITI's
management.
In November 1994, ITI completed a public offering of 1,900,000 newly issued
shares of common stock at $16.00 per share. Prior to the initial public
offering, there was no public market for ITI common stock. In May 1995, in a
subsequent offering, selling stockholders sold 3,225,000 shares and ITI sold
225,000 shares at $24.00 per share. ITI used the net proceeds from these
offerings to retire debt that had been incurred at the time of the acquisition
of Interactive Technologies.
In April 1996, Interactive Technologies incorporated ITI Finance
Corporation as a wholly owned subsidiary under the laws of the State of
Minnesota for the purpose of providing financing to ITI's independent dealer
base.
On April 30, 1997, ITI purchased all of the outstanding stock of
CADDX-CADDI Controls, Inc. for $19,000,000 in cash. In conjunction with the
acquisition of CADDX, ITI also purchased from the majority shareholder of CADDX
the manufacturing facility leased by CADDX for $530,000. Immediately following
the CADDX acquisition, the corporate name was changed to CADDX Controls, Inc.
CADDX, located in Gladewater, Texas, designs, manufactures and markets hardwire
electronic security systems in the United States and certain international
locations.
On May 22, 1997, ITI completed the cash purchase of the Regency product
line and dealer program from the Silent Knight Division of Willknight, Inc.,
located in Minneapolis, Minnesota, for $1,800,000. If sales of Regency products
over the 36-month period ending May 2000 exceed certain levels, a contingent
payment of up to $800,000 will be made. This product line allows ITI to offer an
established product that integrates intrusion protection, fire protection and
access control.
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INTRUSION AND FIRE PROTECTION SYSTEMS
Intrusion and fire protection systems protect residence or commercial
property against fires and intruders by sensing smoke or fire, or intrusions
through doorways, windows, or open areas. Most systems will sound an audible
alarm to warn of fires or intruders. Monitored systems send a signal to a remote
monitoring station, where dispatchers may contact the appropriate authorities. A
typical intrusion and fire protection system consists of the following
components:
- CONTROL PANEL. The control panel receives signals from the sensors and
user interface, regulates all intrusion and home automation functions
and, in the case of a monitored system, reports emergency conditions and
service information to a monitoring facility.
- USER INTERFACE. The user interface, such as an electronic keypad, allows
the user to arm, disarm and give other commands to the system, including
panic buttons to alert the central monitoring facility for police, fire
and medical emergencies. Additional user interfaces include wireless key
fob controls to arm and disarm systems and modules that allow users to
control the system from any telephone inside or outside the home.
- SENSORS. Sensors are devices that are installed on windows, doorways and
other places to detect intrusion, smoke, fire and other environmental
conditions and report them to the control panel.
- SOUNDERS. Sounders are activated in response to a particular alarm
condition to frighten away an intruder or alert the user to the alarm
condition. Many control panels also utilize digitized voice to
communicate with users.
There are two means of communication within any intrusion or fire
protection system, hardwire and wireless. In a hardwire system, the control
panel, sensors and detectors communicate through low-voltage wires. In a
wireless system, the control panel and sensors utilize radio frequency signals
to communicate.
Equipment costs for hardwire systems are typically lower than those for
wireless systems. Hardwire systems are used most widely in new construction
since the installation costs are lower prior to the completion of construction.
Wireless systems, which are less expensive to install, are typically used for
existing homes and businesses because labor costs to install hardwire systems
would raise the overall cost significantly. A third type of security system is a
hybrid system which has both hardwire and wireless capabilities.
MONITORED WIRELESS SECURITY SYSTEMS MARKETED UNDER THE ITI(R) TRADEMARK
ITI's wireless security systems are very flexible and can be programmed by
the end-user to offer varying degrees of security, depending on the end-user's
protection desires. The systems have the ability in all security levels to
detect fire and other environmental conditions and to respond to manual
activation for police, fire and medical emergencies. Sales of these systems
represented approximately 75.7%, 83.7% and 96.8% of ITI's net sales for 1998,
1997 and 1996, respectively.
ITI offers a number of wireless and hybrid security systems to meet a
variety of price points and customer performance requirements, including:
- CONCORD. In 1998, ITI released a modular hybrid system called Concord.
By containing both hardwire and wireless capabilities, Concord offers the
installing dealer the low price of hardwire with the flexibility of
wireless. The basic eight-zone hardwire control panel can be upgraded
through the use of modules to a 76-zone panel with lighting control,
telephone control, voice feedback and paging output for latchkey
reporting. The modular approach allows
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the installing dealer to utilize one product platform for a wide variety
of installation requirements.
- CONCORD EXPRESS. ITI initially rolled out Concord Express in August 1999
as a hardwire security system which includes an integrated high quality
ITI radio receiver in the system control unit at no extra cost. As a
hardwire panel, this system has more hardwire expandability than any
competitive product. Additionally, Concord Express allows the use of
wireless and/or hardwire sensors so installers can employ the best
technology for the installation. Integrating an ITI radio receiver in the
system control unit at no extra cost gives ITI a distinct competitive
advantage by allowing installers to add wireless sensors and remote
control to a traditional hardwire system at the lowest cost in the
industry.
- ULTRAGARD SYSTEM. The UltraGard system was introduced in 1996. The
UltraGard system features a 76-zone panel which operates on 12 volts. The
other products in ITI's lines operate on 6 volts. This high performance
system is well suited for commercial applications as well as the largest
residential applications.
- SIMON. The Simon system, first introduced in 1997, received substantial
enhancements in 1998. Simon is an entry-level wireless security system
aimed at those in the industry looking for a low-cost wireless solution
for mass marketing programs or where security equipment is either given
away or installed at a loss in an effort to obtain a long-term monitoring
contract. The Simon system has the capability to individually recognize
up to 24 wireless sensors. With the enhancement, it can now be controlled
via a remote touch-tone phone and is compatible with two-way listen-in,
talk-back alarm verification. ITI also introduced TOUCHTALK, the
industry's first wireless talking touchpad as an upgrade option. Simon
can be used with all of ITI's existing ITI wireless sensors.
- COMMANDER 2000 SYSTEM. The Commander 2000 system was introduced in 1994
to succeed the RF Commander system, which was first introduced in 1990.
This system was designed as an entry level wireless security system for
use in smaller businesses, homes and apartments and has many of the
advanced features found in more expensive systems. The Commander 2000 has
the capability to individually recognize up to 16 wireless sensors and
can be used with substantially all of ITI's wireless accessories.
- CUSTOMIZED AND PRIVATE LABEL SYSTEMS. ITI has established relationships
with large security companies to develop and manufacture customized,
private label wireless security systems. In developing these systems, ITI
may modify its existing systems by adding customized control panel
software and component packaging as requested by the customer.
SYSTEM FEATURES AND COMPONENTS OF ITI WIRELESS SECURITY SYSTEMS
ITI wireless security systems incorporate several innovative and advanced
features and components which increase product performance, reliability and
marketability:
- SUPERIOR SUPERVISED RADIO TECHNOLOGY. ITI believes its wireless security
systems incorporate the most advanced radio technology currently
available in monitored wireless systems. Each wireless sensor in an ITI
system reports to the central control panel as a unique zone, enabling
the central monitoring station personnel to identify and communicate to
police or firefighters the exact location and nature of an emergency. If
the control panel does not receive scheduled signals from a sensor, it
reports the identity of the particular sensor to the central monitoring
station and the end-user. This feature also allows service personnel to
quickly find a malfunctioning sensor. Through the use of
crystal-controlled radio transmitters and receivers, coupled with its
patented Learn Mode and signaling protocol technologies, ITI has
virtually
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eliminated the effects of interference and greatly increased the range of
its systems within the limitations imposed by the FCC. This supervised
radio technology enhances the reliability and performance of ITI wireless
systems and allows them to be used in larger premises, including many
commercial facilities, where the use of wireless systems once was not
feasible.
- LEARN MODE TECHNOLOGY. ITI's patented Learn Mode technology enables
control panels to automatically "learn" the identity and type of each
factory-programmed sensor in its system when the system is installed. The
Learn Mode technology is attractive to ITI's customers because each
sensor is manufactured with a unique programmed identity. This Learn Mode
process reduces the time and cost of installing sensors and programming
the systems and allows the installation of large numbers of security
systems in densely populated areas without interference with neighboring
systems.
- TOUCH-TONE TELEPHONE USER INTERFACE. ITI was the first to introduce the
use of on- or off-site touch-tone telephones as a user interface to
control security systems. This technology provides touch-tone telephones
with all the system control capabilities of the touchpad user interfaces
manufactured by ITI for ITI wireless security systems. This feature
contributes to end-user convenience by enabling the end-user to control
the system from on- or off-premises by using touch-tone telephones.
- DIGITIZED VOICE TECHNOLOGY. ITI enhanced the "user-friendliness" and
convenience of its systems by incorporating digitized voice technology.
ITI wireless security systems can "talk" to the end-user on-site with
digitized voice, and all systems except for the Commander 2000 can also
"talk" over on- or off-site touch-tone telephones. Incorporating
digitized voice technology allows the end-user to confirm commands, such
as the level of protection or a disarming signal, or to receive a status
report of protection levels and environmental conditions, such as the
temperature inside the end-user's house. In response to various foreign
sales opportunities, ITI has incorporated digitized voice response
capabilities in several foreign languages into its systems.
- BREADTH OF SENSOR LINE. ITI believes it offers the widest variety of
wireless sensors currently available in the security system market. ITI
wireless sensors include motion detectors; different types of intrusion
sensors activated by sound, shock, or shattering glass; photoelectric
smoke sensors; "rate-of-rise" fire sensors with a special thermostat
activated by an unusually rapid temperature increase; carbon monoxide
sensors; pocket-sized emergency transmitters; and environmental sensors
to detect such conditions as furnace failure and flooding. ITI sensors
also are the smallest available in any monitored wireless security
system. ITI believes that its wide variety of sensors and their compact
size offer it a significant competitive advantage. Most of ITI's wireless
sensors have long-life lithium batteries, thus increasing system
reliability and convenience. Much of the ITI wireless sensor line
utilizes crystal-controlled radio transmitters. In 1997, ITI introduced a
new lower cost sensor line based on Surface Acoustic Wave, or SAW, radio
technology.
- INTERACTIVE CAPABILITIES. ITI systems communicate alarm information to
central monitoring facility personnel over telephone lines using ITI's
CS-5000 central station receiver. ITI Toolbox(R), a PC-based software
tool, allows a technician to remotely perform certain kinds of service
and programming on ITI security systems remotely, avoiding delay and
expensive on-site service calls.
- HOME MANAGEMENT CAPABILITIES. The ITI energy saver module, which is
available with the UltraGard and Concord systems, enables an end-user to
adjust a thermostat using either a touchpad or an on-or off-site
touch-tone telephone which can result in reduced energy costs to
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the end-user. The ITI wireless systems also can be used to control lights
through the use of touchpads. ITI has developed a power line signaling
technology that allows its system control panels to activate sirens and
light modules over the household electrical system. Sirens and lights
thus can be installed and controlled virtually anywhere in the premises
where there is an electrical outlet.
- ALARM VERIFICATION. False alarms represent a troublesome issue for the
security industry. In 1993, ITI introduced its Interrogator alarm
verification module to address the false alarm issue. The Interrogator
gives ITI wireless systems two-way voice capabilities through sensitive
microphones and talk-back speakers that are placed strategically
throughout a home or business. After an alarm has occurred and been
reported to the central station, the Interrogator will allow the central
station operator to either "listen in" or, if desired, "talk back" to the
subject home or business. This built-in communicator helps enable the
central station operator to verify alarms before dispatching the police
or fire department. The Interrogator can digitally record and play back
16 seconds of an alarm event with the simple addition of the optional
recording module. This enables the central station operator to listen to
a recording of the actual emergency event as it happened. The
Interrogator and the optional recording module work with all of ITI's
wireless security systems and also can be sold separately for use with
other manufacturers' security systems.
HARDWIRE AND HYBRID SECURITY SYSTEMS MARKETED UNDER THE CADDX(TM) TRADEMARK
ITI has developed a line of hardwire and hybrid security systems targeted
at both the domestic and international markets. Sales of these systems
represented approximately 20.8% and 12.6% of total ITI net sales in 1998 and
1997, respectively. ITI offers multiple systems to satisfy the needs of the
international, new construction and low-end hardwire markets.
- NX PRODUCT LINE. In mid-1997, ITI introduced the CADDX NX-8 security
system, which is designed to be a hybrid security system that will meet
various countries' regulatory requirements throughout the world. The NX-8
is flexible, durable and user/installer friendly. The development of the
NX-8 required several design and engineering innovations, including the
creation of special telecom and power interfaces that would be acceptable
under any country's regulations anywhere in the world. By adding an ITI
wireless receiver to the NX-8 control panel, the NX-8 becomes a true
hybrid system with both hardwire and wireless capabilities. In 1998, ITI
built on the success of the NX-8 by introducing the NX-6 and NX-4
security systems offering similar functionality at a lower price point.
- RANGER PRODUCT LINE. The CADDX Ranger 9000E is a powerful, simple and
flexible hardwire panel that can become a hybrid panel with the addition
of a radio receiver. The Ranger 9000E is suitable for residential,
commercial, retail and multi-tenant office building applications. This
system provides the ability to incorporate security, access control and
environmental process monitoring for commercial applications. Other
security control panels in the CADDX Ranger family include the Ranger
8600, Ranger 8600E, Ranger 8980 and the Ranger 8980E.
- GLASS BREAK DETECTORS. ITI manufactures a line of glass break detectors
under the CADDX trademark. ITI's patented "3x3" technology, which is a
method of glass break detection that monitors three specific frequency
ranges for three different sets of data and looks for a "match" to the
"signature" of breaking glass, is incorporated in CADDX glass break
sensors, making them extremely reliable.
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- OTHER HARDWIRE SECURITY PRODUCTS. ITI also manufactures various other
hardwire sensors for use in connection with hardwire control panels,
including passive infrared sensors (or motion detectors) and seismic
detectors.
FIRE PROTECTION SYSTEMS
We estimate the total fire alarm market to be $3,000,000,000, including
product, installation, service and monitoring. We estimate the manufacturers'
equipment market to be $1,200,000,000. While new to the commercial fire
equipment market, ITI will shortly be offering several commercial fire products.
The soon to be released Advent Fire System offers an excellent product solution
for the high-end fire market. The Regency product and soon to be released UL
commercial fire rated version of the CADDX NX-8 offer solutions for the retail
and small commercial fire markets.
Fire business is traditionally won by persuading specifying firms to
specify your product. It is common to take two to five years in the specifying
market for relationships to lead to sales. Business is also gained through
negotiating directly with the end-users.
- ADVENT FIRE SYSTEM, which is expected to be available in the first half
of 2000, is a full-featured, high-level system. With its built-in
multi-partition, 250 zone and long-range wireless capabilities, Advent
Fire System is targeted for large commercial applications such as
industrial complexes, government facilities, campuses, and high-rise
office and residential complexes. The system can be powered by either one
Class I or two Class II AC power transformers for up to 6 amps of 12/24
VDC regulated power for a large number of sensor, siren, analog smoke
loop and other hardwire peripheral devices. Advent's capabilities can be
increased by plugging in panel input, output, and/or smoke loop expansion
cards. It can also be expanded through the built-in high speed, digital
data bus that can connect a wide array of ITI SuperBus peripherals. The
development of this product has not yet been completed and there can be
no assurance that such product will actually be introduced into and sold
in the market.
- REGENCY is a UL rated system that incorporates commercial burglary, fire
and access control into a single platform. The integration makes it
particularly attractive for retail and small commercial applications
desiring multiple functionality.
- THE NX-8 CF, which is expected to be available in the first half of 2000,
is a commercial fire version of the popular NX-8 control panel. It has 8
zones on-board and can be upgraded to over 40 zones with the addition of
modules.
ACCESS CONTROL
Access control systems monitor traffic through, and regulate access to,
buildings and other restricted areas depending upon the authority level granted
to an individual. Sales of these systems represented approximately 2.5%, 2.6%
and 2.4% of total ITI net sales for 1998, 1997 and 1996, respectively. Access
control systems consist of the following components:
- SYSTEM MANAGER OR CONTROLLER. A software-based system that includes a
database, grants or denies access based on various criteria and produces
audit or other management reporting.
- MAGNETIC LOCKS. Magnetic lock that responds to the system commands to
lock or unlock doors.
- IDENTIFICATION CARDS. Cards, such as identification badges, that are
given to a user and that contain information regarding the user.
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- READERS. The reader uses the data on the identification card to notify
the system manager to determine if the user has the proper authority to
be granted access. With proper authorization, the controller will send a
command to unlock the door.
Access control systems can be used for a single door with a few users or
hundreds of doors at multiple locations with thousands of users.
ITI offers a number of electronic access control systems to meet a variety
of price points and customer performance requirements, including:
- ACCESS NT. Based on Microsoft Windows NT software, this system allows
multiple work stations to be functioning simultaneously to monitor the
system, add cards, change access times, make badges, control
closed-circuit television cameras, create reports, etc.
- ACCESS 5.0. This system has many of the same functions as Access NT, but
with a smaller system capacity that performs in a non-multitasking
operation at a lower price point. Both Access 5.0 and Access NT are aimed
at the middle to large electronic access control installations.
- EASY ACCESS. This is a Microsoft Windows-based system that provides the
sophistication of more expensive PC-based systems but at a low price
point. Easy Access controls up to 32 doors with a very simple to use
point-and-click graphical interface.
- 451 APM. This is a stand-alone system that provides much of the
sophistication of a PC-based system without the expense of a host
computer. Each 451 system has its own microprocessor, database and clock.
Each 451 system can operate independently or as part of a network of up
to 16 APMs, allowing the control of up to 32 doors without the use of a
host computer.
- 351 APM. The 351 system is aimed at small businesses that may have only
one or two doors to protect but want to control who gets in and at what
times. The 351 system is designed to work independently to control one or
two doors and has its own microprocessor, database and clock.
OTHER PRODUCTS
In addition to developing new features for existing products, ITI's product
development programs have produced products for related markets using its
existing technologies. Sales of these products represented approximately 1.1% of
total ITI net sales in 1998 and 1997 and 0.7% in 1996.
- THE QUIK BRIDGE FAMILY. The Quik Bridge family is a group of wireless
receivers equipped with interfaces that broaden the market opportunities
for ITI Learn Mode sensors. ITI has introduced several Quik Bridge family
members. The Quik Bridge Repeater extends the range of ITI wireless
sensors attached to ITI wireless receivers. The Quik Bridge Loop Receiver
enables adding up to 16 ITI wireless sensors to any hardwire panel that
supports a common loop ground and/or a relay unit connection. In 1998,
ITI released the Quik Bridge two-channel receiver, which adds up to four
wireless devices to any hardwire system. ITI also has custom receiver
products specifically designated to work with the CADDX NX line of
control panels in domestic and international markets and certain
Radionics and Detection Systems controls in the U.S. market. In addition,
the Quik Bridge family allows the use of the ITI keychain touchpad to
control ITI's and other manufacturers' access control systems.
- CS 5000 COMPUTERIZED CENTRAL STATION RECEIVER. In 1998, ITI released the
CS 5000 as a replacement for the CS 4000 central station receiver. The CS
5000 can be used by the central
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monitoring service providers to receive and monitor information from
homes and businesses protected with ITI wireless security systems and
certain other manufacturers' security systems. Monitoring station
personnel transmit emergency messages to police, fire, medical or other
authorities.
- LIFEGARD. Recognizing the growing elderly population, ITI introduced in
1996 its LifeGard personal emergency response system. Like a security
system, LifeGard maintains a communication link with a monitoring company
in order to provide the fastest possible response during an emergency.
Two-way voice communication with the monitoring company is initiated
either when the owner presses one of at least two panic buttons, or when
the system does not detect activity in the home after an elapsed time.
The LifeGard system includes a control panel mounted on a base, a
built-in Interrogator and a water-resistant panic pendant.
SALES AND MARKETING
ITI sells ITI wireless security equipment directly to its independent
dealer network, large security companies and other private label customers, and
electric and gas utility companies. ITI sells CADDX hardwire and hybrid security
systems primarily through domestic and international distributors. Approximately
47% of CADDX branded product is sold outside of the United States and Canada.
SALES TO INDEPENDENT DEALER NETWORK. ITI has a nation-wide sales force
supporting its network of over 2,000 independent dealers. Through its
independent dealer network, ITI wireless security products are sold extensively
throughout the United States and Canada. ITI's dealer sales and support programs
include sales aids (such as sales literature and demo kits), marketing
literature and instructional videos for both dealers and end-users. In addition,
ITI provides its dealers with a wide variety of training programs and materials,
including technical, sales, marketing and business management programs and a
number of marketing newsletters. ITI recognizes its top dealers with an
incentive program which includes an annual trip to ITI's national dealer sales
meeting, which reinforces the ties between ITI and its key dealers. ITI's
Security Pro and Regency dealer programs enhance and support its independent
dealer network.
SALES TO LARGE SECURITY COMPANIES AND OTHER PRIVATE LABEL
ARRANGEMENTS. ITI designs and manufactures customized and private label systems
for companies that sell the systems on a national and regional basis. These
customers offer the potential for substantial sales volume, provide extensive
geographic coverage and, in many cases, offer the ability to sell ITI products
under nationally recognized brand names. Members of ITI's senior management team
are involved in initiating and maintaining relationships with its private label
customers.
SALES TO ELECTRIC AND GAS UTILITIES. Electric and gas utilities provide
ITI with an additional distribution channel and the opportunity to develop
related applications of its technologies. These utilities are increasingly
seeking to enter unregulated industries, including the security systems
industry, to increase their profits. This industry offers electric and gas
utilities a logical complement to their businesses, as many already have the
infrastructure in place to sell, install and repair security and home automation
systems and provide monthly monitoring services. Over 60 electric and other
utilities are now purchasing ITI's products. ITI has two sales representatives
who sell to utilities with support from ITI's field sales force.
INTERNATIONAL SALES
Export sales, primarily to Canada, Europe and Australia, accounted for
18.3%, 13.9% and 8.7% of ITI's net sales for 1998, 1997 and 1996, respectively.
ITI currently sells its products in over 50
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foreign countries through distributors and dealers. The CADDX NX product line
was designed specifically with the international market in mind. The NX control
panels include special telecom and power interfaces that are acceptable under
most regulatory requirements throughout the world. Furthermore, in response to
various foreign sales opportunities, ITI has incorporated into its wireless
security systems digitized voice response capabilities in several foreign
languages and intends to expand its product development and marketing efforts to
increase its international sales of wireless security products. ITI is currently
designing its next generation of wireless security systems to satisfy the power,
telephone, radio and other regulatory standards necessary to sell the systems in
the European Community. ITI has also developed a wireless receiver for the CADDX
NX hardwire panels, which creates a global hybrid product solution. Because the
NX security panels have already gained numerous international approvals, it is
helping to accelerate the introduction of ITI wireless sensors in the
international market.
SALES TO A SIGNIFICANT CUSTOMER
During the years ended December 31, 1997 and 1996, ADT Security Systems,
Inc. accounted for 25% and 41%, respectively, of consolidated net sales. This
customer accounted for 11% of consolidated accounts receivable at December 31,
1997. No one customer exceeded more than 6% of consolidated sales or accounts
receivable as of and for the year ended December 31, 1998.
PRODUCT DEVELOPMENT
In the years ended December 31, 1998, 1997, and 1996, ITI had research and
development expenditures of $8,000,000, $7,500,000 and $6,300,000, respectively.
These research and development expenditures have resulted in the introduction of
many new products during the past three years, including Concord, Concord
Express, the CADDX NX product line and the CS 5000 Computerized Central Station
Receiver. Additionally, ITI expects to release two new products in 2000 for the
fire alarm market. ITI expects to release the Advent fire system in the first
quarter of 2000. ITI expects the CADDX NX-8 CF system to be available during the
first half of 2000.
ITI's current product development efforts are primarily devoted to
continuing the enhancement and expansion of its product lines and technologies.
ITI continues to improve its core wireless technology through product
miniaturization, increased sensor battery life and the introduction of two-way
radio frequency devices.
Traditionally, wireless sensors have been larger than their hardwire
counterparts. The larger size is due to the need to provide space for the
addition of the required battery and radio transmitter. In some applications,
the larger size of wireless sensors has led to an aesthetic objection from
end-users. The introduction of miniaturized sensors, such as the ITI Micro
Door/Window sensor and the Micro Recessed Door/Window Sensor, is aimed at
reducing or eliminating that aesthetic concern. Because wireless devices are
battery powered, the replacement of batteries can create a service challenge for
ITI's dealers. ITI has developed a wireless sensor that can be powered for up to
20 years on a single AA lithium battery. Two-way radio frequency devices offer
benefits to both the installer and the end-user. The installer can offer
enhanced operation without increasing the difficulty of installation. The
end-user gets better control and feedback from the system. ITI's first two-way
radio frequency device is the TouchTalk, which is a wireless talking touchpad
for its Simon system. TouchTalk is used as an interface to operate the Simon
system. TouchTalk is installed by simply mounting it on the wall at the desired
location and it provides detailed verbal feedback on the status and operation of
the Simon system without the use of wires.
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COMPETITION
The industry in which ITI participates is highly competitive, with a large
number of manufacturers providing a wide range of products. Competition is based
primarily on product reliability, the incorporation of advanced technological
features, ease of installation, marketing and sales support and price. Market
research conducted by independent third parties documents that ITI is an
established leader in the sale of wireless security equipment.
ITI's competitors in the monitored wireless security system industry
include Ademco Security Group (a division of Pittway Corporation), Linear Corp.
(a subsidiary of Nortek, Inc.) and several smaller manufacturers. ITI also
competes with numerous manufacturers of hardwire security systems, including
Ademco Security Group, Napco Security Systems, Inc., Detection Systems, Inc.,
Digital Security Controls Ltd., C&K Components (a subsidiary of Honeywell),
Silent Knight Security Systems (a subsidiary of Pittway Corporation), and SLC
Technologies B.V. (a European subsidiary of SLC). The manufacturing segment of
the security industry is undergoing change and consolidation, creating
competitors with substantial financial resources. Digital Security Controls and
Pittway have each acquired a number of security related manufacturers over the
past few years. In August 1999, Honeywell completed its acquisition of C&K
Components and in February 2000, Honeywell acquired Pittway. The combined
strengths of SLC and ITI will allow the combined company to better compete with
competitors like Honeywell that have vastly greater resources than ITI.
Furthermore, ITI may encounter additional competition from future industry
entrants.
MANUFACTURING
ITI's production processes include printed circuit board assembly, testing
and calibration and final assembly and testing. ITI has manufacturing facilities
in North St. Paul, Minnesota and Gladewater, Texas. A Mexican contract
manufacturing facility, which is dedicated to ITI, assembles less complex,
high-volume circuit boards, such as transmitter boards, and sends them to North
St. Paul. ITI has invested in various automated printed circuit board assembly
and test equipment at its North St. Paul, Gladewater and Mexican facilities to
achieve manufacturing cost efficiencies and vertically integrate its production
processes. From time to time, ITI uses certain contract manufacturers to perform
some of its printed circuit board assembly and may increase its use of such
companies to meet any increased demand. Certain of the chips, microprocessors
and other products used in ITI's systems are obtained from single sources. If
ITI could not obtain these components from these sources, there may be a 16-to
30-week leadtime to obtain them from a different supplier. To help prevent
delays in the shipment of its products, ITI maintains what it believes to be a
sufficient amount of certain components in inventory or has made safety stock
program arrangements with the suppliers.
INTELLECTUAL PROPERTY
ITI's success is dependent in part on its proprietary information,
technology and know-how. ITI relies on a combination of trade secret and
copyright protection and confidentiality agreements to establish and protect its
proprietary rights. In addition, ITI holds 21 patents covering various
technologies, including its Learn Mode technology, and has several patent
applications pending. ITI believes its Learn Mode technology in particular
affords it significant competitive advantages because it has allowed ITI to
substantially improve the performance and reliability of its products. ITI plans
to aggressively protect its patents and other intellectual property and to
pursue patents to protect its technology. There can be no assurance, however,
that ITI will be able to protect its proprietary information, technology and
know-how, deter misappropriation of its proprietary rights, or prevent third
party development of substantially similar technology and products. In addition,
there can be no
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assurance that any patent applications filed by ITI will result in issued
patents or that any patents issued are or will be sufficiently broad to protect
ITI's technologies or provide ITI with any material competitive advantages.
There also can be no assurance that the patents ITI has obtained in the past or
may obtain in the future will not be contested, invalidated or circumvented.
ITI has occasionally received, and may receive in the future,
communications from third parties asserting intellectual property rights
relating to ITI's products and technologies. Upon receiving such claims, ITI
evaluates their merits and risks and on occasion has negotiated licenses where
third-party technology was necessary or useful for the development or
manufacture of ITI's products. There can be no assurance that third parties will
not assert claims against ITI with respect to existing or future products or
that any licenses will be available on reasonable terms with respect to any
third-party technology. ITI could incur substantial costs in redesigning its
products or in defending any legal action taken against it.
GOVERNMENT REGULATION
Substantially all of the components in ITI's security systems require
approval by the FCC before the systems may be marketed in the United States. The
FCC regulates all communications by telephone and radio frequency. All of ITI's
wireless security systems use radio frequency to send data from sensors and user
interfaces to the control panel. All of ITI's control panels communicate with
the central monitoring system through telephone lines. Although ITI has obtained
FCC approval of its products in the past, it cannot predict whether it will
obtain FCC approvals for components of future products or whether FCC
regulations might change with respect to ITI's current or future products. In
addition, sales of ITI's products in countries outside of the United States
usually are subject to similar types of approvals by regulatory authorities in
those countries. ITI also is subject to various federal, state and foreign laws
and regulations pertaining to the use of potentially dangerous material, the
discharge of material in the environment and otherwise relating to the
protection of the environment. ITI believes it has complied in all material
respects with all such laws and regulations.
EMPLOYEES
On December 31, 1999, ITI had 687 full-time employees, consisting of 394 in
manufacturing, 98 in engineering and product development, 78 in customer
service, 56 in sales, 49 in management and administration and 12 in marketing.
These employees do not include the contract workers in the Mexican facility.
None of ITI's employees are members of a collective bargaining unit, and ITI's
management believes employee relations are good.
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SELECTED CONSOLIDATED FINANCIAL DATA OF ITI
The following selected financial information has been derived from ITI's
audited and unaudited consolidated financial statements. Unaudited interim data
as of September 30, 1998 and 1999 and for the nine month periods then ended, in
the opinion of ITI's management, includes all adjustments, including normal
recurring adjustments, considered necessary for a fair presentation of results
for such interim periods. This information is not necessarily indicative of
results of future operations and is qualified by reference to and should be read
in conjunction with the Consolidated Financial Statements and related notes, and
Management's Discussion and Analysis of Financial Condition, set forth in ITI's
Annual Report on Form 10-K for the year ended December 31, 1998 and ITI's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, both of
which have been incorporated by reference into this proxy statement.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------- -------------------------
1994(D) 1995 1996 1997(A)(B) 1998 1998 1999(C)
------- ----- ----- ---------- ------ ----------- -----------
(UNAUDITED) (UNAUDITED)
(TABLE IN MILLIONS, EXCEPT PER SHARE AND EMPLOYEE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................................... $59.1 $79.0 $93.3 $101.0 $109.0 $80.4 $88.7
Gross profit.................................... 26.7 36.9 45.1 46.6 50.2 36.6 41.7
Marketing, general and administrative........... 12.1 13.0 15.0 18.4 19.4 14.7 16.7
Research and development........................ 4.1 5.2 6.3 7.5 8.0 6.0 6.3
Purchased research and development costs........ -- -- -- 5.2 -- -- --
Patent litigation costs......................... 4.1
Amortization of intangibles..................... .9 .9 .9 1.2 1.4 1.1 1.1
Operating income................................ 9.6 17.8 22.9 14.3 21.4 14.8 13.5
Interest and other expense (income), net........ 4.3 -- (.8) (.5) (.8) (.7) (1.1)
Income before income tax expense and
extraordinary item............................ 5.3 17.8 23.7 14.8 22.2 15.5 14.6
Provision for taxes............................. 1.9 6.4 8.6 7.2 8.0 5.6 5.2
Income before extraordinary item................ 3.4 11.4 15.1 7.6 14.2 9.9 9.4
Extraordinary item.............................. .8
Net income...................................... 2.6 11.4 15.1 7.6 14.2 9.9 9.4
Net earnings per share, basic:
Income before extraordinary item.............. $ .61 $1.31 $1.69 $ .91 $ 1.68 $1.16 $1.11
Extraordinary item............................ (.15) -- -- -- -- -- --
Net income.................................... $ .46 $1.31 $1.69 $ .91 $ 1.68 $1.16 $1.11
Net earnings per share, diluted:
Income before extraordinary item.............. $ .52 $1.26 $1.63 $ .87 $ 1.61 $1.11 $1.07
Extraordinary item............................ (.12) -- -- -- -- -- --
Net income.................................... $ .40 $1.26 $1.63 $ .87 $ 1.61 $1.11 $1.07
Weighted average shares outstanding:
Basic:........................................ 5.6 8.7 8.9 8.4 8.5 8.5 8.4
Diluted:...................................... 6.5 9.0 9.2 8.7 8.9 8.9 8.8
BALANCE SHEET DATA:
Current assets.................................. $26.4 $41.1 $48.1 $ 45.3 $ 53.9 $49.4 $58.5
Current liabilities............................. 7.3 6.2 6.1 9.0 10.9 10.6 11.4
Working capital................................. 19.1 34.9 42.0 36.3 43.0 38.8 47.1
Total assets.................................... 64.5 80.1 89.8 104.0 116.0 110.1 126.2
Long-term debt, including capital leases........ 4.5 -- -- -- -- -- --
Stockholders' equity............................ 49.8 70.1 79.3 87.7 97.4 92.2 108.5
Number of employees............................. 455 456 477 641 645 649 677
</TABLE>
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<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------- -------------------------
1994(D) 1995 1996 1997(A)(B) 1998 1998 1999(C)
------- ----- ----- ---------- ------ ----------- -----------
(UNAUDITED) (UNAUDITED)
(TABLE IN MILLIONS, EXCEPT PER SHARE AND EMPLOYEE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
RATIOS/PERCENTAGES ADJUSTED FOR NON-RECURRING
ITEMS(A)(B)(C)(D)
Gross profit/sales.............................. 45% 47% 48% 47% 46% 46% 47%
Pre tax profit/sales............................ 9% 23% 25% 21% 20% 19% 21%
Net income/sales................................ 6% 14% 16% 13% 13% 12% 14%
EBITDA(e)....................................... $11.6 $19.6 $25.2 $ 17.3 $ 25.2 $17.6 $16.6
Cash flow from operating activities............. 4.0 8.0 14.3 18.0 9.4 8.9 2.5
Cash flows from investing activities............ (1.8) (2.7) (5.0) (26.3) (5.1) (3.9) (6.0)
Cash flows from financing activities............ $(2.1) $ 4.4 $(5.9) $ 0.8 $ (4.5) $(5.4) $ 1.7
</TABLE>
- -------------------------
(a) In 1997, ITI recorded a non-recurring purchase accounting adjustment to cost
of goods sold of $725,000, which resulted from the sale of inventory which
had been written-up to reflect estimated selling price less the sum of
estimated costs of completion and selling at the time of the CADDX
acquisition. This amount has been excluded from the ratio/percentage
calculations.
(b) In 1997, ITI recorded a non-recurring purchase accounting adjustment, which
resulted from the write-off of $5,200,000 for the value assigned to
technology in process at the time of the CADDX acquisition. This charge is
not deductible for income tax purposes and, as such, no related tax benefit
has been recorded as a part of ITI's income tax expense. This amount has
been excluded from the ratio/percentages calculations.
(c) In 1999, ITI recorded a non-cash charge of $4,104,000 related to certain
litigation costs incurred in connection with a patent litigation case
against a competitor that were previously capitalized. In addition, through
September 30, 1999 ITI incurred expenses of $275,000 associated with the
merger. These amounts have been excluded from the ratio/percentages
calculations.
(d) In 1994, ITI incurred an extraordinary charge of $825,000, or $.12 per
share, related to the write-off of unamortized discount and deferred
financing charges, net of related income tax benefits of $462,000, in
connection with the conversion of all outstanding warrants and retirement of
debt subsequent to its November 24, 1994, initial public offering. This
amount has been excluded from the ratio/percentages calculations.
(e) ITI calculated EBITDA by adding: (1) income before income taxes and (2)
depreciation and amortization, less net interest income. ITI included data
concerning EBITDA because management believes it is a measure of operating
performance before leverage and ITI understands that investors use it to
evaluate historical performance and the value of the company. EBITDA is not
determined in accordance with U.S. GAAP. EBITDA is not indicative of net
income or cash flows from operating, investing or financing activities
determined in accordance with GAAP, and you should not consider EBITDA in
isolation, or as an alternative to, or more meaningful than, measures of
performance determined in accordance with U.S. GAAP. In addition, EBITDA, as
defined here, may not be comparable to similarly titled measures used by
other companies.
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BUSINESS OF SLC
OVERVIEW
SLC provides electronic and communication technology focused on security,
fire protection, loss prevention and access control. SLC designs, develops,
manufactures and distributes components and software for the following:
- intrusion and fire protection systems;
- access control systems;
- video surveillance systems; and
- integrated systems, which link independent electronic systems to a
central communication and control point.
SLC manages its business through three geographical segments -- SLC
Americas, SLC Europe & Africa and SLC Asia Pacific, each of which is managed by
a regional president. SLC Americas and SLC Europe & Africa together accounted
for over 97% of consolidated revenue in 1998, with SLC Americas representing
over 61% and SLC Europe & Africa representing 36%. SLC Asia Pacific is primarily
a sales and customer support operation that represents approximately 3% of total
revenue. SLC completed the acquisition of an Australian-based company in 1999 to
strengthen its base of operations in the Asia Pacific region.
SLC serves a broad customer base ranging from residential and commercial
users to large, multinational companies. SLC's products and services are
provided through an array of channels, including direct sales, wholesale
distribution, specialized distribution and system integrators.
SLC has sales and technical support operations in 27 countries and
manufacturing and logistics operations in the United States, Europe, South
Africa, Australia and China.
BUSINESS STRATEGY OF SLC
SLC's strategic objective is to be the global partner of choice to provide
products and services for customers requiring security, fire protection, loss
prevention and access control. To meet this objective, SLC offers products and
services to support the diverse requirements of the residential, commercial and
corporate enterprises markets. SLC seeks to develop customer relationships based
upon its ability to deliver both standardized and customized products, supported
by marketing, training and technical support.
SLC focuses its organization on three defined markets -- residential,
commercial and corporate enterprises, rather than on the basis of product lines.
SLC believes that aligning the organization with these markets provides a deeper
understanding of end-user requirements, creating opportunities to increase
market share. In many cases, SLC's customers have segregated their purchasing
functions into similar market-oriented groups, and SLC believes that having a
similar structure will facilitate relationship management with those customers.
SLC maintains several technology centers focused on research and
development of new technologies. The objective of the technology centers is to
shorten development time and accelerate speed to market of new products. SLC's
technology centers are as follows: sensors, controls, fire systems, video
surveillance, access controls, key management systems and communications.
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HISTORY OF SLC
A Berwind Group Partners' affiliate acquired Sentrol, Inc., a predecessor
of SLC, in 1984. SLC, the vehicle for expanding activities in the security
industry, was incorporated in Delaware in 1993 as a holding company.
In the early 1990s, SLC engaged in acquisitions designed to:
- extend its product lines to include control panels, enabling SLC to
package security and fire protection systems;
- expand its geographical markets throughout Europe and Africa;
- broaden its customer base from primarily commercial applications to
include residential applications for its products; and
- establish a manufacturing and distribution presence in Europe.
Following these acquisitions, SLC expanded its products and services from
core components of security and fire protection systems into the corporate
enterprises market. SLC expanded its products through the following acquisitions
(year of acquisition indicated in parentheses):
SUPRA PRODUCTS, INC. (1994). SLC, through its Supra product lines,
provides a range of key and remote access control products and services.
CASI-RUSCO, INC. (1996). SLC, through its Casi-Rusco product lines,
provides electronic access control systems and services.
FIBER OPTIONS, INC. (1996). SLC, through its Fiber Options product lines,
designs and manufactures equipment for transmitting and receiving video, audio
and control signals over short-range fiber optic cable.
KALATEL, INC. (1997) AND IMPAC TECHNOLOGIES, INC. (1999). SLC's Kalatel
and Impac units provide products and systems to the video surveillance market.
TECOM SYSTEMS PTY. LTD. (1999). SLC Technologies (Australia) Pty Ltd.
acquired the business of Tecom and offers integrated intrusion and electronic
access control products and systems.
PRINCIPAL PRODUCTS AND SERVICES
As a global company, SLC offers products and systems that provide its
customers with value-added features that can be customized to meet their
specific requirements. These products and systems provide a range of
applications for the intrusion and fire protection, access control and
integrated systems markets.
Based on worldwide net sales in 1998, intrusion and fire protection
components and systems accounted for 55% of SLC's sales, access control systems
accounted for 30%, and integrated systems and communications equipment accounted
for 15%.
INTRUSION AND FIRE PROTECTION SYSTEMS
Intrusion and fire protection systems protect a residence or commercial
property against fires and burglaries by sensing smoke or fire, or intrusions
through doorways, windows, or open areas. Most systems will sound an audible
alarm to warn of fires or intrusions. Monitored systems send a signal to
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a remote monitoring station, where dispatchers may contact the appropriate
authorities. A typical intrusion and fire protection system consists of the
following components:
- CONTROL PANEL. The control panel receives signals from the sensors and
user interface, regulates all intrusion and home automation functions
and, in the case of a monitored system, reports emergency conditions and
service information to a monitoring facility. Many control panels also
utilize digitized voice to communicate with users.
- USER INTERFACE. The user interface, such as an electronic keypad, allows
the user to arm, disarm and give other commands to the system, including
panic buttons to alert the central monitoring facility for police, fire
and medical emergencies. Additional user interfaces include wireless key
fob controls to arm and disarm systems and modules that allow users to
control the system from any telephone, inside or outside the home.
- SENSORS. Sensors are devices that are installed on windows, doorways and
other places to detect intrusion, smoke, fire and other environmental
conditions and report them to the control panel.
- SOUNDERS. Sounders are activated in response to a particular alarm
condition to frighten away an intruder or alert the user to the alarm
condition.
There are two means of communication within any intrusion or fire
protection system, hardwire and wireless. In a hardwire system, the control
panel, sensors communicate through low-voltage wires. In a wireless system, the
control panel and sensors utilize radio frequency signals to communicate.
Equipment costs for hardwire systems are typically lower than those for
wireless systems. Hardwire systems are used most widely in new construction
since the installation costs are lower prior to the completion of construction.
Wireless systems, which are less expensive to install, are typically used for
existing homes and businesses because labor costs to install hardwire systems
would raise the overall cost significantly. A third type of security system is a
hybrid system which has both hardwire and wireless capabilities.
SLC sells the majority of its intrusion and fire protection systems
products through distribution to professional installers under the brand names
Sentrol, ESL, Moose and Aritech. SLC's products in this area include all
components of intrusion and fire protection systems and predominantly use
hardwire communication technology.
ACCESS CONTROL SYSTEMS
Access control systems monitor traffic through, and regulate access to,
buildings and other restricted areas depending upon the authority level granted
to an individual. Access control systems refer to two distinct types of
products -- key management systems and electronic access controls. Both systems
consist of the following components:
- SYSTEM MANAGER OR CONTROLLER. A software-based system that includes a
database and grants or denies access based on various criteria and
produces audit or other management reporting.
- MAGNETIC LOCKS. Magnetic lock that responds to the system commands to
lock or unlock doors.
- IDENTIFICATION CARDS. Cards, such as identification badges, that are
given to a user and which contain information regarding the user.
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- READERS. The reader uses the data on the identification card to notify
the system manager to determine if the user has the proper authority to
be granted access. With proper authorization, the controller will send a
command to unlock the door.
Access control systems can be used for a single door with a few users or
hundreds of doors at multiple locations with thousands of users.
A related offering provides electronic key management making possible the
control of multiple remote sites without the need to re-key or re-code these
sites, while providing a software based service management and audit tool.
KEY MANAGEMENT AND REMOTE ACCESS CONTROL SYSTEMS. Under its Supra brand,
SLC provides a line of key management and remote access control products. In the
highly specialized residential real estate brokerage market, the key management
system provides agents convenient, authorized and documented access to listings
in their respective territories by using a common keybox system. The system
limits access to the keybox containing the entrance key to authorized agents.
The system increases the productivity of the agent by providing access to all of
the homes listed for sale in the agent's territory without having to obtain the
entrance key from the selling agent or the homeowner. Each keybox stores the
names of the realtors who have accessed the residence and the time of access.
Building upon the success of the key management system, SLC developed a
remote access control product line, a type of key management system used for
unattended delivery and other remote access management applications. For
example, leading automotive manufacturers use this system to control off-hour
delivery of parts to warehouses.
ELECTRONIC ACCESS CONTROL. Electronic access control systems regulate
access to sensitive areas and buildings. The electronic access control product
line includes single-door systems as well as multi-door systems that can be
expanded to meet a range of customer requirements.
Under its Casi-Rusco brand, SLC offers two principal electronic access
control systems, called Secure Perfect and Picture Perfect. Secure Perfect is a
Microsoft Windows based product aimed at the mid-range of the corporate
enterprises market. It features access control, alarm monitoring, video
surveillance control, and badge imaging. Picture Perfect is also an integrated
system, but serves the high-end of the market. It is a Unix-based system
starting with eight readers that is expandable to over 6,000 readers. Picture
Perfect also features a significant amount of integration capability with other
security products such as fire system control panels, video surveillance
switchers, and other peripherals. SLC receives recurring revenue from sales of
software upgrades for its electric access control products. These systems are
routinely connected to human resources and payroll systems for automated
attendance verification.
Using the technology and expertise derived from the development of its
access management systems, SLC is developing an asset management system
utilizing a new "secure" radio frequency identification product to protect
valuable assets from theft through the use of patented tamper resistant, covert
tag devices. Radio frequency identification is a technology that uses radio
waves to detect when a tag passes through a protected area.
FULLY INTEGRATED SYSTEMS. Under its Tecom brand, SLC markets the
Challenger, a mid- to high-end electronic access control system and commercial
intrusion system. The Challenger system integrates alarm, surveillance and
environmental management functions, and is designed to minimize false alarms and
controlling lighting, heating and air conditioning. The core of the system is
the Challenger control panel, which contains electronic access control and
intrusion programming.
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VIDEO SURVEILLANCE PRODUCTS AND SYSTEMS
SLC's products sold in the video surveillance market include video
surveillance equipment, and fiber optic transmission and communications
technology.
VIDEO SURVEILLANCE EQUIPMENT. SLC's products include camera switches,
computerized matrix switches and computerized camera controllers, which it
markets using its Kalatel brand. Camera switches allow video surveillance system
operators to switch between cameras, either manually or automatically. Computer
technology has expanded the security control within a facility. Historically,
camera switches could only change cameras sequentially on a given monitor.
Matrix switches now make it possible to assign each camera to any of a number of
monitors. In addition, focus, pan-and-tilt and zoom functions can be placed
under the control of an operator. When someone triggers a door or interior
motion detector, the camera view automatically appears on any of several
monitors in multiple remote locations. The camera then returns automatically to
its previous position.
Camera controls using telephone lines and computerized camera controls
offer more sophisticated surveillance within a system because of the additional
level of control they provide. These controls are typically used for more
high-end systems employing digital technology. To meet this need, SLC expanded
its product offering with the introduction of its Cyberdome range that features
a fully integrated camera with zoom lenses and a variable speed pan/tilt system.
MobileView II is a digital video recording system designed for buses, light
rail cars and other mobile applications. When a driver starts a vehicle equipped
with MobileView II, up to eight cameras automatically begin digitally recording
events onboard the vehicle. MobileView II's patented wireless transmission
option enables a driver to hit a hot button to notify a central station of an
incident and begin transferring images of ongoing events. Conversely, an
operator at the central station can call up a vehicle and retrieve images at any
time. MobileView II's digital recorder features 36 gigabytes of hard drive
storage space. Other key features of the system include a synchronized audio
track and eight frames per second recording rate. The unit is lightweight and
its compact construction makes it useful for a variety of applications.
FIBER OPTIC TRANSMISSION AND COMMUNICATIONS TECHNOLOGY. SLC designs and
manufactures a range of products that transmit video, audio and data signals in
fiber optic systems that are sold under the Fiber Options brand. Video, audio
and data signals have traditionally been transmitted using copper wire. As the
demands for communications systems with greater bandwidth (which transmit
information faster) have increased, the use of fiber optic cable as an
alternative to copper wire has increased. SLC provides devices that link
components in fiber optic systems and convert analog and digital information.
For example, in a typical video surveillance system, a video camera in one part
of a building is connected to a monitor in another part of the facility. This
system requires two links -- one link to convert the video signal from the
camera to light pulses which would be transmitted along the fiber optic cable,
and a second link to convert the light pulses back to a video signal to be
displayed on the monitor.
Other important technology offerings of SLC for video surveillance systems
include:
- SLC's Impac brand Parallel Video Processing(TM), a patented technology
that helps digital video multiplexers process up to 60 unique pictures
per second, compared to conventional multiplexers that process 15 to 30
unique pictures per second. This provides security personnel with
clearer, more detailed documentation of crimes or accidents. A video
multiplexer allows multiple camera images to be displayed on one video
monitor in flexible configurations.
- SLC Impac brand Triplex(TM), a multiplexer that allows a single monitor
to display and record current events while simultaneously replaying
previous recordings.
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- SLC's Fiber Options brand FOXdbn(TM) (introduced in December 1999), a
high-speed, high-bandwidth digital fiber product targeted at very large
system users like "traffic control systems," high-rise facilities and
campuses.
TECHNICAL CUSTOMER SUPPORT AND TRAINING
SLC Americas maintains separate technical support and training functions
for each of its major product categories. In most cases, dedicated field staff
handle the technical support responsibilities, such as responding to
installation questions. SLC also has dedicated training staff for intrusion and
fire systems and for electronic access control products who provide customers
additional information on product features and applications. Management believes
that training increases the likelihood of the product being properly installed,
which reduces the number of false alarms. In addition, the training sessions
provide the company an opportunity to promote new or complementary product
lines. The system integrators and end-users can receive technical support for
products by calling a technical "hotline." In addition, SLC provides system
integrators with sales support programs including sales kits, demo kits,
marketing literature and instructional videos.
SLC MARKETS
SLC has focused its business to meet the product, service and support needs
of its customers in three geographic segments: SLC Americas, SLC Europe & Africa
and SLC Asia Pacific. Over 97% of SLC's consolidated revenues are generated by
two segments, SLC Americas and SLC Europe & Africa. Although many of the
products used by these segments are similar, the market channels and product
delivery methods are distinct to each segment.
SLC AMERICAS
OVERVIEW. SLC Americas includes North America, Central America and South
America. In 1998, sales in this segment were $229,100,000 across all product
lines. The sales and marketing efforts in this segment are evolving to provide
support specific to the needs of each unique market. Currently, SLC Americas'
products and services are sold through an array of channels intended to optimize
access to SLC's customers. These distribution channels are as follows:
DIRECT. Products sold through direct channels include fire and intrusion
systems, key management and access control systems. Direct sales of fire and
intrusion systems include sales to national, regional or local system
installation and service businesses, as well as to multi-family housing
management companies. SLC uses account managers to maintain relationships with
national customers. These large security companies represent sales from all
product categories of SLC Americas and offer the potential for significant
market penetration, broad geographic coverage and well-known brand names within
the industry. SLC Americas has one customer that was responsible for 11% of the
total revenues of this segment in 1998 and 8% of SLC's total consolidated
revenues in that year. The loss of the business of this customer could have a
material adverse effect on the business of SLC. Key management systems are sold
directly to real estate boards and their members. Access control systems are
sold directly to several large, multinational companies. These systems are
customized to meet the specific needs of the customer prior to shipment.
WHOLESALE DISTRIBUTION. Wholesale distribution is used to distribute a
majority of SLC's intrusion and fire-related products to the professional
installers serving the small to mid-size companies. Distributors sell the entire
SLC product line designed for their customers. The distributors and professional
installers are supported by customer service groups that provide sales
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literature, product information and technical support. Approximately 12% of SLC
Americas' sales are through one national distributor.
SYSTEM INTEGRATORS. SLC sells to over 150 independent system integrators
located throughout North America. System integrators design, install and
customize several independent systems, such as intrusion and fire protection,
access management, video surveillance and asset tracking, to create an
"integrated" system based on the requirements of the enterprise. These complex,
integrated systems are purchased primarily by large companies, institutions and
governmental entities through the system integrators. The system integrators
utilize the following products sold by SLC: electronic access control systems,
video surveillance systems, fiber optic transmission systems, multiplexing
equipment and digital storage media products.
SLC Americas sells its products and systems through a mix of these
channels, depending on the products, as described below.
SALES OF INTRUSION AND FIRE PROTECTION SYSTEMS. SLC sells electronic
intrusion and fire protection components and systems primarily to national
account customers and wholesale distributors for use in commercial and
residential markets.
SLC sells these products into the commercial market through wholesale
distribution. The wholesale distributors primarily sell to professional
installers who configure and install the intrusion and fire protection systems
to meet the specifications of end users. Traditionally, professional installers
have focused on the sale of equipment rather than on obtaining fees for
monitoring the systems. Sales in the commercial market are influenced
significantly by construction cycles, code compliance and safety concerns.
In the residential market, SLC sells these products primarily to national
account customers who are mass marketers of security systems. Industry sources
estimate that there are over one million residential systems installed per year
in North America, and mass marketers' installations are growing at a faster rate
than local dealer installations. Mass marketers rely on low system prices to
establish a base of installed systems to obtain the recurring revenues
associated with monitoring these systems. As mass marketing companies gain
market share, there is increased pressure for lower total system costs from the
manufacturers of components and systems. Despite this pressure, SLC's sales
volume has increased due to growth in the residential security systems market.
SLC expects sales volume growth in this market segment to continue as wireless
systems combining security and home automation features are used to retrofit
existing homes with minimal installation costs. However, we cannot assure you
that SLC's volume growth will continue.
SALES OF ACCESS CONTROL SYSTEMS. SLC sells key management systems directly
to residential real estate boards within a given market by account
representatives operating in regions. Typically, these real estate boards are
elected for calendar year terms and make annual purchasing decisions. In SLC's
experience, the largest percentage of sales to real estate boards occur during
the last two months of the year, before the succeeding board takes over. As a
result, the difference between fourth quarter sales and the total sales for the
other fiscal quarters varies from year to year. SLC sells remote access control
systems directly to corporate customers by a dedicated sales force.
Electronic access control systems are used in a wide range of industries
and are sold directly to large companies and business partners. The key buying
influences within the corporate enterprises market resides with the national or
local dealer and to a lesser degree, the architect, facility manager or building
owner.
SALES OF VIDEO SURVEILLANCE EQUIPMENT. Regional and national system
integrators are the primary purchasers of video surveillance products that SLC
Americas sells. SLC markets these products by
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establishing relationships with national installers and by brand-name marketing
to regional integrators. National account managers are responsible for
relationships with system integrators and national installers. Independent
representatives also support sales of these products on a commission basis.
SALES OF COMMUNICATIONS PRODUCTS. SLC sells fiber optics and other
communications products primarily to system integrators. A network of
independent representatives complements the SLC sales force to sell these
products. Communications products, such as the fiber optics systems products,
are the central components to integrated systems because they provide the
connections to link the various components of video surveillance, access
control, fire and intrusion. SLC's goal is to develop the ability to create
compatible applications so that all of SLC's current products work together as
part of an integrated system with little customization. This "plug and play"
approach is a key to SLC's strategy of increasing its sales to system
integrators.
SLC EUROPE & AFRICA
OVERVIEW. SLC Europe & Africa uses a marketing, sales and technical
support organization of over 300 people located in over 20 countries to market
its products and services. With a presence in Europe for over 30 years, SLC
believes it is well known within the industry. SLC Europe & Africa has
maintained its industry relationships by providing a dedicated sales team,
technical and customer support and training for each local market. Local
distribution and support centers provide the regional infrastructure to align
both product and service with customer demands. SLC is experienced in compliance
processes and the needs of the customers in each country. SLC Europe & Africa is
a full service supplier, offering a complete line of products from security
system components to integrated systems. Total sales for 1998 were $136,200,000.
SLC Europe & Africa's products are sold through a variety of distribution
channels including large security companies, specialized distribution and system
integrators.
SLC Europe & Africa maintains manufacturing and research and development
operations in Ireland, the Netherlands, the United Kingdom, South Africa and
Sweden, and additional research and development operations in Poland. SLC's six
most significant European countries by sales volume are Belgium, France,
Germany, Italy, the Netherlands and the United Kingdom.
DIRECT. SLC Europe & Africa designs and manufactures products and systems
for large security companies. These customers offer the potential for broad
coverage of the European market and well-known brand names within the industry.
SLC uses an account manager to manage the relationship with these customers. The
large security companies represent sales from all product categories.
SPECIALIZED DISTRIBUTION. The majority of the business of SLC Europe &
Africa is through its own distribution network of 28 offices and branches
located in 17 countries in Europe and South Africa to the professional security
installer. The breadth of SLC's operations in Europe allows SLC to manage the
relationships with the professional installers through local customer and
technical support. In addition, a number of independent security distributors
sell SLC's product in several regions.
SYSTEM INTEGRATORS. SLC Europe & Africa also sells through a network of
selected system integrators. The following product categories are distributed
through the system integrators: electronic access control systems, video
surveillance equipment and communication interface products.
SLC Europe & Africa sells its products and systems through a mix of
channels, depending on the products, as described below.
SALES OF INTRUSION AND FIRE PROTECTION SYSTEMS. SLC Europe & Africa sells
intrusion systems through its network of installers and dealers. These systems
are designed for use in residential and
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commercial applications and comply with local security and telephone company
requirements. The majority of intrusion systems are sold through this network.
In some instances, distributors are used to represent SLC in specific
geographical areas. These distributors operate in a similar way and sell the
same intrusion equipment as an SLC distribution location. In addition, a number
of select security distributors sell other intrusion products in a variety of
markets and regions. SLC's brand of intrusion equipment sold through security
distributors includes Aritech, Sentrol, Cosmotron, GBC and Arrowhead.
Similar to systems in North America, fire protection systems SLC sells in
Europe can be integrated with SLC's intrusion systems. However, the historical
bias of SLC Europe & Africa's market has been towards a greater proportion of
stand-alone fire protection systems that use SLC control panels and SLC and
third party detectors. In addition, the sale of fire detectors and systems is
highly regulated in Europe. Standards vary by country and by application and the
ability to obtain required approvals can have a significant effect on sales
growth when new products are introduced. SLC Europe & Africa sells these
products to professional intrusion and fire installers through its specialized
distribution network and direct to electrical contractors. Penetration of the
high-end commercial market involves working with specifiers, fire brigades and
large end users.
Sales growth in the European residential market has been relatively small
due to the limited amount of new construction and the high cost of installation
for the traditional hardwire intrusion systems. SLC expects growth in the
European residential market to accelerate during the next several years because
of the increased availability of wireless systems. In response to this expected
growth in demand, SLC Europe & Africa has recently released a wireless intrusion
offering, the CS product family.
SALES OF ACCESS CONTROL SYSTEMS. SLC Europe & Africa sells electronic
access control systems primarily to professional installers and system
integrators. The Aritech brand One-Card product family is sold principally to
professional installers through SLC's specialized distribution network in
Europe. The target market for the One-Card product family is primarily the
commercial market and is best suited for less complex applications. The
Casi-Rusco brand products are sold through a network of selected systems
integrators. The target market for the Casi-Rusco product line is the corporate
enterprises market that consists of large or multi-site companies, institutions
and governmental entities. SLC's sales strategy for these access control
products is to develop relationships with the system integrators.
SALES OF VIDEO SURVEILLANCE AND COMMUNICATION SYSTEMS EQUIPMENT. SLC
Europe & Africa has recently begun to offer all of SLC's video surveillance and
fiber optic communication products. SLC Europe & Africa sells equipment through
its specialized distribution network and through selected regional distributors.
SLC Europe & Africa focuses primarily on products that meet highly specialized
needs rather than on the broader video surveillance market.
SLC ASIA PACIFIC
SLC Asia Pacific currently represents a small portion of SLC revenues, with
1998 sales of $10,000,000. SLC Asia Pacific sells product through regional
distributors, installing dealers, system integrators and multi-national
companies. During 1996, SLC established sales offices in Shanghai and Shenzhen,
in the People's Republic of China. The Shanghai operation also assembles smoke
detectors. SLC Asia Pacific augmented these sales groups with a marketing and
support staff in Hong Kong. The sales group's objective is to provide sales and
marketing support in the region for product supplied mainly from the Americas.
Another responsibility of this group is to provide feedback to all of SLC's
technology centers on international requirements of the Asia Pacific region.
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The 1999 acquisition of the assets of Tecom Systems Pty. Ltd. in Australia
is expected to strengthen SLC's presence in the Asia Pacific region. SLC
believes that Tecom is a recognized brand in Australia and has manufacturing
capabilities for regional product delivery. Although economic conditions have
curtailed revenue growth in the region, SLC remains committed to business
development in the Asia Pacific region consistent with SLC's global strategy.
PRODUCT DEVELOPMENT
SLC expands and enhances its product offerings through both research and
development and acquisitions. The steady addition of new products and
technologies through these efforts has contributed to SLC's continued revenue
growth. In the years ended December 31, 1998, 1997 and 1996, SLC had research
and development expenditures of $13,400,000, $10,600,000 and $7,500,000,
respectively.
SLC is currently developing two new systems targeting the corporate
enterprises market. One of these systems is an asset management system using a
radio frequency identification tag. A radio frequency identification tag
installed on movable property identifies the asset when it passes through a
portal using radio frequency technology. This asset management system is
designed to reduce theft of moveable assets and to manage inventory. A second
project is the development of a fiber optic based digital communication system.
With this system, two fiber optic cables can provide video, voice and data
communication for up to 150 miles and allows for line extensions of up to 32
nodes.
While SLC anticipates introducing these two new systems successfully, there
can be no assurance that these products will be developed and marketed, or that,
if developed and marketed, that they will be commercially successful.
INTELLECTUAL PROPERTY
SLC relies on trademarks, trade secrets and patents to protect its
intellectual property. SLC currently holds numerous United States and foreign
patents, including patents relating to security and fire alarm sensor and
control technologies, access control architectures, video signal processing, and
communications protocols. SLC also has a number of United States and foreign
patent applications pending. SLC is a licensee and a licensor of various
intellectual property and expects to continue this practice. While SLC believes
patents and other forms of intellectual property are valuable assets to the
conduct of its business, no single patent, license, or group of patents or
licenses, is critical to SLC's financial results.
COMPETITION
The security industry continues to be highly competitive. SLC's principal
competitor in the intrusion and fire protection systems business is Pittway
Corporation, which manufacturers and distributes burglar, fire and other
security systems under the names Ademco, Systems Sensor, FireLite and Notifier.
Honeywell International Inc. recently acquired all of the outstanding stock of
Pittway. SLC also competes in this market with C&K Systems, which is also owned
by Honeywell, Detection Systems, Inc., DSC Security Systems Limited, Apollo Fire
Detectors Limited and Cerberus, a division of Siemens Building Technologies AG.
Some of these competitors, particularly Honeywell, have greater financial
resources than SLC.
The video surveillance industry has many participants in the manufacturing
sector that are large, well-known producers of diverse video and related
technology. SLC's primary competitors in the video surveillance systems industry
include Sensormatic Electronics Corporation, Royal Philips
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Electronics, Sony Corporation, Matsushita Electric Corporation of America (d/b/a
Panasonic), Ultrak, Inc. and Pelco.
In the electronic access control industry, SLC's primary competitors are
Sensormatic, Lenel, Northern Computers (owned by Honeywell) and Cardkey Systems
(owned by Johnson Controls, Inc.).
There can be no assurance that other firms with greater financial or other
resources will not enter into direct competition with SLC or that new
technologies will be developed and introduced into the marketplace, which could
adversely affect SLC's business.
PROPERTIES
SLC maintains offices in the Americas (11), Europe and Africa (27) and Asia
(3). The principal facilities are as follows:
<TABLE>
<CAPTION>
LEASE OR OWN
SPACE ANNUAL LEASE (REMAINING PRINCIPAL PRINCIPAL
LOCATION (SQ. FT.) AMOUNT TERM) PRODUCTS PURPOSE
- -------- --------- ------------ -------------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Tualatin, OR 140,000 $ 840,000 Lease (10 years) Intrusion Manufacturing,
and Fire sales and
Protection administrative
Hickory, NC 108,000 $ 520,000 Lease (Monthly) Intrusion Manufacturing
and Fire
Protection
Salem, OR 80,000 $ 660,000 Lease (14 years) Key Manufacturing,
Management sales and
administrative
Boca Raton, FL 89,000 $1,400,000 Lease (15 years) Access Sales and
Control administrative
Weert, The Netherlands(1) 62,000 $ 604,000 Lease (10 years) Intrusion Manufacturing,
and Fire sales and
Protection administrative
Dublin, Ireland two 27,000 $ 275,000 Lease (25 years; Intrusion Manufacturing
facilities 8 years) and Fire
Protection
Mitcham, Australia 20,000 $ 85,000 Lease (2 years) Integrated Manufacturing,
Systems sales and
administrative
</TABLE>
- -------------------------
(1) SLC is scheduled to move into this facility in the second quarter of 2001.
SLC has sold the building it currently occupies and is leasing it until it
relocates its operations.
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With the exception of Hickory, each of the facilities listed above is also
a technology center for product development, technical support, customer
support, sales and administration. Other technology centers are as follows:
<TABLE>
<CAPTION>
PRINCIPAL
LOCATION SPACE (SQ. FT.) LEASE OR OWN PRODUCTS PRINCIPAL PURPOSE
- -------- --------------- ------------ -------------- -----------------
<S> <C> <C> <C> <C>
South Hackensack, NJ 6,000 Lease Video Technology
Surveillance center, sales and
administrative
Costa Mesa, CA 16,000 Lease Multiplexer Technology
center,
manufacturing,
sales and
administrative
Corvallis, OR 17,000 Lease Video Technology
Surveillance center, sales and
administrative
Bohemia, NY 18,700 Lease Communications Technology
center, sales and
administrative
Brussels, Belgium 24,000 Lease Intrusion and Technology
Fire center, sales and
Protection administrative
</TABLE>
SLC also leases other sales and administrative offices that are not
material.
SLC is in the process of consolidating some of its manufacturing facilities
to achieve greater efficiencies. During the next twelve months, SLC expects to
move most of its video surveillance and fiber optics communications
manufacturing to the Hickory, NC and Salem, OR facilities. The costs associated
with these consolidations is not expected to be material.
EMPLOYEES
As of December 31, 1999, SLC employed approximately 2,500 employees. SLC
believes that it generally has good relations with its employees.
LEGAL PROCEEDINGS
SLC is not currently a party to any material legal proceedings.
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SELECTED CONSOLIDATED FINANCIAL DATA OF SLC
The following selected financial information has been derived from SLC's
audited and unaudited consolidated financial statements. Unaudited interim data
as of October 3, 1998 and October 2, 1999 and for the nine months then ended
reflects, in the opinion of SLC's management, all adjustments (consisting only
of normal recurring adjustments) considered necessary for a fair presentation of
results for such interim periods. This information is not necessarily indicative
of results of future operations and is qualified by reference to and should be
read in conjunction with the Consolidated Financial Statements and related
notes, and Management's Discussion and Analysis of Financial Condition.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, -------------------------
---------------------------------------------------- OCTOBER 3, OCTOBER 2,
1994 1995 1996 1997 1998 1998 1999
----------- ----------- ------ ------ ------ ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(TABLE IN MILLIONS, EXCEPT PER SHARE AND EMPLOYEE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net Sales.......................... $175.1 $225.2 $275.7 $326.0 $375.6 $269.1 $309.2
Gross Profit....................... 62.8 90.2 113.8 141.4 169.4 118.5 134.8
Selling, General and
Administrative................... 39.8 54.6 70.3 85.4 98.1 71.8 79.3
Research & Development............. 3.8 4.7 7.5 10.6 13.4 10.1 12.8
Amortization of Intangibles........ 5.8 6.2 8.0 8.7 8.1 6.1 6.5
Management Fees:
Export sales commission.......... -- .4 -- .9 3.9 2.9 1.9
Other............................ 3.7 5.0 6.0 5.3 2.7 2.0 2.2
Operating Income................... 9.7 19.3 22.0 30.5 43.2 25.6 32.1
Interest Expense, net(a)........... 7.4 6.7 7.8 9.7 4.8 3.8 3.6
Income before income taxes......... 0.8 12.1 14.4 20.4 37.6 21.7 31.1
Provision for income taxes......... 1.3 6.1 6.9 10.3 16.9 10.2 13.8
Net Income (loss).................. $ (0.5) $ 6.0 $ 7.5 $ 10.1 $ 20.7 $ 11.5 $ 17.3
Earnings Per Share:
Basic............................ $ (.48) $ 6.04 $ 7.50 $10.14 $20.67 $11.52 $17.35
Diluted.......................... $ (.48) $ 6.04 $ 7.50 $10.14 $20.62 $11.50 $17.28
Cash Dividend Per Share............ $ -- $ -- $ -- $ -- $ 3.50 $ 3.50 $ --
Weighted Average Shares Outstanding
Basic............................ 1.000 1.000 1.000 1.000 1.000 1.000 1.000
Diluted.......................... 1.000 1.000 1.000 1.000 1.002 1.002 1.004
</TABLE>
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<PAGE> 92
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, -------------------------
---------------------------------------------------- OCTOBER 3, OCTOBER 2,
1994 1995 1996 1997 1998 1998 1999
----------- ----------- ------ ------ ------ ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(TABLE IN MILLIONS, EXCEPT PER SHARE AND EMPLOYEE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current Assets..................... $ 75.5 $ 76.0 $100.0 $119.0 $125.5 $123.8 $147.7
Current Liabilities................ 30.7 33.7 50.0 60.5 70.7 58.9 67.7
Working Capital.................... 44.8 42.3 50.0 58.5 54.8 64.9 80.0
Total Assets....................... 180.0 182.4 248.3 270.5 273.6 272.8 318.8
Long Term Debt, Including Capital
Leases(b)........................ 12.3 9.3 3.6 79.8 53.1 72.3 87.8
Related Party Debt(b).............. 83.0 79.7 129.5 -- -- -- --
Shareholders Equity(b)............. $ 50.4 $ 58.3 $ 63.5 $127.6 $147.5 $138.9 $161.4
Number of Employees................ 1,381 1,672 1,721 2,162 2,251 2,213 2,485
RATIOS/PERCENTAGES/EBITDA:
Gross Profit/Sales................. 36% 40% 41% 43% 45% 44% 44%
Income Before Income Taxes/Sales... -- 5% 5% 6% 10% 8% 10%
Net Income/Sales................... -- 3% 3% 3% 6% 4% 6%
EBITDA(c).......................... $ 18.9 $ 29.6 $ 37.4 $ 46.5 $ 59.0 $ 37.7 $ 48.6
Cash flows from operating
activities....................... $ 12.3 $ 15.0 $ 20.6 $ 38.7 $ 38.5 $ 14.2 $ 8.0
Cash flows from investing
activities....................... $(30.5) $ (7.4) $(60.7) $(29.8) $(13.5) $ (9.4) $(37.8)
Cash flows from financing
activities....................... $ 19.8 $ (5.7) $ 43.7 $ 4.7 $(31.9) $(11.3) $ 32.5
</TABLE>
- -------------------------
(a) Through October 9, 1997, SLC was charged interest by Berwind Industries,
Inc. on the balance of its intercompany debt. Subsequent to October 9, 1997,
interest expense was incurred by SLC on its credit facility with a syndicate
of banks (see Note (b)).
(b) On October 10, 1997, Berwind Corporation distributed the stock of SLC to its
parent, Berwind Group Partners, in a non-taxable spin-off transaction. At
the same time, SLC obtained a credit facility, the proceeds from which were
used to repay a portion of the intercompany debt to Berwind Industries, Inc.
The balance of this intercompany obligation of $58,485,000 was recorded as a
capital contribution to SLC and credited to paid-in capital.
(c) SLC has calculated EBITDA by adding: (1) income before income taxes, (2)
interest expense, net and (3) depreciation and amortization. SLC has
included data concerning EBITDA because management believes it is a measure
of operating performance before leverage and SLC understands that investors
use it to evaluate historical performance and the value of the company.
EBITDA is not determined in accordance with U.S. GAAP. EBITDA is not
indicative of net income or cash flows from operating, investing or
financing activities determined in accordance with GAAP, and you should not
consider EBITDA in isolation, or as an alternative to, or more meaningful
than, measures of performance determined in accordance with U.S. GAAP. In
addition, EBITDA, as defined here, may not be comparable to similarly titled
measures used by other companies.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SLC
OVERVIEW
Sentrol, Inc., founded in 1977, was the initial investment of an affiliate
of Berwind Group Partners into the security industry by way of acquisition in
1984. In 1993, Sentrol Lifesafety Corporation was incorporated in the state of
Delaware as a holding company for acquisitions within the security and
lifesafety industry. In 1996, Sentrol Lifesafety Corporation's name was changed
to SLC Technologies, Inc. As a result of an internal reorganization, in October
1997, SLC became a wholly-owned subsidiary of Berwind Group Partners in a
non-taxable spin-off.
SLC provides electronic and communications technology focused on security,
fire protection, loss prevention and access control. SLC designs, develops,
manufactures and distributes components and software for intrusion and fire
protection, access control, video surveillance and integrated systems.
RESULTS OF OPERATIONS
The following table illustrates for the periods indicated, the amounts and
percentages which certain items of income and expense are to net sales:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, ----------------------
-------------------------- OCTOBER 3 OCTOBER 2
1996 1997 1998 1998 1999
------ ------ ------ --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net Sales.............................. $275.7 $326.0 $375.6 $269.1 $309.2
Gross Profit........................... 113.8 141.4 169.4 118.5 134.8
Selling, General and Administrative.... 76.3 91.6 104.7 76.7 83.4
Research and Development............... 7.5 10.6 13.4 10.1 12.8
Amortization of Intangibles............ 8.0 8.7 8.1 6.1 6.5
------ ------ ------ ------ ------
Operating Income....................... 22.0 30.5 43.2 25.6 32.1
Interest Expense, net.................. 7.8 9.7 4.8 3.8 3.6
Other Income (Expense), net............ 0.2 (0.4) (0.8) (0.1) 2.6
------ ------ ------ ------ ------
Income Before Income Taxes............. 14.4 20.4 37.6 21.7 31.1
Provision for Income Taxes............. 6.9 10.3 16.9 10.2 13.8
------ ------ ------ ------ ------
Net Income............................. $ 7.5 $ 10.1 $ 20.7 $ 11.5 $ 17.3
====== ====== ====== ====== ======
</TABLE>
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<PAGE> 94
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, ----------------------
-------------------------- OCTOBER 3 OCTOBER 2
1996 1997 1998 1998 1999
------ ------ ------ --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net Sales.............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Gross Profit........................... 41.3% 43.4% 45.1% 44.0% 43.6%
Selling, General and Administrative.... 27.7% 28.1% 27.9% 28.5% 27.0%
Research and Development............... 2.7% 3.3% 3.6% 3.8% 4.1%
Amortization of Intangibles............ 2.9% 2.7% 2.2% 2.3% 2.1%
------ ------ ------ ------ ------
Operating Income....................... 8.0% 9.4% 11.5% 9.5% 10.4%
Interest Expense, net.................. (2.8)% (3.0)% (1.3)% (1.4)% (1.2)%
Other Income (Expense), net............ 0.1% (0.1)% (0.2)% (0.0)% 0.8%
------ ------ ------ ------ ------
Income Before Income Taxes............. 5.2% 6.3% 10.0% 8.1% 10.1%
Provision for Income Taxes............. (2.5)% (3.2)% (4.5)% (3.8)% (4.5)%
------ ------ ------ ------ ------
Net Income............................. 2.7% 3.1% 5.5% 4.3% 5.6%
====== ====== ====== ====== ======
</TABLE>
NINE MONTHS ENDED OCTOBER 2, 1999 AND OCTOBER 3, 1998
NET SALES. SLC's net sales increased from $269,100,000 in the interim
period ended October 3, 1998 to $309,200,000 in the interim period ended October
2, 1999. This represents an increase of $40,100,000, or 14.9%. The acquisitions
of Impac Technologies, Inc. and Tecom Systems Pty. Ltd. in 1999 accounted for
approximately $11,900,000, or 29.7% of this increase. The strengthening of the
U.S. dollar against the Dutch guilder reduced total sales by $1,800,000. Sales
were also impacted by increased demand for electronic access control systems,
sensors and key and remote management systems. Shipments for electronic access
control products and sensors to a large national installer of security systems
commenced during the middle of 1998, with nine months of deliveries occurring
through September of 1999. Electronic access control sales under a business
partner arrangement with this national installation company, were $5,200,000
during 1998 versus $10,800,000 for year-to-date 1999. In 1999 the product range
for shipments to this customer has been expanded to include a broader range of
sensors and wireless smoke detectors. This growth provided the major
contribution to the increase in sensor and smoke detector sales by $7,000,000.
Revenues in the European market increased $4,000,000. This increase resulted
primarily from volume increases in the sensor and intrusion control panel
product lines. In addition, revenues related to demand in commercial
applications for product relating to remote access management contributed
$4,800,000, or 1.8%, to the growth in revenues. The remaining increase in sales
of $8,600,000 can be attributed to volume increases compared to the prior
comparable period.
GROSS PROFIT. Gross profit increased from $118,500,000 in the interim
period ended October 3, 1998 to $134,800,000 in the interim period ended October
2, 1999. This represents an increase of $16,300,000, or 13.7%, generated
primarily from the sales growth discussed above. As a percentage of sales, gross
profit was 43.6% in the first nine months of 1999 versus 44.0% in the same
period of 1998. Gross margin improvement due to procurement of materials at
favorable prices was offset by the inclusion of Impac in the 1999 results, which
generates lower margins than other SLC businesses. During 1999, SLC has started
the consolidation of some manufacturing and supply related activities within the
U.S. The benefits of this program have started to materialize, with further
progress expected over the next six months.
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<PAGE> 95
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses (including management fees) increased from $76,700,000
in the interim period ended October 3, 1998 to $83,400,000 in the interim period
ended October 2, 1999 which represents an increase of $6,700,000 or 8.7%. The
Tecom and Impac acquisitions accounted for $1,900,000, or 28.4%, of this
increase. Also impacting expenses in 1999 has been spending within the European
business to establish a training and technical support infrastructure to support
this market for corporate enterprises related activities. As part of this
program, a technical support center has been established for electronic access
control system installations within the European market. Previously, support had
been provided through U.S. based resources. Expenses for the European expansion
were $900,000. Expense increases related to supporting the incremental access
control demand were directed to training, technical support, and marketing
literature programs. This accounts for $1,700,000 of the expense increase.
During 1999, costs were incurred as a result of the implementation of a common
information technology platform for the U.S. operations. Additionally, marketing
and promotional expenses were incurred for promotion of the Americas intrusion
control panel and sensor product lines. These expenses accounted for
approximately $1,600,000 of the increase. As part of business development in
Asia Pacific, a sales and support office was set up in Hong Kong during 1998.
Resources were added during 1999, with regional support supplied through the
office.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased from $10,100,000 in the interim period ended October 3, 1998 to
$12,800,000 in the interim period ended October 2, 1999, which represents an
increase of $2,700,000, or 26.7%. This increase is due to development efforts to
expand the electronic access control operating platform to include Windows NT as
well as the Unix platform. Projects for the European residential market have
been focused upon introducing an intrusion control panel offering. Shipments for
this product family started in the third quarter. A program in conjunction with
a major European security company is underway which will provide for delivery to
the residential market of a bi-directional wireless product range, targeted for
introduction in 2000. Investments started in 1998 relating to a radio frequency
identification asset tagging system and a digital communications system for
fiber optic applications continued into 1999. Orders have been received for
fourth quarter delivery for the fiber optic transmission system. The asset
tracking system is expected to be commercially available during the first half
of 2000.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased from $6,100,000 in the interim period ended October 3, 1998 to
$6,500,000 in the interim period ended October 2, 1999, which represents an
increase of $400,000, or 6.6%. This increase is attributed to increased goodwill
resulting from 1999 acquisitions.
NET INTEREST EXPENSE. Net interest expense decreased from $3,800,000 in
the interim period ended October 3, 1998 to $3,600,000 in the interim period
ended October 2, 1999, which represents a decrease of $200,000, or 5.3%. This
decrease resulted from a lower average borrowings outstanding under the credit
facility due to significant debt repayments in the fourth quarter of 1998,
coupled with lower interest rates in 1999 as compared to 1998.
OTHER INCOME. Other income net of other expense in the interim period
ended October 2, 1999 was $2,600,000. The increase over the period ended October
3, 1998 was primarily due to net proceeds of $2,700,000 received from the
settlement of a patent infringement lawsuit. In addition, during the third
quarter of 1999 a gain of $700,000 was recorded for the sale of a building in
the Netherlands.
INCOME TAX EXPENSE. Income tax expense increased from $10,200,000 in the
interim period ended October 3, 1998 to $13,800,000 in the interim period ended
October 2, 1999, which represents a $3,600,000 increase. The increase is
attributed primarily to higher earnings in 1999. The effective income tax rate
decreased from 50.8% in 1998 to 44.3% in 1999 primarily due to a lower
percentage
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of non-deductible goodwill relative to pre-tax income. Generally, SLC's
effective tax rate differs from the statutory rate on ordinary income due to
different tax rates applicable to foreign income, amortization of non-deductible
goodwill, state income taxes and the recognition of certain tax credits.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET SALES. SLC's net sales increased from $326,000,000 in 1997 to
$375,600,000 in 1998, which represents an increase of $49,600,000, or 15.2%. A
small European acquisition in 1998 accounted for approximately $1,200,000 of
this increase, while a full year of operations from 1997 acquisitions accounted
for an additional $17,300,000 of the improvement. The strengthening of the U.S.
dollar against the Dutch guilder reduced total sales by $1,700,000. Growth
within the electronic access control product line was $16,000,000. A business
partner arrangement with a national installation company accounted for
$5,200,000 of this growth. In Europe, an agreement was reached in 1998 to supply
electronic access control equipment to a major telephone company in the
Netherlands. This program, coupled with other volume increases, accounted for
the balance of the sales growth in the access control product line. Sensor
product line revenue increases from the prior year were influenced by supply
agreements reached with a major national security company. This agreement
contributed to the $10,300,000 of growth in sensor revenues over the prior year.
Increased demand for key management systems directed at the residential real
estate market also contributed to the growth in revenue by $6,600,000. During
1996, SLC received notification from a major national installation company that
they would discontinue purchasing intrusion control panels mainly targeted for
the residential marketplace. This phase-out was completed during the first half
of 1997, with 1997 revenues for this product line at $8,300,000. Volume
increases in shipments of intrusion control panels in Europe accounted for
$4,500,000 of the increase in sales. The remaining $3,700,000 of the increase in
sales resulted from other volume increases.
GROSS PROFIT. Gross profit increased from $141,400,000 in 1997 to
$169,400,000 in 1998, which represents an increase of $28,000,000, or 19.8%. As
a percentage of sales, gross profit improved from 43.4% in 1997 to 45.1% in
1998. The overall increase in gross profit as a percentage of sales was the
result of revenue growth in the key management product line for the real estate
market place and increased shipments for electronic access control systems. The
1997 phase-out of the lower margin intrusion control panel business, as
previously discussed, contributed to the relative gross market percentage
improvement. Manufacturing driven cost reductions and demand for electronic
access control systems also contributed to margin improvement.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses (including management fees) increased from $91,600,000
in 1997 to $104,700,000 in 1998, which represents an increase of $13,100,000, or
14.3%. A small acquisition in 1998 and the inclusion of the 1997 acquisitions on
a full year basis in 1998 accounted for approximately $3,500,000 of additional
expenses. The increase in expenses includes an incremental $1,000,000 to
establish a service and support center in Hong Kong to provide a platform for
growth within the Asia Pacific region. Previously, product and technical support
were mainly provided by the U.S. based operations. In order to meet the demands
for electronic access control systems, resources totaling $4,100,000 were added
in 1998 principally for technical support, training, and marketing programs.
Approximately $1,000,000 was spent during 1998 to promote and market remote
access control products. An additional $1,700,000 was directed towards
compensation, promotional materials and marketing literature to support growth
in the sensor product line. Additionally, export sales commissions increased by
$3,000,000 due to the participation of additional subsidiaries of SLC in the
program and higher export sales in 1998. Management fees decreased by $2,600,000
due to a reduction in Berwind Corporation's support to SLC as a result of the
spin-off in October 1997.
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RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased from $10,600,000 in 1997 to $13,400,000 in 1998, which represents an
increase of $2,800,000, or 26.4%. Incremental 1998 expenses for two major
projects started in 1997 were $1,400,000. One project originated due to market
demand from the customer base for electronic access control related systems. The
project scope is to develop an asset management system to track or inventory
company assets. The other development is a fiber optics based digital
communication system. In addition, approximately $1,000,000 of the increase from
the prior year for research and development is due to acquisitions completed
during 1997.
AMORTIZATION OF INTANGIBLE ASSETS. Intangible assets include goodwill of
$150,000,000 which is being amortized over 20 years, and patents and other
deferred charges of $18,500,000 which are being amortized over periods of 3 to
17 years. Amortization of intangible assets decreased from $8,700,000 in 1997 to
$8,100,000 in 1998, which represents a decrease of $600,000, or 6.9%. This
decrease is attributable to certain patents and other deferred charges that were
fully amortized in 1997, offset partially by increased goodwill from 1998 and
1997 acquisitions.
NET INTEREST EXPENSE. Net interest expense decreased from $9,700,000 in
1997 to $4,800,000 in 1998, which represents a $4,900,000 decrease, or 50.5%.
This decrease resulted from a lower average borrowings outstanding under the
credit facility due to positive cash flows from operations and the forgiveness
of related party debt in connection with the 1997 spin-off transaction. This
forgiveness of debt was treated as a capital contribution by SLC's stockholder
(see Note 1 to the Consolidated Financial Statements on page F-7).
OTHER EXPENSES. Other expenses increased from $400,000 in 1997 to $800,000
in 1998.
INCOME TAX EXPENSE. Income tax expense increased from $10,300,000 in 1997
to $16,900,000 in 1998, which represents a $6,600,000 increase, or 64.1%. The
increase is attributed primarily to higher earnings in 1998. The effective
income tax rate decreased from 50.4% in 1997 to 45.0% in 1998 primarily due to a
lower percentage of non-deductible goodwill relative to pre-tax income and lower
state taxes. Generally, SLC's effective tax rate differs from the statutory rate
on ordinary income due to different tax rates applicable to foreign income,
amortization of non-deductible goodwill, state income taxes and the recognition
of tax credits.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET SALES. SLC's net sales increased from $275,700,000 in 1996 to
$326,000,000 in 1997, which represents a $50,300,000 increase, or 18.2%. The net
sales for 1997 include approximately six months or $8,000,000 of revenues for
Kalatel, Inc. and eight months of revenues of CCTV Corp. at $9,000,000. Also,
1997 net sales include a full year from the 1996 acquisitions. Two 1996
acquisitions, Casi-Rusco, Inc., and Scantronic Inc., represented an increase of
$27,400,000 of net sales over these businesses 1996 net sales. A significant
portion of the 1997 Casi-Rusco revenue increase from the prior year's
performance was the result of volume growth in the business. The strengthening
of the U.S. dollar against the Dutch guilder reduced total sales by $16,100,000,
or 5.8%. Holding exchange rates consistent with 1996, growth in Europe would
have been $18,100,000. Growth in the communications product line was $7,100,000.
Approximately $1,000,000 of this growth was due to a large airport project.
Another $1,900,000 resulted from growth of this product line in Europe.
Increases in the volume of key management products resulted in $8,000,000 of
sales increases. An estimated $5,000,000 of this increase was in the residential
market and was the result of product introduction delays in 1996.
SLC received notification during the third quarter of 1996 that a major
national installation company was canceling intrusion control panel
requirements. The product phase-out was completed
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over a six-month period. Sales for 1996 associated with this program were
$21,000,000, and were reduced to $8,300,000 in 1997. Shipments for this product
to this customer ceased during the second quarter of 1997. Shipments for this
product line were directed at principally residential applications.
GROSS PROFIT. Gross profit increased from $113,800,000 in 1996 to
$141,400,000 in 1997, which represents an increase of $27,600,000, or 24.2%. The
gross profit as a percentage of sales increased from 41.3% in 1996 to 43.4% in
1997. The improvement in margin is attributed to acquisitions that expanded the
product range from security and fire protection products to include systems
software and communications products which have higher margins. This was
accomplished through acquisitions. Manufacturing savings resulted from the
transfer of production for the intrusion control panel business related to the
Scantronic purchase to an existing SLC facility. Also contributing to the
improved gross profit percentage was the reduction in lower margin business
related to the phase-out of intrusion control panel business to a major customer
in the U.S. In addition, a provision in 1996 for $2,000,000 was established for
a product recall.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses (including management fees) increased from $76,300,000
in 1996 to $91,600,000 in 1997, which represents a $15,300,000 increase, or
20.1%. The 1996 acquisitions of Casi-Rusco and Scantronic and their inclusion
for a full year in 1997 increased expenses by $3,600,000. As part of the
acquisition of Casi-Rusco in 1996 an incentive plan for management was
established based mainly on 1997 operating performance. Expenses for 1997
included a provision of $6,000,000 for this obligation, which was paid in the
first quarter of 1998. Acquisitions during 1997 accounted for approximately
$2,800,000 of additional expenses.
During 1996, SLC established a local presence for the first time in the
People's Republic of China. Expenditures directed at setting up sales offices in
China during 1996 were expanded in 1997 to include the capability of assembling
fire detection products. Expenditures directed at expanding operations in China,
which commenced in 1996, resulted in expenditure increases of $800,000 in 1997.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased from $7,500,000 in 1996 to $10,600,000 in 1997, which represents a
$3,100,000 increase, or 41.3%. The ownership of Casi-Rusco for a full year in
1997 accounted for $1,100,000 of increased spending. Within the European
operation, increased development expenses were due to the migration of the
product line to include greater composition of proprietary product in contrast
to externally sourced product. Increased spending in Europe was also directed at
undertaking a large integration project which was targeted to offer both
intrusion and electronic access control functions within a single system for
European commercial markets.
AMORTIZATION OF INTANGIBLE ASSETS. Intangible assets include goodwill of
$145,900,000 which is being amortized over 20 years, and $17,800,000 of patents
and other deferred charges which are being amortized over periods from 3 to 17
years. Amortization of intangible assets increased from $8,000,000 in 1996 to
$8,700,000 in 1997, which represents a $700,000 increase, or 8.8%. This increase
is attributable to increased goodwill and intangible assets from 1996 and 1997
acquisitions.
NET INTEREST EXPENSE. Net interest expense increased from $7,800,000 in
1996 to $9,700,000 in 1997, which represents a $1,900,000 increase, or 24.4%.
This increase was due to additional intercompany debt to Berwind to fund
acquisitions through the third quarter of 1997 and interest on the new third
party debt in the fourth quarter of 1997.
INCOME TAX EXPENSE. Income tax expense increased from $6,900,000 in 1996
to $10,300,000 in 1997, which represents a $3,400,000 increase, or 49.2%. The
increase is attributed primarily to higher earnings in 1997 and additional
non-deductible goodwill amortization from acquisitions. The effective
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income tax rate increased from 47.7% in 1996 to 50.4% in 1997 primarily due to
an increase in the amortization of non-deductible goodwill as a percentage of
pre-tax income in 1997 associated with acquisitions discussed above. Generally,
SLC's effective tax rate differs from the statutory rate on ordinary income due
to different tax rates applicable to foreign income, amortization of non-
deductible goodwill and certain intangibles, state income taxes and the
recognition of tax credits.
SEGMENT ANALYSIS
SLC manages its business on a geographic basis with regional presidents in
the Americas, Europe and Africa, and Asia Pacific reporting to SLC's chief
executive officer. SLC 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. The accounting policies of the operating segments are the same as
those of the consolidated company. 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 following table presents certain unaudited segment financial
information for each segment in 1996, 1997, 1998, and for the nine month periods
ended October 3, 1998 and October 2, 1999.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, ------------------------
-------------------------- OCTOBER 3, OCTOBER 2,
1996 1997 1998 1998 1999
------ ------ ------ ---------- ----------
(TABLE IN MILLIONS)
<S> <C> <C> <C> <C> <C>
SALES:
Americas: Customer.................... $161.1 $198.8 $229.1 $159.7 $195.2
Intersegment.............. 17.5 24.8 26.2 19.9 19.4
Europe: Customer...................... 108.1 116.5 136.2 100.2 104.3
Intersegment................. 1.4 1.5 1.3 0.9 0.7
All Other/Eliminations................ (12.4) (15.6) (17.2) (11.6) (10.4)
------ ------ ------ ------ ------
Total sales...................... $275.7 $326.0 $375.6 $269.1 $309.2
====== ====== ====== ====== ======
OPERATING PROFIT:
Americas.............................. $ 23.4 $ 34.8 $ 37.4 $ 24.1 $ 31.0
Europe................................ 16.7 17.0 21.7 15.4 14.4
All Other............................. (1.9) (2.8) (3.9) (3.4) (2.2)
------ ------ ------ ------ ------
Total operating profit........... $ 38.2 $ 49.0 $ 55.2 $ 36.1 $ 43.2
====== ====== ====== ====== ======
</TABLE>
Segment operating profit does not include amortization expense and certain
corporate charges including management fees and intercompany commissions paid on
foreign sales. A reconciliation of segment operating profit to operating income
as presented in the financial statements can be found at the end of this segment
discussion and in Note 9 to the consolidated financial statements.
NET SALES: Net customer sales for the Americas increased from $159,700,000
in the interim period ended October 3, 1998 to $195,200,000 in the interim
period ended October 2, 1999. This represents an increase of $35,500,000, or
22.2%. Increased shipments of electronic access control systems, key management
systems and sensors were primarily responsible for this improvement. Net
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customer sales for Europe increased $4,100,000, or 4.1% from $100,200,000 in the
interim period ended October 3, 1998 to $104,300,000 in the interim period ended
October 2, 1999. Interim 1998 sales were favorably impacted by the sale of
electronic access control equipment to a large telephone company in the
Netherlands. Unfavorable exchange rates in converting Dutch guilders to U.S.
dollars reduced 1999 European growth by an additional $1,800,000.
Net customer sales in the Americas increased from $198,800,000 in 1997 to
$229,100,000 in 1998. This represents an increase of $30,300,000, or 15.3%.
Growth within the electronic access control and sensor product lines
incrementally increased the revenues from the prior year due to supply
agreements reached with a major national security company. Net customer sales
for Europe increased $19,700,000, or 16.9% from $116,500,000 in 1997 to
$136,200,000 in 1998. This growth was influenced by an increased demand for
electronic access control systems within the corporate enterprises market.
The Americas net customer sales increased from $161,100,000 in 1996 to
$198,800,000 in 1997. This represents an increase of $37,700,000, or 23.4%. 1997
sales include partial year revenues for the 1997 acquisitions of Kalatel, Inc.,
and CCTV Corp. In addition, 1997 sales include full year revenue for two 1996
acquisitions, Casi-Rusco, Inc. and Scantronic, Inc. Europe's net customer sales
increased $8,400,000, or 7.7% from $108,100,000 in 1996 to $116,500,000 in 1997.
Full year revenues from the 1996 acquisitions and partial year revenues from the
1997 acquisitions also contributed to Europe's growth. The unfavorable exchange
rate in converting Dutch guilders to U.S. dollars reduced European growth by
$16,100,000, or 14.9%.
OPERATING PROFIT: Operating profit in the Americas increased from
$24,100,000 in the interim period ended October 3, 1998 to $31,000,000 in the
interim period ended October 2, 1999. This represents an increase of $6,900,000,
or 28.6%. As a percentage of sales, operating profit improved from 13.4% to
14.4%. Slightly lower selling, general and administrative expenses as a
percentage of sales and the receipt of a patent infringement settlement were
primarily responsible for this improvement. Europe's operating profit decreased
from $15,400,000 in the interim period ended October 3, 1998 to $14,400,000 in
the interim period ended October 2, 1999 which represents a decrease of
$1,000,000, or 6.5%. This decrease in operating profit is a direct result of
Europe's increased spending during 1999. Significant expense associated with the
establishment of a training and technical support infrastructure necessary to
support access control system installations within the European market has been
incurred. The Americas had provided this support prior to 1999.
Operating profit in the Americas increased from $34,800,000 in 1997 to
$37,400,000 in 1998 which represents an increase of $2,600,000, or 7.5%.
Increased research and development expense associated with the asset management
system and a fiber optics digital communications system reduced the growth in
operating profit. In Europe, operating profit increased $4,800,000, or 28.2%,
from $17,000,000 in 1997 to $21,800,000 in 1998. As a percentage of sales,
operating profit improved from 14.4% in 1997 to 15.8% in 1998. This increase was
due to the gross margin improvement from 39.0% in 1997 to 40.6% in 1998.
The Americas operating profit increased from $23,400,000 in 1996 to
$34,800,000 in 1997. This represents an increase of $11,400,000, or 48.7%.
Operating profit as a percentage of sales improved from 13.1% in 1996 to 15.6%
in 1997. The gross margin increase from 38.2% in 1996 to 41.2% in 1997
contributed to this improvement. Operating profit in Europe increased from
$16,700,000 in 1996 to $17,000,000 in 1997 which represents an increase of
$300,000, or 1.8%. The strengthening of the U.S. dollar against the Dutch
guilder reduced operating profit by $2,100,000, or 12.6%.
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The following table presents the reconciliation of segment operating profit
to operating income as presented in the financial statements:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, ------------------------
------------------------------ OCTOBER 3, OCTOBER 2,
1996 1997 1998 1998 1999
----- ------------ ----- ---------- ----------
(TABLE IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Segment operating profit........... $38.2 $49.0 $55.2 $36.1 $43.2
Goodwill amortization expense...... (8.0) (8.7) (8.1) (6.1) (6.5)
Export sales commission............ -- (0.9) (3.9) (2.9) (1.9)
Other management fees.............. (6.0) (5.3) (2.7) (2.0) (2.2)
Other expenses & corporate
charges.......................... (2.2) (3.6) 2.7 0.5 (0.5)
----- ----- ----- ----- -----
Operating profit per income
statement........................ $22.0 $30.5 $43.2 $25.6 $32.1
===== ===== ===== ===== =====
</TABLE>
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited quarterly financial
information for each quarter in 1998 and 1997 and the first, second, and third
quarters of 1999. In the opinion of SLC's management, this information has been
prepared on the same basis as SLC's Consolidated Financial Statements appearing
elsewhere in this proxy statement and includes all adjustments (consisting only
of normal recurring adjustments) necessary to present fairly the financial
results set forth herein.
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<PAGE> 102
Results of operations for any previous quarter are not necessarily indicative of
results for any future period.
<TABLE>
<CAPTION>
FISCAL 1999
-------------------------------------------
APRIL 3 JULY 3 OCTOBER 2
---------- --------- ------------
(TABLE IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales................................................... $97.7 $103.1 $108.4
Gross Profit............................................ 42.6 43.9 48.3
Selling, General and Administrative..................... 26.6 26.4 26.3
Research and Development................................ 4.0 4.3 4.5
Amortization of Intangibles............................. 2.1 2.1 2.3
Export Sales Commission................................. 0.9 0.5 0.5
Other Management Fees................................... 0.7 0.7 0.8
Operating Income........................................ 8.3 9.9 13.9
Interest Expense, net................................... 1.1 1.2 1.3
Other, net.............................................. 0.3 2.6 0.3
Income before income taxes.............................. 6.9 11.3 12.9
Provision for income taxes.............................. 3.5 5.0 5.3
Net Income.............................................. $ 3.4 $ 6.3 $ 7.6
Earnings Per Share:
Basic................................................. $3.40 $ 6.30 $ 7.60
Diluted............................................... $3.39 $ 6.27 $ 7.57
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1998
--------------------------------------------
APRIL 4 JULY 4 OCT 3 DEC 31
--------- -------- ------- --------
(TABLE IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales................................................. $85.0 $86.4 $97.7 $106.5
Gross Profit.......................................... 36.7 37.3 44.5 50.9
Selling, General and Administrative................... 23.9 23.3 24.6 26.3
Research and Development.............................. 3.5 3.2 3.4 3.3
Amortization of Intangibles........................... 2.1 2.0 2.0 2.0
Export Sales Commission............................... 0.1 0.8 2.0 1.0
Other Management Fees................................. 0.7 0.7 0.6 0.7
Operating Income...................................... 6.4 7.3 11.9 17.6
Interest Expense, net................................. 1.3 1.4 1.1 1.0
Other, net............................................ 0.3 (0.3) (0.1) (0.7)
Income before income taxes............................ 5.4 5.6 10.7 15.9
Provision for income taxes............................ 2.8 2.7 4.7 6.7
</TABLE>
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<PAGE> 103
<TABLE>
<CAPTION>
FISCAL 1998
--------------------------------------------
APRIL 4 JULY 4 OCT 3 DEC 31
--------- -------- ------- --------
(TABLE IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net Income............................................ $ 2.6 $ 2.9 $ 6.0 $ 9.2
Earnings Per Share:
Basic............................................... $2.70 $2.70 $6.10 $ 9.20
Diluted............................................. $2.70 $2.70 $6.09 $ 9.18
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997
---------------------------------------------
MARCH 29 JUNE 28 SEPT 27 DEC 31
---------- --------- --------- --------
(TABLE IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales................................................. $70.9 $74.6 $81.9 $98.6
Gross Profit.......................................... 29.5 32.2 34.8 44.9
Selling, General and Administrative................... 19.0 20.2 21.6 24.6
Research and Development.............................. 2.5 2.7 2.5 2.9
Amortization of Intangibles........................... 2.1 2.0 2.3 2.3
Export Sales Commission............................... -- 0.3 0.2 0.4
Other Management Fees................................. 1.5 1.5 1.6 0.7
Operating Income...................................... 4.4 5.5 6.6 14.0
Interest Expense, net................................. 3.6 2.2 2.3 1.6
Other, net............................................ 0.3 -- -- 0.1
Income before income taxes............................ 0.5 3.3 4.3 12.3
Provision for income taxes............................ 0.8 1.7 2.3 5.5
Net Income (loss)..................................... $(0.3) $ 1.6 $ 2.0 $ 6.8
Earnings Per Share:
Basic............................................... $(.20) $1.60 $1.80 $6.90
Diluted............................................. $(.20) $1.60 $1.80 $6.90
</TABLE>
Quarterly revenues and profits are subject to substantial fluctuations
primarily resulting from acquisitions throughout the year and seasonality in the
fourth quarter. Historically, SLC's quarterly results have shown quarter over
quarter improvement with significant improvements in the fourth quarter due to
the strong residential business in the Americas in the fourth quarter. The
difference between fourth quarter sales and the total sales for the other fiscal
quarters varies from year to year. SLC's operating results may fluctuate
significantly from quarter to quarter or on an annual basis in the future as a
result of a number of factors, including but not limited to internal growth of
SLC, acquisitions, and the seasonality of the real estate business.
LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA
Cash flow from operations, supplemented with proceeds from debt financing
historically has provided funding for SLC's capital spending and acquisition
objectives. Cash flow from operations and financing activities are expected to
meet SLC's pre-merger resource requirements.
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<PAGE> 104
CAPITAL EXPENDITURES
Capital expenditures in 1998 totaled $12,800,000, a 52% (or $4,400,000)
increase over 1997. The increase in spending is related to the start of the
implementation of a common information technology platform for the U.S.
companies. With the number of acquisitions in the U.S. during this period, the
linking of management information systems became a priority for SLC.
Expenditures in this area for 1998 totaled $2,300,000, with further capital
spending in 1999 of $3,000,000 to complete this project. Acquisitions in 1998,
related to the European business included $600,000 for Sectro, a distributor of
electronic security, fire detection and closed circuit television systems.
Integration of sub-contract component assembly activity into an SLC
manufacturing operation created the need for additional assembly and test
equipment.
Capital expenditures in 1997 totaled $8,400,000 million, a 6.3% decrease
(or $600,000) from 1996. Acquisitions in 1997, related to the U.S. operations
cost $19,700,000.
Capital expenditures in 1996 totaled $9,000,000, an increase of $5,200,000
over 1995. Acquisitions in 1996 cost $53,100,000.
Capital expenditures are expected to be approximately $16,000,000 in 1999.
Capital spending for the nine month period ended October 2, 1999 was
$14,200,000. In addition, under the terms of various purchase agreements, SLC
has agreed to make certain additional payments, related to 1999 performance, of
up to $2,000,000 to the sellers of certain previously acquired businesses in the
event certain annual profitability or performance targets are met. Any payments
made pursuant to these provisions will be treated as additional purchase price
in SLC's financial statements. It is anticipated capital expenditures and costs
associated with past and future acquisitions will be funded with cash from
operations and proceeds from available financing arrangements.
FINANCING AND CAPITAL STRUCTURE
Prior to the October 10, 1997 spin-off, as discussed in the notes to the
consolidated financial statements, SLC entered into a credit agreement, which
provided for a revolving credit facility of $125,000,000. The proceeds from the
credit facility were used to repay a portion of the intercompany obligation to
Berwind Industries, Inc. in the amount of $81,000,000. The balance of the
intercompany obligation of $58,500,000 was contributed by Berwind Industries to
SLC and was recorded as a contribution to paid-in capital. This credit facility
expires in 2002 and bears interest, at the discretion of SLC, at either (a) the
greater of the prime rate, or the federal funds effective rate plus 0.5%, or (b)
Libor plus a margin that will vary from 0.30% to 0.65% based on SLC's leverage
ratio. In addition, SLC has entered into $30,000,000 of notional amount interest
rate swap contracts to effectively fix the interest rate on a portion of the
outstanding credit facility.
Capital needs in 1998 were financed primarily with cash from operations.
Including the credit agreement, SLC has capacity under lines of credit
aggregating $132,000,000. Management of SLC believes that the availability
capacity provides adequate resources for corporate liquidity.
Pursuant to a commitment letter dated September 28, 1999, SLC expects to
enter into a $325,000,000 senior, first priority, secured facility provided by a
revolving facility in the amount of $225,000,000 and a term facility in the
amount of $100,000,000. The new credit facilities will be reduced in the event
the stockholders of ITI do not exercise the cash election for the entire 50% of
the outstanding ITI common stock.
The new credit facilities shall bear interest, at the discretion of SLC, at
either (a) the greater of the prime rate, or the federal funds effective rate
plus 0.5%, or (b) Libor plus a margin that initially
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<PAGE> 105
will be 1.50% and is applicable for the first 180 days following the initial
funding date. For the remaining term of the loan, this margin will vary from
1.25% to 1.75% based on SLC's leverage ratio.
WORKING CAPITAL
Working capital, excluding cash, as of October 2, 1999 was $65,900,000 and
represented an increase of $23,100,000 from December 31, 1998. Working capital
requirements related to acquisitions in 1999 accounted for $2,500,000, or 10.8%
of the increase. Accounts receivable, excluding the related impact from
acquisitions, exceeded December 1998 levels by $10,800,000 mainly due to the
growth in revenues. Accounts payable, excluding the related impact of
acquisitions, decreased by $3,900,000.
Working capital as of December 31, 1998 was $42,800,000, an increase of
$2,100,000 over the $40,700,000 at the end of 1997. The incremental sales volume
of 15.2% drives the increase from prior year. Inventory levels supporting this
growth were minimized through the application of just-in-time inventory
practices within the manufacturing operations.
Working capital at the end of 1997 was $40,700,000, a reduction of
$4,000,000 from 1996 year end.
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or a liability measured at fair value. SFAS No.
133 requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. This Statement is
effective for fiscal years beginning after June 15, 2000, and it may be
implemented as of the beginning of any fiscal quarter after June 15, 1998. The
transition adjustment resulting from adopting this Statement shall be reported
in net income or other comprehensive income, as appropriate, as the cumulative
effect of a change in accounting principle.
SLC has not yet quantified the impacts of adopting the SFAS No. 133 on the
financial statements or the risk management processes.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SLC is exposed to market risk from changes in interest rates and foreign
exchange rates. SLC utilizes interest rate swap agreements and forward exchange
agreements to hedge a portion of these exposures. SLC does not use derivatives
or other financial instruments for trading purposes. Management of SLC believes
the risk of incurring material losses related to credit risk is remote. The
discussion below presents the sensitivity of the market value of SLC's financial
instruments to selected changes in market rates and prices. The range of change
chosen reflects SLC's view of changes that are reasonably possible over a
one-year period. Market values are the present value of projected future cash
flows based on the market rates and prices chosen. The market values for
interest rate risk and foreign currency risk are calculated by SLC utilizing a
third-party software model, which utilizes standard pricing models to determine
the present value of the instruments based on the market conditions (interest
rates, spot and forward exchange rates, and implied volatilities) as of the
valuation date. The utilization of these instruments is described more fully in
the Notes 1 and 9 to the consolidated financial statements. The major accounting
policies for these instruments are described in Note 1 to the consolidated
financial statements.
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<PAGE> 106
SLC's derivative and other financial instruments consist of long-term debt
(including current portion), interest rate swaps, foreign exchange-forward
contracts, and foreign exchange-option contracts. The net market value of these
financial instruments combined is referred to below as the net financial
instrument position. At December 31, 1998 and 1997, the net financial instrument
position was a liability of $54,400,000 and $81,100,000, respectively. The
decrease in the net financial instrument position from 1997 in 1998 is due
mainly to reductions in outstanding debt made during the year.
INTEREST RATE RISK
SLC's debt portfolio, including interest rate swap agreements, as of
December 31, 1998 is composed of debt denominated in U.S. dollars (95.9%) and
Dutch guilders (4.1%). Substantially all of SLC's debt was variable rate at
December 31, 1998, however, $30,000,000 of this debt has been effectively fixed
with an interest rate swap. At December 31, 1997, there was $3,700,000
outstanding in fixed rate debt. A 100 basis point change in interest rates would
not have a material impact on the net financial instrument position. A change in
interest rates on the variable portion of the debt portfolio impacts the
interest incurred and cash flows but does not impact the net financial
instrument position. Based on the variable-rate debt included in SLC's debt
portfolio as of December 31, 1998 and 1997, a 100 basis point increase in
interest rates would result in an additional $244,100 and $774,000 in interest
incurred per year at December 31, 1998 and 1997, respectively. A 100 basis point
decline would lower interest incurred by $244,100 and $774,000 per year at
December 31, 1998 and 1997, respectively.
FOREIGN CURRENCY EXCHANGE RATE RISK
The primary currencies for which SLC has foreign currency exchange rate
exposure are the U.S. dollar versus the Irish pound, Dutch guilder, French
franc, Australian dollar, and German mark. Foreign currency debt and foreign
exchange forward contracts are occasionally used in countries where it does
business, thereby reducing SLC's net asset exposure. Foreign exchange forward
and option contracts are used on occasion to hedge SLC's firm and highly
anticipated foreign currency cash flows. At December 31, 1998 and December 31,
1997, SLC was not party to any material foreign currency hedging instruments.
INFLATION
The financial statements are presented on a historical cost basis and do
not fully reflect the impact of prior years' inflation. While the U.S. inflation
rate has been modest for several years, SLC operates in many international areas
with both inflation and currency issues. The ability to pass on inflation costs
is an uncertainty due to general economic conditions and competitive situations.
It is estimated that the cost of replacing SLC's plant and equipment today is
greater than its historical cost. Accordingly, depreciation expense would be
greater if the expense were stated on a current cost basis.
YEAR 2000 DISCLOSURE
YEAR 2000 PREPARATION. Software failures due to calculations using Year
2000 dates are a known risk. SLC is currently evaluating and managing the
financial and operating risks associated with this problem. SLC's Year 2000
efforts are addressed in the following sections: Information Technology, Process
Control and Embedded Chip Systems, and Year 2000 Expenditures.
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INFORMATION TECHNOLOGY. Prior to January 1, 2000, SLC reviewed its
infrastructure and business applications computing systems and specific actions
were initiated to achieve Year 2000 readiness on critical systems. SLC has not
experienced any significant Year 2000 complications to date in operating its
computing system. As a result of SLC's inventory, risk assessment, remediation,
and contingency planning with respect to these systems, SLC believes that any
Year 2000 problems that might occur in its computing systems would not have
material adverse impacts on the operations or financial condition of SLC.
PROCESS CONTROL AND EMBEDDED CHIP SYSTEMS. Prior to January 1, 2000, SLC
began preparing for the Year 2000 with respect to systems containing process
control or embedded chip computer programs. SLC's process to address this risk
included contacting process control or embedded chip suppliers regarding product
information, testing, remediation protocols, and the availability of replacement
components, if required. SLC has not experienced any significant complications
to date.
YEAR 2000 EXPENDITURES. SLC has spent approximately $5,300,000 on new ERP
systems at selected US operations, which has addressed some Year 2000 IT issues.
(See discussion on capital expenditures section.)
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UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
give effect to the merger assuming that the cash election is fully subscribed,
that each holder of options to purchase ITI common stock elects to receive cash
for 50% of the holder's options, and that the cash election price is $36.50 per
share. Based on these assumptions and assuming an exchange ratio of 15.17064
shares of ITI common stock for each share of SLC common stock, upon completion
of the merger, Berwind Group Partners will own approximately 15.2 million shares
of common stock of the combined company. Berwind Group Partners will have a
majority voting interest in the combined company based upon its common stock
ownership percentage. The merger will be accounted for under the purchase method
of accounting as the acquisition of ITI by SLC. Accordingly, the unaudited pro
forma financial information presented reflects the historical financial
statements of SLC with purchase accounting being applied to the financial
statements of ITI. The total estimated purchase price of ITI of $312,200,000 for
accounting purposes was computed based on the following:
- an estimate of the fair market value of 50% of the outstanding shares of
ITI common stock and stock options (see additional discussion in the
notes to the unaudited pro forma combined condensed financial
statements),
- the cost of the exchange of ITI common stock and options based on a cash
price of $36.50 per share, and
- the estimated direct expenses of the transaction.
The final purchase price is dependent on:
- The fair value of the stock of ITI at the closing of the transaction. For
purposes of the unaudited pro forma combined condensed financial
statements, management of ITI and SLC have computed the purchase price,
goodwill and the related amortization expense based on the closing price
of ITI stock as reported on the Nasdaq National Market on March 22, 2000
of $28.5625 per share. Holding all other variables constant, a $1 change
in the stock price of ITI would increase or decrease the pro forma net
income by approximately $225,000 and earnings per share by $.01.
- The extent to which stockholders elect to receive cash for up to 50% of
the shares and options outstanding at $36.50 per share. Management of ITI
and SLC believe that it is probable that the stockholders of ITI will
elect to receive the maximum amount of cash allowed under the terms of
the merger agreement. The unaudited pro forma combined condensed
financial statements have been computed based on this assumption. If less
than the maximum 50% of shares and options are exchanged for cash, the
pro forma long-term debt outstanding and interest expense will be reduced
and the pro forma weighted average shares outstanding will increase. A
table is included in the notes to the unaudited pro forma combined
condensed financial statements which provides a range of operations based
on changes in the assumptions regarding the number of shares exchanged
for cash.
- Finalization of the appraisals as of the closing date of the transaction.
The unaudited pro forma combined condensed balance sheet assumes the merger
took place on October 2, 1999. The unaudited pro forma combined condensed
statements of income present SLC's historical combined condensed statements of
income for the year ended December 31, 1998 and the nine months ended October 2,
1999 with ITI's condensed statements of income for the same periods (except that
the 1999 interim amounts of ITI are as of and for the nine-month period ended
September 30, 1999) adjusted to give effect to the merger as if the merger
occurred on January 1,
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<PAGE> 109
1998. The unaudited pro forma combined condensed financial statements presented
herein reflect the adjustments for:
- the estimated allocation of purchase price to the assets acquired,
including goodwill and other identifiable intangibles,
- the effect of recurring charges related to the merger, primarily the
amortization of goodwill over 20 years and other intangibles, principally
acquired technology over periods from 12 to 18 years and trademarks and
other intangible assets over periods from 7 to 20 years, and interest
expense related to the financing for the transaction, and
- the related income tax effects.
The adjustments are based on currently available information and certain
estimates and assumptions. However, the final determination of the purchase
price and the ultimate purchase price allocation may have a material impact on
the result of operations of the combined company. Management of ITI and SLC
believe that the assumptions provide a reasonable basis for presenting the
significant effects of the contemplated transaction and that the pro forma
adjustments give appropriate effect to those assumptions and are properly
applied in the pro forma combined condensed financial statements.
The unaudited pro forma combined condensed financial statements do not
reflect any expected revenue or cost synergies as a result of the merger. SLC
and ITI management are reviewing certain opportunities to reduce combined costs
and plan to eliminate duplicative operations. SLC and ITI management estimate
that cost savings in the first twelve months are expected to be approximately
$10,000,000. Manufacturing economies of scale through streamlined plant
operations are not included in this valuation and are expected to provide
incremental savings during the second year following the merger. The unaudited
pro forma combined condensed statement of income does not reflect the non-
recurring charges directly associated with the transaction related to the
write-off of the fair value of in-process research and development projects
estimated to be $36,000,000 and excess of the fair value over the historical
cost assigned to inventories in the purchase price allocation. The in-process
research and development is based on projects currently in process and will be
written off in the quarter the merger is completed. The purchase price assigned
to inventories will be charged to cost of sales as the related inventory is
sold. It should be noted that the 1999 interim results of ITI include a
$4,104,000 (after-tax amount of $2,626,600) charge associated with the write-off
of previously capitalized patent defense costs. In addition, the 1999 interim
and 1998 annual results of SLC include $2,126,000 (after-tax amount of
$1,360,000) and $2,698,000 (after-tax amount of $1,727,000), respectively, of
management fees charged by Berwind Corporation. SLC and ITI management believe
that the expenses associated with the management fees will cease after the
merger, as the combined company has the organization in place to provide the
services formerly provided by Berwind Corporation. Under the purchase accounting
method, goodwill and other identifiable intangibles in amounts estimated to be
approximately $229,099,000 and $145,700,000, respectively, are capitalized and
amortized over their useful lives, which are estimated to be 20 years for
goodwill and up to 7 to 20 years for other intangible assets. The amounts above
are estimated based on preliminary purchase price allocation and a preliminary
appraisal of existing intangible assets, including completed technology,
customer lists, distribution network and patents, and technology currently in
process. The fair market value of ITI's in process research projects is being
determined utilizing a discounted cash flow income approach at a discount rate
of 18.5% to 28.5% based on the nature of the project and the estimated stage of
completion. The final charge for in-process research and development will equal
its estimated current fair value based on risk adjusted cash flows of
specifically identified technologies for which technological feasibility has not
yet been established and alternative future uses do not exist as of the date of
the merger. A $1,000,000
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increase or decrease in the final amount recorded for in-process research and
development will increase or decrease the goodwill associated with the
acquisition which will result in a change in amortization expense of $50,000 per
year. The actual amounts recorded will vary based upon completion of the final
purchase price allocations and completion of the appraisal and may have a
material impact on the combined company's results of operations or financial
position. The unaudited pro forma combined condensed financial statements for
the nine months ended October 2, 1999, and the year ended December 31, 1998,
include non-cash expenses for amortization of goodwill and intangible assets,
with diluted earnings per share effects of $.75 and $.98, respectively.
The unaudited pro forma combined condensed financial statements are not
necessarily indicative of either the financial position or results of operations
which would have been achieved had the merger been consummated on the dates
described above and should not be construed as representations of future
operations. In addition, the unaudited pro forma combined condensed financial
statements do not present the pro forma effect of SLC's 1999 acquisitions of
Impac Technologies, Inc., Cosmotron AB and Tecom Systems Pty Ltd., as these
acquisitions were not significant individually or in the aggregate.
These unaudited pro forma combined condensed financial statements are based
on, and should be read in conjunction with, the historical financial statements
and the related notes of SLC and ITI, which are included or incorporated by
reference in this proxy statement.
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<PAGE> 111
COMBINED COMPANY
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
OCTOBER 2, 1999
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
SLC ITI ADJUSTMENTS COMBINED
------ ------ ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................... $ 14.0 $ 3.9 $ -- $ 17.9
Accounts receivable................................ 85.5 20.7 -- 106.2
Inventories........................................ 41.8 24.9 4.2(a) 70.9
Prepaid expense and other current assets........... 6.4 9.0 5.4(b) 20.8
------ ------ ------ ------
Total current assets............................. 147.7 58.5 9.6 215.8
PROPERTY & EQUIPMENT................................. 33.2 13.4 1.2(c) 47.8
GOODWILL............................................. 115.9 26.9 86.3(d) 229.1
IDENTIFIABLE INTANGIBLE ASSETS:
Acquired technology................................ 12.8 1.4 81.6(d) 95.8
Trademarks and other intangible assets............. 2.6 14.3 33.0(d) 49.9
NOTES RECEIVABLE..................................... -- 11.6 -- 11.6
OTHER ASSETS......................................... 6.6 -- 4.0(e) 10.6
------ ------ ------ ------
$318.8 $126.1 $215.7 $660.6
====== ====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................... $ 29.2 $ 5.3 $ -- $ 34.5
Accrued liabilities................................ 38.5 6.2 -- 44.7
Long term debt -- current.......................... -- -- -- --
Other short term liabilities....................... -- -- 1.5(f) 1.5
------ ------ ------ ------
Total current liabilities........................ 67.7 11.5 1.5 80.7
LONG-TERM DEBT, net of current portion............... 87.8 -- 181.6(g) 269.4
OTHER LONG-TERM LIABILITIES.......................... 1.9 6.2 42.4(f) 50.5
------ ------ ------ ------
Total liabilities................................ 157.4 17.7 225.5 400.6
------ ------ ------ ------
STOCKHOLDERS' EQUITY
Common stock....................................... -- 0.1 0.1(h) 0.2
Additional Paid-in Capital......................... 107.5 78.0 56.4(j) 241.9
Retained earnings.................................. 58.9 45.7 (81.7)(i) 22.9
Cumulative translation adjustment.................. (5.0) -- -- (5.0)
Treasury stock, at cost............................ -- (15.4) 15.4(j) --
------ ------ ------ ------
Total stockholders' equity....................... 161.4 108.4 (9.8) 260.0
------ ------ ------ ------
$318.8 $126.1 $215.7 $660.6
====== ====== ====== ======
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
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COMBINED COMPANY
UNAUDITED PRO FORMA
COMBINED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
SLC ITI ADJUSTMENTS COMBINED
--------- --------- ----------- ----------
(IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
SALES........................................... $ 375.6 $ 109.0 $ -- $ 484.6
COST OF SALES................................... 206.2 58.8 0.1(k) 265.1
--------- --------- ------ ----------
Gross Profit.................................. 169.4 50.2 (0.1) 219.5
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.... 102.0 19.4 (2.5)(l) 118.9
RESEARCH AND DEVELOPMENT EXPENSE................ 13.4 8.0 -- 21.4
AMORTIZATION OF INTANGIBLES..................... 8.1 1.4 13.2(m) 22.7
MANAGEMENT FEE.................................. 2.7 -- -- 2.7(p)
--------- --------- ------ ----------
Operating Income.............................. 43.2 21.4 (10.8) 53.8
OTHER:
Other, net.................................... 0.8 -- -- 0.8
Interest (income) expense..................... 4.8 (0.8) 14.8(n) 18.8
--------- --------- ------ ----------
Income before income taxes.................. 37.6 22.2 (25.6) 34.2
PROVISION (BENEFIT) FOR INCOME TAXES............ 16.9 8.0 (7.6)(o) 17.3
--------- --------- ------ ----------
NET INCOME...................................... $ 20.7 $ 14.2 $(18.0) $ 16.9
========= ========= ====== ==========
EARNINGS PER SHARE:
Basic......................................... $ 20.67 $ 1.68 $ 0.87
Diluted....................................... $ 20.62 $ 1.61 $ 0.86
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic......................................... 1,000,000 8,461,000 19,401,000
Diluted....................................... 1,002,000 8,860,000 19,631,000
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements
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COMBINED COMPANY
UNAUDITED PRO FORMA
COMBINED CONDENSED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED OCTOBER 2, 1999
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
SLC ITI ADJUSTMENTS COMBINED
---------- ---------- ----------- -----------
(IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
SALES........................................ $ 309.2 $ 88.7 $ -- $ 397.9
COST OF SALES................................ 174.4 47.0 0.1(k) 221.5
---------- ---------- ------ -----------
Gross Profit............................... 134.8 41.7 (0.1) 176.4
SELLING, GENERAL, AND ADMINISTRATIVE
EXPENSES................................... 81.2 16.7 (0.9)(l) 97.0
RESEARCH AND DEVELOPMENT EXPENSE............. 12.8 6.3 -- 19.1
AMORTIZATION OF INTANGIBLES.................. 6.5 5.2 9.9(m) 21.6
MANAGEMENT FEE(p)............................ 2.2 -- -- 2.2
---------- ---------- ------ -----------
Operating Income........................... 32.1 13.5 (9.1) 36.5
OTHER:
Other, net................................. (2.6) -- -- (2.6)
Interest (income) expense.................. 3.6 (1.1) 11.1(n) 13.6
---------- ---------- ------ -----------
Income before income taxes................. 31.1 14.6 (20.2) 25.5
PROVISION (BENEFIT) FOR INCOME TAXES......... 13.8 5.2 (6.0)(o) 13.0
---------- ---------- ------ -----------
NET INCOME................................... $ 17.3 $ 9.4 $(14.2) $ 12.5
========== ========== ====== ===========
EARNINGS PER SHARE:
Basic...................................... $ 17.35 $ 1.11 $ 0.65
Diluted.................................... $ 17.28 $ 1.07 $ 0.64
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic...................................... 1,000,000 8,428,000 19,385,000
Diluted.................................... 1,004,000 8,777,000 19,620,000
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
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COMBINED COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
In accordance with the purchase method of accounting, the total purchase
price was allocated to ITI's assets and liabilities based upon their relative
fair values. Allocations are subject to valuations as of the date of the merger
based upon appraisal and other studies which are not yet completed. The purchase
price and preliminary allocation of the purchase price to assets purchased and
liabilities assumed are as follows:
<TABLE>
<CAPTION>
(TABLE IN MILLIONS)
<S> <C>
Cash redemption of 50% of common shares at $36.50 per
share................................................. $154.6
Buy-out of 50% of stock options......................... 15.2
Fair value of remaining common shares at $28.5625....... 120.8
Fair value of remaining options(1)...................... 13.6
------
Purchase price.......................................... 304.2
Acquisition costs....................................... 8.0
------
Total estimated purchase price..................... $312.2
======
Historical net book value of ITI........................ $108.5
Elimination of historical goodwill...................... (26.9)
Inventory write-up...................................... 4.2
In-process research and development..................... 36.0(q)
Estimated write-up of property and equipment............ 1.2
Tax benefit on options cashed-out....................... 5.4
Deferred income taxes................................... (43.9)
Acquired technology..................................... 81.6
Trademarks and marketing assets......................... 33.0
Goodwill................................................ 113.1
------
$312.2
======
</TABLE>
The fair value of the options was estimated using the Black-Scholes option
pricing model with the following weighted-average assumptions: dividend
yield -- 0%; expected volatility -- 34.25%, risk free interest rate -- 6.96%;
and expected life -- 5 years.
There are no significant additional liabilities or tangible or intangible
assets not already considered in the unaudited pro forma combined condensed
financial statements that are likely to be recognized upon finalization of the
purchase price.
The above total estimated purchase price was computed based on: (1) the
fair market value of 50% of the outstanding shares of ITI common stock and stock
options at the Effective Time (for purposes of the accompanying unaudited pro
forma combined condensed financial statements, the closing price of ITI common
stock as reported on the Nasdaq National Market on March 22, 2000 of $28.5625
has been used), (2) the cost of the exchange of ITI common stock and options
(assuming
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<PAGE> 115
COMBINED COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
that the ITI stockholders elect to exchange an aggregate of 50% of ITI common
stock outstanding for cash at $36.50 per share and that each option holder
elects to exchange 50% of such option holder's options for cash at $36.50 per
share, net of the exercise price), and (3) the direct expenses of the merger. As
discussed in further detail on page 48 of this proxy statement, the ITI common
stock may be viewed as having two components: (a) the right to exercise the cash
election at $36.50 per share, and (b) the right to continue as a stockholder of
ITI. If the cash election price exceeds the trading price of ITI common stock,
the trading price of ITI common stock may decline immediately after the cash
election expires. The actual purchase price will be based on the trading price
of ITI common stock after the effect of the cash election at the effective date
of the merger and the actual cost of the cash election and cash-out of the ITI
management options. A $1 increase (decrease) in the stock price of ITI will
increase (decrease) goodwill by approximately $5,000,000, with a resulting
increase or decrease in the annual pro forma amortization expense and net income
of $250,000, holding all other variables constant. In addition, the final
purchase price and debt incurred by the combined company to fund the acquisition
is dependent upon the number of shares of ITI common stock redeemed pursuant to
the cash election. The following table provides pro forma presentations which
give effect to a range of possible purchase prices, the estimated purchase price
allocations and the results of operations based on different assumptions
regarding the number of shares of ITI common stock redeemed, holding all other
variables constant:
<TABLE>
<CAPTION>
25% OF ITI SHARES 50% OF ITI SHARES
REDEEMED FOR CASH REDEEMED FOR CASH(1)
----------------- --------------------
<S> <C> <C>
Purchase price............................. $294.8 $312.2
====== ======
Purchase price allocation:
Historical book value of ITI............. $108.5 $108.5
Elimination of historical goodwill....... (26.9) (26.9)
Write-up of tangible assets.............. 5.4 5.4
In-process research and development...... 36.0 36.0
Tax benefit on options cashed-out........ 2.7 5.4
Deferred income taxes.................... (43.9) (43.9)
Identifiable intangibles................. 114.6 114.6
Goodwill................................. 98.4 113.1
------ ------
$294.8 $312.2
====== ======
Long-term debt:............................ $184.6 $269.4
====== ======
Results of operations:
Year ended December 31, 1998:
Net income............................ $ 21.6 $ 16.9
====== ======
</TABLE>
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COMBINED COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
25% OF ITI SHARES 50% OF ITI SHARES
REDEEMED FOR CASH REDEEMED FOR CASH(1)
----------------- --------------------
<S> <C> <C>
Earnings per share:
Basic............................... $ 1.00 $ 0.87
Diluted............................. $ 0.99 $ 0.86
Weighted average shares outstanding:
Basic.................................... 21,565,000 19,401,000
Diluted.................................. 21,825,000 19,631,000
Nine months ended September 30, 1999:
Net income............................ $ 16.1 $ 12.5
====== ======
Earnings per share:
Basic............................... $ 0.75 $ 0.65
Diluted............................. $ 0.74 $ 0.64
Weighted average shares outstanding:
Basic.................................... 21,550,000 19,385,000
Diluted.................................. 21,795,000 19,620,000
</TABLE>
- -------------------------
(1) This is the assumption management considers probable. The accompanying
unaudited pro forma combined condensed financial statements have been
prepared on this basis. The extent to which shareholders elect to receive
cash under the cash election will impact the results of operations and
financial position of the combined company. If less than the maximum 50% of
shares and options are exchanged for cash, the purchase price for the
acquisition will change, the long-term debt outstanding and interest expense
will be reduced and the weighted average shares of the combined company will
increase. The above table provides the pro forma purchase prices, the
estimated purchase price allocations and results of operations based on two
different assumptions regarding the number of shares exchanged for cash.
The unaudited pro forma combined condensed balance sheet and statement of
income give effect to the following pro forma adjustments:
(a) Reflects the write-up of inventories to estimated fair market value in the
amount of $4,200,000 in accordance with APB No. 16. This fair market value
inventory adjustment is excluded from the unaudited pro forma combined
condensed statement of income due to the non-recurring nature of this
expense.
(b) Represents the deferred tax benefit generated on the cash-out of ITI
management options in connection with the merger. The weighted average
exercise price of these options was used in determining the value of the
related tax benefit.
(c) Represents the write-up of property, plant, and equipment to estimated fair
value at the balance sheet date in accordance with APB No. 16.
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COMBINED COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(d) Represents goodwill and other identifiable intangible assets resulting from
the merger. Goodwill will be amortized based on a 20-year life. For
valuation purposes, identifiable intangible assets of ITI have been broken
down into five distinct groupings, namely:
- Core technology, which represents technology developed by ITI that is
used in many of the products that constitute ITI's current product line
and is anticipated to be used in future products under development by
ITI. The core technology of ITI consists of the knowledge ITI has
developed and the inventions ITI has made relating to its products,
including its supervised radio technology, Learn Mode technology,
technology relating to ITI's touch-phone telephone user interface,
digitized voice technology and the interactive capabilities of ITI's
security systems. See "BUSINESS OF ITI -- System Features and Components
of ITI Wireless Security Systems."
- Product specific technology, which represents technology unique to
existing products, including software, unique product features,
inventions and other technology, that is generally useful only during the
life cycle of the specific product. Likewise, many product families have
unique product features and technology, including the Magic Key feature
and technology, which is unique to the Commander product family, meter
reading technology, which is unique to the CareTaker product family,
distance training technology, which is unique ITI's RF Access product,
and the pin point technology unique to ITI's Pin Point hardwire loop
identification product. See "BUSINESS OF ITI -- Monitored Wireless
Security Systems Marketed Under the ITI(R) Trademark," "-- Hardwire and
Hybrid Security Systems Marketed Under the CADDX(TM) Trademark" and
"-- Intellectual Property."
- Trademarks and trade names, which represent the market goodwill
associated with the existing trademarks and trade names of ITI, which
serve to identify the source of products manufactured by ITI. Examples
include the "ITI" and "CADDX" trademarks, which have been in use since
1983 and 1984, respectively. ITI also has other long standing trademarks
that are associated with its products, including "CareTaker," "SX-V,"
"Regency," "Commander," "Interrogator," "Magic Key," "Security Pro,"
"SuperBus," "UltraGard," "Simon" and "Quik Bridge."
- Customer base, which represents ITI's portfolio of active customers. The
value of the customer base is derived by estimating the costs that would
be incurred to establish a customer relationship, which is then
multiplied by the number of active customers that existed at the
appraisal date.
- Workforce, which represents the entire group of employees working for ITI
at the time of acquisition. The value of the workforce is derived by
estimating the cost to replace the employees. The replacement, or
assemblage cost reflects the expenses that would be normally incurred to
recruit and train new personnel to reach the productivity level possessed
by the existing personnel as an effective and cohesive group. Among the
factors considered are, as applicable, the availability of replacement
personnel, degree of specialization of people in the organization, salary
and fringe benefits, other compensation, search fees and expenses, travel
and temporary living expenses, relocation costs, and nonproductive time
during a training period. The summation of all the assemblage costs
represents the total replacement cost of the assembled work force.
110
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COMBINED COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the significant components of identifiable assets of ITI and
the related estimated useful lives follows:
<TABLE>
<CAPTION>
FAIR VALUE USEFUL LIVES
---------- ------------
<S> <C> <C>
TECHNOLOGY
Core technology............................... $49,100 18 years
Product specific technology................... 32,500 12 years
TRADEMARKS AND OTHER INTANGIBLE ASSETS
Trade names -- trademarks..................... 36,600 20 years
Customer base................................. 4,400 7 years
Work force.................................... 7,600 7 years
</TABLE>
A useful life of 18 years has been selected for amortization of core
technology based upon ITI's experience and current expectations for the
future. ITI was incorporated in 1980 and was in developmental stages
through 1983. Much of the technology developed by ITI in the early 1980s is
still being utilized in its products today and management expects that such
technology will continue to be utilized for the foreseeable future.
Wireless security systems have existed for over 30 years. ITI, however, was
the first to introduce supervised wireless security systems with the
introduction of the SX product line in 1983. ITI's supervised radio
technology, which made wireless security systems a technically acceptable
installation solution, was developed in the early 1980s and is still in use
throughout ITI's wireless product line today. Likewise, the interactive
capabilities that ITI developed for its wireless security systems over 17
years ago are still in use today. ITI management expects to utilize both
the supervised radio technology and the interactive capabilities developed
in the early 1980s for the foreseeable future. In 1988, ITI patented its
Learn Mode technology, which enables control panels to automatically
"learn" the identity and type of each factory-programmed sensor in its
systems. ITI first introduced products utilizing its Learn Mode technology
in 1990 and anticipates utilizing this technology for the foreseeable
future. Other core technology has been developed over the years, some of
which is documented in the 21 United States patents held by ITI covering
various security system technology. Seven of these patents were issued
prior to 1990 and management currently expects to utilize much of this
technology for the foreseeable future.
A useful life of 12 years has been selected for amortization of product
specific technology based upon ITI's experience and current expectations
for the future. Product specific technology is included in ITI's existing
wireless, hardwire and hybrid security control panels, fire systems, a wide
array of wireless and hardwire sensors, and other peripheral devices and
products. The life of the product specific technology is tied to the life
cycle of the specific product. The SX product line was first introduced in
1983 and is still sold by ITI 17 years later. Various other ITI products
have been on the market for 12 or 13 years. ITI management expects that, on
average, its existing products will have a market life of at least 12
years.
A useful life of 20 years has been selected for amortization of ITI's
trademarks and trade names. ITI has been in business since 1981 and has
used the ITI and CADDX trademarks since the early 1980s. both of these
trademarks are widely recognizable and have significant following and
111
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COMBINED COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
value in the industry. ITI also has other long standing trademarks, which
it expects to derive value from for at least 20 years.
Given the technological nature of ITI's products and the level of
competition in the industry, useful lives will be reevaluated in each
reporting period.
The estimated fair value of core technology, product specific technology
and in-process research and development, based upon currently available
data and third party appraisals utilizing a discounted cash flow income
approach, are $49,100,000, $32,500,000 and $36,000,000, respectively. The
significant assumptions used to value these components of technology
include the revenues which the current products and products under
development are projected to generate, the cost structure inherent in
manufacturing, marketing and selling the products, and the discount rates
(of 18.5% to 28.5%) used to discount to present value the cash flows
projected for each product. The value of the in-process research and
development is based on the existing stage of development of the projects
and does not contemplate developments expected to occur after the merger.
(e) Represents debt acquisition costs incurred in connection with obtaining the
credit facilities to finance the transaction. (See (g) below). The debt
acquisition costs are being amortized over the life of the facility. The
amortization is included in interest expense.
(f) Reflects the deferred taxes provided at the statutory rate of 36% recorded
on the write-up of the acquired assets to fair market value, net of ITI's
previously recorded tax liability related to intangible assets. The net
accumulated earnings of foreign subsidiaries at December 31, 1998 were
$41,296,000. All of these earnings are considered permanently reinvested.
(g) Reflects borrowings of $181,573,000 under bank facilities, the proceeds of
which were used to finance the acquisition of ITI shares, the buy-out of ITI
stock options, and debt issue and other direct costs of the merger. The SLC
bank facilities include a $225,000,000 revolving credit facility due in 5
years and a $100,000,000 term loan due in quarterly installments over 5
years. Interest on these borrowings is payable at the Prime Rate, Federal
Funds Effective Rate or LIBOR, plus applicable spreads. See additional
discussion of the significant terms of the bank facilities in Note 11 to
SLC's consolidated financial statements on page F-22.
(h) As of October 31, 1999, ITI had outstanding 8,529,542 shares of common
stock. Pursuant to the merger Agreement, ITI would issue 15,170,640 shares
of common stock in exchange for all of the outstanding shares of SLC common
stock. The adjustment to common stock reflects the issuance of 15,170,640
shares with a par value of $.01 and the elimination of SLC common stock.
(i) Represents the elimination of ITI historical retained earnings and the
charge to write-off the fair value of in-process research and development
projects upon the completion of the merger, which is currently estimated to
be $36,000,000. This adjustment is excluded from the unaudited pro forma
combined condensed statement of income due to the non-recurring nature of
this expense.
112
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COMBINED COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(j) Represent the assumed retirement of treasury shares and the adjustment to
record the stock issued to effect the merger, computed as follows.
<TABLE>
<CAPTION>
(TABLE IN MILLIONS)
<S> <C>
Fair value of shares and options......... $134.4
Historical ITI........................... (78.0)
------
$ 56.4
======
</TABLE>
(k) Represents the additional depreciation expense to be included in cost of
sales based on the estimated write-up of property, plant and equipment to
fair value.
(l) Represents: (i) the additional depreciation (not included in cost of sales)
as a result of the write up of property, plant and equipment to fair market
value, (ii) the elimination of a commission paid to a Domestic International
Sales Corporation (DISC) maintained by Berwind Group Partners, the
stockholder of SLC, on intercompany sales to foreign affiliates which will
be terminated at the completion of the transaction, and (iii) compensation
expense to be recognized over the three-year vesting period for 17,500
options (which will be converted into 265,486 options to purchase ITI common
stock) to be issued to SLC's management with an exercise price equal to a
50% discount to market value (which is assumed to be $28.5625) at the
completion of the transaction (see discussion in the notes to SLC's
consolidated financial statements on page F-17), as follows:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 2,
1998 1999
------------ ----------
(TABLE IN MILLIONS)
<S> <C> <C>
Depreciation expense............................ $ 0.1 $ 0.1
Commission paid to DISC......................... (3.9) (1.9)
Compensation expense............................ 1.3 0.9
----- -----
$(2.5) $(0.9)
===== =====
</TABLE>
The commission was paid to the DISC under the terms of a related party tax
agreement which will be eliminated pursuant to the terms of the merger
agreement and by matter of tax law. The related tax benefit recognized in
SLC's financial statements has also been eliminated in the accompanying pro
forma financial statements (see footnote (o)).
(m) Represents the amortization of goodwill and other intangibles over their
estimated useful lives (see note (d)). Goodwill and other intangibles and
the related amortization expense are subject to possible adjustment
resulting from the completion of the final purchase price adjustments and
the valuation analysis.
(n) Reflects the adjustment to interest expense based on a current market rate
of 7.3% related to the $181,573,000 of bank debt incurred to fund the
transaction (see note (g)) and the SLC debt refinanced with proceeds from a
new bank facility. A 1% increase (decrease) in interest rates would increase
(decrease) pro forma net income by $1,724,000.
113
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COMBINED COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(o) The net tax benefit on the pro forma income statement adjustments outlined
in (j) through (n) above after giving effect to the non-deductible goodwill
amortization.
(p) The 1999 interim and 1998 unaudited pro forma combined condensed statements
of income include management fees charged by Berwind Corporation. Upon
completion of the merger, the contract for management services with Berwind
Corporation will terminate. As such, SLC and ITI management believe that the
expenses associated with these fees will not be incurred in future periods
as the combined company has the infrastructure in place to provide the
services previously provided by Berwind Corporation. The unaudited pro forma
diluted earnings per share effect of the management fees in the October 2,
1999 and December 31, 1998 combined condensed statements of income was $0.07
and $0.09, respectively.
(q) Following is a current summary of the significant in-process research and
development projects acquired. Each of these products is subject to various
development risks, including:
- Lack of market acceptability.
- Inability to obtain the necessary governmental and regulatory approvals
required or desirable to market the product.
- Unforeseen or undetected errors in the software underlying the product.
- Inability to achieve the necessary cost targets.
- Inability to manufacture the product in sufficient volumes to meet
demand.
- Technical feasibility of the electronic circuitry and other hardware.
These projects, in their current stage, have no alternative future use and
are not expected to be technologically feasible at the closing date of the
merger. For a discussion of the assumptions used to value these projects,
see footnote (d).
ADVENT 2000:
The control panel will be a commercially rated fire system with wireless
capability. This is unique in that there currently are no commercially rated
fire systems on the market with wireless capabilities. This control panel
will have other advanced features, including voice feedback, flash memory, a
high-speed modem, scheduling, programmable authority levels, heavy-duty
power supplies and voice evacuation as standard. This development project
also involves development of over 20 peripherals capable of communicating
with the control panel. The platform is a flexible operating system that can
be reconfigured to fit the high-end residential security and home automation
markets, the commercial burglary market and the commercial fire market. The
platform produces the following products:
ADVENT HOME NAVIGATOR -- Aimed at the custom installation market, the
Home Navigator will be offered as both a 132 zone and 250 zone control
panel. As a stand-alone system, Advent Home Navigator will offer
extensive schedule and lighting and appliance control options allowing
the creation of sophisticated arming levels based on the homeowner's
114
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COMBINED COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
lifestyle. The automation module will also allow connection to home
automation systems manufactured by third parties.
ADVENT COMMERCIAL SYSTEM -- The Advent Commercial system will provide
high-security protection for commercial, industrial and government
facilities. It will have 250 zones and 8 partitions and has received
several important UL and US government approvals.
ADVENT FIRE -- Advent Fire will be a commercial fire system. It will be
appropriate for large and complex new construction and retrofit
installations. It will offer conventional hardwire and analog addressable
smoke detection and has received UL approval for wireless commercial
smoke detection. Advent Fire's wireless capabilities will enable control
of other important fire system devices such as water flow valves without
the need for expensive wire runs. The system will offer voice evacuation
in multiple languages and agent release as standard features.
The software code base for this platform is larger than all of ITI's current
existing control panel platforms combined. There is significant software
development yet to be completed for this platform. Accordingly, this
platform is not yet technologically feasible. In its current stage of
development, this platform has no alternative future uses. Unique
development risks relating to this platform include the following:
- The software is completely unique and its viability and reliability have
not yet been demonstrated in the market.
- The wireless nature of this platform is unique. Wireless commercial fire
systems do not currently exist in the marketplace. There is a risk that
the market may not accept the revolutionary nature of this architecture,
particularly its wireless attributes.
- The platform's hardware and software is extremely complex. Accordingly,
its reliability may not be fully verified through in-house testing or
limited field testing.
- The complexity of the hardware may present unique challenges in the
manufacturing of products using this platform in volumes that can meet
market demands. The product must meet the unique test requirements of
local fire authorities having regulatory jurisdiction over the products
in each market. The unique nature of this product will require that these
local authorities be educated on its functionality. This process will be
extremely time consuming.
Development on Advent originally began in 1992; however, significant R&D
began in 1995. $8,100,000 had been expended on this project through February
2000 with an estimated $825,000 to complete. This project is in the
implementation stage of development, with several variations currently
undergoing field tests. The fair value assigned to this project is
$15,500,000.
ADVENT 2001:
Using some of the technology developed in connection with the Advent 2000
project, ITI is in the process of developing several additional products
that are in the concept phase of development with initial roll out planned
for February 2001. In the concept phase, the market is being analyzed,
product requirements are being specified and technical feasibility is being
115
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COMBINED COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
established. Advent 2001 will involve unique configurations and
functionalities that will require development of new and unique hardware
and software designs. These products will introduce access control
capability to the Advent platform and will be targeted at the mid-tier fire
market. Advent 2001 will include the following products:
FIRE CHIEF -- This is a totally new fire platform based partially on
Advent technology and partially on new technology. It will be designed to
both better position ITI in the fire market and fill a major void in the
mid-tier fire market. The positioning is beneath Advent Fire 2000.
Several variations of Fire Chief are planned.
ADVENT ACCESS -- A 250 zone, 8 partition commercial security system with
integrated access control capabilities that will support 3,000 users and
32 doors. This product will bridge the market between Advent Commercial
and Advent Access.
Development of Advent 2001 is being done concurrently with development of
Advent 2000. In addition to the costs associated with the Advent 2000,
$2,400,000 had been expended on this project through February 2000 with an
estimated $2,400,000 to complete. In that Advent 2001 is an extension of
Advent 2000, it shares the same unique development risks relating to the
Advent 2000 platform. The fair value assigned to this project is $7,500,000.
EURO CONCORD:
An extension of the Concord product line into Europe. It differs from the
U.S. Concord product because it is self-contained, with the keypad and
control panel in a single plastic enclosure. The development of the Euro
Concord required the significant redesign of three circuit boards contained
in the current Concord line and the development of an additional circuit
board. The system's phone circuitry, power supply configuration and radio
devices needed to be developed to comply with European standards and radio
frequency band width. Accessories needed to be redeveloped to be flexible
for multiple languages and the panel's housing needed to be developed to be
self-contained and to have space for the additional circuit board.
Initially, ITI intends to sell this product to existing customers in Ireland
and Italy. It will be capable of being sold across Europe. Development began
in the first quarter of 1998. $1,300,000 had been expended on this project
through February 2000 with an estimated $188,000 to complete. The project is
in the implementation phase of development with field testing planned for
April 2000. The fair value assigned to this project is $3,300,000.
The redesign required to meet European standards presents unique development
risks. There can be no assurances that ITI will be able to achieve
acceptable cost requirements, that the product will meet ITI's quality
standards of performance or that the product will be accepted in the
European market.
OPEN SOLUTIONS:
The front-end software interface for a PC used for security access control
such as security gates, card swipe, etc. It will enable easy customization
to fit the particular access control needs of customers. Development began
in May 1999. $184,000 had been expended on this project through February
2000 with an estimated $80,000 to complete. The project is in the
116
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COMBINED COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
implementation phase of development with field testing planned for May
2000. The fair value assigned to this project is $1,000,000.
The unique development risks associated with this product include:
- A third party contractor has been retained to develop the software. This
contractor may become unable or unwilling to provide continued service or
development for the product.
- The software upon which this product will be based may have errors that
may only be revealed in connection with this new application.
SPANISH SIMON:
A Spanish language version of Simon II, ITI's largest volume, mass market
control panel. This product will be aimed at the Hispanic market in the
United States, as well as the South American market. This project will
include the development of new speech generation technology and
redevelopment of circuit boards to accommodate this new speech technology.
It is intended that this product will have the same functionality as ITI's
current Simon II product. This project is in the implementation phase of
development. $83,000 had been expended on this project through February 2000
with an estimated $12,000 to complete. The fair value assigned to this
project is $1,900,000.
CONCORD:
These projects consist of Concord II and Concord III. The fair value
assigned to these projects is $1,800,000.
Concord II will involve the development of functional enhancements over the
existing Concord product and will replace the existing Concord product. This
project will require the development of new software and implementation of
new communications protocols. New hardware will have to be developed to
accommodate the new communications protocols. This project is in the
implementation phase of development. $61,000 had been expended on this
project through February 2000 with an estimated $250,000 to complete.
Concord III will entail cost reduction and additional functional
enhancements over Concord II. It will replace Concord II. This project will
entail development of an entirely new hardware architecture. Accordingly,
the software will have to be completely rewritten to support the new
hardware architecture. Numerous new peripherals will also be developed for
this control panel. This project is in the design phase of development.
$30,000 had been expended on this project through February 2000 with an
estimated $1,100,000 to complete.
CONCORD EXPRESS PLUS:
This project involves functional enhancements to the Concord product line.
The final product will be positioned between Concord Express and Concord.
The project is in the implementation stage of development and involves
development of new software and peripherals. $410,000 had been expended on
this project through February 2000, with an estimated $80,000 to complete.
The fair value assigned to this project is $1,000,000.
117
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COMBINED COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
ALLEGRO:
This product will be targeted at the multi-family apartment market and will
be specifically designed to address the unique installation and user
profiles of that market. A large portion of the U.S. population lives in
rental housing and there is very low penetration of this market by security
systems. This project will entail the development of a completely new
low-cost hardware and software platform. Simplified and low-cost targets for
this product require a unique architectural approach, which may heighten the
development risk. This project is in the design phase of development.
$800,000 had been expended on this project through February 2000 with an
estimated $640,000 to complete. The fair value assigned to this project is
$1,500,000.
PERSONAL EMERGENCY RESPONSE:
This project will involve the development of a control panel that provides
"social monitoring" and response for people who need specialized supervision
in their homes. This product will replace ITI's existing LifeGard product,
but at a much lower product cost and increased functionality. This project
is in the design phase of development. $311,000 had been expended on this
project through February 2000 with an estimated $460,000 to complete. The
fair value assigned to this project is $2,100,000.
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RECENT DEVELOPMENTS
The following unaudited financial information for the three months and the
year ended December 31, 1999 is preliminary and subject to adjustment.
ITI
ITI recorded net sales for the year ended December 31, 1999, of
$121,600,000, compared to $109,000,000 for the prior year, an increase of 11.6%.
ITI's net sales for the fourth quarter ended December 31, 1999, were
$32,900,000, compared to $28,600,000 in the fourth quarter of 1998, an increase
of 14.9%.
Gross margins for 1999 were 47.0%, compared to 46.0% for the prior year.
For the three months ended December 31, 1999 and 1998, gross margins were 47.3%
and 47.5%, respectively. The 1.0% increase in gross margins for the year
reflects increased utilization of ITI's North St. Paul manufacturing facility
and other cost reductions.
Operating income for 1999 of $19,000,000 represented 15.6% of sales, as
compared to $21,400,000, or 19.6% of sales for the prior year. Operating income
for the fourth quarter of 1999 was $5,500,000, or 16.8% of sales, compared to
$6,600,000 and 23.0% of sales in the comparable prior period. Financial results
for the year ended December 31, 1999, included a second quarter non-cash charge
of $4,100,000 related to certain litigation costs incurred in connection with
the patent litigation against Pittway that were previously capitalized. Also in
1999, ITI incurred $763,000 of expenses related to the SLC merger. Approximately
$500,000 of these expenses were incurred in the fourth quarter. Earnings for the
fourth quarter were also adversely affected by higher than normal bad debt
expense.
Net income for the year ended December 31, 1999, was $13,400,000, compared
to $14,200,000 for the prior year. This decrease was due to the second quarter
after-tax charge of approximately $2,600,000 related to the patent litigation
write-off, approximately $600,000 of after-tax expenses related to the SLC
merger ($400,000 of which was incurred in the fourth quarter), and a $500,000
fourth quarter after-tax charge to bad debt expense discussed above. Net income
for 1999, excluding the patent litigation charge and the merger related
expenses, would have been approximately $16,600,000. ITI's net income for the
three months ended December 31, 1999, was $4,000,000 compared to $4,300,000 for
the prior comparable period. This decrease was primarily due to the merger
related expenses and bad debt write-off discussed above.
Diluted per share earnings were $.45 for the fourth quarter of 1999
compared to $.50 for the fourth quarter of 1998. Expenses associated with the
proposed merger with SLC negatively impacted earnings per share in the fourth
quarter by approximately $.05.
Diluted per share earnings were $1.52 for the year ended December 31, 1999,
compared to $1.61 for the prior year. Expenses associated with the proposed
merger with SLC and the patent litigation charge negatively impacted earnings
per share for the year by approximately $.07 and $.30, respectively. For the
year, diluted earnings per share, excluding merger related expenses and the non-
cash charge that occurred in the second quarter of 1999 related to the patent
lawsuit against Pittway, would have been $1.89 compared to $1.61 for 1998.
As of December 31, 1999, ITI's balance sheet included $114,400,000 of
stockholder equity, $9,700,000 of cash, $19,600,000 of interest bearing notes
and no debt.
SLC
SLC recorded net sales for the year ended December 31, 1999 of
$427,800,000, compared to $375,600,000 for the prior year, an increase of 13.9%.
SLC's net sales for the fourth quarter ended
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December 31, 1999 were $118,600,000, compared to $106,500,000 in the fourth
quarter of 1998. While this represents growth of 11.3% as compared to the prior
year quarter, fourth quarter revenue growth was adversely impacted by a slowing
of demand for systems for the corporate enterprises markets. SLC's management
believes that customer shipments related to year 2000 compliance were
accelerated prior to the fourth quarter of 1999 in order to meet year-end
requirements.
Gross margins for 1999 were 43.7% compared to 45.1% for the prior year. For
the three months ended December 31, 1999 and 1998, gross margins were 44.0% and
47.7%, respectively. The 1.4% reduction in gross margins for the year resulted
primarily from a change in the mix of products sold. In addition, gross margins
in the fourth quarter were adversely affected by accelerated shipments of higher
margin products noted above.
Operating income for 1999 of $48,100,000 represented 11.2% of sales, as
compared to $43,200,000, or 11.5% of sales for the prior year. For the fourth
quarter of 1999, operating income of $15,900,000 represented 13.5% of sales,
compared to $17,500,000, or 16.5% of sales in the comparable prior period.
Financial results for SLC include certain parent company payments which will
cease upon consummation of the merger. For the year and three months ended
December 31, 1999, these parent company expenses were $5,300,000 and $1,200,000,
respectively.
Net income for the year ended December 31, 1999 was $25,700,000 compared to
$20,600,000 for the prior year, an increase of 24.8%. SLC's net income for the
three months ended December 31, 1999 was $8,400,000, compared to $9,200,000 for
the prior comparable period, a decrease of 8.7%. This decrease is due in part to
the decreased margins in the fourth quarter discussed above. Net income for the
year and three months ended December 31, 1999 was $28,900,000 and $9,100,000,
respectively, excluding parent company expenses which will cease upon
consummation of the merger.
As of December 31, 1999, SLC's balance sheet included $166,800,000 of
stockholder equity, $69,300,000 of debt related to bank financing and
$21,600,000 of cash.
The slowdown in sales and earnings experienced in the fourth quarter of
1999 has carried forward into SLC's first months of 2000, and reflects a
softness in demand for corporate enterprise systems and an inventory reduction
program by a major customer. In addition, the continued strengthening of the
U.S. dollar is resulting in translation adjustments in the first two months,
adversely affecting reported results. On an interim, preliminary basis SLC
recorded net sales for the first two months of 2000 of $57,100,000 compared to
$59,500,000 for the same period of last year. Net income for the two-month
period, excluding SLC's parent company management charges, was $200,000 versus
$1,700,000 in the prior year. At this time, SLC's management believes that the
underlying factors causing the slowdown are temporary and that SLC's year 2000
prospects are substantially consistent with the forecast used by Goldman Sachs
in preparation of its fairness opinion. See "THE MERGER -- Development of
Financial Analyses and Projections" on page 21 and "-- Opinion of Financial
Advisor to ITI" on page 29.
With respect to the statement above regarding SLC's year 2000 prospects,
SLC does not make public as a matter of course any projections as to future
performance or earnings. Neither ITI nor the combined company if the merger is
completed intends to publish updated forward looking financial information. The
forecast used by Goldman Sachs regarding SLC's year 2000 prospects was not
prepared with a view to public disclosure or compliance with the published
guidelines established by the American Institute of Certified Public Accountants
regarding projections or forecasts. SLC's internal operating projections are, in
general, prepared solely for internal use and capital budgeting and other
management decisions and are subjective in many respects and thus susceptible to
various interpretations and periodic revision based on actual experience and
business developments. The information provided regarding SLC's year 2000
prospects is subject to significant uncertainties and
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contingencies that may be beyond the control of SLC and some of these
assumptions may not be realized.
The actual results will vary from those set forth in the forecast used by
Goldman Sachs, and those variations may be material. SLC's independent
accountants have not examined or compiled the information provided regarding
SLC's year 2000 prospects and accordingly do not provide any form of assurance
with respect to this information. The inclusion of this information should not
be regarded as an indication that ITI or anyone who received this information
then considered, or now considers, it a reliable prediction for future events,
and this information should not be relied on as such. In light of the
uncertainties inherent in any projected data, stockholders are cautioned not to
place undue reliance on the information provided above regarding SLC's year 2000
prospects. See "FORWARD-LOOKING STATEMENT" on page 15.
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DIRECTORS OF THE COMBINED COMPANY
The bylaws of ITI provide that the number of directors may be set by the
board of directors at any time but may not be fewer than three nor more than
nine. Pursuant to the merger agreement, at the effective time of the merger nine
individuals will serve on the board of directors of ITI. The merger agreement
provides that two of the directors will be Thomas C. Auth and Perry J. Lewis,
and that the seven other directors will be individuals selected by SLC. Mr. Auth
and Mr. Lewis have served as directors of ITI since 1992. The seven individuals
selected by SLC do not currently serve as directors of ITI. Information
regarding these seven individuals and Messrs. Auth and Lewis is set forth below.
THOMAS L. AUTH, age 54, has been an executive officer of Interactive
Technologies, Inc., a wholly owned subsidiary of ITI since 1981 and its
President since 1983. He has been President and Chief Executive Officer of ITI
since March 1993 and a director since May 1992. Mr. Auth was appointed Chairman
of the board of directors of ITI on April 1, 1997. Mr. Auth is currently a
director, Chief Executive Officer and President of Interactive Technologies, a
director of CADDX Controls, Inc., a wholly owned subsidiary of ITI, a director
and President and Treasurer of ITI International, Inc., a wholly owned
subsidiary of Interactive Technologies, and a director and Chief Executive
Officer of ITI Finance Corporation, a wholly owned subsidiary of Interactive
Technologies. Mr. Auth also is a director of MedAmicus, Inc., a publicly held
company, and Ergodyne Corporation, EH Publishing, Inc., Vomela Specialty Company
and CompU-Shop, Inc., which are privately held companies. He has served as the
Treasurer and a Board member of the Security Industry Association and is also a
certified public accountant.
C.G. BERWIND, JR., age 71, is a 1951 graduate of the University of Vermont
and received an MBA from the Harvard Business School in 1952. He served in the
U.S. Coast Guard from 1953 to 1955. Mr. Berwind joined Berwind Corporation in
1955 and worked in its operations from 1955 to 1957. He became Vice President in
1960 and was elected President and Chief Executive Officer in 1967. Mr. Berwind
succeeded his father as Chairman in 1972.
KENNETH BOYDA, age 55, serves as President and Chief Executive Officer of
SLC Technologies, Inc. at its world headquarters located in Portland, Oregon.
Mr. Boyda joined the Berwind family of companies in 1990 as President and CEO of
Sentrol, Inc. Prior thereto, he worked for fourteen years at Colortran, Inc. in
a variety of positions, lastly as President and Chief Executive Officer. Early
professional experience included positions at American Can Company, CCMP
Management Consultant and Gladding Corporation. Mr. Boyda has extensive
international experience, having been involved in and negotiated major contracts
in more than forty countries throughout Europe, Asia and Latin America. He
earned an AB degree in Government from Harvard College and an MBA from the
Harvard Business School. He has been active in the security industry and has
served as a Director of the Security Industry Association, and has served on the
boards of several electronic manufacturing companies.
JAN P. BRANTJES, age 64, is Chairman of IPSO-I.L.G. N.V., a public company
in Belgium that manufactures equipment for the laundry industry. From 1958 to
1978, Mr. Brantjes held several management positions in Rockwool B.V., a company
manufacturing isolation materials for the building industry. From 1981 to 1992,
Mr. Brantjes was Chief Executive Officer and President of Aritech Europe B.V.,
which in 1992 was sold to SLC. He remained President of Aritech until 1994. From
August 2, 1993 through the end of 1997, Mr. Brantjes was a member of the board
of directors of SLC. From 1995 through the middle of 1999, Mr. Brantjes also
served as an adviser to SLC.
LAWRENCE C. KARLSON, age 57, provides consulting services to a wide variety
of businesses and, as a private investor, invests in companies where he can
contribute in a non-executive role to the development of the business. Mr.
Karlson completed his undergraduate engineering studies at the Ryerson Institute
of Technology in Toronto, Canada and was awarded an MBA by the Wharton
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School of the University of Pennsylvania where he graduated with distinction.
Prior to 1993, Mr. Karlson served as Chairman of Spectra-Physics AB, formerly
Pharos AB, where he had also served as President and Chief Executive Officer.
Mr. Karlson serves on the boards of AmeriSource Health Corporation (AAS), CDI
Corporation (CDI), Vlasic Foods International, Inc. (VFI), and Spectra-Physics
Lasers, Inc. (SPLI).
EDWARD F. KOSNIK, age 55, has been President and Chief Executive Officer of
Berwind Group Partners since December 1999 and President and Chief Operating
Officer of Berwind Group Partners since June 1997. He is a 1966 graduate of
Marquette University with a BS in Electrical Engineering, served as an officer
in the U.S. Navy until 1970, and graduated in 1972 with an MBA from the Wharton
School of the University of Pennsylvania. After graduation he worked at Wachovia
Bank, and from 1973 to 1982 held various senior financial and operating
positions including Chief Financial Officer and Group President at Arvida
Corporation, a Florida-based real estate development company. In 1982, he was
President, Penn Central Property Group and from 1983 to 1987 was Executive Vice
President and Chief Executive Officer of the Penn Central Corporation. From 1987
to 1992, he was President and Chief Executive Officer of Sprague Technologies,
Inc., a global electronic component supplier, from 1992 to 1994 Executive Vice
President and Chief Financial Officer, then Chairman and Chief Executive Officer
of JWP, Inc., a global mechanical and electrical contracting company, and from
1994 to 1997 Executive Vice President and Chief Financial Officer then Senior
Executive Vice President and Chief Operating Officer of Alexander and Alexander
Service, Inc., a global risk management and brokerage company. He is a director
of Buckeye Pipeline, a publicly held limited partnership.
PERRY J. LEWIS, age 61, has been a director of ITI since May 1992 and was
President from May 1992 until March 1993. Mr. Lewis was a founding partner of
Morgan Lewis Githens & Ahn ("MLG&A"), a privately owned international investment
banking and leveraged buyout firm that was founded in 1982, and has served as a
partner of that firm since 1982. He has been a general partner of MLGAL
Partners, L.P. since April 1987. Mr. Lewis is a director of Aon Corporation and
AMFM, Inc., which are publicly held companies.
DONALD L. SEELEY, age 55, serves as Vice Chairman and Chief Financial
Officer of True North Communications, Inc., a marketing communications and
advertising firm with revenues of $1.3 billion. He joined True North in June
1997 as Executive Vice President and Chief Financial Officer. Prior to his
appointment at True North, Mr. Seeley was President and Chief Executive Officer
of The Alexander Consulting Group in 1993, after previously joining the parent
company in 1988 as Senior Vice President -- Financial Management. Prior to his
positions with Alexander & Alexander he served as Vice President and Treasurer
of United Airlines (1986-1988); Vice President and Treasurer of G.D. Searle and
Company (1979-1986); and in various financial positions with Firestone Tire and
Rubber Company. He earned an MBA and BS in accounting from the University of
Colorado at Boulder and is a Chartered Financial Analyst. Mr. Seeley is also a
director of Modem Media and Poppe Tyson, Inc.
RICHARD W. OLIVER, age 53, has been a Professor of Management at the Owen
Graduate School of Management, Vanderbilt University since September 1992. He
also has been Chairman of the Board of SymmetriCom, Inc., a company that designs
and manufactures equipment for the telecom industry, since June 1998. From 1977
to September 1992, Mr. Oliver served in various marketing and corporate
positions, including Vice President of Business and Residential Services, Vice
President of Corporate Marketing and special assistant to the Chairman and Chief
Executive Officer for Northern Telecom, Ltd., a telecommunications company. He
earned a PhD from the State University of New York, an MA from the University of
Delaware and a BS from Cornell University. Mr. Oliver also serves on the boards
of several companies, both private and public, including Applied Innovation,
Inc., Business Essentials and Quality Industries.
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SECURITY OWNERSHIP OF ITI MANAGEMENT AND
BENEFICIAL OWNERS OF ITI COMMON STOCK
The following table provides information about the beneficial ownership of
the common stock of ITI as of March 20, 2000, by (i) each stockholder who is
known by ITI to own beneficially more than 5% of the outstanding ITI common
stock, (ii) each director of ITI, (iii) each other person who would become a
director by virtue of the merger, (iv) each executive officer named in the
Summary Compensation Table of ITI's proxy statement dated April 8, 1999,
incorporated herein by reference, and (v) all ITI executive officers and
directors as a group.
<TABLE>
<CAPTION>
AMOUNT OF BENEFICIAL
OWNERSHIP(1)
--------------------
NAME OF BENEFICIAL OWNER OR IDENTITY OF GROUP SHARES PERCENT
- --------------------------------------------- --------- -------
<S> <C> <C>
SLC Technologies, Inc.(2)................................... 1,603,637 18.8%
Berwind Group Partners (3).................................. 1,603,637 18.8%
MLGAL Partners, L.P.(5)..................................... 1,281,159 15.0%
MLGA Fund II, L.P.(4)(5).................................... 1,281,159 15.0%
Sentry Insurance(6)......................................... 778,000 9.1%
Fleet Boston Corporation(7)................................. 606,814 7.1%
Farallon Capital Management LLC(8).......................... 436,100 5.1%
Thomas L. Auth.............................................. 903,613(10) 9.8%
Charles E. Briskey.......................................... 148,509(10) 1.7%
Joe Hurst................................................... 75,600(10) *
Perry J. Lewis(9)........................................... 62,656(10) *
W. Wallace McDowell, Jr..................................... 61,000(10) *
Sangwoo Ahn(9).............................................. 50,656(10) *
Walter R. Barry, Jr......................................... 15,000(10) *
Charles A. Durant........................................... 16,785(10) *
Reed G. Grothe.............................................. 17,600(10) *
All ITI executive officers and directors of ITI as a group
(13 persons).............................................. 1,402,363(10) 14.7%
C. G. Berwind, Jr.(11)(12).................................. 0 0
Edward F. Kosnik(11)(12).................................... 0 0
Kenneth Boyda (11).......................................... 0 0
Larry C. Karlson............................................ 0 0
Jan P. Brantjes............................................. 0 0
</TABLE>
- -------------------------
* Less than 1%.
(1) Percentages of outstanding shares are based on 8,536,642 shares of ITI
common stock outstanding as of March 20, 2000. Shares of ITI common stock
subject to options granted under ITI's Long-Term Stock Incentive Plan
(1992) (the "Stock Incentive Plan") and the Nonemployee Director Stock
Option Plan (the "Director Plan") that currently are exercisable, or which
become exercisable within 60 days, are deemed outstanding for computing the
number and percentage ownership of the person or group holding such options
but are not deemed outstanding for computing the percentages with respect
to other persons. Except as otherwise
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noted, the persons named in the table and footnotes have sole voting and
investment power with respect to all shares of ITI common stock reported as
beneficially owned by them.
(2) SLC filed a Schedule 13D with the SEC on October 8, 1999 (the "SLC Schedule
13D") reporting that, as a result of proxies granted in the Voting Support
Agreements, it may be deemed to beneficially own these shares of ITI common
stock. SLC's business address is 12345 SW Leveton Drive, Tualatin, Oregon
97602.
(3) Pursuant to the SLC Schedule 13D, Berwind Group Partners reported that, as
the sole owner of SLC and as a result of proxies granted in the Voting
Support Agreements, it may be deemed to indirectly beneficially own the
shares of ITI common stock that may be deemed to be beneficially owned by
SLC. Berwind Group Partners's business address is 1 Belmont Avenue, Suite
401, Bala Cynwyd, Pennsylvania 19004.
(4) The business address of MLGAL Partners, L.P. and MLGA Fund II, L.P. is Two
Greenwich Plaza, Greenwich, Connecticut 06830.
(5) MLGAL Partners, L.P., controls MLGA Fund II, L.P., and thus the 1,281,159
shares of ITI common stock owned of record by MLGA Fund II, L.P., are also
shown as being owned by MLGAL Partners, L.P.
(6) On February 9, 2000, ITI received Schedule 13Gs from Sentry Insurance,
Sentry Life Insurance Company and Sentry Fund, all filing as members of the
same group (collectively, the "Sentry 13G"). The Sentry 13G reports
beneficial ownership of an aggregate of 778,000 shares of ITI common stock.
Each of these reporting entities has its principal place of business at
1800 Northpoint Drive, Stevens Point, Wisconsin 54481. All of the foregoing
information set forth in this footnote is from the Sentry 13G.
(7) A Schedule 13G was filed with the SEC on February 14, 2000, by Fleet Boston
Corporation, reporting beneficial ownership of 606,814 shares of ITI common
stock (the "Fleet Boston Schedule 13G"). Fleet Boston Corporation is a
parent holding company pursuant to Rule 13d-1(b)(ii)(G) under the 1934 Act.
The Fleet Boston Schedule 13G reports shares of ITI common stock acquired
by Fleet Trust & Investment Services Company, Fleet National Bank and Fleet
Investment Advisors, all subsidiaries of Fleet Boston Corporation. The
business address of Fleet Boston Corporation is One Federal Street, Boston,
Massachusetts 02110. All of the foregoing information set forth in this
footnote is from the Fleet Boston Schedule 13G.
(8) A Schedule 13D was filed with the SEC on January 12, 2000, by Farallon
Capital Partners, L.P., Farallon Capital Institutional Partners, L.P.,
Farallon Capital Institutional Partners II, L.P., Farallon Capital
Institutional Partners III, L.P., Tinicum Partners, L.P. (together, the
"Partnerships"), Farallon Capital Management, L.L.C. (the "Management
Company"), Farallon Partners, L.L.C. (the General Partner of the
Partnerships), Enrique H. Boilini, David I. Cohen, Jospeh F. Downes,
William F. Duhamel, Fleur E. Fairman, Jason M. Fish, Andrew B. Fremder,
Richard B. Fried, William F. Mellin, Stephen L Millham, Meridee A. Moore,
Thomas F. Steyer and Mark C. Wehrly (the "Individual Reporting Persons")
reporting beneficial ownership of an aggregate of 436,100 shares of ITI
common stock (the "Farallon Schedule 13D"). The Partnerships reported
owning directly an aggregate of 256,400 shares and each Partnership has
shared voting and dispositive powers with respect to the shares held by it.
The General Partner has the power to direct the affairs of the
Partnerships, including the disposition of the proceeds of the sale of the
shares of ITI common stock. The Management Company is an investment adviser
to various accounts and has shared voting and dispositive powers with
respect to an aggregate of 179,700 shares which are held in the managed
accounts. All of the Individual Reporting Persons are managing members of
the General Partner and the Management Company (other than Fairman, who is
a managing member of only the General
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Partner). The Management Company, the General Partner and the Individual
Reporting Persons each disclaim beneficial ownership of any of the shares.
The address of the foregoing persons is c/o Farallon Capital Management,
LLC., One Maritime Plaza, Suite 1325, San Francisco California 94111. All
of the foregoing information set forth in this footnote is from the
Farallon Schedule 13D.
(9) Messrs. Ahn, Lewis, and John A. Morgan may be deemed to be affiliates of
MLGAL Partners, L.P. These individuals each disclaim beneficial ownership
of the shares directly owned by MLGAL Partners, L.P. The business address
of these individuals is MLGAL Partners, L.P., Two Greenwich Plaza,
Greenwich, Connecticut 06830.
(10) Includes options granted under the Stock Incentive Plan and the Director
Plan to purchase the following number of shares held by the following
individuals, which options are currently exercisable or will become
exercisable within 60 days of March 20, 2000: Mr. Auth (663,009), Mr.
Briskey (141,600), Mr. Hurst (75,600), Mr. McDowell (15,000), Mr. Ahn
(15,000), Mr. Lewis (15,000), Mr. Barry (15,000), Mr. Durant (15,700), Mr.
Grothe (16,400), and other executive officers as a group, 4 persons
(46,650). The business address of Mr. Auth is Interactive Technologies,
Inc., 2266 North Second Street, North St. Paul, Minnesota 55109.
(11) Messrs. Berwind, Boyda and Kosnik may be deemed to be affiliates of SLC.
Each of these individuals disclaims beneficial ownership of shares of ITI
common stock which may be deemed to be beneficially owned by SLC. The
business address of Messrs. Berwind and Kosnik is 3000 Centre Square West,
1500 Market Street, Philadelphia, Pennsylvania 19102. Mr. Boyda's business
address is 12345 SW Leveton Drive, Tualatin, Oregon 97062.
(12) Messrs. Berwind and Kosnik may be deemed to be affiliates of Berwind Group
Partners. Each of these individuals disclaims beneficial ownership of
shares of ITI common stock which may be deemed to be beneficially owned by
Berwind Group Partners. The business address of Messrs. Berwind and Kosnik
is 3000 Centre Square West, 1500 Market Street, Philadelphia, Pennsylvania
19102.
EXECUTIVE OFFICERS
CURRENT EXECUTIVE OFFICERS OF ITI
Information regarding the current executive officers of ITI is set forth
below.
THOMAS L. AUTH -- See "DIRECTORS OF THE COMBINED COMPANY" on page 122.
JOE HURST has been employed by CADDX since 1986 and has been President and
a director of CADDX since 1987. Mr. Hurst has been a director of ITI since May
12, 1999, and a Senior Vice President of ITI since May 22, 1997. He served as
President of the Security Industry Association, a security industry trade
association, from 1993 to 1995.
CHARLES E. BRISKEY has been employed by Interactive Technologies in various
capacities since July 1981. Mr. Briskey has served as Vice President, Operations
of Interactive Technologies since July 1985. He has been an executive officer of
ITI since March 1993. He has been a Senior Vice President of ITI since March
1996 and Treasurer of ITI since March 1993. He also serves as a director and
Vice President and Secretary of ITI International.
CHARLES A. DURANT has been an employee of ITI and Interactive Technologies
since January 1996. He became Secretary of ITI in March 1996 and was appointed
Vice President, General Counsel and Secretary of ITI in May 1997. Mr. Durant
also serves as Vice President,
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General Counsel and Secretary of Interactive Technologies, a director, Secretary
and Treasurer of CADDX, and a director, President and Secretary of ITI Finance.
From September 1989 until January 1996, he was an attorney at Winthrop &
Weinstine, P.A., which provides legal services to ITI. Prior to entering the
legal profession, he held various accounting positions with Honeywell Inc.
REED G. GROTHE has been Vice President, Sales of Interactive Technologies
since March 1996 and has been employed at Interactive Technologies since
February 1995. He was Executive Vice President, Sales and Administration for
General Office Products Company, a regional distributor of office equipment,
supplies and furnishings, from June 1990 to February 1995. From 1986 to 1989, he
was President of Executone of Minnesota, a regional distributor of telephone and
hospital communication systems.
GERALD U. KLASEN has been Vice President, International and Commercial
Sales of Interactive Technologies since March 1997. From 1977 to 1997, he held
various executive positions with Swiss Industrial Group (SIG), Neuhausen,
Switzerland, including Vice President Sales and marketing, SIG North America,
Vice President Sales and Marketing, Doboy Division, and Vice President positions
in administration and human resources. SIG is an international manufacturer and
marketer of sophisticated plant automation equipment.
DUANE PAULSON has been Vice President, Marketing of Interactive
Technologies since March 1996 and has been employed in various marketing
positions at Interactive Technologies since 1991. From August 1988 to March
1991, he was a management consultant to member utilities while on the staff of
the National Rural Electric Cooperative Association. From March 1980 to August
1988, he held various marketing and public relations positions with United Power
Association, a Minnesota utility. Mr. Paulson has been a director of the
Security Industry Association since 1995 and an executive officer of the
Security Industry Association since September 1998. He is also a director and
president elect of the Home Automation Association, a trade association, since
February 1999.
JACK A. REICHERT joined Interactive Technologies in February 1991 as
Controller and became an executive officer of ITI in September 1994. He now
serves as Vice President, Finance of ITI. Mr. Reichert also serves as Vice
President, Finance and Administration of Interactive Technologies and a
director, Vice President and Treasurer of ITI Finance. From May 1990 until
February 1991, he was Controller at American Coating Technology, Inc., a paper
coating concern. From 1983 until May 1990, Mr. Reichert held various accounting
positions with Donaldson Company, Inc., a multinational manufacturer of
filtration products and accessories. He is also a certified public accountant.
BRIAN K. SEEMANN has been employed by Interactive Technologies since August
1995. Mr. Seemann began at Interactive Technologies as Director of Engineering,
Alarm Systems. Since July of 1998, he has served as Vice President of
Engineering of Interactive Technologies. Prior to being employed at ITI, Mr.
Seemann has been employed in various engineering and management capacities in
the utility meter reading at Itron, Inc. and E.F. Johnson, semiconductor,
process control and aerospace industries at Rosemount, Inc.
EXECUTIVE OFFICERS OF THE COMBINED COMPANY
As of the date of this proxy statement, some of the executive officers of
the combined company have been selected. Additional executive officers may be
added. The executive officers who have been selected are:
KENNETH L. BOYDA will be President and Chief Executive Officer of the
combined company.
JOHN R. LOGAN will be Chief Financial Officer of the combined company. Mr.
Logan joined Sentrol, Inc. through the acquisition of Aritech Corp. in 1993 and
became Chief Financial Officer of
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SLC Technologies, Inc. in 1995. Prior to his career in finance with Aritech
Corp., he held several positions at Nortel Networks in both financial and
operational capacities. Mr. Logan, a business graduate of Sir George Williams
University in Montreal, is a Certified Management Accountant and is APICS
certified.
CLIFFORD LICKO will be Senior Vice President of Operations of the combined
company. Mr. Licko joined Sentrol in 1988 as the Director of Manufacturing. Mr.
Licko is currently responsible for worldwide manufacturing and logistics. He has
been instrumental in SLC's drive towards World Class Manufacturing. Mr. Licko is
a graduate of California State University and has an MA and MBA from Claremont
Graduate School.
M. BRIAN MCCARTHY will be Chief Executive Officer, Americas Group, of the
combined company. Mr. McCarthy joined SLC in 1997. Mr. McCarthy has extensive
experience in the security industry having held positions as Senior Vice
President of Marketing and Technology, Division President and Senior Vice
President Operations for ADT Security Systems from 1981 to 1996. Mr. McCarthy
graduated from Queens University and has a postgraduate degree in systems
engineering from University of Waterloo.
HUGUES WAUCQUEZ will be CEO, Europe/Africa Group of the combined company.
Mr. Waucquez joined Aritech Europe as Director of Finance and Administration in
1989 and became President of SLC Europe and Africa in 1993. Prior to joining
Aritech, Mr. Waucquez held a variety of positions in manufacturing, finance and
marketing at Champion Spark Plug Europe and in the audit department at KPMG in
Brussels. Mr. Waucquez is a Belgian citizen and possesses an undergraduate and
masters in economics from the University of Namur (Belgium).
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Thomas L. Auth, Chairman, CEO and President of ITI, is a director and
shareholder in EH Publishing, Inc., which publishes several periodicals,
including Popular Home Automation and CE Pro, operates a web site at
<electronichouse.com>, and coordinates the Home Automation Trade Show. Both
Interactive Technologies, Inc., and CADDX Controls, Inc., advertise in
periodicals published by EH Publishing from time to time. Additionally,
Interactive Technologies, Inc., advertises on EH Publishing's web site and
participates in the Home Automation Trade Show. During the 12-month period
ending September 30, 1999, subsidiaries of ITI have paid EH Publishing an
aggregate of $68,819 for advertising and trade show services. All of these
transactions have been negotiated at arms' length by employees of ITI's
subsidiaries and Mr. Auth had no personal involvement. Furthermore, the board of
directors of Interactive Technologies, Inc. has approved the transactions to
date and authorized the future placement, by Interactive Technologies and its
affiliates, of advertisements in trade periodicals published by EH Publishing at
customary rates.
In 1998, ITI appointed Aon Corporation its insurance broker for all
insurance lines. Perry J. Lewis, a Director of ITI, is a director of Aon
Corporation. Charles A. Durant, Vice President, General Counsel and Secretary of
ITI, had established a business relationship with representatives from Aon
Corporation over the last several years and had retained Aon Corporation without
consulting Mr. Lewis. Aon Corporation reported to ITI that it derives
approximately $62,000 in income annually as ITI's insurance broker. The board of
directors of ITI, other than Mr. Lewis, who abstained, has approved the
transactions to date between ITI and Aon Corporation and the continued use of
Aon Corporation as an insurance broker by ITI.
Berwind Property Group Inc., an affiliate of Berwind Group Partners, from
time to time provides real estate services and, through partnership affiliates,
leases facilities to SLC and its subsidiaries. Such transactions are conducted
on an arms-length basis.
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PRICE RANGE OF ITI COMMON STOCK AND DIVIDENDS
ITI common stock is listed on the Nasdaq National Market and is currently
traded under the symbol "ITII." The symbol "ILXI" has been reserved for use
after the merger to reflect the name change. The following table sets forth, for
the periods indicated, the high and low reported closing sale prices per share
of ITI common stock on the Nasdaq National Market and cash dividends declared
per share of ITI common stock.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
------------------
HIGH LOW
------- -------
<S> <C> <C>
1997
First Quarter....................................... $ 18 $ 13.25
Second Quarter...................................... 22.9 14.125
Third Quarter....................................... 29 22.90
Fourth Quarter...................................... 28.125 21.75
1998
First Quarter....................................... $26.125 $ 20
Second Quarter...................................... 33 26
Third Quarter....................................... 28.5 23
Fourth Quarter...................................... 32.125 24.50
1999
First Quarter....................................... $36.875 $29.875
Second Quarter...................................... 29.500 21.875
Third Quarter....................................... 30.063 20.562
Fourth Quarter...................................... 30.500 26.500
------- -------
</TABLE>
On September 28, 1999, the last trading day before ITI publicly announced
the execution of the merger agreement, the closing price per share of ITI common
stock on the Nasdaq National Market was $26.125. On March 22, 2000, the closing
price per share was $28.5625. The prices indicated for the ITI common stock may
not be indicative of the market price of the combined company's common stock.
ITI has never paid dividends on its common stock. ITI currently intends to
retain any and all future earnings for the operation and expansion of its
business and does not expect to pay any cash dividends on its common stock in
the foreseeable future.
AMENDMENTS TO ITI'S CERTIFICATE OF INCORPORATION
The certificate of incorporation and bylaws of ITI in effect immediately
prior to the merger will continue as the certificate of incorporation and bylaws
of the combined company. However, when the merger becomes effective, the
certificate of incorporation of ITI will be amended (a) to opt out of Section
203 of the Delaware General Corporation Law, (b) to increase the authorized
number of shares of capital stock of ITI to a total of 60,000,000 shares and (c)
to change the name of the corporation from "ITI Technologies, Inc." to
"Interlogix, Inc." These amendments are attached to this proxy statement as
Appendix C. By approving the merger and the merger agreement, ITI stockholders
will also be approving these amendments.
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OPT OUT OF SECTION 203 OF DELAWARE GENERAL CORPORATION LAW
When the merger becomes effective, the certificate of incorporation of ITI
will be amended to make the provisions of Section 203 of the Delaware General
Corporation Law inapplicable to the combined company. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the stockholder became an "interested stockholder," unless:
- prior to that date the board of directors of the corporation approved
either the "business combination" or the transaction which resulted in
the stockholder becoming an "interested stockholder," or
- upon completion of the transaction which resulted in the stockholder
becoming an "interested stockholder," the "interested stockholder" owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by
- persons who are directors and also officers and
- by employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer, or
- on or subsequent to that date the "business combination" is approved by
the board of directors and authorized at the annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the 'interested
stockholder."
A "business combination" includes certain mergers, stock or asset sales and
other transactions resulting in a financial benefit to the "interested
stockholder." An "interested stockholder" is a person who, together with
affiliates and associates, owns (or within three years, did own) 15% or more of
the corporation's voting stock.
Approval of the merger agreement will constitute approval of an amendment
to ITI's certificate of incorporation electing not to be governed by Section 203
of the Delaware General Corporation Law. Under the terms of Section 203, this
amendment will not be effective until 12 months after its adoption and will not
apply to any "business combination" between ITI and any person who becomes an
"interested stockholder" on or prior to the adoption.
INCREASE AUTHORIZED COMMON STOCK
The principal purpose and effect of the amendment to increase the
authorized number of shares of ITI common stock to 60,000,000 will be:
- to provide for a sufficient number of shares of ITI common stock for
issuance to SLC's sole stockholder in the merger and
- to authorize additional shares of common stock that may be issued upon
the approval by the board of directors of the combined company without
requiring stockholder approval
- to accommodate further issuances under employee benefit plans,
- for future equity financing, if any, and
- for use in connection with other acquisitions, if any.
ITI currently has 30,000,000 shares of common stock authorized. As of March
20, 2000, a total of 8,536,642 shares of ITI common stock were issued and
outstanding and an additional 6,208,701
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shares of ITI common stock were reserved for issuance. A total of 15,170,640
shares of ITI Common stock will be issued to SLC's sole stockholder in the
merger.
The additional shares of ITI common stock for which we are seeking
authorization would be a part of the existing class of ITI common stock and, if
and when issued, would have the same rights and privileges as the shares of ITI
common stock presently outstanding. These additional shares would not (and the
shares of ITI common stock presently outstanding do not) entitle stockholders to
preemptive or cumulative voting rights. The increase in authorized shares will,
in addition to providing sufficient capital stock for issuance in connection
with the merger, provide additional shares for general corporate purposes,
including stock dividends, raising additional capital, issuances pursuant to
employee and stockholder stock plans and possible future acquisitions. There
are, however, no present plans, understandings or agreements for issuing a
material number of additional shares of ITI common stock from the additional
shares of stock that we are asking you to authorize.
The issuance of shares of ITI common stock, including the additional shares
that would be authorized if the amendment to the certificate of incorporation is
adopted, may dilute the present equity ownership position of current ITI
stockholders and may be made without stockholder approval, unless otherwise
required by applicable laws or stock exchange regulations. Under existing Nasdaq
National Market regulations, with certain exemptions, approval of the holders of
a majority of the shares of ITI common stock would nevertheless be required in
connection with any transaction or series of related transactions that would
result in the original issuance of additional shares of ITI common stock, other
than in a public offering for cash, if:
- the ITI common stock (including securities convertible into ITI common
stock) has, or will have upon issuance, voting power equal to or in
number of shares of ITI common stock to be issued is or will be equal to
or in excess of 20% of the voting power outstanding before the issuance
of that ITI common stock,
- the number of shares of ITI common stock to be issued is or will be equal
to or in excess of 20% of the number of shares outstanding before the
issuance of the ITI common stock or
- the issuance would result in a change of control of ITI.
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PROPOSAL TO APPROVE STOCK INCENTIVE PLAN
GENERAL
We are asking you to approve a new stock incentive plan. This will be in
addition to ITI's existing stock incentive plan described below and in addition
to SLC's existing stock incentive plan.
EXISTING STOCK INCENTIVE PLAN. On May 11, 1992, ITI's board of directors
and stockholders approved the ITI Technologies, Inc. Long-Term Stock Incentive
Plan. This stock incentive plan permits the granting of awards to employees and
non-employee directors of ITI or its subsidiaries in the form of stock options,
restricted stock, restricted stock units and stock appreciation rights. The
total number of shares of ITI common stock for which awards may be granted under
the existing stock incentive plan is 2,500,000. Awards of options on virtually
all 2,500,000 shares available under the existing stock incentive plan have been
granted. ITI issued an aggregate of 870,109 options prior to ITI's initial
public offering on November 22, 1994. Of the options issued prior to the initial
public offering, ITI issued 625,700 in 1992 in connection with the acquisition
of Interactive Technologies by ITI.
Additionally, at the effective time of the merger, all outstanding options
to purchase SLC common stock will be converted into and become rights to
purchase a total of 758,532 shares of ITI common stock at an estimated weighted
average price of $16.53 per share.
NEW STOCK INCENTIVE PLAN. On January 11, 2000, the board of directors of
ITI adopted a new stock incentive plan, subject to stockholder approval. The
stock incentive plan provides for the grant of stock options and other
stock-based awards to employees, officers, consultants, independent contractors
and directors providing services to ITI and its subsidiaries as determined by a
committee of directors designated by the board of directors to administer the
plan.
If stockholders approve the new stock incentive plan, no further options
will be granted under either ITI's or SLC's existing stock incentive plans,
other than the 7,500 options SLC has committed to grant prior to the merger. See
"THE MERGER -- Interests of Persons in the Merger" on page 36. While the merger
agreement requires ITI to submit a proposal to its stockholders to approve the
new stock incentive plan, approval of the new stock incentive plan is not a
condition to closing the merger and completion of the merger is not a condition
of adopting the new stock incentive plan. If the stockholders approve the merger
and the stock incentive plan, ITI will not issue stock incentives prior to the
completion of the merger.
The following section summarizes the new stock incentive plan. We urge you
to read the complete plan, a copy of which is included in this proxy statement
as Appendix D.
SUMMARY OF THE STOCK INCENTIVE PLAN
PURPOSE. The purpose of the stock incentive plan is to promote the
interests of ITI and its stockholders by aiding ITI in attracting and retaining
directors, officers, employees, consultants and independent contractors capable
of assuring the future success of ITI, to offer such persons incentives to put
forth maximum efforts for the success of ITI's business and to afford such
persons an opportunity to acquire a proprietary interest in ITI.
ADMINISTRATION. The board of directors will designate a committee to
administer the stock incentive plan. The committee will have full power and
authority to determine when and to whom it will grant awards and the type,
amount, form of payment and other terms and conditions of each award, consistent
with the provisions of the stock incentive plan, including performance goals
which must be obtained in order for awards to vest. Subject to the provisions of
the stock incentive plan, the
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committee may amend or waive the terms and conditions of an outstanding award.
The committee will have full authority to interpret the stock incentive plan and
establish rules and regulations for the administration of the stock incentive
plan.
ELIGIBILITY. Any director, employee, consultant or independent contractor
providing services to ITI and its subsidiaries will be eligible to be selected
by the committee to receive awards under the stock incentive plan. As of
December 31, 1999, there were approximately 687 employees and four non-employee
directors who were eligible as a class to be selected by the committee to
receive awards under the stock incentive plan. As of the date of this proxy
statement, no consultants or independent contractors of ITI are expected to
participate in the stock incentive plan.
The number and type of awards that the committee will grant in the future
under the stock incentive plan to directors, officers, consultants, independent
contractors and employees are not determinable since the committee will make
these determinations in its discretion.
NUMBER OF SHARES. The stock incentive plan provides for the issuance of up
to 1,500,000 shares of ITI common stock, subject to adjustment in the event of a
stock dividend or other distribution, recapitalization, stock split, reverse
stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase or exchange of ITI common stock or other securities of
ITI, issuance of warrants or other rights to purchase ITI common stock or other
securities of ITI or other similar changes in the corporate structure or stock
of ITI. Shares of ITI common stock subject to awards under the stock incentive
plan that are not used or are forfeited because the terms and conditions of the
awards are not met, or because the award terminates without delivery of any
shares, may again be used for awards under the stock incentive plan. The shares
of ITI common stock issued under the stock incentive plan may be authorized but
unissued shares or shares acquired on the open market or otherwise. On March 22,
2000, the closing price for ITI common stock on the Nasdaq National Market was
$28.5625.
No participant may be granted stock options or stock appreciation rights
with exercise prices greater than or equal to the price of the ITI common stock
on the dates of grant, relating to more than 500,000 shares in the aggregate in
any calendar year. No participant may be granted in any calendar year other
types of awards contingent on the attainment of performance goals which are
valued at more than $3,000,000 on the dates of grant.
TYPES OF AWARDS AND CERTAIN TERMS AND CONDITIONS. The types of awards that
the committee may grant under the stock incentive plan are stock options, stock
appreciation rights, restricted stock, restricted stock units, performance
awards, and other stock grants and any combination thereof. The stock incentive
plan provides that all awards are to be evidenced by written agreements
containing the terms and conditions of the award. The committee may not amend or
discontinue any outstanding award without the consent of the holder of the award
if such action would adversely affect the rights of the holder. Except as
provided by the stock incentive plan, awards will not be transferable other than
by will or by the laws of descent and distribution. During the lifetime of a
participant, an award may be exercised only by the participant to whom such
award is granted. The committee may grant awards for no cash consideration or
for such minimal cash consideration as may be required by law. Generally, the
consideration ITI will receive for the grant of awards under the stock incentive
plan will be the participant's past, present or expected future contributions to
ITI.
STOCK OPTIONS. The committee may grant incentive stock options meeting the
requirements of Section 422 of the Code ("Incentive Stock Options") and
non-qualified options under the stock incentive plan. The committee will
determine the exercise price of any option granted under the stock incentive
plan, but in no event will the exercise price of an Incentive Stock Option be
less than 100% of the fair market value of the shares of ITI common stock on the
date of grant. Stock options will
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be exercisable at such times as the committee determines. Stock options may be
exercised in whole or in part by payment in full of the exercise price in cash
or such other form of consideration as the committee may specify, including
delivery of ITI common stock having a fair market value on the date of exercise
equal to the exercise price. The committee may grant reload options when a
participant pays the exercise price or tax withholding upon exercise of an
option by using shares of ITI common stock. A reload option would be a new
option to purchase the number of shares surrendered or withheld at a price equal
to the price of ITI common stock on the date of grant.
STOCK APPRECIATION RIGHTS. The committee may grant stock appreciation
rights exercisable at such times and subject to such conditions or restrictions
as the committee may determine. Upon exercise of a stock appreciation right by a
holder, the holder is entitled to receive the excess of the fair market value of
one share of ITI common stock on the date of exercise over the fair market value
of one share of ITI common stock on the date of grant. The payment may be made
in cash or shares of ITI common stock, or other form of payment, as determined
by the committee.
RESTRICTED STOCK AND PHANTOM SHARES. The committee may grant shares of
restricted stock and phantom shares subject to such restrictions and terms and
conditions as the committee may impose. Shares of restricted stock granted under
the stock incentive plan will be evidenced by stock certificates, which will be
held by ITI, and the committee may, in its discretion, grant voting and dividend
rights with respect to such shares. No shares of stock will be issued at the
time of award of phantom shares. A phantom share will have a value equal to the
fair market value of one share of ITI common stock and may include, if so
determined by the committee, the value of any dividends or other rights or
property received by stockholders after the date of grant of the phantom share.
The committee generally has the right to waive any vesting requirements or to
accelerate the vesting of restricted stock or phantom shares.
PERFORMANCE AWARDS. A performance award will entitle the holder to receive
payments upon the achievement of specified performance goals. The committee will
determine the terms and conditions of a performance award, including the
performance goals to be achieved during the performance period, the length of
the performance period and the amount and form of payment of the performance
award. A performance award will be denominated in shares of ITI common stock.
PERFORMANCE GOALS. A performance goal is a goal that has been established
by the committee that if met by the end of a performance period designated by
the committee will result in an award becoming vested. The committee will have
sole discretion to determine the specific targets within each category of
performance goals, and whether such performance goals have been achieved. With
respect to any participant who may be subject to the $1 million annual limit on
deductible compensation under Section 162(m) of the Code, such performance goals
may include, among other things:
- the price of ITI common stock,
- the market share of ITI, its subsidiaries or affiliates (or any of their
business units),
- sales by ITI, its subsidiaries or affiliates (or any of their business
units),
- earnings per share of ITI common stock,
- return on equity of ITI, or
- costs of ITI, its subsidiaries or affiliates (or any of their business
units).
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OTHER STOCK GRANTS. The committee may otherwise grant shares of ITI common
stock as it deems to be consistent with the purpose of the stock incentive plan.
The committee will determine the terms and conditions of such other stock
grants.
DURATION, TERMINATION AND AMENDMENT. Unless the board of directors earlier
discontinues or terminates the stock incentive plan, the committees may not
grant awards under the stock incentive plan 10 years after the plan's effective
date. The stock incentive plan permits the board of directors to amend, alter,
suspend, discontinue or terminate the stock incentive plan at any time, except
that prior stockholder approval will be required for any amendment to the stock
incentive plan that requires stockholder approval under the rules or regulations
of the Nasdaq National Market System or any securities exchange that are
applicable to ITI or under Sections 422 or 162(m) of the Internal Revenue Code
(related to Incentive Stock Options and the deductibility of certain executive
compensation).
FEDERAL TAX CONSEQUENCES
The following is a summary of the principal federal income tax consequences
generally applicable to awards under the stock incentive plan.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. The grant of an option or
stock appreciation right is not expected to result in any taxable income for the
recipient. The holder of an incentive stock option generally will have no
taxable income upon exercising the Incentive Stock Option (except that a
liability may arise pursuant to the alternative minimum tax), and ITI will not
be entitled to a tax deduction when an incentive stock option is exercised. Upon
exercising a nonqualified stock option, the optionee must recognize ordinary
income equal to the excess of the fair market value of the shares of ITI common
stock acquired on the date of exercise over the exercise price, and ITI will be
entitled at that time to a tax deduction for the same amount. Upon exercising a
stock appreciation right, the amount of any cash received and the fair market
value on the exercise date of any shares of ITI common stock received are
taxable to the recipient as ordinary income and deductible by ITI. The tax
consequence to an optionee upon a disposition of shares acquired through the
exercise of an option will depend on how long the shares have been held and upon
whether such shares were acquired by exercising an incentive stock option or by
exercising a nonqualified stock option or stock appreciation right. Generally,
there will be no tax consequence to ITI in connection with disposition of shares
acquired under an option, except that ITI may be entitled to a tax deduction in
the case of a disposition of shares acquired under an incentive stock option
before the applicable incentive stock option holding periods set forth in the
Internal Revenue Code have been satisfied.
OTHER AWARDS. With respect to other awards granted under the stock
incentive plan that are payable either in cash or shares of ITI common stock
that are either transferable or not subject to substantial risk of forfeiture,
the holder of such an award must recognize ordinary income equal to the excess
of (a) the cash or the fair market value of the shares of ITI common stock
received (determined as of the date of such receipt) over (b) the amount (if
any) paid for such shares of ITI common stock by the holder of the award, and
ITI will be entitled at that time to a deduction for the same amount. With
respect to an award that is payable in shares of ITI common stock that are
restricted as to transferability and subject to substantial risk of forfeiture,
unless a special election is made pursuant to the Internal Revenue Code, the
holder of the award must recognize ordinary income equal to the excess of (i)
the fair market value of the shares of ITI common stock received (determined as
of the first time the shares become transferable or not subject to substantial
risk of forfeiture, whichever occurs earlier) over (ii) the amount (if any) paid
for such shares of ITI
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common stock by the holder, and ITI will be entitled at that time to a tax
deduction for the same amount.
SATISFACTION OF TAX OBLIGATIONS. Under the stock incentive plan, the
committee may permit participants receiving or exercising awards, subject to the
discretion of the committee and upon such terms and conditions as it may impose,
to surrender shares of ITI common stock (either shares received upon the receipt
or exercise of the award or shares previously owned by the optionee) to ITI to
satisfy federal and state tax obligations.
SECTION 162(M) REQUIREMENTS. The stock incentive plan has been designed to
meet the requirements of Section 162(m) of the Code regarding deductibility of
executive compensation.
RECOMMENDATION OF THE BOARD
THE ITI BOARD OF DIRECTORS RECOMMENDS THAT ITI STOCKHOLDERS VOTE FOR
APPROVAL OF THE STOCK INCENTIVE PLAN. The persons named in the accompanying
proxy intend to vote the proxies held by them in favor of such proposal, unless
otherwise directed. Adoption of the stock incentive plan requires the
affirmative vote, in person or by proxy, of a majority of the shares of ITI
common stock present and entitled to vote at the special meeting.
INDEPENDENT ACCOUNTANTS
Representatives of PricewaterhouseCoopers LLP, ITI's independent
accountants, are expected to be present at the meeting where they will be
available to respond to appropriate questions and have the opportunity to make a
statement if they so desire.
FUTURE STOCKHOLDER PROPOSALS
ITI's annual meeting of stockholders, previously planned for May 2000, has
been postponed. Under the Securities Exchange Act of 1934, ITI's stockholders
may submit proposals to be considered at an annual stockholders' meeting. Rule
14a-8 under the Exchange Act sets forth the procedure and requirements for
requesting that ITI include these proposals in its proxy statement. Under that
rule, in the case where an annual meeting has been changed by more than 30 days
from the date of the previous year's meeting, as will be the case for ITI's
annual meeting, the deadline for submitting proposals under Rule 14a-8 is a
reasonable time before the company begins to print and mail its proxy materials.
Stockholders also may submit proposals to be voted on at an annual meeting
without having the proposals included in ITI's proxy statement. These proposals
are known as "non-Rule 14a-8 proposals." Rule 14a-4(c)(1) under the Exchange Act
explains when the proxies named by a company to vote at an annual meeting may
exercise their discretionary voting powers for proposals not included in the
company's proxy statement, including non-Rule 14a-8 proposals. Rule 14a(c)(1)
was recently amended to provide that proxies named by a company to vote at an
annual meeting may be given discretionary authority to vote all proxies with
respect to any non-Rule 14a-8 proposals that properly come before the annual
meeting for a vote of the stockholders if (i) in the case of a company such as
ITI that has changed the date of its annual meeting by more than 30 days from
the date of the previous year's meeting, the company has not received advance
notice of the proposal a reasonable time before it mails its proxy materials,
and (ii) stockholders have been notified of this advance notice requirement.
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You are hereby notified that, for the annual meeting of stockholders to be
held later this year, ITI's proxies will be able to exercise their discretionary
voting authority with respect to any non-Rule 14a-8 proposal not submitted to
ITI a reasonable time before ITI mails its proxy materials.
Any Rule 14a-8 proposal that a stockholder wishes to have considered for
inclusion in ITI's proxy solicitation materials for the annual meeting of
stockholders in 2000, and notice of any non-Rule 14a-8 stockholder proposals,
should be given in writing to the Secretary of ITI, Mr. Charles A. Durant, ITI
Technologies, Inc., 2266 Second Street North, North St. Paul, Minnesota 55109.
Due to the technical nature of the rights of stockholders and ITI in this
area, a stockholder desiring to make a stockholder proposal should consider
consulting his or her personal legal counsel.
WHERE YOU CAN FIND MORE INFORMATION ON ITI
ITI files reports, proxy statements and other information with the SEC
under the Exchange Act. You may read and copy this information at the following
locations of the SEC:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-2511
</TABLE>
You may also obtain copies of this information by mail from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, at prescribed rates.
The SEC also maintains an Internet world wide web site that contains
reports, proxy statements and other information about issuers, like ITI, which
file electronically with the SEC. The address of that site is
http://www.sec.gov.
The SEC allows ITI to "incorporate by reference" information into this
proxy statement. This means that ITI can disclose important information to you
by referring you to another document filed separately with the SEC. The
information incorporated by reference is considered to be a part of this proxy
statement, except for any information that is superseded by information that is
included directly in this document.
This proxy statement incorporates by reference the documents listed below
that ITI has previously filed with the SEC. They contain important information
about ITI and its financial condition.
<TABLE>
<CAPTION>
ITI SEC FILINGS PERIOD
- --------------- ------
<S> <C>
Annual Report on Form 10-K...................... Year Ended December 31, 1998
Quarterly Reports on Form 10-Q.................. Quarter ended March 31, 1999
Quarter ended June 30, 1999
Quarter ended September 30, 1999
Current Reports on Form 8-K and Form 8-K/A...... Filed September 30, 1999
Filed October 12, 1999
Proxy Statement pursuant to Section 14(a)....... Filed April 8, 1999
</TABLE>
ITI incorporates by reference additional documents that it may file with
the SEC between the date of this proxy statement and the date of the special
meeting. These documents include periodic
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reports, such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K, as well as proxy statements.
DOCUMENTS INCORPORATED BY REFERENCE ARE AVAILABLE FROM ITI WITHOUT CHARGE,
EXCLUDING ANY EXHIBITS TO THOSE DOCUMENTS UNLESS THE EXHIBIT IS SPECIFICALLY
INCORPORATED BY REFERENCE AS AN EXHIBIT IN THIS PROXY STATEMENT. You can obtain
documents incorporated by reference in this proxy statement by requesting them
in writing or by telephone from Georgeson Shareholder Communications Inc. at the
following address:
GEORGESON SHAREHOLDER COMMUNICATIONS INC.
17 State Street
New York, NY 10004
Call toll free: (800) 223-2064
If you would like to request documents, please do so by April 27, 2000 to
receive them before the special meeting. If you request any incorporated
documents from Georgeson, Georgeson will mail them to you by first class mail,
or another equally prompt means, within one business day after we receive your
request.
NEITHER ITI NOR SLC HAS AUTHORIZED ANYONE TO GIVE ANY INFORMATION OR MAKE
ANY REPRESENTATION ABOUT THE MERGER OR ITI OR SLC THAT IS DIFFERENT FROM, OR IN
ADDITION TO, THAT CONTAINED IN THIS PROXY STATEMENT OR IN ANY OF THE MATERIALS
THAT ARE INCORPORATED INTO THIS DOCUMENT. THEREFORE, IF ANYONE DOES GIVE YOU
INFORMATION OF THIS SORT, YOU SHOULD NOT RELY ON IT. THE INFORMATION CONTAINED
IN THIS DOCUMENT SPEAKS ONLY AS OF THE DATE OF THIS DOCUMENT UNLESS THE
INFORMATION SPECIFICALLY INDICATES THAT ANOTHER DATE APPLIES.
138
<PAGE> 146
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................... F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Income......................... F-4
Consolidated Statements of Stockholder's Equity........... F-5
Consolidated Statements of Cash Flows..................... F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-7 - F-25
SCHEDULE:
SCHEDULE II
Valuation and Qualifying Accounts......................... F-26
</TABLE>
F-1
<PAGE> 147
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,
1998 and 1997, 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, 1998. 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 generally accepted auditing
standards. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements are presented for purposes of complying with the Securities
and Exchange Commissions rules and are not part of the basic financial
statements. These schedules have been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
February 19, 1999
F-2
<PAGE> 148
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- OCTOBER 2,
1997 1998 1999
------ ------ -----------
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 17.9 $ 12.0 $ 14.0
Receivables, less reserves of $2.9 in 1997, $2.6 in
1998 and $2.6 in 1999............................... 61.6 71.5 85.5
Inventories............................................ 33.2 35.9 41.8
Prepaid expenses....................................... 2.5 3.4 4.0
Deferred income taxes.................................. 3.8 2.7 2.4
------ ------ ------
Total current assets................................ 119.0 125.5 147.7
PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated
depreciation........................................... 22.9 26.9 33.2
OTHER ASSETS............................................. 7.4 4.8 6.6
INTANGIBLE ASSETS:
Patents and other deferred charges..................... 2.4 2.3 2.6
Acquired technology.................................... -- -- 12.8
Goodwill, net of accumulated amortization of $25.9 in
1997, $33.3 in 1998 and $39.8 in 1999............... 118.7 114.1 115.9
------ ------ ------
$270.5 $273.6 $318.8
====== ====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt...................... $ 1.3 $ 0.2 $ --
Accounts payable....................................... 22.4 31.2 29.2
Accrued expenses....................................... 36.8 39.3 38.5
------ ------ ------
Total current liabilities........................... 60.5 70.7 67.7
LONG-TERM DEBT, less current portion..................... 79.8 53.1 87.8
OTHER NONCURRENT LIABILITIES............................. 2.6 2.3 1.9
------ ------ ------
Total liabilities................................... 142.9 126.1 157.4
------ ------ ------
COMMITMENTS AND CONTINGENCIES (Note 14)
STOCKHOLDER'S EQUITY:
Common stock, par value $.005, 2,000,000 shares
authorized, 1,000,000 issued and outstanding........ -- -- --
Paid-in capital........................................ 107.5 107.5 107.5
Retained earnings...................................... 24.4 41.6 58.9
Cumulative translation adjustment...................... (4.3) (1.6) (5.0)
------ ------ ------
Total stockholder's equity.......................... 127.6 147.5 161.4
------ ------ ------
$270.5 $273.6 $318.8
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 149
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, ------------------------
-------------------------- OCTOBER 3, OCTOBER 2,
1996 1997 1998 1998 1999
------ ------ ------ ---------- ----------
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SALES................................. $275.7 $326.0 $375.6 $269.1 $309.2
COST OF SALES......................... 161.9 184.6 206.2 150.6 174.4
------ ------ ------ ------ ------
Gross profit..................... 113.8 141.4 169.4 118.5 134.8
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................ 76.3 91.6 104.7 76.7 83.4
RESEARCH AND DEVELOPMENT EXPENSES..... 7.5 10.6 13.4 10.1 12.8
AMORTIZATION OF INTANGIBLE ASSETS..... 8.0 8.7 8.1 6.1 6.5
------ ------ ------ ------ ------
Operating income................. 22.0 30.5 43.2 25.6 32.1
OTHER (INCOME) EXPENSE:
Interest expense, net................. 7.8 9.7 4.8 3.8 3.6
Other, net............................ (0.2) 0.4 0.8 0.1 (2.6)
------ ------ ------ ------ ------
Income before income taxes....... 14.4 20.4 37.6 21.7 31.1
PROVISION FOR INCOME TAXES............ 6.9 10.3 16.9 10.2 13.8
------ ------ ------ ------ ------
Net income....................... $ 7.5 $ 10.1 $ 20.7 $ 11.5 $ 17.3
====== ====== ====== ====== ======
EARNINGS PER SHARE:
Basic............................... $ 7.50 $10.14 $20.67 $11.52 $17.35
Diluted............................. $ 7.50 $10.14 $20.62 $11.50 $17.28
WEIGHTED AVERAGE SHARES OUTSTANDING:
(in thousands)
Basic............................... 1,000 1,000 1,000 1,000 1,000
Diluted............................. 1,000 1,000 1,002 1,002 1,004
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 150
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------------
CAPITAL CUMULATIVE TOTAL
NUMBER STOCK, $.005 PAID-IN RETAINED TRANSLATION STOCKHOLDER'S
OF SHARES PAR VALUE CAPITAL EARNINGS ADJUSTMENT EQUITY
--------- ------------ ------- -------- ----------- -------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996................ 1,000,000 $ -- $ 49.0 $ 6.8 $ 2.5 $ 58.3
Comprehensive income:
Net income............................ -- -- -- 7.5 -- 7.5
Cumulative translation adjustment..... -- -- -- -- (2.3) (2.3)
------
Total comprehensive income......... 5.2
======
BALANCE, DECEMBER 31, 1996.............. 1,000,000 -- 49.0 14.3 0.2 63.5
Comprehensive income:
Net income............................ -- -- -- 10.1 -- 10.1
Cumulative translation adjustment..... -- -- -- -- (4.5) (4.5)
------
Total comprehensive income......... 5.6
======
Capital contribution (Note 1)........... -- -- 58.5 -- -- 58.5
--------- ---------- ------ ----- ----- ------
BALANCE, DECEMBER 31, 1997.............. 1,000,000 -- 107.5 24.4 (4.3) 127.6
Comprehensive income:
Net income............................ -- -- -- 20.7 -- 20.7
Cumulative translation adjustment..... -- -- -- -- 2.7 2.7
------
Total comprehensive income......... 23.4
======
Dividend ($3.50 per share).............. -- -- -- (3.5) -- (3.5)
--------- ---------- ------ ----- ----- ------
BALANCE, DECEMBER 31, 1998.............. 1,000,000 -- 107.5 41.6 (1.6) 147.5
Comprehensive income:
Net income (unaudited)................ -- -- -- 17.3 -- 17.3
Cumulative translation adjustment
(unaudited)........................ -- -- -- -- (3.4) (3.4)
------
Total comprehensive income
(unaudited)...................... 13.9
--------- ---------- ------ ----- ----- ======
BALANCE, OCTOBER 2, 1999 (unaudited).... 1,000,000 $ -- $107.5 $58.9 $(5.0) $161.4
========= ========== ====== ===== ===== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 151
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, -----------------------
------------------------ OCTOBER 3, OCTOBER 2,
1996 1997 1998 1998 1999
------ ------ ------ ---------- ----------
(UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 7.5 $ 10.1 $ 20.7 $ 11.5 $ 17.3
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization..................... 15.2 16.3 16.6 12.1 13.9
Deferred income tax provision..................... 0.2 1.2 1.1 0.5 0.4
Gain on the sale of capital assets................ (0.2) -- (0.1) -- (0.7)
Changes in assets and liabilities, net of effects
from acquisitions --
Accounts receivable............................. (3.9) (4.9) (9.8) (8.0) (10.4)
Inventories..................................... (2.2) 5.5 (2.6) 0.7 (2.3)
Prepaid expenses................................ 0.1 (0.2) (0.8) (2.0) (0.4)
Other assets.................................... (1.7) 2.4 2.8 0.9 (2.0)
Accounts payable................................ 2.1 1.9 8.7 1.2 (4.1)
Accrued expenses................................ 3.5 6.4 1.9 (2.7) (3.7)
------ ------ ------ ------ ------
Net cash provided by operating activities.... 20.6 38.7 38.5 14.2 8.0
------ ------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of subsidiaries, net of cash acquired of
$1.9, $0.1, $0.2, $0.2 and $1.2................... (51.2) (19.7) (0.6) (0.6) (21.0)
Proceeds from sale of capital assets................. 0.2 0.1 0.7 0.7 1.3
Capital expenditures................................. (8.9) (8.4) (12.7) (8.2) (14.1)
Other, net........................................... (0.8) (1.8) (0.9) (1.3) (4.0)
------ ------ ------ ------ ------
Net cash used in investing activities........ (60.7) (29.8) (13.5) (9.4) (37.8)
------ ------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings............................. 0.7 92.5 2.5 19.5 34.3
Repayment of long-term debt.......................... (6.8) (16.8) (30.9) (27.3) (1.8)
Net borrowing (repayment) from Berwind............... 49.8 (71.0) -- -- --
Dividends paid....................................... -- -- (3.5) (3.5) --
------ ------ ------ ------ ------
Net cash provided by (used in) financing
activities................................ 43.7 4.7 (31.9) (11.3) 32.5
------ ------ ------ ------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................ (0.5) (1.0) 1.0 0.9 (0.7)
------ ------ ------ ------ ------
Net increase (decrease) in cash and cash
equivalents............................... 3.1 12.6 (5.9) (5.6) 2.0
CASH AND CASH EQUIVALENTS, Beginning of period......... 2.2 5.3 17.9 17.9 12.0
------ ------ ------ ------ ------
CASH AND CASH EQUIVALENTS, End of period............... $ 5.3 $ 17.9 $ 12.0 $ 12.3 $ 14.0
====== ====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 152
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF OCTOBER 2, 1999, AND FOR THE NINE MONTHS ENDED
OCTOBER 2, 1999 AND OCTOBER 3, 1998 IS UNAUDITED)
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 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. 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 exchanged, 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, Berwind Group Partners will control ITI.
Berwind Group Partners' ownership interest will be dependent upon the number of
ITI shares exchanged.
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 is treated as being acquired by the Company for
accounting purposes. The total estimated purchase price of the acquisition will
be computed based on: (1) an estimate of the fair market value of 50% of the
outstanding shares of ITI
F-7
<PAGE> 153
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock at the Effective Time of the merger, (2) the cost of the exchange
of ITI common stock and options (assuming that the ITI stockholders elect to
exchange an aggregate of 50% of ITI common stock outstanding for cash at $36.50
per share and that each option holder elects to exchange 50% of such option
holder's options for cash at $36.50 per share, net of the exercise price), and
(3) the direct expenses of the merger. 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 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, receipt by the
Company of a supplemental ruling from the IRS relating to the 1997 spin-off from
Berwind, approval by regulatory authorities, and customary closing conditions.
The transaction is expected to close in the first or 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. The first, second, and third quarters of 1998 ended on
April 4, July 4, and October 3, respectively. All interim quarters include 13
weeks.
INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements as of October 2, 1999
and October 3, 1998 are unaudited, and in the opinion of management include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position and results of operations for those
interim periods. The results of operations for the nine months ended October 2,
1999 and October 3, 1998 are not necessarily indicative of the results to be
expected for any other interim period, or the full year.
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.
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.
F-8
<PAGE> 154
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1996, 1997 and 1998, (gains) and losses
from these foreign currency transactions are $(196,000), $162,000 and $386,000,
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.
Development costs and implementation costs are expensed until the Company has
determined that the software has probable future benefits. Thereafter, external
direct costs of materials and services and qualifying internal costs of
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.
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.
F-9
<PAGE> 155
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 1997, Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share." SFAS No. 128 requires the disclosure of Basic and Diluted
Earnings per Share ("EPS"). Basic EPS is calculated using income available to
common stockholders divided by the weighted average of common shares outstanding
during the year. Diluted EPS is similar to Basic EPS except that the weighted
average of common shares outstanding is increased to include the number of
additional common shares that would have been outstanding if the dilutive
potential common shares, such as options, had been issued. The treasury stock
method is used to calculate dilutive shares. See Note 5 for more information
regarding the earnings per share calculation.
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which requires companies to report all changes in equity, except those
resulting from investment by owners and distribution to owners, in a financial
statement for the period in which they are recognized. The Company has chosen to
disclose comprehensive income, which encompasses net income and translation
adjustments, in the consolidated statement of stockholder's equity. Prior years
have been restated to conform with the SFAS No. 130 requirements.
F-10
<PAGE> 156
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which defines the disclosure
requirements for operating segments as components of an enterprise for which
separate financial information is available that is evaluated regularly by the
chief operating decision maker. (See Note 9)
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 1996, the Company acquired Fiber Options, Inc., a manufacturer of fiber optic
equipment, Casi-Rusco, Inc. a developer and manufacturer of integrated
computer-based security systems and Scantronic, Inc., a developer and
manufacturer of components for security systems. 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. All the
related acquisitions have been accounted for under the purchase method of
accounting. The total
F-11
<PAGE> 157
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
costs of the acquired businesses were $53,055,000 and $19,795,000 and $776,000
and $22,164,000 in 1996, 1997, 1998, and 1999, respectively, with the purchase
prices allocated as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------- OCTOBER 2,
1996 1997 1998 1999
------ ------ ----- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Current assets............................. $17.7 $ 6.7 $0.6 $ 8.4
Property, plant and equipment.............. 2.9 0.8 -- 0.8
Other assets............................... 2.5 -- -- --
Goodwill................................... 40.4 15.7 0.5 19.6
Liabilities assumed........................ (10.4) (3.4) (0.3) (6.6)
----- ----- ---- -----
Cash paid................................ $53.1 $19.8 $0.8 $22.2
===== ===== ==== =====
</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 the January 1 of the year
prior to the acquisition:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
---------------- OCTOBER 2,
1997 1998 1999
------ ------ -----------
(DOLLARS IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Sales............................................ $335.6 $395.9 $313.4
Net income....................................... 10.8 20.7 18.2
Earnings per share:
Basic.......................................... $10.77 $20.70 $18.18
Diluted........................................ $10.77 $20.67 $18.10
</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.
F-12
<PAGE> 158
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORY:
Inventory is comprised of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- OCTOBER 2,
1997 1998 1999
----- ----- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Raw materials........................................ $21.2 $20.6 $23.1
Work in process...................................... 2.1 3.1 5.7
Finished goods....................................... 13.3 15.4 17.0
----- ----- -----
36.6 39.1 45.8
Less-Inventory reserve............................... (3.4) (3.2) (4.0)
----- ----- -----
$33.2 $35.9 $41.8
===== ===== =====
</TABLE>
The increase in the inventory reserve in 1999 is related primarily to the
current year acquisitions.
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is comprised of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- OCTOBER 2,
1997 1998 1999
----- ----- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Land................................................. $ 0.9 $ 0.4 $ 0.4
Buildings............................................ 2.5 2.2 1.6
Machinery and equipment.............................. 31.3 37.7 44.8
Furniture, fixtures and other........................ 16.0 22.2 27.4
----- ----- -----
50.7 62.5 74.2
Less -- Accumulated depreciation..................... 27.8 35.6 41.0
----- ----- -----
$22.9 $26.9 $33.2
===== ===== =====
</TABLE>
5. EARNINGS PER SHARE:
SFAS No. 128, "Earnings Per Share," requires two presentations of earnings
per share ("EPS") -- basic and diluted. 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.
F-13
<PAGE> 159
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the differences between basic weighted
average shares outstanding and diluted weighted average shares outstanding used
to compute diluted EPS:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, -----------------------
----------------------- OCTOBER 3, OCTOBER 2,
1996 1997 1998 1998 1999
----- ------ ------ ---------- ----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net income............................. $ 7.5 $ 10.1 $ 20.7 $ 11.5 $ 17.3
Earnings per common share:
Basic................................ $7.50 $10.14 $20.67 $11.52 $17.35
Diluted.............................. $7.50 $10.14 $20.62 $11.50 $17.28
Weighted average shares outstanding:
(in thousands)
Basic................................ 1,000 1,000 1,000 1,000 1,000
Dilutive impact of options........... -- -- 2 2 4
----- ------ ------ ------ ------
Diluted.............................. 1,000 1,000 1,002 1,002 1,004
===== ====== ====== ====== ======
</TABLE>
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 tables show the components of income before income taxes and
the provision for income taxes:
INCOME BEFORE INCOME TAXES:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997 1998
------ ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Domestic....................................... $ 2.6 $ 9.9 $25.6
Foreign........................................ 11.8 10.5 12.0
------ ----- -----
$14.49 $20.4 $37.6
====== ===== =====
</TABLE>
F-14
<PAGE> 160
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROVISION FOR INCOME TAXES:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1997 1998
----- ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Federal:
Current........................................ $2.6 $ 3.8 $ 9.3
Deferred....................................... .2 1.2 1.1
---- ----- -----
2.8 5.0 10.4
---- ----- -----
State:
Current........................................ 0.6 1.3 2.0
Deferred....................................... .0 .0 .0
---- ----- -----
0.6 1.3 2.0
---- ----- -----
Foreign:
Current........................................ 3.3 4.0 4.5
Deferred....................................... .2 .0 .0
---- ----- -----
3.5 4.0 4.5
---- ----- -----
$6.9 $10.3 $16.9
==== ===== =====
</TABLE>
Major differences between the Federal statutory rate and the effective tax
rate are:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, ------------------------
------------------------- OCTOBER 3, OCTOBER 2,
1996 1997 1998 1998 1999
----- ----- ----- ---------- ----------
<S> <C> <C> <C> <C> <C>
United States federal statutory
rate............................. 35.0% 35.0% 35.0% 35.0% 35.0%
State taxes, net of federal tax
benefit.......................... 2.6 4.2 3.5 4.2 3.3
Impact of foreign income tax
rates............................ (0.9) (1.3) 0.2 1.1 1.3
Non-tax deductible goodwill
amortization..................... 12.4 10.0 5.9 7.3 5.4
Other.............................. (1.4) 2.5 0.4 3.2 (0.7)
---- ---- ---- ---- ----
Effective tax rate................. 47.7% 50.4% 45.0% 50.8% 44.3%
==== ==== ==== ==== ====
</TABLE>
F-15
<PAGE> 161
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The significant components of deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1998
------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Gross deferred tax assets:
Warranty reserves.................................. $ 0.6 $ 1.1
Inventory and receivables reserve.................. 1.3 0.8
Net operating loss carry forwards.................. 2.5 1.9
Foreign tax credits................................ 0.1 0.8
Other accruals and miscellaneous................... 2.6 2.0
Valuation allowance................................ (1.0) (1.7)
----- -----
Deferred tax assets.................................. 6.1 4.9
----- -----
Gross deferred tax liabilities:
Plant and equipment................................ 0.4 0.4
Other.............................................. 0.7 0.6
----- -----
Deferred tax liabilities............................. 1.1 1.0
----- -----
Net deferred income tax asset...................... $ 5.0 $ 3.9
===== =====
</TABLE>
The deferred tax asset at December 31, 1997 and 1998 includes $2,489,000
and $1,882,000, 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 $779,000 as of December 31, 1998, 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, 1997 and 1998 amounted to $30,558,000 and
$41,296,000, respectively. As of December 31, 1998, an estimated $700,000 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 in December of 1997. 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. None of the options issued have been
exercised.
F-16
<PAGE> 162
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 $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 periods 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.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, ------------------------
------------------------- OCTOBER 3, OCTOBER 2,
1996 1997 1998 1998 1999
----- ------ ------ ---------- ----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net income
As reported.......................... $ 7.5 $ 10.1 $ 20.7 $ 11.5 $ 17.3
Pro forma............................ $ 7.5 $ 10.1 $ 18.3 $ 9.6 $ 15.7
Earnings per share:
As reported:
Basic............................. $7.50 $10.14 $20.67 $11.52 $17.35
Diluted........................... $7.50 $10.14 $20.62 $11.50 $17.28
Pro forma:
Basic............................. $7.50 $10.14 $18.28 $ 9.59 $15.72
Diluted........................... $7.50 $10.14 $18.24 $ 9.57 $15.66
</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
</TABLE>
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 $1,235,000 consist primarily of listed stocks, fixed income
securities, cash and cash equivalents. The net periodic benefit cost is
immaterial to the financial
F-17
<PAGE> 163
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
statements. At December 31, 1998, one of the company's pension plans had an
unfunded pension liability in the amount of $262,000.
During 1996, 1997 and 1998, the Company recorded expense of $462,000,
$719,000, and $679,000, 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 & 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.
F-18
<PAGE> 164
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, ------------------------
-------------------------- OCTOBER 3, OCTOBER 2,
1996 1997 1998 1998 1999
------ ------ ------ ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
SALES:
Americas:
Customer......................... $161.1 $198.8 $229.1 $159.7 $195.2
Intersegment..................... 17.5 24.8 26.2 19.9 19.4
Europe and Africa:
Customer......................... 108.1 116.5 136.2 100.2 104.3
Intersegment..................... 1.4 1.5 1.3 0.9 0.7
All other........................... (12.4) (15.6) (17.2) (11.6) (10.4)
------ ------ ------ ------ ------
Total sales...................... $275.7 $326.0 $375.6 $269.1 $309.2
====== ====== ====== ====== ======
OPERATING INCOME(a):
Americas............................ $ 23.4 $ 34.8 $ 37.4 $ 24.1 $ 31.0
Europe.............................. 16.7 17.0 21.7 15.4 14.4
All other........................... (1.9) (2.8) (3.9) (3.4) (2.2)
------ ------ ------ ------ ------
Total operating income........... $ 38.2 $ 49.0 $ 55.2 $ 36.1 $ 43.2
====== ====== ====== ====== ======
DEPRECIATION:
Americas............................ $ 4.6 $ 4.9 $ 5.4 $ 3.8 $ 5.1
Europe.............................. 2.6 2.7 3.0 2.1 2.1
All other........................... -- -- 0.1 0.1 0.2
------ ------ ------ ------ ------
Total depreciation............... $ 7.2 $ 7.6 $ 8.5 $ 6.0 $ 7.4
====== ====== ====== ====== ======
CAPITAL EXPENDITURES:
Americas............................ $ 3.2 $ 5.1 $ 9.0 $ 5.6 $ 11.3
Europe.............................. 5.4 3.2 3.6 2.5 2.7
All other........................... 0.3 0.1 0.1 0.1 0.1
------ ------ ------ ------ ------
Total capital expenditures....... $ 8.9 $ 8.4 $ 12.7 $ 8.2 $ 14.1
====== ====== ====== ====== ======
TOTAL ASSETS:
Americas............................ $151.6 $170.4 $170.1 $167.4 $194.0
Europe.............................. 61.9 61.6 72.6 72.7 87.5
All other........................... 34.8 38.5 30.9 32.7 37.3
------ ------ ------ ------ ------
Total assets..................... $248.3 $270.5 $273.6 $272.8 $318.8
====== ====== ====== ====== ======
</TABLE>
F-19
<PAGE> 165
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
SALES BY MAJOR COUNTRY:
United States.............................. $157.4 $191.8 $220.7
The Netherlands............................ 18.7 17.4 24.6
France..................................... 17.8 17.2 19.4
Italy...................................... 9.7 10.5 13.0
Germany.................................... 12.2 10.9 11.9
All other foreign.......................... 59.9 78.2 86.0
------ ------ ------
Total sales............................. $275.7 $326.0 $375.6
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
REVENUES BY MARKET CHANNEL:
Residential................................ $ 73.8 $ 70.8 $ 74.6
Commercial................................. 158.9 189.6 211.7
Enterprise Solutions....................... 43.0 65.6 89.3
------ ------ ------
Total sales............................. $275.7 $326.0 $375.6
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
LONG-LIVED ASSETS BY MAJOR COUNTRY:
United States.............................. $114.2 $122.7 $120.6
The Netherlands............................ 16.9 16.0 17.8
All other foreign.......................... 6.1 5.3 4.9
------ ------ ------
Total long-lived assets................. $137.2 $144.0 $143.3
====== ====== ======
</TABLE>
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:
F-20
<PAGE> 166
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
----------------------- ------------------------
OCTOBER 2, OCTOBER 3,
1996 1997 1998 1998 1998
----- ----- ----- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
RECONCILATION:
Segment operating income................. $38.2 $49.0 $55.2 $36.1 $43.2
Amortization expense..................... (8.0) (8.7) (8.1) (6.1) (6.5)
Export sales commissions................. -- (0.9) (3.9) (2.9) (1.9)
Other management fees.................... (6.0) (5.3) (2.7) (2.0) (2.2)
Other income (expenses) & corporate
charges................................ (2.2) (3.6) 2.7 0.5 (0.5)
----- ----- ----- ----- -----
Operating income reported................ $22.0 $30.5 $43.2 $25.6 $32.1
===== ===== ===== ===== =====
</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
$6,006,000, $5,265,000, and $2,698,000 for the years ended December 31, 1996,
1997, and 1998, respectively, have been charged to the Company and included in
Selling, General and Administrative expenses. In addition, $712,000, $897,000
and $960,000 for the years ended December 31, 1996, 1997 and 1998, respectively,
have been paid to Berwind for premiums on casualty, liability and workmen's
compensation insurance coverages.
At December 31, 1998, the Company has a payable to Berwind of $1,401,000
which is included in accrued expenses.
A subsidiary of Berwind Group Partners charged the Company a commission of
$909,000 and $3,876,000 during the years ended December 31, 1997 and 1998,
respectively, for services associated with certain export sales. The commission
for the nine months ended October 2, 1999 and October 3, 1998 was $1,921,000 and
$2,833,000, respectfully. 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 $7,370,000 and $7,974,000 during 1996 and
1997, respectively.
F-21
<PAGE> 167
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- OCTOBER 2,
1997 1998 1999
----- ----------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Revolving credit facility, due 2002..... $77.4 $53.1 $85.9
All other............................... 3.7 0.2 1.9
----- ----- -----
81.1 53.4 87.8
Less- Current portion................... 1.3 0.2 --
----- ----- -----
Total long-term debt............... $79.8 $53.1 $87.8
===== ===== =====
</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% and 5.68% at December 31,
1997 and 1998, respectively. The effective interest rate during 1997 and 1998
was 6.35% and 6.58%, 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, 1998, $2,127,000 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 $6,845,000. No portion of these lines were in
use at December 31, 1998.
Interest expense related to third party debt was $436,000, $1,765,000 and
$4,713,000 during 1996, 1997 and 1998, respectively.
Pursuant to a commitment letter dated September 28, 1999, the Company
expects to enter 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 amount of $100,000,000. 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 event, the reduced amount of the cash election consideration from
the amount otherwise payable if such election had been made in full shall be
applied to reduce, first, the Term Facility, and second, the
F-22
<PAGE> 168
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
New Revolver. Should the reduction exceed the Term Facility, the New Revolver
cannot be reduced by greater than $25,000,000.
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.
Initially, the Applicable Margin will be 1.50% and is applicable for the first
180 days following the initial funding date. For the remaining term of the loan,
the Applicable Margin will vary from 1.25% to 1.75% based on the Company's
leverage ratio.
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.
The Company entered into interest rate swap contracts to manage interest
rate risk. At December 31, 1998, 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 5.06% 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, 1998, mature
in 2005. The net unrealized loss, which equals their fair value, on the interest
rate swaps at December 31, 1998 was $1,043,000.
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, 1998 and 1997 are not material. The Company has no
F-23
<PAGE> 169
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
-------------- OCTOBER 2,
1997 1998 1999
----- ----- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Accrued compensation................................. $ 7.5 $ 8.2 $ 9.5
Accrued incentives................................... 9.2 5.2 3.6
Accrued warranty..................................... 2.2 2.1 2.4
Accrued taxes........................................ 7.1 6.5 6.6
Deferred revenue..................................... 1.9 4.1 4.1
Other accruals....................................... 8.9 13.2 12.3
----- ----- -----
Total accrued expenses.......................... $36.8 $39.3 $38.5
===== ===== =====
</TABLE>
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, ------------------------
------------------------ OCTOBER 3, OCTOBER 2,
1996 1997 1998 1998 1999
----- ----- ------ ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
CASH PAID DURING THE PERIOD FOR:
Interest......................... $7.7 $9.9 $ 4.8 $4.1 $ 3.8
==== ==== ===== ==== =====
Income taxes, net, including
$1,771,000 and $534,000 paid
to Berwind in 1996 and 1997,
respectively.................. $5.9 $5.6 $16.1 $9.1 $10.5
==== ==== ===== ==== =====
</TABLE>
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 $4,341,000,
F-24
<PAGE> 170
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$4,270,000 and $4,878,000 in 1996, 1997 and 1998, respectively, and the
aggregate future rentals are approximately $31,641,000. Rentals are due as
follows beginning on January 1, 1999:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
<S> <C>
1999 $ 4.8
2000 3.1
2001 2.6
2002 2.2
2003 2.0
2004 and thereafter 16.9
</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, 1998, the remaining guarantee under these arrangements was
$6,776,000. 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.
During 1996, the Company recorded a reserve of $2,800,000 for the recall of
a product. During 1996, 1997 and 1998, approximately $790,000, $1,810,000 and
$8,000 respectively, of this reserve has been utilized in connection with the
recall.
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.
F-25
<PAGE> 171
SCHEDULE II
SLC TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COST AND OTHER END OF
DESCRIPTIONS OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ------------ ---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful
accounts................ $2.9 $1.1 $(0.4) $(0.7) $2.9
Year ended December 31, 1997:
Allowance for doubtful
accounts................ 2.9 0.6 (0.2) (0.4) 2.9
Year ended December 31, 1998:
Allowance for doubtful
accounts................ $2.9 $1.0 $(1.0) $(0.3) $2.6
</TABLE>
F-26
<PAGE> 172
APPENDIX A
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
BETWEEN
ITI TECHNOLOGIES, INC.
AND
SLC TECHNOLOGIES, INC.
DATED AS OF SEPTEMBER 28, 1999
A-1
<PAGE> 173
TABLE OF CONTENTS
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RECITALS.................................................... 1
ARTICLE I -- THE MERGER..................................... A-6
Section 1.1 The Merger............................... A-6
Section 1.2 Effective Time........................... A-6
Section 1.3 Effects of the Merger.................... A-6
Section 1.4 Charter and Bylaws; Directors and
Officers................................. A-7
Section 1.5 Conversion of Securities................. A-7
Section 1.6 Cash Election Procedures................. A-8
Section 1.7 Exchange Procedures...................... A-9
Section 1.8 Additional Exchange Procedures........... A-9
Section 1.9 Stock Options............................ A-10
Section 1.10 Further Assurances....................... A-10
Section 1.11 Closing.................................. A-11
ARTICLE II -- REPRESENTATIONS AND WARRANTIES OF ITI......... A-11
Section 2.1 Organization, Standing and Power......... A-11
Section 2.2 Capital Structure........................ A-11
Section 2.3 Authority................................ A-12
Section 2.4 Consents and Approvals; No Violation..... A-12
Section 2.5 SEC Documents and Other Reports;
Financial Matters........................ A-13
Section 2.6 Proxy Statement.......................... A-14
Section 2.7 Absence of Certain Changes or Events..... A-14
Section 2.8 Permits and Compliance................... A-15
Section 2.9 Tax Matters.............................. A-16
Section 2.10 Actions and Proceedings.................. A-17
Section 2.11 Certain Agreements....................... A-17
Section 2.12 ERISA.................................... A-17
Section 2.13 Compliance with Worker Safety and
Environmental Laws....................... A-18
Section 2.14 Labor Matters............................ A-19
Section 2.15 Intellectual Property.................... A-19
Section 2.16 Reorganization; Supplemental Ruling...... A-21
Section 2.17 Required Vote of ITI Stockholders........ A-21
Section 2.18 Brokers.................................. A-21
Section 2.19 State Takeover Statutes; Certain Charter
Provisions............................... A-21
</TABLE>
A-2
<PAGE> 174
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 2.20 Year 2000 Matters........................ A-22
Section 2.21 Opinion of Financial Advisor............. A-22
ARTICLE III -- REPRESENTATIONS AND WARRANTIES OF SLC........ A-22
Section 3.1 Organization, Standing and Power......... A-22
Section 3.2 Capital Structure........................ A-22
Section 3.3 Authority................................ A-23
Section 3.4 Consents and Approvals; No Violation..... A-23
Section 3.5 Financial Statements; Books and
Records.................................. A-24
Section 3.6 Proxy Statement.......................... A-25
Section 3.7 Absence of Certain Changes or Events..... A-25
Section 3.8 Permits and Compliance................... A-26
Section 3.9 Tax Matters.............................. A-27
Section 3.10 Actions and Proceedings.................. A-27
Section 3.11 Certain Agreements....................... A-28
Section 3.12 ERISA.................................... A-28
Section 3.13 Compliance with Worker Safety and
Environmental Laws....................... A-29
Section 3.14 Labor Matters............................ A-29
Section 3.15 Intellectual Property.................... A-30
Section 3.16 Reorganization; Supplemental Ruling...... A-31
Section 3.17 Required Vote of SLC Stockholders........ A-32
Section 3.18 Brokers.................................. A-32
Section 3.19 State Takeover Statutes; Certain Charter
Provisions............................... A-32
Section 3.20 Year 2000 Matters........................ A-32
Section 3.21 Financing................................ A-32
ARTICLE IV -- COVENANTS RELATING TO CONDUCT OF BUSINESS..... A-32
Section 4.1 Conduct of Business Pending the Merger... A-32
Section 4.2 No Solicitation.......................... A-34
Section 4.3 SLC Stockholder Agreement................ A-35
Section 4.4 Reorganization........................... A-35
Section 4.5 Actions Inconsistent With Ruling......... A-35
Section 4.6 Redemption of Rights Plan................ A-36
ARTICLE V -- ADDITIONAL AGREEMENTS.......................... A-36
Section 5.1 Stockholder Meeting...................... A-36
Section 5.2 Preparation of Proxy Statement........... A-36
Section 5.3 Private Placement of Common Stock........ A-37
Section 5.4 Comfort Letters.......................... A-37
Section 5.5 Access to Information.................... A-37
</TABLE>
A-3
<PAGE> 175
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 5.6 Fees and Expenses........................ A-38
Section 5.7 Reasonable Best Efforts.................. A-38
Section 5.8 Public Announcements..................... A-39
Section 5.9 State Takeover Law....................... A-39
Section 5.10 Indemnification; Directors and Officers
Insurance................................ A-40
Section 5.11 Notification of Certain Matters.......... A-40
Section 5.12 IRS Ruling Letter........................ A-40
Section 5.13 Financing Commitment..................... A-40
Section 5.14 ITI Stock Option Plan.................... A-40
Section 5.15 NASDAQ Listing........................... A-40
Section 5.16 Form S-8................................. A-40
Section 5.17 Redemption of Shareholder Rights Plan.... A-40
Section 5.18 Name of Surviving Corporation............ A-41
Section 5.19 Services Agreement....................... A-41
ARTICLE VI -- CONDITIONS PRECEDENT TO THE MERGER............ A-41
Section 6.1 Conditions to Each Party's Obligation to
Effect the Merger........................ A-41
Section 6.2 Conditions to Obligation of ITI to Effect
the Merger............................... A-41
Section 6.3 Conditions to Obligations of SLC to
Effect the Merger........................ A-42
ARTICLE VII -- TERMINATION, AMENDMENT AND WAIVER............ A-44
Section 7.1 Termination.............................. A-44
Section 7.2 Effect of Termination.................... A-45
Section 7.3 Amendment................................ A-45
Section 7.4 Waiver................................... A-45
ARTICLE VIII -- GENERAL PROVISIONS.......................... A-45
Section 8.1 Representations and Warranties........... A-45
Section 8.2 Notices.................................. A-45
Section 8.3 Interpretation........................... A-47
Section 8.4 Counterparts............................. A-47
Section 8.5 Entire Agreement; No Third-Party
Beneficiaries............................ A-47
Section 8.6 Governing Law............................ A-47
Section 8.7 Assignment............................... A-47
</TABLE>
A-4
<PAGE> 176
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 8.8 Severability............................. A-47
Section 8.9 Enforcement of this Agreement............ A-47
SIGNATURES.................................................. A-48
Exhibit A -- Amendment to Certificate of Incorporation
Exhibit B -- Voting Agreement
Exhibit C -- Registration Rights Agreement
Exhibit D -- Indemnification Agreement
</TABLE>
A-5
<PAGE> 177
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION, dated as of September 28,
1999 (this "Agreement"), between ITI TECHNOLOGIES, INC. a Delaware corporation
("ITI"), and SLC TECHNOLOGIES, INC., a Delaware corporation ("SLC").
W I T N E S S E T H:
WHEREAS, the respective Boards of Directors of ITI and SLC have approved
and declared advisable the merger of SLC with and into ITI (the "Merger"), upon
the terms and subject to the conditions set forth herein;
WHEREAS, the respective Boards of Directors of ITI and SLC have determined
that the Merger is in the best interest of their respective stockholders;
WHEREAS, SLC and its stockholder ("SLC Stockholder") desire to enter into a
transaction pursuant to which the stock of SLC is exchanged for publicly traded
stock;
WHEREAS, as an inducement for SLC to enter into this Agreement, certain
stockholders of ITI have entered into one or more Voting Support Agreements
("Voting Support Agreements");
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the premises, representations,
warranties and agreements herein contained and intending to be legally bound,
the parties agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the conditions
hereof, and in accordance with the Delaware General Corporation Law (the
"DGCL"), SLC shall be merged with and into ITI at the Effective Time (as
hereinafter defined). Following the Merger, the separate corporate existence of
SLC shall cease and ITI shall continue as the surviving corporation (the
"Surviving Corporation") and shall succeed to and assume all the rights and
obligations of SLC in accordance with the DGCL. ITI and SLC are sometimes
collectively referred to herein as the "Constituent Corporations."
Section 1.2 Effective Time. The Merger shall become effective when a
Certificate of Merger (the "Certificate of Merger"), executed in accordance with
the relevant provisions of the DGCL, is accepted for filing by with the
Secretary of State of the State of Delaware; provided, however, that, upon
mutual consent of the Constituent Corporations, the Certificate of Merger may
provide for a later date of effectiveness of the Merger not more than 30 days
after the date the Certificate of Merger is filed. When used in this Agreement,
the term "Effective Time" shall mean the date and time at which the Certificate
of Merger is accepted for record or such later time established by the
Certificate of Merger. The filing of the Certificate of Merger shall be made on
the date of the Closing (as defined in Section 1.11).
Section 1.3 Effects of the Merger. The Merger shall have the effects set
forth in Section 259 of the DGCL.
A-6
<PAGE> 178
Section 1.4 Charter and Bylaws; Directors and Officers.
(a) At the Effective Time, (i) the Amended and Restated Certificate of
Incorporation of ITI shall be amended as of the Effective Time as provided in
Exhibit A, (ii) the Amended and Restated Certificate of Incorporation of ITI, as
so amended, shall be the Certificate of Incorporation of the Surviving
Corporation until thereafter legally amended as provided therein or by
applicable law and (iii) the Bylaws of ITI, as in effect at the Effective Time,
shall be the Bylaws of the Surviving Corporation until thereafter legally
amended.
(b) At the Effective Time, the total number of persons serving on the Board
of Directors of ITI shall be nine (unless otherwise agreed in writing by the
parties hereto prior to the Effective Time), two of whom shall be Thomas L. Auth
and Perry J. Lewis and seven of whom shall be selected solely by and at the
absolute discretion of the Board of Directors of SLC. Thereafter, membership on
the ITI Board of Directors shall be determined in accordance with the Voting
Agreement in the form attached hereto as Exhibit B, which shall be executed and
delivered by the parties thereto at the Effective Time.
(c) At the Effective Time, Thomas L. Auth shall be Chairman of the Board of
ITI and Kenneth L. Boyda shall be President and Chief Executive Officer of ITI.
Section 1.5 Conversion of Securities. As of the Effective Time, by virtue
of the Merger and without any action on the part of ITI, SLC or the holders of
any securities of the Constituent Corporations:
(a) Each share of the common stock, $0.005 par value, of SLC (the "SLC
Common Stock") issued and outstanding immediately prior to the Effective Time
(other than shares of SLC Common Stock owned by SLC or any wholly owned
Subsidiary of SLC) shall be converted into 15.17064 shares of common stock,
$0.01 par value, of ITI (the "ITI Common Stock") (the "SLC Per Share Stock
Consideration"). If, between the date of this Agreement and the Effective Time,
the outstanding shares of ITI Common Stock or SLC Common Stock are changed to a
different number or class of shares by reason of any stock split, stock
dividend, reverse stock split, reclassification or other similar transaction,
then the SLC Per Share Stock Consideration and the Per Share Cash Consideration
(defined below) shall be appropriately adjusted.
(b) Each share of ITI Common Stock issued and outstanding immediately prior
to the Effective Time for which an election is properly made to receive cash
pursuant to Section 1.6 shall be converted into cash in an amount equal to
$36.50 per share and, if on March 28, 2000, the conditions set forth in Sections
6.1, 6.3(a), 6.3(c), 6.3(e) and 6.3(f) would have been satisfied or waived if
March 28, 2000 were considered to be the Effective Time, then, if the Effective
Time occurs after March 28, 2000, an additional $.25 and if the Effective Time
occurs after April 28, 2000, an additional $.25 (the "Per Share Cash
Consideration" and, together with the SLC Per Share Stock Consideration, the
"Merger Consideration") and subject further to the election, conversion and
proration procedures set forth in Section 1.6; provided, however, that,
notwithstanding the foregoing, if the condition set forth in Section 6.3(d) is
satisfied or waived on or prior to March 28, 2000, then no $.25 increase shall
be made and, if such condition is met or waived after March 28, 2000 and before
April 29, 2000, then only one $.25 increase shall be made.
(c) Each share of ITI Common Stock issued and outstanding immediately prior
to the Effective Time and for which no election has been properly made to
receive cash pursuant to Section 1.6 shall remain issued and outstanding.
(d) Each share of SLC Common Stock issued and outstanding immediately prior
to the Effective Time and owned by SLC or any wholly owned Subsidiary of SLC
shall be canceled and extinguished and shall cease to exist, and no exchange or
payment shall be made therefor.
A-7
<PAGE> 179
Section 1.6 Cash Election Procedures.
(a) Subject to Section 1.6(b), each record holder of ITI Common Stock
immediately prior to the Effective Time will be entitled to elect to receive
cash for all or some of the shares of ITI Common Stock ("Cash Election Shares")
held by such record holder. All such elections (each an "Election") shall be
made on a form designated for that purpose by ITI and reasonably acceptable to
SLC (an "Election Form") and in accordance with all applicable laws. Any shares
of ITI Common Stock with respect to which the record holder thereof shall not,
as of the Election Deadline (as defined below), have properly submitted to the
Exchange Agent (as defined below) a properly completed Election Form shall be
deemed not to have elected to receive cash pursuant to Section 1.5(b) and this
Section 1.6. A record holder acting in different capacities or acting on behalf
of other persons in any way shall be entitled to submit an Election Form for
each capacity in which such record holder so acts with respect to each person
for which it so acts. The exchange agent (the "Exchange Agent") shall be Norwest
Bank, N.A., or other reputable bank or trust company jointly selected by ITI and
SLC.
(b) Not later than two business days after the Election Deadline, ITI shall
cause the Exchange Agent to effect the conversions among the holders of ITI
Common Stock of rights to receive the Per Share Cash Consideration in the Merger
as follows: If the aggregate number of Cash Election Shares properly elected
represents more than 50% of the number of shares of ITI Common Stock issued and
outstanding immediately prior to the Effective Time (on the basis of Election
Forms received by the Election Deadline), then the Exchange Agent shall reduce
(pro rata according to each holder's total number of Cash Election Shares of
those holders who made an Election), rounded to the nearest whole share, a
sufficient number of Cash Election Shares such that the total number of Cash
Election Shares represents, as closely as practicable, 50% of the number of
shares of ITI Common Stock issued and outstanding immediately prior to the
Effective Time.
(c) Not later than the 25th business day prior to the anticipated Effective
Time or such other date as ITI and SLC may agree in writing, ITI shall mail an
Election Form to each person that was a holder of record of ITI Common Stock at
that time. To be effective, an Election Form must be properly completed, signed
and actually received by the Exchange Agent not later than 5:00 p.m. prevailing
Central Time, on the second business day prior to the Effective Time (the
"Election Deadline") and accompanied by the certificates representing all the
shares of ITI Common Stock ("ITI Certificates") as to which the Election is
being made (or an appropriate guarantee of delivery by an eligible
organization). The Election Form (which shall specify that delivery shall be
effected and the risk of loss and title to the ITI Certificates (and the payment
right represented by such certificates) shall pass only upon proper delivery of
such ITI Certificates to the Exchange Agent) will advise the holders of ITI
Certificates of the procedure for surrendering to the Exchange Agent such
certificates in exchange for the Per Share Cash Consideration. ITI shall have
reasonable discretion, which it may delegate in whole or in part to the Exchange
Agent, to determine whether Election Forms have been properly completed, signed
and timely submitted or to disregard defects in Election Forms; such decisions
of ITI (or of the Exchange Agent) shall be conclusive and binding. ITI shall
consult with SLC on any significant issues regarding any Election Form. None of
SLC, ITI or the Exchange Agent shall be under any obligation to notify any
person of any defect in an Election Form submitted to the Exchange Agent. The
Exchange Agent shall also make, and ITI shall verify, all computations
contemplated by this Section 1.6, and all such computations shall be conclusive
and binding on the holders or former holders of ITI Common Stock, absent
manifest error. The Exchange Agent shall promptly provide ITI and SLC with a
copy of the completed computation. Shares of ITI Common Stock covered by an
Election Form which is not effective shall be treated as if no Election has been
made with respect to such shares of ITI Common Stock. Once an Election is made
it may not be revoked unless such revocation has been communicated in writing to
the Exchange Agent
A-8
<PAGE> 180
prior to the Election Deadline. The Exchange Agent shall cause to be properly
reissued ITI Certificates representing ITI Common Stock as to which the Election
is not applicable.
Section 1.7 Exchange Procedures.
(a) At the Closing, the SLC Stockholder will surrender its certificates
which, immediately prior to the Effective Time, represented outstanding shares
of SLC Common Stock converted in the Merger (the "SLC Certificates") in exchange
for certificates representing ITI Common Stock. Subject to Section 1.8, upon
surrender of a SLC Certificate to ITI for exchange, together with such other
documents as may be reasonably required by ITI consistent with this Agreement,
(i) the holder of such SLC Certificate shall be entitled to receive in exchange
therefore a certificate representing the number of shares of ITI Common Stock
that such holder has the right to receive pursuant to the provisions of Section
1.5(a) and (ii) the SLC Certificate so surrendered shall be canceled. Until so
surrendered, each SLC Certificate shall be deemed, from and after the Effective
Time, to represent only the right to receive ITI Common Stock (and cash in lieu
of any fractional share of ITI Common Stock) as contemplated by this Section 1.7
and Section 1.8.
(b) At and after the Effective Time, there shall be no further registration
or transfers of shares of SLC Common Stock (other than transfers by operation of
law), and the stock ledgers of SLC shall be closed. After the Effective Time,
SLC Certificates presented to ITI for transfer shall be canceled and exchanged
for the Merger Consideration provided for, without interest, and in accordance
with the procedures set forth, in this Article I.
(c) No dividends, interest or other distributions with respect to the
Merger Consideration shall be paid to the holder of any unsurrendered SLC
Certificates until such certificates are surrendered as provided in this Section
1.7. Upon such surrender, there shall be paid, without interest, to the person
in whose name any SLC Certificate is registered all dividends and other
distributions payable in respect of such securities on a date subsequent to, and
in respect of a record date after, the Effective Time.
Section 1.8 Additional Exchange Procedures.
(a) If any of the Merger Consideration is to be paid or issued to a person
other than the registered holder of the shares of ITI Common Stock or SLC Common
Stock, as the case may be, formerly represented by the certificates surrendered
with respect thereto, it shall be a condition of payment of the Merger
Consideration that the ITI Certificate or Certificates or the SLC Certificate or
Certificates so surrendered shall be properly endorsed or otherwise be in proper
form for transfer and that the person requesting such payment or issuance shall
pay to the Exchange Agent any transfer or other taxes required as a result of
such payment or issuance to a person other than the registered holder of such
shares of ITI Common Stock or SLC Common Stock, as the case may be, or shall
establish to the reasonable satisfaction of the Exchange Agent that such tax has
been paid or is not payable.
(b) In the event that any ITI Certificates or SLC Certificates shall have
been lost, stolen or destroyed, the Exchange Agent or ITI, as the case may be,
shall pay in respect of such lost, stolen or destroyed certificate, upon the
making of an affidavit of that fact by the holder thereof, the Merger
Consideration as may be provided pursuant to this Agreement; provided, however,
that ITI may, in its sole discretion and as a condition precedent to the payment
thereof, require the owner of such lost, stolen or destroyed certificate to
deliver an indemnity agreement or a bond in such sum as it may reasonably direct
as indemnity against any claim that may be made against ITI, the Surviving
Corporation, the Exchange Agent or any other party with respect to the
certificate alleged to have been lost, stolen or destroyed.
A-9
<PAGE> 181
(c) Neither ITI nor the Surviving Corporation shall be liable to any holder
or former holders of SLC Common Stock or ITI Common Stock for any shares of
common stock (or dividends or distributions with respect thereto), or for any
cash amounts properly delivered to any public official pursuant to any
applicable abandoned property, escheat or similar law.
(d) No fractional interests in shares of ITI Common Stock, and no
certificates representing such fractional interests, shall be issued upon the
surrender for exchange of certificates representing SLC Common Stock. In lieu of
any fractional share, ITI shall pay to each former holder of SLC Common Stock
who otherwise would be entitled to receive a fractional interest in a share of
ITI Common Stock (after aggregating all fractional shares of ITI Common Stock
issuable to such holder), upon surrender of such holder's SLC Certificates an
amount of cash (without interest) determined by multiplying (i) the Per Share
Cash Consideration by (ii) the fractional interest to which such holder would
otherwise be entitled.
Section 1.9 Stock Options.
(a) Each holder of options to purchase ITI Common Stock ("ITI Option")
shall be given the right to elect to receive a cash payment, for up to 50% of
the number of shares of ITI Common Stock covered by such options, equal to the
Per Share Cash Consideration times the number of shares covered by such options
minus the aggregate exercise price of such options in exchange for the
cancellation of such options. Any ITI Option not so exchanged will remain
outstanding pursuant to its terms and will vest to the extent provided in the
existing terms of the applicable stock option plan or any agreement evidencing
such option.
(b) At the Effective Time, all rights with respect to SLC Common Stock
under each option to purchase SLC Common Stock ("SLC Option") then outstanding
shall be converted into and become rights with respect to ITI Common Stock, and
ITI shall assume each such SLC Option in accordance with the requirements of
Section 424 (a) of the Code and the terms of the stock option plan under which
it was issued and the stock option agreement by which it is evidenced. From and
after the Effective Time, (i) each SLC Option assumed by ITI may be exercised
solely for shares of ITI Common Stock, (ii) the number of shares of ITI Common
Stock covered by each such SLC Option shall be equal to the number of shares of
SLC Common Stock covered by such SLC Option immediately prior to the Effective
Time multiplied by the SLC Per Share Stock Consideration, rounded up to the
nearest whole share and (iii) the per share exercise price under each such SLC
Option shall be adjusted by dividing the per share exercise price under such SLC
Option by the SLC Per Share Stock Consideration and rounding up to the nearest
cent. Each SLC Option assumed by ITI in accordance with this Section 1.9(b)
shall, in accordance with its terms, be subject to further adjustments as
appropriate to reflect any stock split, stock dividend, reverse stock split,
reclassification, recapitalization or other similar transaction prior to the
Effective Time.
Section 1.10 Further Assurances. If at any time after the Effective Time
the Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments or assurances or any other acts or things are necessary,
desirable or proper (a) to vest, perfect or confirm, of record or otherwise, in
the Surviving Corporation its right, title or interest in, to or under any of
the rights, privileges, powers, franchises, properties or assets of either of
the Constituent Corporations, or (b) otherwise to carry out the purposes of this
Agreement, the Surviving Corporation and its proper officers and directors or
their designees shall be authorized to execute and deliver, in the name and on
behalf of either of the Constituent Corporations, all such deeds, bills of sale,
assignments and assurances and to do, in the name and on behalf of either
Constituent Corporation, all such other acts and things as may be necessary,
desirable or proper to vest, perfect or confirm the Surviving Corporation's
right, title or interest in, to or under any of the rights, privileges, powers,
franchises, properties or assets of such Constituent Corporation and otherwise
to carry out the purposes of this Agreement.
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Section 1.11 Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") and all actions specified in this Agreement to occur
at the Closing shall take place at the offices of Dorsey & Whitney LLP, 220
South Sixth Street, Minneapolis, Minnesota, at 10:00 a.m., local time, on the
second business day following the day on which the last of the conditions set
forth in Article VI shall have been fulfilled or waived (if permissible) or at
such other time and place as ITI and SLC shall agree.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF ITI
ITI represents and warrants to SLC as follows:
Section 2.1 Organization, Standing and Power. ITI is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the requisite corporate power and authority to carry on its
business as now being conducted. Each Subsidiary (as hereinafter defined) of ITI
is duly organized, validly existing and in good standing under the laws of the
jurisdiction in which it is organized and has the requisite corporate (in the
case of a subsidiary that is a corporation) or other power and authority to
carry on its business as now being conducted, except where the failure to be so
organized, existing or in good standing or to have such power or authority would
not, individually or in the aggregate, have a Material Adverse Effect (as
hereinafter defined) on ITI. ITI and each of its Subsidiaries are duly qualified
to do business, and are in good standing, in each jurisdiction where the
character of their properties owned or held under lease or the nature of their
activities makes such qualification necessary, except where the failure to be so
qualified would not, individually or in the aggregate, have a Material Adverse
Effect on ITI. For purposes of this Agreement (a) "Material Adverse Change" or
"Material Adverse Effect" means, when used with respect to ITI or SLC, as the
case may be, any event, occurrence, development, change or effect that,
individually or in the aggregate, with other events, occurrences, developments,
changes or effects, is or could reasonably be expected (as far as can be
foreseen at the time) to be materially adverse to the business, assets,
liabilities, financial condition or results of operations of ITI and its
Subsidiaries, taken as a whole, or SLC and its Subsidiaries, taken as a whole,
as the case may be; and (b) "Subsidiary" means any corporation, partnership,
limited liability company, joint venture or other legal entity of which ITI or
SLC, as the case may be (either alone or through or together with any other
Subsidiary), owns, directly or indirectly, 50% or more of the stock or other
equity interests the holders of which are generally entitled to vote for the
election of the board of directors or other governing body of such corporation,
partnership, limited liability company, joint venture or other legal entity.
Section 2.2 Capital Structure. As of the date hereof, the authorized
capital stock of ITI consists solely of 30,000,000 shares of ITI Common Stock
and no shares of Preferred Stock. At the close of business on September 28,
1999, (i) 8,438,342 shares of ITI Common Stock were issued and outstanding, all
of which were validly issued, fully paid and nonassessable and free of
preemptive rights, (ii) 956,700 shares of ITI Common Stock were held in the
treasury of ITI or by Subsidiaries of ITI, (iii) 1,713,920 shares of ITI Common
Stock were reserved for issuance pursuant to outstanding options to purchase
shares of ITI Common Stock and other benefits granted under ITI's benefit plans,
or pursuant to any plans assumed by ITI in connection with any acquisition,
business combination or similar transaction and (iv) each share of ITI Common
Stock is accompanied by a "Right" as defined in the Rights Agreement dated as of
November 27, 1996 by and between ITI and Norwest Bank Minnesota, National
Association as rights agent (the "Shareholder Rights Plan"). As of the date of
this Agreement, except as set forth above no shares of capital stock or other
voting securities of ITI were issued, reserved for issuance or outstanding. All
of the shares of ITI Common Stock issuable in exchange for SLC Common Stock at
the Effective Time in accordance with this
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Agreement will be, when so issued, duly authorized, validly issued, fully paid
and nonassessable and free of preemptive rights. As of the date of this
Agreement, except (i) for this Agreement, (ii) as set forth above, or (iii) as
set forth in Section 2.2 of the letter dated the date hereof and delivered on
the date hereof by ITI to SLC, which letter relates to this Agreement and is
designated therein as the ITI Letter (the "ITI Letter"), there are no options,
warrants, calls, rights, agreements or other commitments to which ITI or any of
its Subsidiaries is a party or by which any of them is bound obligating ITI or
any of its Subsidiaries to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock of ITI or any of its
Subsidiaries or obligating ITI or any of its Subsidiaries to grant, extend or
enter into any such option, warrant, call, right, agreement or other commitment.
Except as set forth in Section 2.2 of the ITI Letter, neither ITI nor any of its
Subsidiaries is obligated to pay for or repurchase any shares of capital stock
of ITI or any of its Subsidiaries. There are no outstanding ITI securities that
are convertible into or exchangeable for any shares of capital stock or other
securities of ITI or its Subsidiaries. Each outstanding share of capital stock
of each Subsidiary of ITI is duly authorized, validly issued, fully paid and
nonassessable and, except as disclosed in Section 2.2 of the ITI Letter, each
such share is owned by ITI or another Subsidiary of ITI, free and clear of all
security interests, liens, claims, pledges, options, rights of first refusal,
agreements, limitations on voting rights, charges and other encumbrances of any
nature whatsoever. Except as set forth in Section 2.2 of the ITI Letter, no
holder of ITI Common Stock, or any option, warrant or other security
exchangeable or convertible into ITI Common Stock, has any rights, contingent or
otherwise, to require ITI to register such securities under the Securities Act
(as hereinafter defined). Except as set forth above, ITI does not have any
outstanding bonds, debentures, notes or other obligations the holders of which
have the right to vote (or convertible into, exchangeable for or exercisable for
securities having the right to vote) with the stockholders of ITI on any matter.
All of ITI's Subsidiaries are wholly owned, directly or indirectly, by ITI and
are listed in Section 2.2 of the ITI Letter.
Section 2.3 Authority. On or prior to the date of this Agreement, the
Board of Directors of ITI, at a meeting duly called and held at which a quorum
was present throughout, has by the requisite vote of the directors, declared the
Merger to be advisable and fair to and in the best interest of ITI and its
stockholders, has approved and adopted this Agreement in accordance with the
DGCL and has resolved to recommend the approval by ITI's stockholders of the
Merger and this Agreement and no such declaration, approval, adoption or
recommendation has been changed, withdrawn or revoked. ITI has all requisite
corporate power and authority to enter into this Agreement, and, subject to
approval by the stockholders of ITI of the Merger, to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
by ITI and the consummation by ITI of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of ITI,
subject to (x) approval by the stockholders of ITI of the Merger and (y) the
filing of the Certificate of Merger. This Agreement has been duly executed and
delivered by ITI, and (assuming the valid authorization, execution and delivery
of this Agreement by SLC and the validity and binding effect hereof on SLC) this
Agreement constitutes the valid and binding obligation of ITI enforceable
against ITI in accordance with its terms.
Section 2.4 Consents and Approvals; No Violation. Assuming that all
consents, approvals, authorizations and other actions described in this Section
2.4 have been obtained and all filings and obligations described in this Section
2.4 have been made, and except as set forth in Section 2.4 of the ITI Letter,
the execution and delivery of this Agreement do not, and the consummation of the
transactions contemplated hereby and compliance with the provisions hereof will
not, result in any violation of, or default (with or without notice or lapse of
time, or both) under, or give to others a right of termination, cancellation or
acceleration of any obligation or the loss of a material benefit under, or
result in the creation of any lien, security interest, charge or encumbrance
upon any of the properties or assets of ITI or any of its Subsidiaries under,
any provision of (i) the Certificate of
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Incorporation or Bylaws of ITI, (ii) any provision of the comparable charter or
organization documents of any of ITI's Subsidiaries, (iii) any loan or credit
agreement, note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise or license applicable to ITI or any of
its Subsidiaries or (iv) any judgment, order, injunction, decree, statute, law,
ordinance, rule or regulation applicable to ITI or any of its Subsidiaries or
any of their respective properties or assets, other than, in the case of clauses
(iii) or (iv), any such violations, defaults, rights, liens, security interests,
charges or encumbrances that, individually or in the aggregate, would not have a
Material Adverse Effect on ITI, materially impair the ability of ITI to perform
its obligations hereunder or prevent the consummation of any of the transactions
contemplated hereby. Except as set forth in Section 2.4 of the ITI Letter, no
filing or registration with review by, or authorization, consent or approval of,
any third party, including any domestic (federal, state or local), foreign or
supranational court, commission, governmental body, regulatory agency, authority
or tribunal (a "Governmental Entity") is required by or with respect to ITI or
any of its Subsidiaries in connection with the execution and delivery of this
Agreement by ITI or is necessary for the consummation of the Merger and the
other transactions contemplated by this Agreement and compliance with the
provisions hereof, except for (i) in connection, or in compliance, with the
provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), the Securities Act of 1933, as amended (together with
the rules and regulation promulgated thereunder the "Securities Act"), and the
Securities Exchange Act of 1934, as amended (together with the rules and
regulations promulgated thereunder, the "Exchange Act"), (ii) the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware and
appropriate documents with the relevant authorities of other states in which ITI
is qualified to do business, (iii) applicable requirements, if any, of state
securities or "blue sky" laws ("Blue Sky Laws"), (iv) as may be required under
foreign laws and (v) such other consents, orders, authorizations, registrations,
declarations and filings the failure of which to be obtained or made would not,
individually or in the aggregate, have a Material Adverse Effect on ITI,
materially impair the ability of ITI to perform its obligations hereunder or
prevent the consummation of any of the transactions contemplated hereby.
Section 2.5 SEC Documents and Other Reports; Financial Matters.
(a) ITI has timely filed with the SEC all forms, reports, schedules,
statements and other documents required to be filed by it under the Exchange Act
or the Securities Act since January 1, 1995 (the "ITI SEC Documents"). As of
their respective dates (and in the case of registration statements and proxy
statements, on the dates of effectiveness and the dates of mailing,
respectively), the ITI SEC Documents complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be, and,
at the respective times they were filed (and in the case of registration
statements and proxy statements, on the dates of effectiveness and the dates of
mailing, respectively), none of the ITI SEC Documents contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The consolidated
financial statements (including, in each case, any notes thereto) of ITI
included in the ITI SEC Documents (the "ITI Financial Statements") at the
respective times they were filed (and in the case of registration statements and
proxy statements, on the dates of effectiveness and the dates of mailing,
respectively) complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, were prepared in accordance with generally accepted accounting
principles (except, in the case of the unaudited statements, as permitted by
Form 10-Q of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated therein or in the notes thereto) and fairly
presented in all material respects the consolidated financial position of ITI
and its consolidated Subsidiaries as at the respective dates thereof and the
consolidated results of their operations and their consolidated cash flows for
the periods then ended (subject, in the case of unaudited statements, to normal
year-end
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audit adjustments and to any other adjustments described therein which were not
or are not expected to be material in amount). Except as set forth in Section
2.5 of the ITI Letter, ITI has not, since December 31, 1998, made any change in
the accounting practices or policies applied in the preparation of financial
statements.
(b) The minute books of ITI and its Subsidiaries, all of which have been
made available to SLC, contain records of all meetings held of, and corporate
action taken by, the stockholders and the Board of Directors of ITI and its
Subsidiaries, which are accurate in all material respects, and no meeting of any
such stockholders or Board of Directors has been held for which minutes have not
been prepared and are not contained in such minute books.
(c) ITI and its Subsidiaries do not have any liabilities of any nature,
whether known or unknown, absolute, accrued, contingent or otherwise and whether
due or to become due that, individually or in the aggregate, have a Material
Adverse Effect on ITI, except (i) as and to the extent set forth on the most
recent balance sheet included in the ITI SEC Documents, (ii) for liabilities or
obligations incurred since the date of the balance sheet referred to in clause
(i) in the ordinary course of business or (iii) as set forth in Section 2.5 of
the ITI Letter. The term "liabilities" is not intended to include contractual
obligations (other than those in default or those that would be in default upon
the giving of notice, the passage of time or both) other than those customarily
reflected on the face of a balance sheet.
Section 2.6 Proxy Statement. None of the information to be supplied by or
on behalf of ITI for inclusion or incorporation by reference in the definitive
proxy statement (the "Proxy Statement") relating to the ITI Stockholder Meeting
(as defined in Section 5.1) will, at the time of the mailing of the Proxy
Statement, at the time of the ITI Stockholder Meeting or at the Effective Time,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement will comply as to form in all material respects
with the provisions of the Exchange Act.
Section 2.7 Absence of Certain Changes or Events. Except as otherwise
contemplated in this Agreement (including the actions permitted in Section 4.1)
or in Section 2.7 of the ITI Letter, since the date of the most recent ITI
Financial Statements contained in the ITI SEC Documents:
(a) ITI has conducted its business only in the ordinary course
consistent with past practice;
(b) there has not been any Material Adverse Effect with respect to
ITI;
(c) ITI has not made any material increase in any bonus or any wage,
salary or compensation to officers or key employees, or any material
increase in benefits payable under or pursuant to any, or created any
material new, employment agreements or profit-sharing, bonus, deferred
compensation, savings, severance, insurance, pension, retirement or other
employee benefit plan, payment or arrangement (including, but not limited
to, the granting of employee stock options, restricted stock or contingent
stock awards);
(d) ITI has not made any loans or advances in excess of $100,000 to
any officer, director, stockholder or affiliate of ITI (except for ordinary
travel and business expense payments);
(e) there has not been any change in the accounting methods or
practices followed by ITI;
(f) ITI has not split, combined or reclassified any outstanding shares
of capital stock of ITI or declared, set aside or paid, or accrued any
liability for the payment of, any dividends or other distributions payable
in cash, property or otherwise with respect to any shares of capital stock
of ITI;
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(g) ITI has not entered into any commitment or transaction (including
without limitation any borrowing or capital expenditure) other than in the
ordinary course of business consistent with past practice;
(h) ITI has not incurred or guaranteed any debt, liability or
obligation, whether accrued, absolute, contingent or otherwise,
individually or in the aggregate in excess of $500,000 or other than in the
ordinary course of business consistent with past practice;
(i) ITI has not issued, redeemed or repurchased any stock, bond or
other corporate security;
(j) ITI has not experienced any damage to, or destruction, theft or
loss of, any asset or property, whether or not covered by insurance, in an
amount exceeding $100,000 in the aggregate or any material interruption in
the use of any of the assets of ITI;
(k) ITI has not entered into an amendment to or termination of (or an
oral commitment to do so) any material contract, agreement or license to
which it is a party or by which it is bound;
(l) ITI has not sold, assigned, leased, transferred or otherwise
disposed of any of its assets or property (tangible or intangible),
including any sale, assignment, lease, transfer or other disposition of any
of the Intellectual Property (as hereinafter defined), except in the
ordinary course of business consistent with past practice;
(m) ITI has not sold, issued, granted or authorized the sale, issuance
or grant of (i) any capital stock or security (except for ITI Common Stock
issued upon the exercise of outstanding ITI Options), (ii) any option,
call, warrant or right to acquire any capital stock or other security or
(iii) any instrument convertible into or exchangeable for any capital stock
or other security of ITI;
(n) Except as contemplated hereby and except by the virtue of the
transactions contemplated hereby, ITI has not amended or waived any of its
rights under, or taken any action to permit the acceleration, vesting or
repricing under, (i) any provision of ITI's stock option plans, (ii) any
provision of any agreement evidencing any outstanding ITI Options or (iii)
any restricted stock purchase agreement;
(o) There has been no amendment to the Certificate of Incorporation,
Bylaws or other charter or organizational documents of ITI or any of its
Subsidiaries;
(p) Neither ITI nor any of its Subsidiaries has made any material
election with respect to Taxes nor has ITI or any of its Subsidiaries
entered into an agreement, arrangement or settlement with respect to
material Taxes with any taxing authority or other person; and
(q) ITI has not entered into any commitment (written or oral,
contingent or otherwise) to do any of the foregoing.
The phrase "consistent with past practice" wherever used is intended as a
limitation only when current practices can be meaningfully compared to past
practices. In this Section 2.7 "ITI" refers to ITI and/or its Subsidiaries.
Section 2.8 Permits and Compliance. Each of ITI and its Subsidiaries is in
possession of all franchises, grants, authorizations, licenses, permits,
charters, easements, variances, exceptions, consents, certificates, approvals
and orders of any Governmental Entity necessary for ITI or any of its
Subsidiaries to own, lease and operate its properties or to carry on its
business as it is now being conducted (the "ITI Permits"), except where the
failure to have any of the ITI Permits would not, individually or in the
aggregate, have a Material Adverse Effect on ITI, and, as of the date of this
Agreement, no suspension or cancellation of any of the ITI Permits is pending
or, to the Knowledge of ITI (as hereinafter defined), threatened, except where
the suspension or cancellation of any of the
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ITI Permits would not, individually or in the aggregate, have a Material Adverse
Effect on ITI Neither ITI nor any of its Subsidiaries is in violation of (A) its
charter, by-laws or other organizational documents, (B) any applicable law,
ordinance, administrative or governmental rule or regulation or (C) any order,
decree or judgment of any Governmental Entity having jurisdiction over ITI or
any of its Subsidiaries, except, in the case of clauses (A), (B) and (C), for
any violations that, individually or in the aggregate, would not have a Material
Adverse Effect on ITI. Except as disclosed in Section 2.8 of the ITI Letter, as
of the date hereof there is no contract or agreement that is material to the
business, assets, liabilities, financial condition or results of operations of
ITI and its Subsidiaries, taken as a whole. Except as set forth in Section 2.8
of the ITI Letter, no event of default or event that, but for the giving of
notice or the lapse of time or both, would constitute an event of default exists
or, upon the consummation by ITI of the transactions contemplated by this
Agreement, will exist under any indenture, mortgage, loan agreement, note or
other agreement or instrument for borrowed money, any guarantee of any agreement
or instrument for borrowed money or any lease, contractual license or other
agreement or instrument to which ITI or any of its Subsidiaries is a party or by
which ITI or any such Subsidiary is bound or to which any of the properties,
assets or operations of ITI or any such Subsidiary is subject, other than any
defaults that, individually or in the aggregate, would not have a Material
Adverse Effect on ITI. ITI has no reason to believe that all material
agreements, guarantees and commitments (each a "Contract") to which ITI or any
Subsidiary is a party or by which ITI or any Subsidiary is bound are not valid
and binding obligations of ITI or such Subsidiary and each other party thereto
except such Contracts which if not so valid and binding would not, individually
or in the aggregate, have a Material Adverse Effect on ITI ITI has no reason to
believe that any other party to a Contract is in violation of or in default
under such Contract except such violations or defaults which, individually or in
the aggregate, would not have a Material Adverse Effect on ITI. Neither ITI nor
any of its Subsidiaries is a party to or bound by any Contract that, after the
Effective Time, would interfere with the conduct of the Surviving Corporation's
business, except for such interference that would not have a Material Adverse
Effect on the Surviving Corporation. For purposes of this Agreement, "Knowledge
of ITI" (and similar phrases) means the actual knowledge, after reasonable
inquiry, of the individuals identified in Section 2.8 of the ITI Letter.
Section 2.9 Tax Matters. Except as otherwise set forth in Section 2.9 of
the ITI Letter, (i) ITI and each of its Subsidiaries have timely filed all
federal, and all material state, local, foreign and provincial, Tax Returns (as
hereinafter defined) required to have been filed or appropriate extensions
therefor have been properly obtained, and such Tax Returns are correct and
complete, except to the extent that any failure to so file or any failure to be
correct and complete would not, individually or in the aggregate, have a
Material Adverse Effect on ITI; (ii) all Taxes (as hereinafter defined) shown to
be due on such Tax Returns have been timely paid or extensions for payment have
been properly obtained, or such Taxes are being timely and properly contested
(such contested Taxes being set forth in Section 2.9 of the ITI Letter), (iii)
ITI and each of its Subsidiaries have complied in all material respects with all
rules and regulations relating to the withholding of Taxes except to the extent
that any failure to comply with such rules and regulations would not,
individually or in the aggregate, have a Material Adverse Effect on ITI; (iv)
neither ITI nor any of its Subsidiaries has waived any statute of limitations in
respect of its Taxes; (v) no Tax Return referred to in clause (i) that reflected
material Taxes is currently being examined by the appropriate taxing authority
(all such federal Tax Returns that are closed being listed in Section 2.9 of the
ITI Letter); (vi) no issues have been raised by the relevant taxing authority in
connection with the examination of the Tax Returns referred to in clause (i)
that are currently pending, asserted or threatened; (vii) neither ITI nor any of
its Subsidiaries is a party to a closing agreement, or the subject of a private
ruling, concerning Taxes with any taxing authority; (viii) except as provided
under Treas. Reg. Section 1.1502-6 (or any similar provision of state, local or
foreign law), neither ITI nor any of its Subsidiaries has any liability or
obligation to pay Taxes of another person; (ix) neither ITI nor any of its
Subsidiaries has made
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any payment, is obligated to make any payment, or is a party to any agreement
(including this Agreement), that could obligate it to make any payment that will
not be deductible under Section 280G of the Code; and (x) all deficiencies
asserted or assessments made as a result of any examination of Tax Returns
referred to in clause (i) by any taxing authority have been paid in full or are
being timely and properly contested (such contested items being set forth in
Section 2.9 of the ITI Letter). All Taxes of ITI and its Subsidiaries which will
be due and payable, whether now or hereafter, for any period ending on, ending
on and including or ending prior to the Effective Time shall have been paid by
or on behalf of ITI and its Subsidiaries or shall be reflected, in a manner
consistent with past practice, on ITI's books as an accrued Tax liability,
either current or deferred. For purposes of this Agreement: (i) "Taxes" means
any federal, state, local, foreign or provincial income, gross receipts,
property, sales, use, license, excise, franchise, employment, payroll,
withholding, alternative or added minimum, ad valorem, value-added, transfer or
excise tax, or other tax, custom, duty, governmental fee or other like
assessment or charge of any kind whatsoever, together with any interest or
penalty imposed by any Governmental Entity, and (ii) "Tax Return" means any
return, report or similar statement (including the attached schedules) required
to be filed with respect to any Tax, including, without limitation, any
information return, claim for refund, amended return or declaration of estimated
Tax.
Section 2.10 Actions and Proceedings. Except as set forth in Section 2.10
of the ITI Letter, there are no, and since January 1, 1999, there have been no,
outstanding orders, judgments, injunctions, awards or decrees of any
Governmental Entity against or involving ITI or any of its Subsidiaries, or
against or involving any of the present or former directors, officers,
employees, consultants, agents or stockholders of ITI or any of its
Subsidiaries, as such, any of its or their properties, assets or business or any
ITI Plan (as hereinafter defined) that, individually or in the aggregate, would
have a Material Adverse Effect on ITI or materially impair the ability of ITI or
its Subsidiaries to perform its obligations hereunder. Except as set forth in
Section 2.10 of the ITI Letter, there are no actions, suits or claims or legal,
administrative or arbitrative proceedings or investigations pending or, to the
Knowledge of ITI, threatened against or involving ITI or any of its Subsidiaries
or any of its or their present or former directors, officers, employees,
consultants, agents or stockholders, as such, or any of its or their properties,
assets or business or any ITI Plan that, individually or in the aggregate, would
have a Material Adverse Effect on ITI or materially impair the ability of ITI or
its Subsidiaries to perform its obligations hereunder. There are no actions,
suits, labor disputes or other litigation, legal or administrative proceedings
or governmental investigations pending or, to the Knowledge of ITI, threatened
against or affecting ITI or any of its Subsidiaries or any of its or their
present or former officers, directors, employees, consultants, agents or
stockholders, as such, or any of its or their properties, assets or business
relating to the transactions contemplated by this Agreement that would have a
Material Adverse Effect on the Surviving Corporation, after giving effect to
available insurance coverage.
Section 2.11 Certain Agreements. Except as otherwise set forth in Section
2.11 of the ITI Letter, neither ITI nor any of its Subsidiaries is a party to
any material oral or written agreement or plan, including any employment
agreement, severance agreement, stock option plan, stock appreciation rights
plan, restricted stock plan or stock purchase plan, any of the benefits of which
will be increased, or the vesting of the benefits of which will be accelerated,
by the occurrence of any of the transactions contemplated by this Agreement or
the value of any of the benefits of which will be calculated on the basis of any
of the transactions contemplated by this Agreement.
Section 2.12 ERISA.
(a) Each material ITI Plan (as hereinafter defined) is listed in Section
2.12 of the ITI Letter. Except as would not have a Material Adverse Effect on
ITI, each ITI Plan complies in all respects with the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), the Code and
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all other applicable statutes and governmental rules and regulations, and (i) no
"reportable event" (within the meaning of Section 4043 of ERISA) has occurred
with respect to any ITI Plan that is likely to have individually or in the
aggregate, a Material Adverse Effect on ITI and (ii) ITI has not withdrawn from
any ITI Plan or ITI Multiemployer Plan (as hereinafter defined) or instituted,
or is currently considering taking, any action to do so. Except as would not
have a Material Adverse Effect on ITI, no ITI Plan, nor any trust created
thereunder, has incurred any "accumulated funding deficiency" (as defined in
Section 302 of ERISA), whether or not waived. Neither ITI nor any ERISA
Affiliate of ITI maintains a plan subject to Title IV of ERISA. Neither ITI nor
any ERISA Affiliate has ever contributed to, or been required to contribute to
any "multiemployer plan" (within the meaning of Section 3(37) of ERISA). For
this purpose, "ERISA Affiliate" means any entity which is under common control
with or which would be considered a single employer with ITI pursuant to Section
414(b), (c), (m) or (o) of the Code. Except for the Subsidiaries, there are no
ERISA Affiliates of ITI.
(b) With respect to the ITI Plans, no event has occurred and, to the
Knowledge of ITI, there exists no condition or set of circumstances in
connection with which ITI or any ITI Plan fiduciary could be subject to any
liability under the terms of such ITI Plans, ERISA, the Code or any other
applicable law, other than liabilities for benefits payable in the normal
course, which would have a Material Adverse Effect on ITI. All ITI Plans that
are intended to be qualified under Section 401(a) of the Code have been
determined by the IRS to be so qualified, or a timely application for such
determination is now pending or a request for such a determination filed within
the remedial amendment period of Section 401(b) of the Code is pending, and ITI
is not aware of any reason why any such ITI Plan is not so qualified in
operation. ITI has not been notified by any ITI Multiemployer Plan that such ITI
Multiemployer Plan is currently in reorganization or insolvency under and within
the meaning of Section 4241 or 4245 of ERISA or that such ITI Multiemployer Plan
intends to terminate or has been terminated under Section 4041A of ERISA. Except
as disclosed in Section 2.12(b) of ITI Letter, ITI does not have any liability
or obligation under any welfare plan to provide benefits after termination of
employment to any employee or dependent other than as required by Section 4980B
of the Code.
(c) As used herein, (i) "ITI Plan" means a "pension plan" (as defined in
Section 3(2) of ERISA (other than a ITI Multiemployer Plan)), a "welfare plan"
(as defined in Section 3(1) of ERISA), or any bonus, profit sharing, deferred
compensation, incentive compensation, stock ownership, stock purchase, stock
option, phantom stock, holiday pay, vacation, severance, death benefit, sick
leave, fringe benefit, personnel policy, insurance or other plan, arrangement or
understanding, in each case established or maintained by ITI or any of its
Subsidiaries as to which ITI or any of its Subsidiaries has contributed or
otherwise may have any liability and (ii) "ITI Multiemployer Plan" means a
"multiemployer plan" (as defined in Section 4001(a)(3) of ERISA) to which ITI is
or has been obligated to contribute or otherwise may have any liability.
Section 2.13 Compliance with Worker Safety and Environmental Laws. The
properties, assets and operations of ITI and its Subsidiaries are in compliance
with all applicable federal, state, local and foreign laws, rules and
regulations, orders, decrees, judgments, permits and licenses relating to public
and worker health and safety (collectively, "Worker Safety Laws") and the
protection and clean-up of the environment and activities or conditions related
thereto, including, without limitation, those relating to the generation,
handling, disposal, transportation or release of hazardous materials
(collectively, "Environmental Laws"), except for any violations that,
individually or in the aggregate, would not have a Material Adverse Effect on
ITI. No hazardous materials have been released, spilled, leaked, discharged,
disposed of, pumped, poured, emitted, emptied, injected, leached, dumped or
allowed to escape ("Releases") by any person at any property now owned, operated
or leased by ITI or its Subsidiaries or by ITI or a Subsidiary at any property
formerly owned, operated or leased by ITI or its Subsidiaries, except for such
Releases that individually and in the aggregate would not
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have a Material Adverse Effect on ITI. Neither ITI nor any Subsidiary have
received any request for information, notice of claim, demand or notification
that it is or may be potentially responsible with respect to any investigation
or clean-up of any threatened or actual Release. Except as set forth in Section
2.13 of the ITI Letter and heretofore provided to SLC, within the past five
years, there have been no environmental inspections, studies, audits, tests,
reviews or other analyses conducted by a third party environmental consultant or
engineer in relation to any property or business now or previously owned,
operated or leased by ITI or its Subsidiaries. With respect to such properties,
assets and operations, including any previously owned, leased or operated
properties, assets or operations, there are no events, conditions,
circumstances, activities, practices, incidents, actions or plans of ITI or any
of its Subsidiaries that may interfere with or prevent compliance or continued
compliance with applicable Worker Safety Laws and Environmental Laws, other than
any such interference or prevention as would not, individually or in the
aggregate with any such other interference or prevention, have a Material
Adverse Effect on ITI.
Section 2.14 Labor Matters. Except as otherwise set forth in Section 2.14
of the ITI Letter, neither ITI nor any of its Subsidiaries is a party to any
collective bargaining agreement or labor contract. Neither ITI nor any of its
Subsidiaries has engaged in any unfair labor practice with respect to any
persons employed by or otherwise performing services primarily for ITI or any of
its Subsidiaries (the "ITI Business Personnel"), and there is no unfair labor
practice complaint or grievance against ITI or any of its Subsidiaries by the
National Labor Relations Board or any comparable state agency pending or
threatened in writing with respect to ITI Business Personnel, except where such
unfair labor practice, complaint or grievance would not have a Material Adverse
Effect on ITI. There is no labor strike, dispute, slowdown or stoppage pending
or, to the Knowledge of ITI, threatened against or affecting ITI or any of its
Subsidiaries which may interfere with the respective business activities of ITI
or any of its Subsidiaries, except where such dispute, strike or work stoppage
would not have a Material Adverse Effect on ITI.
Section 2.15 Intellectual Property.
(a) For the purposes of this Agreement, the following terms have the
following definitions.
"Intellectual Property" shall mean any or all of the following and all
rights associated therewith: (i) all domestic and foreign patents and
applications therefor and all issues, divisions, renewals, extensions,
continuations and continuations-in-part thereof; (ii) all inventions (whether
patentable or not), invention disclosure, improvements, processes, trade
secrets, proprietary information, know how, technology, technical data and
customer lists, and all documentation relating to any of the foregoing; (iii)
all copyrights, copyrights registrations and applications therefor, and all
other rights corresponding thereto throughout the world, all mask works, mask
work registrations and applications therefor; (v) all industrial designs, trade
dress and any registrations and applications therefor; (vi) all trade names,
logos, common law trademarks and service marks, trademarks and service marks
registrations and applications therefor and all goodwill associated therewith;
(vii) all computer software (other than packaged software not customized except
in an incidental manner) including source code, object code, firmware,
development tools, files, records and data, all media on which any of the
foregoing is recorded, all documentation related to any of the foregoing; and
(viii) all domain names.
"Intellectual Property of ITI" shall mean any Intellectual Property that:
(i) is owned by or exclusively licensed to ITI and/or its Subsidiaries and is
material to the operation of ITI and its Subsidiaries, taken as a whole; or (ii)
is material to the operation of ITI and its Subsidiaries, taken as a whole,
including the design, manufacture and use of the products and/or technology of
ITI and its Subsidiaries as it currently is conducted including, without
limitation, the design, development, manufacture and sale of all products and/or
technology currently manufactured, licensed or sold by ITI or any Subsidiary or
under development by ITI or any Subsidiary.
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(b) Section 2.15(b) of the ITI Letter lists all of the United States and
foreign (i) patent and patent applications; (ii) registered trademarks and
trademark applications; (iii) registered copyrights and applications for
copyright registration; (iv) mask work registrations and applications to
register mask works; (v) domain names; and (vi) any other Intellectual Property
of ITI that is the subject of an application to, or certificate or registration
issued by, any state, government or other public legal authority or that is
owned by or exclusively licensed to ITI or any Subsidiary. The registrations of
the Intellectual Property of ITI and its Subsidiaries listed in Section 2.15(b)
of the ITI Letter are valid and subsisting and in full force, all necessary
registration and renewal fees in connection with all material registrations have
been paid to the relevant patent, copyright and trademark authorities in the
United States for the purposes of maintaining such registrations. ITI and its
Subsidiaries have complied in all material respects with all applicable
disclosure requirements and neither ITI, any Subsidiary nor any named inventor
or assignee has committed any fraudulent act in the application for or
maintenance of any Intellectual Property of ITI. All Intellectual Property of
ITI listed in Section 2.15(b) of the ITI Letter that is within the meaning of
(i)-(v) above is specifically designated as such in Section 2.15(b) of the ITI
Letter.
(c) Except as otherwise set forth in Section 2.15(c) of the ITI Letter, ITI
and/or its Subsidiaries owns and has good and exclusive title to each item of
Intellectual Property of ITI that is owned by ITI or any Subsidiary and listed
in Section 2.15(b) of the ITI Letter, free and clear of any liens, encumbrances
or restrictions. Except as otherwise set forth in Section 2.15(c) of the ITI
Letter, to the Knowledge of ITI, no registration for any Intellectual Property
of ITI is the subject of any cancellation or reexamination proceeding or any
other proceeding challenging its extent or validity. Except as otherwise set
forth in Section 2.15(c) of the ITI Letter, ITI or one of its Subsidiaries is
the applicant of record in all patent application, and applications for
trademark, service mark, trade dress, industrial design, copyright and mask work
registration with respect to Intellectual Property of ITI, and, to the Knowledge
of ITI, no opposition, extension of time to oppose, interference, rejection or
refusal to register has been received in connection with any such application,
and all fees in connection with such applications have been paid. ITI or a
Subsidiary owns, or has the right to use or operate under, all Intellectual
Property of ITI not listed on Section 2.15(b) of the ITI Letter. No Intellectual
Property of ITI or any Subsidiary or product and/or technology of ITI or any
Subsidiary is subject to any material outstanding decree, order, judgment, or
stipulation restricting in any material manner the use or licensing thereof by
ITI or such Subsidiary.
(d) Section 2.15(d) of the ITI Letter lists all material contracts,
licenses and agreements, (whether written or otherwise) by which ITI or any
Subsidiary licenses Intellectual Property of ITI from or to any third party
other than incidental to the sale of products or services. Except pursuant to
agreements listed in Section 2.15(d) of the ITI Letter other than incident to
sale of goods and services, (i) no Person (as hereinafter defined) has any
material rights to use any of the Intellectual Property of ITI that is owned by
ITI or any Subsidiary; and (ii) no Person owns or retains any material rights in
the Intellectual Property of ITI that is owned by ITI or any Subsidiary. All
contracts listed in Section 2.15(d) of the ITI Letter that are within the
meaning of (i) or (ii) above are specifically designated as such in Section
2.15(d) of the ITI Letter. For purposes of this Agreement, "Person" means any
individual, corporation, limited liability corporation, partnership,
association, joint-stock company, business trust or other entity or
unincorporated organization.
(e) Except as would not have a Material Adverse Effect on ITI: (i) the
contracts, licenses and agreements listed in Section 2.15(d) of the ITI Letter
are in full force and effect; (ii) there are no contracts, licenses and
agreements between ITI or any of its Subsidiaries and any other Person with
respect to Intellectual Property of ITI with respect to which there is any
dispute known to ITI regarding the scope of such agreement, or performance under
such agreement including with respect to any payments to be made or received by
ITI or any Subsidiary thereunder; (iii) the consummation of the transactions
contemplated by this Agreement will neither violate nor result in the breach,
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modification, cancellation, termination, or suspension of the contracts,
licenses and agreements listed in Section 2.15(d) of the ITI Letter or alter or
impair any of ITI's or its Subsidiaries' rights to the Intellectual Property;
and (iv) ITI and its Subsidiaries and, to the Knowledge of ITI, any Person with
which ITI or any of its Subsidiaries has entered into any such contract, license
or agreement are in compliance with, and have not breached any term of, those
contracts, licenses and agreements.
(f) Except as would not have a Material Adverse Effect on ITI or except as
set forth in Section 2.15(f) of the ITI Letter, (i) the Intellectual Property of
ITI does not infringe, dilute (in the case of trademarks) or otherwise violate
Intellectual Property of any Person; (ii) the operation of ITI's and its
Subsidiaries' business as it currently is conducted, including its design,
development, manufacture and sale of its products and/or technology, including
products and/or technology currently under development, and provision of
services, does not infringe, dilute (in the case of trademarks) or otherwise
violate the Intellectual Property of any other Person; (iii) to the Knowledge of
ITI, no officer, director, employee or consultant of ITI or any Subsidiary is
infringing or misappropriating, diluting (in the case of trademarks) or
otherwise violating the Intellectual Property of any other Person in the course
of performing his or her duties for ITI or any Subsidiary; and (iv) neither ITI
nor any of its Subsidiaries has received notice from any Person that the
Intellectual Property of ITI or the operation of ITI's business, including its
design, development, manufacture and sale of its products and/or technology
(including with respect to products and/or technology currently under
development) and provision of services, infringes, dilutes (in the case of
trademarks) or otherwise violates the Intellectual Property of any Person.
(g) There are no material claims asserted or, to the Knowledge of ITI,
threatened against ITI or any Subsidiary related to any product or service of
ITI or any Subsidiary. To the Knowledge of ITI, there are no material claims
asserted or threatened against any customer of ITI or any Subsidiary, related to
any product or service of ITI or any Subsidiary.
(h) The Intellectual Property of ITI constitutes all Intellectual Property
necessary to operate the business of ITI and its Subsidiaries as it is currently
conducted.
Section 2.16 Reorganization; Supplemental Ruling. Neither ITI nor any of
its Subsidiaries (i) has taken any action or failed to take any action which
action or failure would jeopardize the qualification of the Merger as a
reorganization within the meaning of Section 368(a) of the Code; or (ii) is
aware of any fact that would jeopardize SLC's receipt of the supplemental ruling
referred to in Section 6.3(d).
Section 2.17 Required Vote of ITI Stockholders. The affirmative vote of
the holders of a majority of the outstanding shares of ITI Common Stock is
required to adopt this Agreement. No other vote of the securityholders of ITI is
required by law, the Certificate of Incorporation or the Bylaws of ITI or
otherwise in order for ITI to consummate the Merger and the transactions
contemplated hereby.
Section 2.18 Brokers. No broker, investment banker or other person, other
than Goldman, Sachs & Co. and U.S. Bancorp Piper Jaffray, Inc., the fees and
expenses of which will be paid by ITI (as reflected in an agreement between
Goldman, Sachs & Co and ITI and an agreement between U.S. Bancorp Piper Jaffray,
Inc. and ITI a copy of each of which has been furnished to SLC), is entitled to
any broker's, finder's or other similar fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of ITI.
Section 2.19 State Takeover Statutes; Certain Charter Provisions. The
Board of Directors of ITI has, to the extent such statutes are applicable, taken
all action (including appropriate approvals of the Board of Directors of ITI)
necessary to exempt ITI, its Subsidiaries and affiliates, the Merger, this
Agreement and the transactions contemplated hereby from the requirements of any
"moratorium,"
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"control share," "fair price," or other antitakeover laws and regulations of any
state, including Section 203 of the DGCL.
Section 2.20 Year 2000 Matters. ITI and its Subsidiaries have engaged in a
commercially reasonable effort to: (a) identify software, firmware and hardware,
whether in systems, equipment, product or otherwise (collectively, "Technology")
purchased, owned, leased, licensed or otherwise used by ITI or any of its
Subsidiaries, which is material to ITI and its Subsidiaries taken as a whole,
and which they believe must be capable of accurately processing date/time data
within, from, into and between the Twentieth and Twenty-First Centuries,
including leap year calculations and the processing of four-digit date data
("Year 2000 Compliant"), (b) test such material Technology to determine whether
it is Year 2000 Compliant and (c) seek to obtain verification from providers of
such material Technology, as appropriate, that such Technology is Year 2000
Compliant. Except as otherwise set forth in Section 2.20 of the ITI Letter,
there is no Technology of ITI or its Subsidiaries that would have a Material
Adverse Effect on ITI due to being non-Year 2000 Compliant. The statements
contained in this Section 2.20 constitute a Year 2000 Readiness Disclosure for
purposes of the United States of America's Year 2000 Information and Readiness
Disclosure Act.
Section 2.21 Opinion of Financial Advisor. ITI has received the opinion of
its financial advisor to the effect that, as of the date hereof, the Company
Consideration (as defined below) to be paid and retained pursuant to this
Agreement is, in the aggregate, fair from a financial point of view to the
stockholders of ITI. The "Company Consideration" shall mean the aggregate Per
Share Cash Consideration paid, together with the shares of ITI Common Stock as
to which the Per Share Cash Consideration is not paid.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SLC
SLC represents and warrants to ITI as follows:
Section 3.1 Organization, Standing and Power. SLC is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the requisite corporate power and authority to carry on its
business as now being conducted. Each Subsidiary of SLC is duly organized,
validly existing and in good standing under the laws of the jurisdiction in
which it is organized and has the requisite corporate (in the case of a
Subsidiary that is a corporation) or other power and authority to carry on its
business as now being conducted, except where the failure to be so organized,
existing or in good standing or to have such power or authority would not,
individually or in the aggregate, have a Material Adverse Effect on SLC. SLC and
each of its Subsidiaries are duly qualified to do business, and are in good
standing, in each jurisdiction where the character of their properties owned or
held under lease or the nature of their activities makes such qualification
necessary, except where the failure to be so qualified would not, individually
or in the aggregate, have a Material Adverse Effect on SLC.
Section 3.2 Capital Structure. As of the date hereof, the authorized
capital stock of SLC consists solely of 2,000,000 shares of SLC Common Stock,
$.005 par value. At the close of business on September 22, 1999, (i) 1,000,000
shares of SLC Common Stock were issued and outstanding, all of which were
validly issued, fully paid and nonassessable and free of preemptive rights, (ii)
no shares of SLC Common Stock were held in the treasury of SLC or by
Subsidiaries of SLC and (iii) 50,000 shares of SLC Common Stock were reserved
for issuance pursuant to outstanding options to purchase shares of SLC Common
Stock and other benefits granted under SLC's benefit plans, or pursuant to any
plans assumed by SLC in connection with any acquisition, business combination or
similar transaction. As of the date of this Agreement, except as set forth
above, no shares of capital stock or other voting securities of SLC were issued,
reserved for issuance or outstanding. As of the
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date of this Agreement, except (i) for this Agreement, (ii) as set forth above
or (iii) as set forth in Section 3.2 of the letter dated the date hereof and
delivered on the date hereof by SLC to ITI, which letter relates to this
Agreement and is designated therein as the SLC Letter (the "SLC Letter"), there
are no options, warrants, calls, rights, agreements or other commitments to
which SLC or any of its Subsidiaries is a party or by which any of them is bound
obligating SLC or any of its Subsidiaries to issue, deliver or sell, or cause to
be issued, delivered or sold, additional shares of capital stock of SLC or any
of its Subsidiaries or obligating SLC or any of its Subsidiaries to grant,
extend or enter into any such option, warrant, call, right, agreement or other
commitment. Except as set forth in Section 3.2 of the SLC Letter, neither SLC
nor any of its Subsidiaries is obligated to pay for or repurchase any shares of
capital stock of SLC or any of its Subsidiaries. There are no outstanding SLC
securities that are convertible into or exchangeable for any shares of capital
stock or other securities of SLC or its Subsidiaries. Each outstanding share of
capital stock of each Subsidiary of SLC is duly authorized, validly issued,
fully paid and nonassessable and, except as disclosed in Section 3.2 of the SLC
Letter, each such share is owned by SLC or another Subsidiary of SLC, free and
clear of all security interests, liens, claims, pledges, options, rights of
first refusal, agreements, limitations on voting rights, charges and other
encumbrances of any nature whatsoever. Except as set forth above, SLC does not
have any outstanding bonds, debentures, notes or other obligations the holders
of which have the right to vote (or convertible into, exchangeable for or
exercisable for securities having the right to vote) with the stockholders of
SLC on any matter. Except as otherwise set forth in Section 3.2 of the SLC
Letter, all of SLC's Subsidiaries are wholly owned, directly or indirectly, by
SLC and are listed in Section 3.2 of the SLC Letter.
Section 3.3 Authority. On or prior to the date of this Agreement, the
Board of Directors of SLC, at a meeting duly called and held at which a quorum
was present throughout, has by the requisite vote of the directors, declared the
Merger to be advisable and fair to and in the best interest of SLC and its
stockholders and has approved this Agreement in accordance with the DGCL. The
stockholder of SLC has approved this Agreement in accordance with the DGCL, and
this Agreement, and such approval, has not been changed, withdrawn or revoked.
SLC has all requisite corporate power and authority to enter into this Agreement
and to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement by SLC and the consummation by SLC of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of SLC, subject to the filing of the Certificate of
Merger. This Agreement has been duly executed and delivered by SLC and (assuming
the valid authorization, execution and delivery of this Agreement by ITI and the
validity and binding effect hereof on ITI) constitutes the valid and binding
obligation of SLC enforceable against SLC in accordance with its terms.
Section 3.4 Consents and Approvals; No Violation. Assuming that all
consents, approvals, authorizations and other actions described in this Section
3.4 have been obtained and all filings and obligations described in this Section
3.4 have been made, except as set forth in Section 3.4 of SLC Letter, the
execution and delivery of this Agreement do not, and the consummation of the
transactions contemplated hereby and compliance with the provisions hereof will
not, result in any violation of, or default (with or without notice or lapse of
time, or both) under, or give to others a right of termination, cancellation or
acceleration of any obligation or the loss of a material benefit under, or
result in the creation of any lien, security interest, charge or encumbrance
upon any of the properties or assets of SLC or any of its Subsidiaries under,
any provision of (i) the Certificate of Incorporation or Bylaws of SLC, (ii) any
provision of the comparable charter or organization documents of any of SLC's
Subsidiaries, (iii) any loan or credit agreement, note, bond, mortgage,
indenture, lease or other agreement, instrument, permit, concession, franchise
or license applicable to SLC or any of its Subsidiaries or (iv) any judgment,
order, injunction, decree, statute, law, ordinance, rule or regulation
applicable to SLC or any of its Subsidiaries or any of their respective
properties or assets, other than, in the case of clauses (iii) or (iv), any such
violations, defaults, rights, liens,
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security interests, charges or encumbrances that, individually or in the
aggregate, would not have a Material Adverse Effect on SLC, materially impair
the ability of SLC to perform its obligations hereunder or prevent the
consummation of any of the transactions contemplated hereby. Except as set forth
in Section 3.4 of the SLC Letter, no filing or registration with, review by or
authorization, consent or approval of, any third party, including any
Governmental Entity is required by or with respect to SLC or any of its
Subsidiaries in connection with the execution and delivery of this Agreement by
SLC or is necessary for the consummation of the Merger and the other
transactions contemplated by this Agreement and compliance with the provisions
hereof, except for (i) in connection, or in compliance, with the provisions of
the HSR Act, the Securities Act and the Exchange Act, (ii) the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware and
appropriate documents with the relevant authorities of other states in which SLC
is qualified to do business, (iii) applicable requirements, if any, of Blue Sky
Laws, (iv) as may be required under foreign laws and (v) such other consents,
orders, authorizations, registrations, declarations and filings the failure of
which to be obtained or made would not, individually or in the aggregate, have a
Material Adverse Effect on SLC, materially impair the ability of SLC to perform
its obligations hereunder or prevent the consummation of any of the transactions
contemplated hereby.
Section 3.5 Financial Statements; Books and Records.
(a) SLC has furnished ITI with copies of (i) the audited consolidated
balance sheets of SLC and its Subsidiaries as of December 31, 1998, 1997 and
1996 and the related audited consolidated statements of income, changes in
stockholders' equity and statements of cash flows for the years then ended
(together with any footnotes thereto, the "Audited Financial Statements") and
(ii) the unaudited consolidated balance sheets of SLC and its Subsidiaries as of
June 30, 1999 and the related unaudited consolidated statements of income,
changes in stockholders' equity and statements of cash flows for the six months
then ended (together with any footnotes thereto, the "Unaudited Financial
Statements" and, together with the Audited Financial Statements, the "SLC
Financial Statements"). Except as otherwise set forth in Section 3.5(a) of the
SLC Letter, the SLC Financial Statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved and fairly presented in all material respects the
consolidated financial position of SLC and its Subsidiaries as of the dates
thereof and the results of operations and cash flows for the periods then ended,
except that the Unaudited Financial Statements are subject to normal year-end
adjustments which were not or are not expected to be material in amount and do
not contain complete footnotes required by generally accepted accounting
principles. Except as and to the extent set forth in Section 3.5 of SLC Letter,
SLC has not, since December 31, 1998, made any change in the accounting
practices or policies applied in the preparation of financial statements.
(b) The books of account of SLC have been maintained in accordance with the
requirements of Section 13(b)(2) of the Exchange Act (regardless of whether or
not SLC is subject to that Section), including the maintenance of an adequate
system of internal controls. The minute books of SLC and its Subsidiaries, all
of which have been made available to ITI, contain records of all meetings held
of, and corporate action taken by, the stockholders and the Board of Directors
of SLC and its Subsidiaries, which are accurate in all material respects, and no
meeting of any such stockholders or Board of Directors has been held for which
minutes have not been prepared and are not contained in such minute books.
(c) SLC and its Subsidiaries do not have any liabilities of any nature,
whether known or unknown, absolute, accrued, contingent or otherwise and whether
due or to become due that, individually or in the aggregate, have a Material
Adverse Effect on SLC, except (i) as and to the extent set forth on the most
recent balance sheet included in the Unaudited Financial Statements,
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(ii) for liabilities or obligations incurred since the date of the balance sheet
referred to in clause (i) in the ordinary course of business or (iii) as set
forth in Section 3.5 of the SLC Letter. The term "liabilities" is not intended
to include contractual obligations (other than those in default or those that
would be in default upon the giving of notice, the passage of time or both)
other than those customarily reflected on the face of a balance sheet.
Section 3.6 Proxy Statement. None of the information to be supplied by or
on behalf of SLC for inclusion or incorporation by reference in the Proxy
Statement will, at the time of the mailing of the Proxy Statement, at the time
of the ITI Stockholder Meeting or at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading.
Section 3.7 Absence of Certain Changes or Events. Except as otherwise
contemplated in this Agreement (including the actions permitted in Section 4.1)
or in Section 3.7 of the SLC Letter, since June 30, 1999:
(a) SLC has conducted its business only in the ordinary course
consistent with past practice;
(b) there has not been any Material Adverse Effect with respect to
SLC;
(c) SLC has not made any material increase in any bonus or any wage,
salary or compensation to officers or key employees, or any material
increase in benefits payable under or pursuant to any, or created any
material new, employment agreements or profit-sharing, bonus, deferred
compensation, savings, severance, insurance, pension, retirement or other
employee benefit plan, payment or arrangement (including, but not limited
to, the granting of employee stock options, restricted stock or contingent
stock awards);
(d) SLC has not made any loans or advances in excess of $100,000 to
any officer, director, stockholder or affiliate of SLC (except for ordinary
travel and business expense payments);
(e) there has not been any change in the accounting methods or
practices followed by SLC;
(f) SLC has not split, combined or reclassified any outstanding shares
of capital stock of SLC or declared, set aside or paid, or accrued any
liability for the payment of, any dividends or other distributions payable
in cash, property or otherwise with respect to any shares of capital stock
of SLC;
(g) SLC has not entered into any commitment or transaction (including
without limitation any borrowing or capital expenditure) other than in the
ordinary course of business consistent with past practice;
(h) SLC has not incurred or guaranteed any debt, liability or
obligation, whether accrued, absolute, contingent or otherwise,
individually or in the aggregate in excess of $500,000 or other than in the
ordinary course of business consistent with past practice;
(i) SLC has not issued, redeemed or repurchased any stock, bond or
other corporate security;
(j) SLC has not experienced any damage to, or destruction, theft or
loss of, any asset or property, whether or not covered by insurance, in an
amount exceeding $100,000 in the aggregate or any material interruption in
the use of any of the assets of SLC;
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(k) SLC has not entered into an amendment to or termination of (or an
oral commitment to do so) any material contract, agreement or license to
which it is a party or by which it is bound;
(l) SLC has not sold, assigned, leased, transferred or otherwise
disposed of any of its assets or property (tangible or intangible),
including any sale, assignment, lease, transfer or other disposition of any
of the Intellectual Property (as hereinafter defined), except in the
ordinary course of business consistent with past practice;
(m) SLC has not sold, issued, granted or authorized the sale, issuance
or grant of (i) any capital stock or security (except for SLC Common Stock
issued upon the exercise of outstanding SLC Options), (ii) any option,
call, warrant or right to acquire any capital stock or other security or
(iii) any instrument convertible into or exchangeable for any capital stock
or other security of SLC;
(n) Except as contemplated hereby and except by the virtue of the
transactions contemplated hereby, SLC has not amended or waived any of its
rights under, or taken any action to permit the acceleration, vesting or
repricing under, (i) any provision of SLC's stock option plans, (ii) any
provision of any agreement evidencing any outstanding SLC Options or (iii)
any restricted stock purchase agreement;
(o) There has been no amendment to the Certificate of Incorporation,
Bylaws or other charter or organizational documents of SLC or any of its
Subsidiaries;
(p) Neither SLC nor any of its Subsidiaries has made any material
election with respect to Taxes nor has SLC or any of its Subsidiaries
entered into an agreement, arrangement or settlement with respect to
material Taxes with any taxing authority or other person; and
(q) SLC has not entered into any commitment (written or oral,
contingent or otherwise) to do any of the foregoing.
The phrase "consistent with past practice" wherever used is only intended
as a limitation when current practices can be meaningful compared to past
practices. In this Section 3.7 "SLC" refers to SLC and/or its Subsidiaries.
Section 3.8 Permits and Compliance. Each of SLC and its Subsidiaries is in
possession of all franchises, grants, authorizations, licenses, permits,
easements, variances, exceptions, consents, certificates, approvals and orders
of any Governmental Entity necessary for SLC or any of its Subsidiaries to own,
lease and operate its properties or to carry on its business as it is now being
conducted (the "SLC Permits"), except where the failure to have any of SLC
Permits would not, individually or in the aggregate, have a Material Adverse
Effect on SLC, and, as of the date of this Agreement, no suspension or
cancellation of any of SLC Permits is pending or, to the Knowledge of SLC (as
hereinafter defined), threatened, except where the suspension or cancellation of
any of SLC Permits would not, individually or in the aggregate, have a Material
Adverse Effect on SLC. Neither SLC nor any of its Subsidiaries is in violation
of (A) its charter, by-laws or other organizational documents, (B) any
applicable law, ordinance, administrative or governmental rule or regulation or
(C) any order, decree or judgment of any Governmental Entity having jurisdiction
over SLC or any of its Subsidiaries, except, in the case of clauses (A), (B) and
(C), for any violations that, individually or in the aggregate, would not have a
Material Adverse Effect on SLC. Except as disclosed in Section 3.8 of SLC
Letter, as of the date hereof there is no contract or agreement that is material
to the business, assets, liabilities, condition or results of operations of SLC
and its Subsidiaries, taken as a whole. Except as disclosed in Section 3.8 of
SLC Letter, no event of default or event that, but for the giving of notice or
the lapse of time or both, would constitute an event of default exists or, upon
the consummation by SLC of the transactions contemplated by this
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Agreement, will exist under any indenture, mortgage, loan agreement, note or
other agreement or instrument for borrowed money, any guarantee of any agreement
or instrument for borrowed money or any lease, contractual license or other
agreement or instrument to which SLC or any of its Subsidiaries is a party or by
which SLC or any such Subsidiary is bound or to which any of the properties,
assets or operations of SLC or any such Subsidiary is subject, other than any
defaults that, individually or in the aggregate, would not have a Material
Adverse Effect on SLC. SLC has no reason to believe that all Contracts to which
SLC or any Subsidiary is a party or by which SLC or any Subsidiary is bound are
not valid and binding obligations of SLC or such Subsidiary and each other party
thereto except such Contracts which if not so valid and binding would not,
individually or in the aggregate, have a Material Adverse Effect on SLC. SLC has
no reason to believe that any other party to a Contract is in violation of or in
default under such Contract except such violations or defaults which,
individually or in the aggregate, would not have a Material Adverse Effect on
SLC. Neither SLC nor any of its Subsidiaries is a party to or bound by any
Contract that, after the Effective Time, would interfere with the conduct of the
Surviving Corporation's business, except for such interference that would not
have a Material Adverse Effect on the Surviving Corporation. For purposes of
this Agreement, "Knowledge of SLC" (and similar phrases) means the actual
knowledge, after reasonable inquiry, of the individuals identified on Section
3.8 of SLC Letter.
Section 3.9 Tax Matters. Except as otherwise set forth in Section 3.9 of
the SLC Letter, (i) SLC and each of its Subsidiaries have timely filed all
federal, and all material state, local, foreign and provincial, Tax Returns
required to have been filed or appropriate extensions therefor have been
properly obtained, and such Tax Returns are correct and complete, except to the
extent that any failure to so file or any failure to be correct and complete
would not, individually or in the aggregate, have a Material Adverse Effect on
SLC; (ii) all Taxes shown to be due on such Tax Returns have been timely paid or
extensions for payment have been properly obtained, or such Taxes are being
timely and properly contested (such contested Taxes being set forth in Section
3.9 of the SLC Letter); (iii) SLC and each of its Subsidiaries have complied in
all material respects with all rules and regulations relating to the withholding
of Taxes except to the extent that any failure to comply with such rules and
regulations would not, individually or in the aggregate, have a Material Adverse
Effect on SLC; (iv) neither SLC nor any of its Subsidiaries has waived any
statute of limitations in respect of its Taxes; (v) no Tax Return referred to in
clause (i) that reflected material Taxes is currently being examined by the
appropriate taxing authority (all such federal Tax Returns that were closed
being listed in Section 3.9 of the SLC Letter); (vi) no issues have been raised
by the relevant taxing authority in connection with the examination of the Tax
Returns referred to in clause (i) that are currently pending, asserted or
threatened; (vii) neither SLC nor any of its Subsidiaries is a party to a
closing agreement, or the subject of a private ruling, concerning Taxes with any
taxing authority; (viii) except as provided under Treas. Reg. Section 1.1502-6
(or any similar provision of state, local or foreign law), neither SLC nor any
of its Subsidiaries has any liability or obligation to pay Taxes of another
person; (ix) neither SLC nor any of its Subsidiaries has made any payment, is
obligated to make any payment, or is a party to any agreement (including this
Agreement), that could obligate it to make any payment that will not be
deductible under Section 280G of the Code; and (x) all deficiencies asserted or
assessments made as a result of any examination of Tax Returns referred to in
clause (i) by any taxing authority have been paid in full or are being timely
and properly contested (such contested items being set forth in Section 3.9 of
the SLC Letter). All Taxes of SLC and its Subsidiaries which will be due and
payable, whether now or hereafter, for any period ending on, ending on and
including or ending prior to the Effective Time shall have been paid by or on
behalf of SLC and its Subsidiaries or shall be reflected, in a manner consistent
with past practice, on SLC's books as an accrued Tax liability, either current
or deferred.
Section 3.10 Actions and Proceedings. Except as set forth in Section 3.10
of SLC Letter, there are no, and since January 1, 1999 there have been no,
outstanding orders, judgments, injunctions,
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awards or decrees of any Governmental Entity against or involving SLC or any of
its Subsidiaries, or against or involving any of the present or former
directors, officers, employees, consultants, agents or stockholders of SLC or
any of its Subsidiaries, as such, any of its or their properties, assets or
business or any SLC Plan (as hereinafter defined) that, individually or in the
aggregate, would have a Material Adverse Effect on SLC or materially impair the
ability of SLC or its Subsidiaries to perform its obligations hereunder. Except
as set forth in Section 3.10 of the SLC Letter, there are no actions, suits or
claims or legal, administrative or arbitrative proceedings or investigations
pending or, to the Knowledge of SLC, threatened against or involving SLC or any
of its Subsidiaries or any of its or their present or former directors,
officers, employees, consultants, agents or stockholders, as such, or any of its
or their properties, assets or business or any SLC Plan that, individually or in
the aggregate, would have a Material Adverse Effect on SLC or materially impair
the ability of SLC or its Subsidiaries to perform its obligations hereunder.
There are no actions, suits, labor disputes or other litigation, legal or
administrative proceedings or governmental investigations pending or, to the
Knowledge of SLC, threatened against or affecting SLC or any of its Subsidiaries
or any of its or their present or former officers, directors, employees,
consultants, agents or stockholders, as such, or any of its or their properties,
assets or business relating to the transactions contemplated by this Agreement
that would have a Material Adverse Effect on the Surviving Corporation, after
giving effect to available insurance coverage.
Section 3.11 Certain Agreements. Except as otherwise set forth in Section
3.11 of SLC Letter, neither SLC nor any of its Subsidiaries is a party to any
material oral or written agreement or plan, including any employment agreement,
severance agreement, stock option plan, stock appreciation rights plan,
restricted stock plan or stock purchase plan, any of the benefits of which will
be increased, or the vesting of the benefits of which will be accelerated, by
the occurrence of any of the transactions contemplated by this Agreement or the
value of any of the benefits of which will be calculated on the basis of any of
the transactions contemplated by this Agreement. No holder of any SLC Option is
or will be entitled to receive cash from SLC or any Subsidiary in lieu of or in
exchange for such option or shares as a result of the transactions contemplated
by this Agreement.
Section 3.12 ERISA.
(a) Each material SLC Plan (as hereinafter defined) is listed in Section
3.12(a) of SLC Letter. Except as would not have a Material Adverse Effect on
SLC, each SLC Plan (other than non-U.S. SLC Plans) complies in all respects with
ERISA, the Code and all other applicable statutes and governmental rules and
regulations, and (i) no "reportable event" (within the meaning of Section 4043
of ERISA) has occurred with respect to any SLC Plan that is likely to have
individually or in the aggregate, a Material Adverse Effect on SLC, (ii) SLC has
not withdrawn from any SLC Multiemployer Plan (as hereinafter defined) or
instituted, or is currently considering taking, any action to do so, and (iii)
no action has been taken, or is currently being considered, to terminate any SLC
Plan subject to Title IV of ERISA. No SLC Plan, nor any trust created
thereunder, has incurred any "accumulated funding deficiency" (as defined in
Section 302 of ERISA), whether or not waived.
(b) Except as listed in Section 3.12(b) of SLC Letter, with respect to SLC
Plans, no event has occurred and, to the Knowledge of SLC, there exists no
condition or set of circumstances in connection with which SLC or any SLC Plan
fiduciary could be subject to any liability under the terms of such SLC Plans,
ERISA, the Code or any other applicable law, other than liabilities for benefits
payable in the normal course, which would have a Material Adverse Effect on SLC.
All SLC Plans that are intended to be qualified under Section 401(a) of the Code
have been determined by the IRS to be so qualified, or a timely application for
such determination is now pending or a request for such a determination filed
within the remedial amendment period of Section 401(b) of the Code is pending,
and SLC is not aware of any reason why any such SLC Plan is not so qualified in
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operation. SLC has not been notified by any SLC Multiemployer Plan that such SLC
Multiemployer Plan is currently in reorganization or insolvency under and within
the meaning of Section 4241 or 4245 of ERISA or that such SLC Multiemployer Plan
intends to terminate or has been terminated under Section 4041A of ERISA. Except
as disclosed in Section 3.12(b) of SLC Letter, SLC does not have any liability
or obligation under any welfare plan to provide benefits after termination of
employment to any employee or dependent other than as required by Section 4980B
of the Code.
(c) As used herein, (i) "SLC Plan" means a "pension plan" (as defined in
Section 3(2) of ERISA (other than a SLC Multiemployer Plan)), a "welfare plan"
(as defined in Section 3(1) of ERISA), or any bonus, profit sharing, deferred
compensation, incentive compensation, stock ownership, stock purchase, stock
option, phantom stock, holiday pay, vacation, severance, death benefit, sick
leave, fringe benefit, personnel policy, insurance or other plan, arrangement or
understanding, in each case established or maintained by SLC or any of its
Subsidiaries or, as to which SLC or any of its Subsidiaries has contributed or
otherwise may have any liability, and (ii) "SLC Multiemployer Plan" means a
"multiemployer plan" (as defined in Section 4001(a)(3) of ERISA) to which SLC is
or has been obligated to contribute or otherwise may have any liability.
(d) Item 3.12(d) of SLC Letter contains a list of all (i) severance and
employment agreements with executive officers of SLC, (ii) severance programs
and policies of SLC with or relating to its executive officers and (iii) plans,
programs, agreements and other arrangements of SLC with or relating to its
executive officers containing change of control or similar provisions.
(e) No entity which is under common control with or which would be
considered a single employer with SLC pursuant to Section 414(b), (c), (m) or
(o) of the Code (a "SLC ERISA Affiliate") is obligated to contribute to, nor
does any such entity have any liability or potential liability with respect to,
a "multiemployer plan," as defined in Section 4001(a)(3) of ERISA. No
liabilities associated with plans which are maintained or contributed to by any
SLC ERISA Affiliate and which are subject to title IV of ERISA could have a
Material Adverse Effect on SLC.
Section 3.13 Compliance with Worker Safety and Environmental Laws. The
properties, assets and operations of SLC and its Subsidiaries are in compliance
with all applicable Worker Safety Laws and Environmental Laws, except for any
violations that, individually or in the aggregate, would not have a Material
Adverse Effect on SLC. No hazardous materials have been Released by any person
at any property now owned, operated or leased by SLC or its Subsidiaries or by
SLC or a Subsidiary at any property formerly owned, operated or leased by SLC or
its Subsidiaries, except for such Releases that individually and in the
aggregate would not have a Material Adverse Effect on SLC. Neither SLC nor any
Subsidiary have received any request for information, notice of claim, demand or
notification that it is or may be potentially responsible with respect to any
investigation or clean-up of any threatened or actual Release. Except as set
forth in Section 3.13 of the SLC Letter and heretofore provided to ITI, within
the past five years, there have been no environmental inspections, studies,
audits, tests, reviews or other analyses conducted by a third party
environmental consultant or engineer in relation to any property or business now
or previously owned, operated or leased by SLC or its Subsidiaries. With respect
to such properties, assets and operations, including any previously owned,
leased or operated properties, assets or operations, there are no events,
conditions, circumstances, activities, practices, incidents, actions or plans of
SLC or any of its Subsidiaries that may interfere with or prevent compliance or
continued compliance with applicable Worker Safety Laws and Environmental Laws,
other than any such interference or prevention as would not, individually or in
the aggregate with any such other interference or prevention, have a Material
Adverse Effect on SLC.
Section 3.14 Labor Matters. Except as otherwise set forth in Section 3.14
of the SLC Letter, neither SLC nor any of its Subsidiaries is a party to any
collective bargaining agreement or labor contract. Neither SLC nor any of its
Subsidiaries has engaged in any unfair labor practice with
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respect to any persons employed by or otherwise performing services primarily
for SLC or any of its Subsidiaries (the "SLC Business Personnel"), and there is
no unfair labor practice complaint or grievance against SLC or any of its
Subsidiaries by the National Labor Relations Board or any comparable state
agency pending or threatened in writing with respect to SLC Business Personnel,
except where such unfair labor practice, complaint or grievance would not have a
Material Adverse Effect on SLC. There is no labor strike, dispute, slowdown or
stoppage pending or, to the Knowledge of SLC, threatened against or affecting
SLC or any of its Subsidiaries which may interfere with the respective business
activities of SLC or any of its Subsidiaries, except where such dispute, strike
or work stoppage would not have a Material Adverse Effect on SLC.
Section 3.15 Intellectual Property.
(a) For the purposes of this Agreement, the following terms have the
following definitions.
"Intellectual Property of SLC" shall mean any Intellectual Property that:
(i) is owned by or exclusively licensed to SLC and/or its Subsidiaries and is
material to the operation of SLC and its Subsidiaries, taken as a whole; or (ii)
is or material to the operation of SLC and its Subsidiaries, taken as a whole,
including the design, manufacture and use of the products and/or technology of
SLC and its Subsidiaries as it currently is conducted, including, without
limitation, the design, development, manufacture and sale of all products and/or
technology currently manufactured, licensed or sold by SLC or any Subsidiary or
under development by SLC or any Subsidiary.
(b) Section 3.15(b) of the SLC Letter lists all of the United States and
foreign (i) patent and patent applications; (ii) registered trademarks and
trademark applications; (iii) registered copyrights and applications for
copyright registration; (iv) mask work registrations and applications to
register mask works; (v) domain names; and (vi) any other Intellectual Property
of SLC that is the subject of an application to, or certificate or registration
issued by, any state, government or other public legal authority or that is
owned by or exclusively licensed to SLC or any Subsidiary. The registrations of
the Intellectual Property of SLC and its Subsidiaries listed in Section 3.15(b)
of the SLC Letter are valid and subsisting and in full force, all necessary
registration and renewal fees in connection with all material registrations have
been paid to the relevant patent, copyright and trademark authorities in the
United States for the purposes of maintaining such registrations. SLC and its
Subsidiaries have complied in all material respects with all applicable
disclosure requirements and neither SLC, any Subsidiary nor any named inventor
or assignee has committed any fraudulent act in the application for or
maintenance of any Intellectual Property of SLC. All Intellectual Property of
SLC listed in Section 3.15(b) of the SLC Letter that is within the meaning of
(i)-(v) above is specifically designated as such in Section 3.15(b) of the SLC
Letter.
(c) Except as otherwise set forth in Section 3.15(c) of the SLC Letter, SLC
and/or its Subsidiaries owns and has good and exclusive title to each item of
Intellectual Property of SLC that is owned by SLC or any Subsidiary and listed
in Section 3.15(b) of the SLC Letter, free and clear of any liens, encumbrances
or restrictions. Except as otherwise set forth in Section 3.15(c) of the SLC
Letter, to the Knowledge of SLC, no registration for any Intellectual Property
of SLC, is the subject of any cancellation or reexamination proceeding or any
other proceeding challenging its extent or validity. Except as otherwise set
forth in Section 3.15(c) of the SLC Letter, SLC or one of its Subsidiaries is
the applicant of record in all patent application, and applications for
trademark, service mark, trade dress, industrial design, copyright and mask work
registration with respect to Intellectual Property of SLC, and, to the Knowledge
of SLC, no opposition, extension of time to oppose, interference, rejection or
refusal to register has been received in connection with any such application,
and all fees in connection with such applications have been paid. SLC or a
Subsidiary owns, or has the right to use or operate under, all Intellectual
Property of SLC not listed on Section 3.15(b) of the SLC Letter. No Intellectual
Property of SLC or any Subsidiary or product and/or technology of
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SLC or any Subsidiary is subject to any material outstanding decree, order,
judgment, or stipulation restricting in any material manner the use or licensing
thereof by SLC or such Subsidiary.
(d) Section 3.15(d) of the SLC Letter lists all material contracts,
licenses and agreements, (whether written or otherwise) by which SLC or any
Subsidiary licenses Intellectual Property of SLC from or to any third party
other than incidental to the sale of products or services. Except pursuant to
agreements listed in Section 3.15(d) of the SLC Letter, other than incident to
sale of goods and services; (i) no Person has any material rights to use any of
the Intellectual Property of SLC that is owned by SLC or any Subsidiary; and
(ii) no Person owns or retains any material rights in the Intellectual Property
of SLC that is owned by SLC or any Subsidiary. All contracts listed in Section
3.15(d) of the SLC Letter that are within the meaning of (i) or (ii) above are
specifically designated as such in Section 3.15(d) of the SLC Letter.
(e) Except as would not have a Material Adverse Effect on SLC: (i) the
contracts, licenses and agreements listed in Section 3.15(d) of the SLC Letter
are in full force and effect; (ii) there are no contracts, licenses and
agreements between SLC or any of its Subsidiaries and any other Person with
respect to Intellectual Property of SLC with respect to which there is any
dispute known to SLC regarding the scope of such agreement, or performance under
such agreement including with respect to any payments to be made or received by
SLC or any Subsidiary thereunder; (iii) the consummation of the transactions
contemplated by this Agreement will neither violate nor result in the breach,
modification, cancellation, termination, or suspension of the contracts,
licenses and agreements listed in Section 3.15(d) of the SLC Letter or alter or
impair any of SLC's or its Subsidiaries' rights to the Intellectual Property;
and (iv) SLC and its Subsidiaries and, to the Knowledge of SLC, any Person with
which SLC or any of its Subsidiaries has entered into any such contract, license
or agreement are in compliance with, and have not breached any term of, those
contracts, licenses and agreements.
(f) Except as would not have a Material Adverse Effect on SLC or except as
set forth in Section 3.15(f) of the SLC Letter, (i) the Intellectual Property of
SLC does not infringe, dilute (in the case of trademarks) or otherwise violate
the Intellectual Property of any Person; (ii) the operation of SLC's and its
Subsidiaries business as it currently is conducted, including its design,
development, manufacture and sale of its products and/or technology, including
products and/or technology currently under development, and provision of
services, does not infringe, dilute (in the case of trademarks) or otherwise
violate the Intellectual Property of any other Person; (iii), to the Knowledge
of SLC, no officer, director, employee or consultant of SLC or any Subsidiary is
infringing or misappropriating, diluting (in the case of trademarks) or
otherwise violating the Intellectual Property of any other Person in the course
of performing his or her duties for SLC or any Subsidiary; and (iv) , neither
SLC nor any of its Subsidiaries has received notice from any Person that the
Intellectual Property of SLC or the operation of SLC's business, including its
design, development, manufacture and sale of its products and/or technology
(including with respect to products and/or technology currently under
development) and provision of services, infringes, dilutes (in the case of
trademarks) or otherwise violates the Intellectual Property of any Person.
(g) There are no material claims asserted or, to the Knowledge of SLC,
threatened against SLC or any Subsidiary related to any product or service of
SLC or any Subsidiary. To the Knowledge of SLC, there are no material claims
asserted or threatened against any customer of SLC or any Subsidiary, related to
any product or service of SLC or any Subsidiary.
(h) The Intellectual Property of SLC constitutes all Intellectual Property
necessary to operate the business of SLC and its Subsidiaries as it is currently
conducted.
Section 3.16 Reorganization; Supplemental Ruling. Neither SLC nor any of
its Subsidiaries (i) has taken any action or failed to take any action which
action or failure would jeopardize the
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qualification of the Merger as a reorganization within the meaning of Section
368(a) of the Code; or (ii) is aware of any fact that would jeopardize SLC's
receipt of the supplemental ruling referred to in Section 6.3(d).
Section 3.17 Required Vote of SLC Stockholders. The affirmative vote of
the holders of a majority of the outstanding shares of SLC Common Stock is
required to adopt this Agreement. The holders of all of the outstanding shares
of SLC Common Stock have voted to adopt this Agreement and have effectively
waived any appraisal right for the fair value of such shares under Section 262
of the DGCL. No other vote of the securityholders of SLC is required by law, the
Certificate of Incorporation or Bylaws of SLC or otherwise in order for SLC to
consummate the Merger and the transactions contemplated hereby.
Section 3.18 Brokers. No broker, investment banker or other person, other
than ING Baring Furman Selz LLC, the fees and expenses of which will be paid by
SLC (as reflected in an agreement between ING Baring Furman Selz LLC and SLC, a
copy of which has been furnished to ITI), is entitled to any broker's, finder's
or other similar fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
SLC.
Section 3.19 State Takeover Statutes; Certain Charter Provisions. The
Board of Directors of SLC has, to the extent such statutes are applicable, taken
all action (including appropriate approvals of the Board of Directors of SLC)
necessary to exempt SLC, its Subsidiaries and affiliates, the Merger, this
Agreement and the transactions contemplated hereby from the requirements of any
"moratorium," "control share," "fair price," or other antitakeover laws and
regulations of any state, including Section 203 of the DGCL.
Section 3.20 Year 2000 Matters. SLC and its Subsidiaries have engaged in a
commercially reasonable effort to: (a) identify Technology purchased, owned,
leased, licensed or otherwise used by SLC or any of its Subsidiaries, which is
material to SLC and its Subsidiaries taken as a whole, and which they believe to
Be Year 2000 Compliant, (b) test such material Technology to determine whether
it is Year 2000 Compliant and (c) seek to obtain verification from providers of
such material Technology, as appropriate, that such Technology is Year 2000
Compliant. Except as otherwise set forth in Section 3.20 of the SLC Letter,
there is no Technology of SLC or its Subsidiaries that would have a Material
Adverse Effect on SLC due to being non-Year 2000 Compliant. The statements
contained in this Section 3.20 constitute a Year 2000 Readiness Disclosure for
purposes of the United States of America's Year 2000 Information and Readiness
Disclosure Act.
Section 3.21 Financing. SLC has an executed commitment for financing of
the payment for Cash Election Shares contemplated by this Agreement, a copy of
which has been provided to ITI (the "Financing Commitment").
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
Section 4.1 Conduct of Business Pending the Merger. Except as expressly
permitted by clauses (a) through (r) of this Section 4.1 or otherwise expressly
permitted by this Agreement, during the period from the date of this Agreement
through the earlier of the termination of this Agreement pursuant to Section 7.1
or the Effective Time (the "Pre-Closing Period"), each of ITI and SLC shall, and
each shall cause each of its Subsidiaries to, in all material respects carry on
its business in the ordinary course of its business as currently conducted and,
to the extent consistent therewith, use reasonable best efforts to preserve
intact its current business organizations, keep available the services of its
current officers and employees and preserve its relationships with customers,
suppliers, distributors, dealers and others having business dealings with it to
the end that its goodwill and ongoing business shall be unimpaired at the
Effective Time. During the Pre-Closing Period, each of
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ITI and SLC shall notify the other party of any material complaints,
investigations or hearings regarding it or any of their respective Subsidiaries
that are initiated after the date of this Agreement by any federal, state, or
local governmental body or authority. Without limiting the generality of the
foregoing, and except as otherwise expressly contemplated by this Agreement or
as set forth in the ITI Letter or the SLC Letter (with specific reference to the
applicable subsection below), as the case may be, neither ITI nor SLC will, and
neither ITI nor SLC shall permit any of its Subsidiaries to, without the prior
written consent of the other party (which consent shall not be unreasonably
withheld or delayed):
(a) (i) declare, set aside or pay any dividends on, or make any other
actual, constructive or deemed distributions in respect of, any of its capital
stock, or otherwise make any payments to its stockholders in their capacity as
such (other than dividends and other distributions by Subsidiaries), (ii) other
than in the case of any Subsidiary, split, combine or reclassify any of its
capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock, (iii)
directly or indirectly purchase, redeem or otherwise acquire any shares of its
capital stock or any other securities thereof or any rights, warrants or options
to acquire any such shares or other securities, (iv) amend or waive any of its
rights under, or take any action to permit the acceleration, vesting or
repricing under any stock option plan, any agreement evidencing any outstanding
ITI Option or any restricted stock purchase agreement or (v) grant or award any
options, warrants, conversion rights or other rights to acquire any shares of
its capital stock;
(b) issue, deliver, sell, pledge, dispose of or otherwise encumber any
shares of its capital stock, any other voting securities or equity equivalent or
any securities convertible into, or any rights, warrants or options to acquire
any such shares, voting securities, equity equivalent or convertible securities,
other than the issuance of shares of common stock upon the exercise of employee
stock options outstanding on the date of this Agreement in accordance with their
current terms;
(c) amend its charter or by-laws;
(d) acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial portion of the assets of or equity in, or by any other
manner, any business or any corporation, limited liability company, partnership,
association or other business organization or division thereof or otherwise
acquire or agree to acquire any assets, other than transactions that are in the
ordinary course of business consistent with past practice and not material to
ITI or SLC, as the case may be, and its Subsidiaries taken as a whole.
(e) sell, lease, transfer, pledge, mortgage, encumber or otherwise dispose
of, or agree to sell, lease or otherwise dispose of, any of its assets, other
than transactions that are in the ordinary course of business consistent with
past practice;
(f) incur, create, assume or otherwise become liable for any indebtedness
for borrowed money, guarantee any such indebtedness or make any loans, advances
or capital contributions to, or other investments in, any other person, other
than indebtedness, loans, advances, capital contributions and investments
between ITI or SLC, as the case may be, and any of its wholly owned Subsidiaries
or between any of such wholly owned Subsidiaries; provided, however, that SLC or
ITI may incur indebtedness for borrowed money in connection with acquisitions
allowed by the terms hereof;
(g) alter (through merger, liquidation, reorganization, restructuring or in
any other fashion) the corporate structure or ownership of itself or any
Subsidiary;
(h) enter into or adopt any, or amend any existing, ITI Plan or SLC Plan,
as the case may be, except as required by applicable law and except as permitted
by Section 4.1(i);
(i) (x) increase the compensation or benefits payable or to become payable
to its directors, officers, employees or consultants (except for increases in
the ordinary course of business consistent
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with past practice), (y) grant any severance or termination pay to, or enter
into any stay put, termination or severance agreement or similar agreement or
arrangement with, any director or officer, or (z) enter into or amend any
employment or consulting agreement with any director, officer, employee or
consultant of it or any of its Subsidiaries; provided that ITI or SLC or their
respective Subsidiaries may enter into employment contracts with newly hired
employees and may enter into or amend consulting agreements for a term of less
than one year or in substitution for existing employment agreements.
(j) violate or fail to perform any obligation or duty imposed upon it or
any Subsidiary by any applicable federal, state or local law, rule, regulation,
guideline or ordinance, except as would not have a Material Adverse Effect on
SLC or ITI, as the case may be;
(k) make any change to accounting policies or procedures;
(l) prepare or file any Tax Return inconsistent with past practice or, on
any such Tax Return, take any position, make any election, or adopt any method
that is inconsistent with positions taken, elections made or methods used in
preparing or filing similar Tax Returns in prior periods;
(m) make any material tax election or settle or compromise any material
federal, state, local or foreign income tax liability;
(n) enter into or amend any agreement or contract material to it and its
Subsidiaries, taken as a whole, except in the ordinary course of business
consistent with past practices; or make or agree to make any new capital
expenditure(s) which, individually, is, with respect to ITI and its
Subsidiaries, in excess of $1,000,000 or, in the aggregate, are in excess of
$10,000,000, and with respect to SLC and its Subsidiaries, in excess of
$5,000,000 or, in the aggregate, in excess of $20,000,000;
(o) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction, in the ordinary course of business
consistent with past practice or in accordance with their terms, of liabilities
reflected or reserved against in, the most recent financial statements (or the
notes thereto) included in the ITI SEC Documents, in the case of ITI, or the SLC
Financial Statements, in the case of SLC, or incurred in the ordinary course of
business consistent with past practice;
(p) take any action that would likely result in the representations and
warranties made by it herein becoming false or inaccurate and having a Material
Adverse Effect on ITI or SLC, as the case may be;
(q) authorize, recommend, propose or announce an intention to do any of the
foregoing, or enter into any contract, agreement, commitment or arrangement to
do any of the foregoing; or
(r) enter into any Contract that, after the Effective Time, would interfere
with the conduct of Surviving Corporation's business as currently conducted by
ITI, SLC and their Subsidiaries, taken as a whole, except for such interference
as would not reasonably be expected to have a Material Adverse Effect on the
Surviving Corporation.
Section 4.2 No Solicitation. ITI shall not, nor shall it permit any of its
Subsidiaries to, nor shall it authorize or permit any officer, director or
employee of or any financial advisor, attorney or other advisor or
representative of, ITI or any of its Subsidiaries to, directly or indirectly (i)
solicit, initiate, induce or encourage the submission of, any ITI Takeover
Proposal (as hereafter defined), (ii) enter into any agreement contemplating or
with respect to any ITI Takeover Proposal, (iii) participate in any discussions
or negotiations regarding, or furnish to any person any information with respect
to, or take any other action to facilitate any inquiries or the making of any
proposal that constitutes, or may reasonably be expected to lead to, any ITI
Takeover Proposal or (iv) approve, endorse or recommend any ITI Takeover
Proposal; provided, however, that prior to the ITI Stockholders Meeting, this
Section 4.2 shall not prohibit ITI from furnishing nonpublic information
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regarding ITI or its Subsidiaries to, or entering into discussions with, any
person in response to a Superior Proposal submitted by such person (and not
withdrawn) if (i) neither ITI nor any of its officers, directors, employees,
attorneys, financial advisors, agents or other representatives shall have
violated any of the restrictions set forth in this Section 4.2, (ii) prior to
furnishing such nonpublic information to, or entering into discussions with,
such person, ITI gives SLC written notice of ITI's intention to furnish
nonpublic information to, or enter into discussions with, such person, and ITI
receives from such person an executed confidentiality agreement containing
customary limitations on the use and disclosure of all nonpublic information
furnished to such person by or on behalf of ITI and (iii) prior to furnishing
any such nonpublic information to such person, ITI furnishes such nonpublic
information to SLC. ITI acknowledges and agrees that any violation of any of the
restrictions set forth in the preceding sentence by any officer, director,
employee, attorney, financial advisor, agent or other representative of ITI,
whether or not such person is purporting to act on behalf of ITI, shall be
deemed to constitute a breach of this Section 4.2 by ITI. ITI shall immediately
advise SLC orally and in writing of (x) any ITI Takeover Proposal that is made
or submitted by any such person, (y) the identity of the person making or
submitting such ITI Takeover Proposal and the terms thereof and (z) any
discussion or negotiation with respect to ITI Takeover Proposal that changes the
terms thereof. Notwithstanding anything herein to the contrary, if SLC
reasonably determines that a person who has made a Superior Proposal is a direct
competitor of ITI with a market share in wireless security systems that is
comparable to or larger than ITI's share of such market, SLC can, by written
notice to ITI, prohibit ITI from providing nonpublic information to such person.
ITI shall immediately cease and cause to be terminated any existing discussions
with any person that relate to any ITI Takeover Proposal. For purposes of this
Agreement, "ITI Takeover Proposal" means any proposal for a merger or other
business combination involving ITI or any of its Subsidiaries or any proposal or
offer to acquire in any manner, directly or indirectly, a substantial equity
interest in, a substantial portion of the voting securities of, or a substantial
portion of the assets of ITI or any of its Subsidiaries, other than the
transactions contemplated by this Agreement, and "Superior Proposal" means a
bona fide, unsolicited written ITI Takeover Proposal made by a third party the
terms of which a majority of the Board of Directors of ITI, taking into
consideration financial, legal, regulatory and other factors as they deem
relevant, determines in their reasonable good faith judgment, based on the
advice of financial advisors, outside counsel and other advisors selected by
them, to be more favorable to ITI's stockholders than the terms of the Merger
(including a determination that the proposal is more favorable to ITI's
stockholders than the Merger from a financial point of view) and the negotiation
of which proposal is consistent with the Board's fiduciary obligations to the
ITI stockholders. ITI has provided to SLC forms of confidentiality agreements
(the "Confidentiality Agreements") executed by all Persons to whom ITI has given
confidential information in the last twelve months. ITI will not agree to any
amendment, modification or waiver of any provision of any Confidentiality
Agreement without the prior written consent of SLC, and will enforce all of its
rights to the full extent provided by the Confidentiality Agreements.
Section 4.3 SLC Stockholder Agreement. During the period from the date of
this Agreement through the Effective Time, the SLC Stockholder will not transfer
any shares of SLC Common Stock to any other Person unless the transferee agrees
that such transfer shall not rescind, change or invalidate such SLC
Stockholder's vote in favor of this Agreement and the transactions contemplated
hereby.
Section 4.4 Reorganization. During the Pre-Closing Period, unless the
other party shall otherwise agree in writing, none of ITI, SLC or any of their
respective Subsidiaries shall knowingly take or fail to take any action which
action or failure would jeopardize the qualification of the Merger as a
reorganization within the meaning of Section 368(a) of the Code.
Section 4.5 Actions Inconsistent With Ruling. During the Pre-Closing
Period, SLC shall take no action, and shall use its reasonable best efforts to
prevent the occurrence of any event or condition,
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that would be inconsistent with its May 13, 1997 tax-free spin-off IRS ruling or
any supplemental IRS ruling or opinion of counsel contemplated by Section
6.3(d). Each of ITI and SLC shall reasonably cooperate in making changes
requested by SLC not later than five days prior to the proposed mailing of the
Proxy Statement to the structure of the transactions contemplated hereby in a
manner that is likely to produce a result that is favorable to SLC with respect
to the aforementioned tax rulings, so long as the effect of such changes does
not exceed $100,000 to ITI or delay receipt of such ruling.
Section 4.6 Redemption of Rights Plan. ITI shall not, during the
Pre-Closing Period (a) redeem the Shareholder Rights Plan or (b) implement or
adopt any other so-called "poison-pill," shareholder rights plan or other
similar plan.
ARTICLE V
ADDITIONAL AGREEMENTS
Section 5.1 Stockholder Meeting. ITI will take all action necessary under
all applicable laws to, as soon as practicable following the date of this
Agreement, duly call, give notice of, convene and hold a meeting of stockholders
(the "ITI Stockholder Meeting") at a date reasonably approved by SLC for the
purpose of considering, acting upon and voting upon the adoption and approval of
the Merger and this Agreement and the transaction contemplated hereby. ITI will,
through its Board of Directors, unanimously recommend to its stockholders the
adoption and approval of the Merger and this Agreement and the transaction
contemplated hereby, shall use all reasonable best efforts to solicit such
adoption by its stockholders and shall not withdraw, amend or revoke such
recommendation; provided, however, that ITI's Board of Directors may withdraw,
amend or revoke such recommendation if (i) a Superior Proposal is made to ITI
and is not withdrawn and (ii) Section 4.2 has not been breached or violated.
Without limiting the generality of the foregoing, ITI agrees that its
obligations pursuant to the first sentence of this Section 5.1 shall not be
affected by the commencement, public proposal, public disclosure or
communication to ITI of an ITI Takeover Proposal. The Agreement shall be
submitted to the ITI stockholders at the ITI Stockholder Meeting whether or not
ITI's Board of Directors hereafter determines that the Agreement is no longer
advisable and recommends that the ITI stockholders reject it. Nothing in this
Section 5.1 is intended to affect any obligations under Rule 14e-2(a) of the
Exchange Act.
Section 5.2 Preparation of Proxy Statement.
(a) As promptly as practicable after the execution of this Agreement, ITI
shall cause to be prepared and filed with the Securities and Exchange Commission
a preliminary proxy statement relating to the Merger. SLC shall furnish all
information concerning it and the holders of its capital stock as ITI may
reasonably request in connection with the preparation thereof. ITI shall furnish
a draft of the preliminary proxy statement and any proposed amendment or
supplement thereto to SLC a reasonable time before its proposed filing date, and
shall make such changes thereto prior to filing thereof as SLC shall reasonably
request. Each of SLC and ITI shall use its reasonable best efforts to have the
preliminary proxy statement cleared for use as promptly as practicable after
such filing. As promptly as practicable after the Proxy Statement shall have
been so cleared, ITI shall mail the Proxy Statement to its stockholders. ITI and
its representatives shall allow SLC to participate in any substantive
communication with the SEC.
(b) Each party to the Agreement hereby (i) consents to the use of its name
and, on behalf of its Subsidiaries and affiliates, the names of such
Subsidiaries and affiliates, and to the inclusion of financial statements and
business information relating to such party and its Subsidiaries and affiliates
(in each case, to the extent required by applicable securities laws) in the
Proxy Statement, (ii) agrees to use its reasonable best efforts to obtain the
written consent of any person or entity
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retained by it which may be required to be named (as an expert or otherwise) in
such Proxy Statement (provided that reasonable best efforts, as used herein and
elsewhere in this Agreement, shall not include expending money other than as is
customary for professional advisors and reasonable expenses), (iii) agrees to
cooperate, and agrees to use its reasonable efforts to cause its Subsidiaries
and affiliates to cooperate, with any legal counsel, investment banker,
accountant or other agent or representative retained by any of the parties
specified in clause (i) in connection with the preparation of any and all
information required, as determined after consultation with each party's
counsel, by applicable securities laws to be disclosed in any such Proxy
Statement, and (iv) agrees to notify the other promptly upon the receipt of any
comments from the SEC or its staff and of any request by the SEC or its staff
for amendments or supplements to the Proxy Statement or for additional
information and will supply the other with copies of all correspondence between
such party or any of its representatives, on one hand, and the SEC or its staff,
on the other hand, with respect to the Proxy Statement.
(c) If at any time prior to the Effective Time SLC discovers any event or
circumstance relating to SLC or any of its Subsidiaries, or its officers or
directors, which should be set forth in an amendment or supplement to the Proxy
Statement, SLC shall promptly inform ITI of such event or circumstance. If at
any time prior to the Effective Time ITI discovers any event or circumstance
relating to ITI or any of its Subsidiaries, or its or their respective officers
or directors which should be set forth in an amendment or supplement to the
Proxy Statement, ITI shall inform SLC of such event or circumstance. Promptly
upon discovery of or upon learning of any event or circumstance required to be
set forth in a supplement to the Proxy Statement, ITI and SLC shall prepare such
supplement and cause it to be sent to ITI's stockholders.
Section 5.3 Private Placement of Common Stock.
(a) The SLC Stockholder, simultaneous with the execution of this Agreement,
has executed a letter containing certain representations regarding an investment
in the private offering of Common Stock as part of the Merger.
(b) ITI and SLC shall jointly take all actions required to register or
qualify or obtain exemptions from such registrations or qualifications under any
applicable state securities laws in connection with the Merger.
Section 5.4 Comfort Letters.
(a) ITI shall use its reasonable best efforts to cause to be delivered to
SLC "comfort" letters of PricewaterhouseCoopers, ITI's independent public
accountants, dated within two days of the date of the Proxy Statement and as of
the Effective Time, and addressed to ITI and SLC, in form and substance
reasonably satisfactory to SLC and reasonably customary in scope and substance
for letters delivered by independent public accountants in connection with
transactions such as those contemplated by this Agreement.
(b) SLC shall use its reasonable best efforts to cause to be delivered to
ITI "comfort" letters of Arthur Andersen, SLC's independent public accountants,
dated within two days of the date of the Proxy Statement and as of the Effective
Time, and addressed to ITI and SLC, in form and substance reasonably
satisfactory to ITI and reasonably customary in scope and substance for letters
delivered by independent public accountants in connection with transactions such
as those contemplated by this Agreement.
Section 5.5 Access to Information. Subject to currently existing
contractual and legal restrictions applicable to ITI or to SLC or any of their
Subsidiaries, each of ITI and SLC shall, and shall cause each of its
Subsidiaries to, afford to the officers, employees, accountants, counsel,
financial advisors and other representatives of the other party hereto
reasonable access to, and permit them to
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make such inspections as they may reasonably require of, during normal business
hours during the Pre-Closing Period, all their respective properties, books,
contracts, customers, suppliers, commitments and records (including, without
limitation, the work papers of independent accountants, if available and subject
to the consent of such independent accountants and Tax Returns), and, during
such period, ITI and SLC shall, and shall cause each of its Subsidiaries to,
furnish promptly to the other (i) a copy of each report, schedule, registration
statement and other document filed by it during such period pursuant to the
requirements of federal or state securities laws and (ii) all other information
concerning its business, properties and personnel as the other may reasonably
request. No investigation pursuant to this Section 5.5 shall affect any
representation or warranty in this Agreement of any party hereto or any
condition to the obligations of the parties hereto. All information obtained by
ITI or SLC pursuant to this Section 5.5 shall be kept confidential in accordance
with the Confidentiality Agreement, dated April 22, 1998 (as amended by the
First Amendment dated June 3, 1999, the Second Amendment dated June 24, 1999,
and the Third Amendment dated August 24, 1999), between ITI and SLC (the
"Confidentiality Agreement").
Section 5.6 Fees and Expenses.
(a) Except as provided in this Section 5.6 whether or not the Merger is
consummated, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby including, without limitation, the fees
and disbursements of counsel, financial advisors and accountants, shall be paid
by the party incurring such costs and expenses, provided that all printing
expenses and all filing fees (including, without limitation, filing fees under
the Securities Act, the Exchange Act and the HSR Act) shall be divided equally
between ITI and SLC.
(b) In the event of the termination of this Agreement and the abandonment
of the Merger at any time by ITI or SLC pursuant to Sections 7.1(d), (e), (f) or
(g) and in order to compensate SLC for the expenses associated with the
negotiation of this Agreement and the other matters contemplated hereby, ITI
shall, within two business days following such termination, pay SLC a fee of
$10,000,000 in immediately available funds; provided, however, that such fee
shall be payable with respect to a termination pursuant to Section 7.1(d) only
if, and then when, ITI directly or indirectly enters into a definitive agreement
relating to an ITI Takeover Proposal within one year of such termination.
(c) In the event of the termination of this Agreement and the abandonment
of the Merger at any time by ITI pursuant to Section 7.1(b), and if the
condition contained in Section 6.3(d) or 6.3(f) has not been satisfied or waived
by SLC and all the other conditions contained in Sections 6.1, 6.3(a), 6.3(c)
and 6.3(e) have been satisfied or waived as though the date of termination were
considered as the Effective Time, SLC shall, within two business days following
such termination, reimburse ITI in immediately available funds for its
reasonable out-of-pocket expenses (not to exceed $2,000,000) incurred after the
date hereof in carrying out its obligations under this Agreement.
Section 5.7 Reasonable Best Efforts.
(a) Subject to Section 5.7(c), upon the terms and subject to the conditions
set forth in this Agreement, each of the parties agrees to use reasonable best
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, and to assist and cooperate with the other parties in doing, all things
necessary, proper or advisable to consummate and make effective, in the most
expeditious manner practicable, the Merger and the other transactions
contemplated by this Agreement, including, but not limited to: (i) the obtaining
of all necessary actions or non-actions, waivers, consents and approvals from
all Governmental Entities and the making of all necessary registrations and
filings (including filings with Governmental Entities) and the taking of all
reasonable steps as may be necessary to obtain an approval or waiver from, or to
avoid an action or proceeding by, any Governmental Entity (including those in
connection with the HSR Act and State Takeover
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Approvals), (ii) the obtaining of all necessary consents, approvals or waivers
from third parties, (iii) the defending of any lawsuits or other legal
proceedings, whether judicial or administrative, challenging this Agreement or
the consummation of the transactions contemplated hereby, including seeking to
have any stay or temporary restraining order entered by any court or other
Governmental Entity vacated or reversed and (iv) the execution and delivery of
any additional instruments necessary to consummate the transactions contemplated
by this Agreement. The parties agree to file the initial notification required
under the HSR Act within 30 days of the date hereof. No party to this Agreement
shall consent to any voluntary delay of the consummation of the Merger at the
behest of any Governmental Entity without the consent of the other party to this
Agreement, which consent shall not be unreasonably withheld. Without the prior
consent of the other party (not to be unreasonably withheld) no party or its
representatives shall take any action contemplated by clause (i) above, or make
any proposal to a Governmental Entity with respect to the foregoing; provided,
however, that SLC may file the request for the supplemental ruling contemplated
by Section 5.12 and any supplemental filings related thereto without the consent
of ITI. Neither party nor its representatives shall engage in any communication
with any Governmental Entity with respect to the actions contemplated by clause
(i) above without the participation of the other party or its representatives.
If any lawsuits or other legal proceedings of the type contemplated by clause
(iii) above are instituted, the defendant shall keep the other party reasonably
informed of the proceeding. No lawsuit or legal proceeding of the type
contemplated by clause (iii) shall be settled by one party without the prior
written consent of the other party.
(b) Each party shall use its reasonable best efforts to not take any
action, or enter into any transaction, which would cause any of its
representations or warranties contained in this Agreement to be untrue or result
in a breach of any covenant made by it in this Agreement.
(c) Notwithstanding anything to the contrary contained in this Agreement,
in connection with any filing or submission required or action to be taken by
either ITI or SLC to effect the Merger and to consummate the other transactions
contemplated hereby, neither party shall without the other party's prior written
consent, commit to any divestiture transaction, and none of SLC, ITI or any of
their Subsidiaries shall be required to divest or hold separate or otherwise
take or commit to take any action that limits its freedom of action with respect
to, or its ability to retain, any of its material businesses, product lines or
assets or that otherwise would have a Material Adverse Effect on it.
(d) Each of ITI and SLC agrees to cooperate and coordinate efforts to
integrate their respective benefit plans.
Section 5.8 Public Announcements. Each of the parties agrees that it shall
not, nor shall any of their respective affiliates, issue or cause the
publication of any press release or other public announcement with respect to
the Merger, this Agreement or the other transactions contemplated hereby without
the prior approval of the other party, except such disclosure as may be required
by law or by any listing agreement with Nasdaq or a national securities
exchange; provided, if such disclosure is required by law or any such listing
agreement, such disclosure may not be made without prior consultation of the
other parties.
Section 5.9 State Takeover Laws. If any "fair price," "business
combination" or "control share acquisition" statute or other similar statute or
regulation shall become applicable to the transactions contemplated hereby, ITI
and SLC and their respective Boards of Directors shall use their reasonable best
efforts to grant such approvals and take such actions as are necessary so that
the transactions contemplated hereby and thereby may be consummated as promptly
as practicable on the terms contemplated hereby and thereby and otherwise act to
minimize the effects of any such statute or regulation on the transactions
contemplated hereby and thereby.
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Section 5.10 Indemnification; Directors and Officers Insurance. For six
years from and after the Effective Time, ITI agrees to indemnify and hold
harmless all past and present officers and directors of SLC and its Subsidiaries
to the same extent such persons are indemnified as of the date of this Agreement
by SLC pursuant to SLC's Certificate of Incorporation, Bylaws or agreements in
existence on the date hereof for acts or omissions occurring at or prior to the
Effective Time. ITI shall provide for an aggregate period of not less than six
years from the Effective Time, ITI's and SLC's directors and officers on the
date hereof an insurance and indemnification policy that provides coverage for
events occurring prior to the Effective Time that is substantially similar (with
respect to limits and deductibles) to ITI's existing policy or, if substantially
equivalent insurance coverage is unavailable, the best available coverage;
provided, however, that the annual premiums for such coverage will not exceed
200% of the annual premiums currently paid by SLC for such coverage.
Section 5.11 Notification of Certain Matters. ITI shall use its reasonable
best efforts to give prompt notice to SLC, and SLC shall use its reasonable best
efforts to give prompt notice to ITI, of: (i) the occurrence, or non-occurrence,
of any event the occurrence, or non-occurrence, of which it is aware and which
has caused or would be reasonably likely to cause (x) any representation or
warranty contained in this Agreement to be untrue or inaccurate in any material
respect or (y) any covenant, condition or agreement contained in this Agreement
not to be complied with or satisfied in all material respects, (ii) any failure
of ITI or SLC, as the case may be, to comply in a timely manner with or satisfy
any covenant, condition or agreement to be complied with or satisfied by it
hereunder or (iii) any change or event which would be reasonably likely to have
a Material Adverse Effect on ITI or SLC, as the case may be; provided, however,
that the delivery of any notice pursuant to this Section 5.11 shall not limit or
otherwise affect the remedies available hereunder to the party receiving such
notice.
Section 5.12 IRS Ruling Letter. SLC shall use its reasonable best efforts
to obtain and ITI shall cooperate in obtaining from the IRS a supplemental
ruling to its May 13, 1997 tax-free spin-off ruling to the effect that the
transactions contemplated by this Agreement are consistent with, and would not
have an adverse effect on the conclusion reach in the prior ruling and SLC shall
file a request therefor not later than five business days after the date of this
Agreement. Notwithstanding the foregoing, SLC may withdraw its request for such
supplemental ruling if it reasonably believes that the condition set forth in
Section 6.3(d) will not be satisfied.
Section 5.13 Financing Commitment. SLC shall use its reasonable best
efforts to obtain the financing necessary for the payment of the maximum
aggregate Per Share Cash Consideration as contemplated by this Agreement.
Section 5.14 ITI Stock Option Plan. In connection with the Proxy
Statement, ITI shall submit a proposal to its stockholders to approve an omnibus
stock plan with terms substantially equivalent to those customarily used by
publicly held corporations and acceptable to SLC covering 1,500,000 shares of
ITI Common Stock.
Section 5.15 NASDAQ Listing. Prior to the Effective Time, ITI shall use
its reasonable best efforts to cause the shares of ITI Common Stock issuable
pursuant to the Merger to be approved for listing on NASDAQ, subject to official
notice of issuance.
Section 5.16 Form S-8. ITI will file with the SEC within 15 business days
after the Effective Time a registration statement on Form S-8 or other
appropriate form under the Securities Act to register the shares of ITI Common
Stock issuable upon exercise of the SLC Options and use its reasonable best
efforts to cause such registration statement to remain effective until the
exercise or expiration of such options.
Section 5.17 Redemption of Shareholder Rights Plan. After the time at
which the condition set forth in Section 6.1(a) shall have been satisfied, ITI
shall not redeem the Shareholder Rights Plan in
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connection with, related to, or in anticipation of any transaction other than
the transactions contemplated hereby.
Section 5.18 Name of Surviving Corporation. SLC may designate the name of
the Surviving Corporation with the consent of ITI, which consent shall not be
unreasonably withheld, no later than five days prior to the proposed mailing
date of the Proxy Statement, in which case the parties agree to amend this
Agreement to reflect such name.
Section 5.19 Services Agreement. At the Effective Time, except as set
forth in Section 5.19 of the SLC Letter, all agreements, arrangements or
understandings between Berwind Corporation or its affiliates and SLC or its
Subsidiaries requiring the payment of money by SLC or its Subsidiaries shall
terminate.
ARTICLE VI
CONDITIONS PRECEDENT TO THE MERGER
Section 6.1 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Time of the following
conditions:
(a) Stockholder Approval. This Agreement shall have been duly adopted by
the requisite vote of stockholders of ITI in accordance with applicable law and
the Certificate of Incorporation and Bylaws of ITI and the rules of NASDAQ.
(b) Stock Exchange Listings. The ITI Common Stock issuable in connection
with the Merger shall have been authorized for listing on the Nasdaq Stock
Market, subject to official notice of issuance.
(c) HSR and Other Approvals.
(i) Any applicable waiting period (and any extension thereof)
applicable to the consummation of the Merger under the HSR Act shall have
expired or been terminated.
(ii) All authorizations, consents, orders, declarations or approvals
of, or filings with, or terminations or expirations of waiting periods
imposed by, any Governmental Entity, which the failure to obtain, make or
occur would have the effect of making the Merger or any of the transactions
contemplated hereby illegal or would have, individually or in the
aggregate, a Material Adverse Effect on ITI (assuming the Merger had taken
place), shall have been obtained, shall have been made or shall have
occurred.
(d) No Order. After the date hereof, no court or other Governmental Entity
having jurisdiction over ITI or SLC, or any of their respective Subsidiaries,
shall have enacted, issued, promulgated, enforced or entered any law, rule,
regulation, executive order, decree, injunction or other order (whether
temporary, preliminary or permanent) which is then in effect and has the effect
of prohibiting the Merger or any of the transactions contemplated hereby (the
parties having used their respective reasonable best efforts (consistent with
the provisions of this Agreement) to remove any such injunction, order or
decree).
Section 6.2 Conditions to Obligation of ITI to Effect the Merger. The
obligations of ITI to effect the Merger shall be subject to the fulfillment at
or prior to the Effective Time of the following additional conditions:
(a) Performance of Obligations; Representations and Warranties. SLC shall
have performed in all material respects each of its agreements contained in this
Agreement required to be performed on or prior to the Effective Time. Each of
the representations and warranties of SLC set forth in
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Sections 3.1, 3.2 and 3.3 (the "SLC Specified Representations") shall be true
and correct on and as of the Effective Time as if made on and as of such date
(except for the representations and warranties which address matters only as of
a certain date which shall be true and correct as of such certain date).
Excluding the SLC Specified Representations, each of the other representations
and warranties of SLC contained in this Agreement shall be true and correct on
and as of the Effective Time as if made on and as of such date (other than
representations and warranties which address matters only as of a certain date
which shall be true and correct as of such certain date), in each case except as
expressly contemplated or permitted by this Agreement and except for
inaccuracies or misrepresentations of any representation or warranty of SLC
(other than the SLC Specified Representations) which, when taken together with
all other inaccuracies or misrepresentations of representations or warranties of
SLC (other than the SLC Specified Representations) would not have a Material
Adverse Effect on SLC. ITI shall have received certificates signed on behalf of
SLC by its Chief Executive Officer and its Chief Financial Officer as to the
matters set forth in this Section 6.2(a).
(b) Tax Opinion. ITI shall have received an opinion, in form and substance
reasonably satisfactory to it, from Dorsey & Whitney LLP dated as of the
Effective Time, substantially to the effect that, on the basis of the facts,
representations and assumptions set forth in such opinions which are consistent
with the state of facts existing at the Effective Time, the Merger will be
treated for Federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code and that accordingly no gain or loss will be
recognized by SLC or ITI as a result of the Merger. In rendering such opinion,
such counsel may require and rely upon representations and covenants including
those contained in certificates of officers of ITI, SLC and others.
(c) Material Adverse Change. Since the date of this Agreement, there shall
have been no material adverse change in, and no event, occurrence or development
in the business of SLC or its Subsidiaries that, taken together with other
events, occurrences and developments with respect to such business, would have
or would reasonably be expected to have a Material Adverse Effect on SLC.
(d) Indemnification Agreement. Immediately prior to the Effective Time,
Berwind Corporation and SLC shall have entered into the Indemnification
Agreement in the form of Exhibit D hereto.
Section 6.3 Conditions to Obligations of SLC to Effect the Merger. The
obligations of SLC to effect the Merger shall be subject to the fulfillment at
or prior to the Effective Time of the following additional conditions:
(a) Performance of Obligations; Representations and Warranties. ITI shall
have performed in all material respects each of its agreements contained in this
Agreement required to be performed on or prior to the Effective Time. Each of
the representations and warranties of ITI set forth in Sections 2.1, 2.2 and 2.3
(the "ITI Specified Representations") shall be true and correct on and as of the
Effective Time as if made on and as of such date (except for the representations
and warranties which address matters only as of a certain date which shall be
true and correct as of such certain date). Excluding the ITI Specified
Representations, each of the other representations and warranties of ITI
contained in this Agreement that is qualified by materiality shall be true and
correct on and as of the Effective Time as if made on and as of such date (other
than representations and warranties which address matters only as of a certain
date which shall be true and correct as of such certain date) and as if made
without any Material Adverse Effect qualifications, in each case except as
expressly contemplated or permitted by this Agreement and except for
inaccuracies or misrepresentations of any representation or warranty of ITI
(other than the ITI Specified Representations) which, when taken together with
all other inaccuracies or misrepresentations of representations or warranties of
ITI (other than the ITI Specified Representations) would not have a Material
Adverse Effect on
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ITI. SLC shall have received certificates signed on behalf of ITI by each of its
Chief Executive Officer and its Chief Financial Officer as to the matters set
forth in this Section 6.3(a).
(b) Tax Opinion. SLC shall have received an opinion, in form and substance
reasonably satisfactory to it, from Dechert Price & Rhoads, dated as of the
Effective Time, substantially to the effect that, on the basis of the facts,
representations and assumptions set forth in such opinions which are consistent
with the state of facts existing at the Effective Time, the Merger will be
treated for Federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code and that accordingly:
(i) No gain or loss will be recognized by SLC or ITI as a result of
the Merger;
(ii) No gain or loss will be recognized by the stockholders of SLC who
exchange their SLC stock for ITI stock pursuant to the Merger (except with
respect to cash received in lieu of a fractional share interest in Common
Stock);
(iii) The tax basis of the Common Stock received by the stockholders
in exchange for SLC Common Stock in the Merger will be the same as the tax
basis of the SLC Common Stock surrendered in exchange therefor; and
(iv) The holding period of the Common Stock received by a stockholder
of SLC pursuant to the Merger will include the period during which the SLC
Common Stock surrendered therefor was held, provided the SLC Common Stock
is a capital asset in the hands of the stockholder of SLC at the time of
the Merger.
In rendering such opinion, such counsel may require and rely upon
representations and covenants including those contained in certificates of
officers of ITI, SLC and others.
(c) Material Adverse Change. Since the date of this Agreement, there shall
have been no material adverse change in, and no event, occurrence or development
in the business of ITI or its Subsidiaries that, taken together with other
events, occurrences and developments with respect to such business, would have
or would reasonably be expected to have a Material Adverse Effect on ITI.
(d) IRS Issues. SLC shall have received from the IRS a supplemental ruling
to its May 13, 1997 tax-free spin-off ruling to the effect that the transactions
contemplated by this Agreement are consistent with the prior ruling, such
supplemental ruling being in form and content acceptable to SLC, in its sole
discretion, and SLC is satisfied, in its sole discretion, that no event or
condition has occurred that would be inconsistent with, or have an adverse
effect on the conclusions reached in, the original or supplemental IRS ruling or
request.
(e) Registration Rights. ITI (or its assignees) shall have entered into a
Registration Rights Agreement substantially in the form attached hereto as
Exhibit C.
(f) Since the date of this Agreement, (i) trading in securities generally
on the New York Stock Exchange or NASDAQ shall not have been suspended or
materially limited, (ii) a general moratorium on commercial banking activities
in New York shall not have been declared by either federal or state authorities,
or (iii) there shall not have occurred any outbreak or escalation of hostilities
or other international or domestic calamity, crisis or change in political,
financial or economic conditions, the effect thereof on the global financial
markets makes it impossible for ITI to receive the proceeds of financing on
terms and in amounts substantially similar to the terms set forth in the
Financing Commitment.
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ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
Section 7.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after any approval of the matters
presented in connection with the Merger by the stockholders of ITI:
(a) by the mutual written consent of ITI and SLC;
(b) by either ITI or SLC if the Effective Time will not have occurred on or
before the six-month anniversary of the date of this Agreement ("Upset Date");
provided, however, that the right to terminate this Agreement pursuant to this
Section 7.1(b) shall not be available to any party whose failure to fulfill any
of its obligations contained in this Agreement has been the cause of, or
resulted in, the failure of the Merger to have occurred on or prior to the
aforesaid date; and provided, further, that either ITI or SLC may extend the
Upset Date up to two times in the aggregate for an additional one-month period
each time by written notice given no less than three days prior to the scheduled
Upset Date.
(c) by either ITI or SLC if (i) a statute, rule, regulation or executive
order will have been enacted, entered or promulgated prohibiting the
consummation of the Merger substantially on the terms contemplated hereby or
(ii) an order, decree, ruling or injunction will have been entered permanently
restraining, enjoining or otherwise prohibiting the consummation of the Merger
substantially on the terms contemplated hereby and such order, decree, ruling or
injunction will have become final and non-appealable; provided, that the party
seeking to terminate this Agreement pursuant to this provision will have used
its reasonable best efforts to remove such injunction, order or decree;
(d) by either ITI or SLC if the approvals of the Merger will not have been
obtained by reason of the failure to obtain the required vote at a duly held
meeting of ITI stockholders or of any adjournment thereof;
(e) by ITI or SLC if ITI enters into a merger, acquisition or other
agreement (including an agreement in principle) to effect a Superior Proposal or
the Board of Directors of ITI resolves to do so prior to satisfaction of the
conditions set forth in Section 6.1(a); provided, however, that ITI may not
terminate this Agreement pursuant to this Section 7.1(e) unless (i) ITI has
delivered to SLC a written notice of ITI's intent to enter into such an
agreement to effect the Superior Proposal, (ii) five business days have elapsed
following delivery to SLC of such written notice by ITI and (iii) during such
five business day period ITI has fully cooperated with SLC, including, without
limitation, informing SLC of the terms and conditions of the ITI Takeover
Proposal and the identity of the Person making the ITI Takeover Proposal, with
the intent of enabling SLC to agree to a modification of the terms and
conditions of this Agreement so that the transactions contemplated hereby may be
effected and (iv) ITI has considered in good faith any modification of the terms
of this Agreement proposed by SLC during such five business day period;
provided, further, that ITI may not terminate this Agreement pursuant to this
Section 7.1(e) unless (i) at the end of such five business day period the Board
of Directors of ITI continues reasonably to believe that the ITI Takeover
Proposal constitutes a Superior Proposal, (ii) prior to such termination ITI
pays to SLC the amounts specified under Section 5.7 and (iii) simultaneously
with such termination, ITI enters into a definitive acquisition, merger or
similar agreement to effect the Superior Proposal;
(f) by SLC if a tender offer or exchange offer for 20% or more of the
outstanding shares of capital stock of ITI is commenced prior to the ITI
Stockholder Meeting, and the Board of Directors of ITI fails to recommend
against acceptance of such tender offer or exchange offer within the time period
presented by Rule 14e-2 by its stockholders;
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(g) by SLC if the board of directors of ITI at any time withdraws, modifies
or revokes its recommendation of its support for the Merger, or if upon a
request by SLC, does not confirm its recommendation and support for the Merger;
(h) by ITI or SLC if there shall have been a material breach by the other
of any of its representations, warranties, covenants or agreements contained in
this Agreement and such breach will not have been cured within 30 days after
notice will have been received by the party alleged to be in breach;
(i) by ITI or SLC if SLC shall have withdrawn the request for a
supplemental ruling as permitted by Section 5.12; or
(j) by SLC if there shall have been a material breach by any of the other
parties thereto of any of their respective representations, warranties,
covenants or agreements contained in any of the Voting Support Agreements.
The right of any party hereto to terminate this Agreement pursuant to this
Section 7.1 shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of any party hereto, any person
controlling any such party or any of their respective officers or directors,
whether prior to or after the execution of this Agreement.
Section 7.2 Effect of Termination. In the event of termination of this
Agreement by either ITI or SLC, as provided in Section 7.1, this Agreement shall
forthwith become void and there shall be no liability hereunder on the part of
ITI or SLC or their respective officers or directors (except for the last
sentence of Section 5.5 and the entirety of Section 5.6, which shall survive the
termination); provided, however, that nothing contained in this Section 7.2
shall relieve any party hereto from any liability for any willful breach of this
Agreement giving rise to such termination.
Section 7.3 Amendment. This Agreement may be amended by the parties
hereto, by or pursuant to action taken by their respective Boards of Directors,
at any time before or after approval of the matters presented in connection with
the Merger by the stockholders of ITI, but, after any such approval, no
amendment shall be made which by law requires further approval by such
stockholders without such further approval. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
Section 7.4 Waiver. At any time prior to the Effective Time, the parties
hereto may (i) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (ii) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (iii) waive compliance with any of the agreements or
conditions contained herein which may legally be waived. Notwithstanding the
forgoing, no failure or delay by ITI or SLC will operate as a waiver thereof nor
will any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right hereunder. Any agreement on
the part of a party hereto to any such extension or waiver shall be valid only
if set forth in an instrument in writing signed on behalf of such party.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.1 Representations and Warranties. The representations and
warranties in this Agreement or in any instrument delivered pursuant to this
Agreement shall terminate at the Effective Time.
Section 8.2 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given when delivered personally, one day after
being delivered to an overnight
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courier or when telecopied (with a confirmatory copy sent by overnight courier)
to the parties at the following addresses (or at such other address for a party
as shall be specified by like notice):
(a) if to ITI, to:
ITI Technologies, Inc.
2266 Second Street North
North Saint Paul, Minnesota 55109
Attention: Thomas L. Auth
President and Chief Executive Officer
Telephone: (651) 779-2690
Facsimile: (651) 779-4802
with a copy to:
ITI Technologies, Inc.
2266 Second Street North
North Saint Paul, Minnesota 55109
Attention: Charles A. Durant
Vice President, General Counsel
and Secretary
Telephone: (651) 779-4865
Facsimile: (651) 779-4802
and
Dorsey & Whitney LLP
200 South Sixth Street
Pillsbury Center South
Minneapolis, Minnesota 55402
Attention: William B. Payne
Telephone: (612) 340-2722
Facsimile: (612) 340-8738
(b) if to SLC, to:
SLC Technologies, Inc.
12345 SW Leveton Drive
Tualatin, Oregon 97062
Attention: Kenneth L. Boyda
Chief Financial Officer
Telephone: (503) 691-7243
Facsimile: (503) 691-7562
with a copy to:
Berwind Corporation
3000 Centre Square West
1500 Market Street
Philadelphia, Pennsylvania 19102
Attention: Pamela I. Lehrer
General Counsel
Telephone: (215) 575-2800
Facsimile: (215) 563-4489
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and:
Dechert Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, Pennsylvania 19103
Attention: Herbert F. Goodrich
Telephone: (215) 992-4000
Facsimile: (215) 994-2222
Section 8.3 Interpretation. When a reference is made in this Agreement to
a Section, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation."
Section 8.4 Counterparts. This Agreement may be executed in counterparts,
all of which shall be considered one and the same agreement, and shall become
effective when one or more counterparts have been signed by each of the parties
and delivered to the other parties.
Section 8.5 Entire Agreement; No Third-Party Beneficiaries. This Agreement
(together with the Exhibits hereto, the ITI Letter, the SLC Letter and the other
documents delivered pursuant hereto or contemplated hereby), except as provided
in the last sentence of Section 5.5, constitutes the entire agreement and
supersedes all prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter hereof. This Agreement is not
intended to confer upon any person other than the parties hereto any rights or
remedies hereunder.
Section 8.6 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
Section 8.7 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties.
Section 8.8 Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law, or public
policy, all other terms, conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic and legal
substance of the transactions contemplated hereby are not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in a mutually acceptable manner in
order that the transactions contemplated by this Agreement may be consummated as
originally contemplated to the fullest extent possible.
Section 8.9 Enforcement of this Agreement. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific wording or were
otherwise breached. It is accordingly agreed that the parties hereto shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions hereof in any court of the
United States or any state having jurisdiction, such remedy being in addition to
any other remedy to which any party is entitled at law or in equity.
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IN WITNESS WHEREOF, ITI and SLC have caused this Agreement to be signed by
their respective officers thereunto duly authorized all as of the date first
written above.
ITI TECHNOLOGIES, INC.
By /s/ THOMAS L. AUTH
--------------------------------------
Chief Executive Officer and President
SLC TECHNOLOGIES, INC.
By /s/ KENNETH L. BOYDA
--------------------------------------
Chief Executive Officer and President
Accepted and agreed to as to Sections 1.4(b), 3.17 and 4.3.
BERWIND GROUP PARTNERS
By /s/ JAMES C. COOK
--------------------------------------
Senior Vice President-Finance
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AMENDMENT TO AGREEMENT AND PLAN
OF MERGER AND REORGANIZATION
THIS AMENDMENT (the "Amendment") to the Agreement and Plan of Merger and
Reorganization (the "Merger Agreement"), dated as of September 28, 1999, by and
between ITI Technologies, Inc., a Delaware corporation ("ITI"), and SLC
Technologies, Inc., a Delaware corporation ("SLC"), is entered into as of March
9, 2000.
WHEREAS, pursuant to the Merger Agreement, SLC shall be merged with and
into ITI (the "Merger") upon the terms and subject to the conditions set forth
therein; and
WHEREAS, SLC and ITI desire to amend and restate the cash election
procedures contained in the Merger Agreement.
NOW, THEREFORE, the parties hereby agree to amend the Merger Agreement as
follows:
Section 1.6 of the Merger Agreement is deleted in its entirety and replaced
as follows:
"Section 1.6 Cash Election Procedures.
(a) Subject to Section 1.6(b), each record holder of ITI Common Stock at the
close of business on the business day immediately preceding the ITI
Stockholder Meeting (as defined in Section 5.1) will be entitled to elect to
receive cash for all or some of the shares of ITI Common Stock ("Cash
Election Shares") held by such record holder. All such elections (each an
"Election") shall be made on a form designated for that purpose by ITI and
reasonably acceptable to SLC (an "Election Form") and in accordance with all
applicable laws. Any shares of ITI Common Stock with respect to which the
record holder thereof shall not, as of the Election Deadline (as defined
below), have properly submitted to the Exchange Agent (as defined below) a
properly completed Election Form shall be deemed not to have elected to
receive cash pursuant to Section 1.5(b) and this Section 1.6. A record
holder acting in different capacities or acting on behalf of other persons
in any way shall be entitled to submit an Election Form for each capacity in
which such record holder so acts with respect to each person for which it so
acts. The exchange agent (the "Exchange Agent") shall be Norwest Bank, N.A.,
or other reputable bank or trust company jointly selected by ITI and SLC.
(b) At the Effective Time or three business days after the Election Deadline,
whichever is later, ITI shall cause the Exchange Agent to effect the
conversions among the holders of ITI Common Stock of rights to receive the
Per Share Cash Consideration in the Merger as follows: If the aggregate
number of Cash Election Shares properly elected represents more than 50% of
the number of shares of ITI Common Stock issued and outstanding immediately
prior to the Effective Time (on the basis of Election Forms received by the
Election Deadline), then the Exchange Agent shall reduce (pro rata according
to each holder's total number of Cash Election Shares of those holders who
made an Election), rounded to the nearest whole share, a sufficient number
of Cash Election Shares such that the total number of Cash Election Shares
represents, as closely as practicable, 50% of the number of shares of ITI
Common Stock issued and outstanding immediately prior to the Effective Time.
(c) Not later than the 20th business day prior to the date of the ITI
Stockholder Meeting, or such other date as ITI and SLC may agree in writing,
ITI shall mail an Election Form to each person that was a holder of record
of ITI Common Stock at that time. To be effective, an Election Form must be
properly completed, signed and actually received by the Exchange Agent not
later than 5:00 p.m. prevailing Central Time, on the business day
immediately preceding the ITI Stockholder Meeting (the "Election Deadline")
and accompanied by the certificates representing
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all the shares of ITI Common Stock ("ITI Certificates") as to which the
Election is being made (or an appropriate guarantee of delivery by an
eligible organization or provision for lost, stolen, misplaced or destroyed
certificates acceptable to the Exchange Agent). The Election Form (which
shall specify that delivery shall be effected and the risk of loss and title
to the ITI Certificates (and the payment right represented by such
certificates) shall pass only upon proper delivery of such ITI Certificates
to the Exchange Agent) will advise the holders of ITI Certificates of the
procedure for surrendering to the Exchange Agent such certificates in
exchange for the Per Share Cash Consideration. ITI shall have reasonable
discretion, which it may delegate in whole or in part to the Exchange Agent,
to determine whether Election Forms have been properly completed, signed and
timely submitted or to disregard defects in Election Forms; such decisions
of ITI (or of the Exchange Agent) shall be conclusive and binding. ITI shall
consult with SLC on any significant issues regarding any Election Form. None
of SLC, ITI or the Exchange Agent shall be under any obligation to notify
any person of any defect in an Election Form submitted to the Exchange
Agent. The Exchange Agent shall also make, and ITI shall verify, all
computations contemplated by this Section 1.6, and all such computations
shall be conclusive and binding on the holders or former holders of ITI
Common Stock, absent manifest error. The Exchange Agent shall promptly
provide ITI and SLC with a copy of the completed computation. Shares of ITI
Common Stock covered by an Election Form which is not effective shall be
treated as if no Election has been made with respect to such shares of ITI
Common Stock. Once an Election is made it may not be revoked unless such
revocation has been communicated in writing to the Exchange Agent prior to
the Election Deadline. The Exchange Agent shall cause to be properly
reissued ITI Certificates representing ITI Common Stock as to which the
Election is not applicable."
IN WITNESS WHEREOF, ITI and SLC have caused this Agreement to be signed by
their respective officers thereunto duly authorized all as of this 9th day of
March, 2000.
ITI TECHNOLOGIES, INC.
By /s/ THOMAS L. AUTH
------------------------------------
Thomas L. Auth
Chief Executive Officer and
President
SLC TECHNOLOGIES, INC.
By /s/ KENNETH L. BOYDA
------------------------------------
Kenneth L. Boyda
Chief Executive Officer and
President
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APPENDIX B
[GOLDMAN SACHS LETTERHEAD]
PERSONAL AND CONFIDENTIAL
September 28, 1999
Board of Directors
ITI Technologies, Inc.
2266 North Second Street
North St. Paul, MN 55109
Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders of the outstanding shares of common stock, par value $.01
per share (the "Shares"), of ITI Technologies, Inc. (the "Company") of the
Company Consideration (as defined below), in the aggregate, to be paid and
retained pursuant to the Agreement and Plan of Merger and Reorganization, dated
as of September 28, 1999, between SLC Technologies, Inc. ("SLC") and the Company
(the "Merger Agreement"). Pursuant to the Merger Agreement, SLC will be merged
into the Company (the "Merger"), each share of common stock, par value $.005 per
share, of SLC will be converted into 15.17064 Shares, and holders (collectively,
the "Stockholders") of Shares issued and outstanding immediately prior to the
effective time (the "Effective Time") of the Merger may make an election (an
"Election") to receive $36.50, subject to certain adjustments, in cash (the
"Cash Consideration") for each Share, subject to certain procedures and
limitations, including among other things, that the total number of Shares which
may be converted into cash in the Merger may not exceed 50% of the Shares issued
and outstanding immediately prior to the Effective Time, as to which procedures
and limitations we are expressing no opinion. Each Share as to which the Cash
Consideration is not paid shall remain issued and outstanding (the "Retained
Interest"). The aggregate Cash Consideration paid, together with the Retained
Interest, is referred to as the "Company Consideration."
Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. We are
familiar with the Company having acted as its financial advisor in connection
with, and having participated in certain of the negotiations leading to, the
Merger Agreement. Goldman, Sachs & Co. is a full service securities firm and as
such may from time to time effect transactions and hold positions in securities
or options on securities of the Company for its own account or the account of
customers.
In connection with this opinion, we have reviewed, among other things, the
Merger Agreement; the Annual Reports on Form 10-K of the Company for the five
years ended December 31, 1998; certain interim reports to stockholders and
Quarterly Reports on Form 10-Q of the Company; certain
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ITI Technologies, Inc.
September 28, 1999
Page 2
other communications from the Company to its stockholders; the audited
consolidated financial statements of SLC for the three years ended December 31,
1998 and certain additional financial and other information of SLC; certain
internal financial analyses and forecasts for SLC prepared by the management of
SLC; and certain internal financial analyses and forecasts for the Company and
SLC prepared by the management of the Company (the "Forecasts"), including
certain cost savings and operating synergies projected by the management of the
Company to result from the Merger (the "Synergies"). We also have held
discussions with members of the senior management of the Company and SLC
regarding the strategic rationale for, and the potential benefits of, the Merger
and the past and current business operations, financial condition and future
prospects of their respective companies. In addition, we have reviewed the
reported price and trading activity for the Shares, reviewed the financial terms
of certain recent business combinations in the security equipment industry
specifically and in other industries generally and performed such other studies
and analyses as we considered appropriate.
We have relied upon the accuracy and completeness of all of the financial
and other information reviewed by us and have assumed such accuracy and
completeness for purposes of rendering this opinion. Prior to preparation of the
Forecasts, the Company prepared forecasts which indicated future financial
performance by the Company superior to that indicated in the Forecasts. We have
discussed with the Company its view regarding the risks and uncertainties
inherent in preparing forecasts of the future financial performance of the
Company and SLC. In that regard, you have stated to us that the Forecasts and
Synergies referenced above are the best currently available estimates of the
Company as to the future financial performance of the Company and SLC and have
instructed us to utilize such Forecasts and Synergies in rendering our opinion.
In addition, we have not made an independent evaluation or appraisal of the
assets and liabilities of the Company or SLC or any of their subsidiaries and we
have not been furnished with any such evaluation or appraisal. Our advisory
services and the opinion expressed herein are provided for the information and
assistance of the Board of Directors of the Company in connection with its
consideration of the transaction contemplated by the Merger Agreement and such
opinion does not constitute a recommendation as to how any Stockholder should
vote with respect to the Merger. Inasmuch as the particular circumstances of
each Stockholder may vary and the market value of the Shares as of the Election
Deadline (as defined in the Merger Agreement) is not determinable at this time,
our opinion does not constitute a recommendation as to whether any individual
Stockholder should make an Election to receive the Cash Consideration pursuant
to the terms of the Merger Agreement. However, in rendering our opinion as of
the date hereof, we have assumed, with your consent, that the maximum aggregate
amount of Cash Consideration available to be paid pursuant to the Merger
Agreement will be paid. In addition, we are not expressing an opinion as to the
price at which Shares will trade following the Merger.
Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that, as of the date hereof, the
Company Consideration to be paid and retained pursuant to the Merger Agreement
is, in the aggregate, fair from a financial point of view to the Stockholders.
Very truly yours,
[GOLDMAN SACHS SIGNATURE]
- ---------------------------------------
(GOLDMAN, SACHS & CO.)
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APPENDIX C
AMENDMENTS TO AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
ITI TECHNOLOGIES, INC.
ITI Technologies, Inc.'s Amended and Restated Certificate of Incorporation
is hereby amended in the following respects:
A. Article First is amended to read: "FIRST: The name of the Corporation is
Interlogix, Inc."
B. Article Fifth is amended to read: "FIFTH: The total number of shares of
stock which the Corporation shall have authority to issue is 60,000,000,
and the par value of each such share is $0.01, amounting in the
aggregate to $600,000."
C. A new Article Tenth will be added to read as follows: "TENTH: The
Corporation expressly elects not to be governed by Section 203 of the
Delaware General Corporation Law, as amended from time to time."
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APPENDIX D
ITI TECHNOLOGIES, INC.
2000 STOCK INCENTIVE PLAN
1. PURPOSE OF THE PLAN
The purpose of the Plan is to promote the long term financial success of
ITI Technologies, Inc., its Subsidiaries and Affiliates, and to materially
increase shareholder value by: (i) providing performance related incentives that
motivate superior performance on the part of the Employees, Directors and
Consultants; (ii) providing the Employees, Directors and Consultants with the
opportunity to acquire an ownership interest in the Company, and to thereby
acquire a greater stake in the Company and a closer identity with it; and (iii)
enabling the Company to attract and retain the services of Employees, Directors
and Consultants of outstanding ability and upon whose judgment, interest and
special effort the successful conduct of the Company's operations is largely
dependent.
2. DEFINITIONS
2.1. "Act" means the Securities Exchange Act of 1934, as amended.
2.2. "Affiliate" means any entity other than the Subsidiaries in which the
Company has a substantial direct or indirect equity interest, as determined by
the Board.
2.3. "Award" means an award of Options, SARs, Restricted Stock, Phantom
Shares, a Performance Award, Other Stock Grants or any combination thereof.
2.4. "Award Share" means any share of Common Stock purchased upon the
exercise of an Option or SAR, or issued pursuant to an Award of Restricted
Stock, Phantom Shares, a Performance Award or Other Stock Grants.
2.5. "Board" means the Board of Directors of the Company.
2.6. "Cause" means any of the following actions taken by a Participant,
unless an Award agreement specifies otherwise:
2.6.1. willful engagement in activities which result in significant
injury to the Company, its Subsidiaries or Affiliates, monetarily or
otherwise;
2.6.2. gross negligence in the performance of the Participant's
duties;
2.6.3. commitment of a felony or crime involving moral turpitude; or
2.6.4. disclosure of trade secrets, customer lists or confidential
information of the Company, its Subsidiaries or Affiliates to a competitor
or unauthorized person.
2.7. "Change of Control" shall mean, if and when the merger of SLC
Technologies, Inc. into the Company (the "Merger") becomes effective, the
occurrence of any of the following events (prior to the Merger, the Committee
shall determine whether a Change of Control has occurred):
2.7.1. the acquisition in one or more transactions by any "Person" (as
such term is used for purposes of Section 13(d) or Section 14(d) of the
Act) but excluding, for this purpose, the Company or its Subsidiaries and
Affiliates or any employee benefit plan of the Company or its
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Subsidiaries and Affiliates, of "Beneficial Ownership" (within the meaning
of Rule 13d-3 under the Act) of thirty percent (30%) or more of the
combined voting power of the Company's then outstanding voting securities
(the "Voting Securities"), at a time when the "Beneficial Ownership"
(within the meaning of Rule 13d-3 under the Act) of Berwind Group Partners
or its affiliates is less than thirty percent (30%) of the combined voting
power of the Company's then outstanding Voting Securities;
2.7.2. the individuals who, as of the effective date of the Merger,
constitute the Board (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board; provided, however, that if the
election, or nomination for election by the Company's shareholders, of any
new director was approved by a vote of at least a majority of the Incumbent
Board, such new director shall be considered as a member of the Incumbent
Board, and provided further that any reductions in the size of the Board
that are instituted voluntarily by the Incumbent Board shall not constitute
a Change of Control, and after any such reduction the "Incumbent Board"
shall mean the Board as so reduced;
2.7.3. a merger or consolidation involving the Company if the
shareholders of the Company, immediately before such merger or
consolidation, do not own, directly or indirectly, immediately following
such merger or consolidation, more than thirty percent (30%) of the
combined voting power of the outstanding Voting Securities of the
corporation resulting from such merger or consolidation or a complete
liquidation or dissolution of the Company or a sale or other disposition of
all or substantially all of the assets of the Company; or
2.7.4. acceptance by shareholders of the Company of shares in a share
exchange if the shareholders of the Company, immediately before such share
exchange, do not own, directly or indirectly, immediately following such
share exchange, more than thirty percent (30%) of the combined voting power
of the outstanding Voting Securities of the corporation resulting from such
share exchange.
2.8. "Code" means the Internal Revenue Code of 1986, as amended.
2.9. "Committee" means the committee designated by the Board to administer
the Plan under Section 4. The Committee shall have at least two members. All
members shall be "non-employee directors," as defined under Rule 16b-3 issued
under the Act, and "outside directors," as defined under Treasury Regulation
sec.1.162-27(e)(3).
2.10. "Common Stock" means the common stock of the Company, par value $.01
per share, or such other class or kind of shares or other securities resulting
from the application of Section 13.
2.11. "Company" means the ITI Technologies, Inc., a Delaware corporation,
or any successor corporation.
2.12. "Consultant" means a key consultant or advisor to the Company or any
of its Subsidiaries or Affiliates who is not an Employee.
2.13. "Director" means a member of the Board who is not an Employee.
2.14. "Disability" means a medically-determinable condition of a permanent
nature which, as determined by the Committee, renders an Optionee incapable of
fulfilling the duties and responsibilities that the Optionee was performing for
the Company, its Subsidiaries and/or Affiliates immediately prior to the on-set
of such condition.
2.15. "Employee" means an officer or other key employee of the Company, a
Subsidiary or an Affiliate, including any member of the Board who is such an
employee.
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2.16. "Fair Market Value" means, on any given date:
2.16.1. if the Common Stock is listed on an established stock exchange
or exchanges, the mean between the highest and lowest prices of actual
sales of Common Stock on the principal exchange on which it is traded on
such date, or if no sale was made on such date on such principal exchange,
on the last preceding day on which the Common Stock was traded;
2.16.2. if the Common Stock is not then listed on an exchange, but is
quoted on NASDAQ or a similar quotation system, the mean between the
closing bid and asked prices per share for the Common Stock as quoted on
NASDAQ or similar quotation system on such date;
2.16.3. if the Common Stock is not then listed on an exchange or
quoted on NASDAQ or a similar quotation system, the value, as determined in
good faith by the Committee.
2.17. "Incentive Stock Option" means an Option which meets the requirements
of Section 422 of the Code, and which is designated as an Incentive Stock Option
by the Committee.
2.18. "Non-Qualified Stock Option" means an Option not intended to be and
not designated as an Incentive Stock Option by the Committee.
2.19. "Option" means the right, granted from time to time under the Plan,
to purchase Common Stock for a specified period of time at a stated price. An
Option may be an Incentive Stock Option or a Non-Qualified Stock Option.
2.20. "Other Stock Grant" shall mean any right granted under Article 11 of
the Plan.
2.21. "Participant" means an Employee, Director or Consultant who is
designated by the Committee as eligible to participate in the Plan and who
receives an Award under this Plan.
2.22. "Performance Award" means the conditional grant to a Participant of
the right to receive, at the end of the Performance Period, either (i) Common
Stock, (ii) cash equal to the Fair Market Value of the Common Stock at the end
of the Performance Period, or (iii) a combination of (i) and (ii) as specified
in the Award and provided that the terms, conditions and objectives specified in
the Award are satisfied.
2.23. "Performance Goal" means a goal that has been established by the
Committee and that must be met by the end of a Performance Period (but that is
substantially uncertain to be met before the grant). The Committee shall have
sole discretion to determine the specific targets within each category of
Performance Goals, and whether such Performance Goals have been achieved. With
respect to any Section 162(m) Participant, such Performance Goals may include,
among other things: (i) the price of Common Stock, (ii) the market share of the
Company, its Subsidiaries or Affiliates (or any business unit thereof), (iii)
sales by the Company, its Subsidiaries or Affiliates (or any business unit
thereof), (iv) earnings per share of Common Stock, (v) return on equity of the
Company, or (vi) costs of the Company, its Subsidiaries or Affiliates (or any
business unit thereof).
2.24. "Performance Period" means the time period during which Performance
Goals must be met.
2.25. "Phantom Share" means a right to receive payment of the Fair Market
Value of a share of Common Stock upon exercise of the right.
2.26. "Plan" means the ITI Technologies, Inc. 2000 Stock Incentive Plan
herein set forth, as amended from time to time.
2.27. "Reload Option" shall mean any Option granted under Section 6.10 of
the Plan.
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2.28. "Restriction Period" means the period during which Restricted Stock
awarded under the Plan is subject to forfeiture.
2.29. "Restricted Stock" means Common Stock awarded by the Committee under
Section 8 of the Plan.
2.30. "SAR" means the right to receive, in cash or in Common Stock, as
determined by the Committee, the increase in the Fair Market Value of the Common
Stock underlying the SAR from the date of grant to the date of exercise.
2.31. "Section 162(m) Participant" means any key employee designated by the
Committee as a key employee whose compensation for the fiscal year in which the
key employee is so designated or a future fiscal year may be subject to the
limit on deductible compensation imposed by Section 162(m) of the Code.
2.32. "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50 percent or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.
3. ELIGIBILITY
Any Employee, Director or Consultant who is designated by the Committee as
eligible to participate in the Plan shall be eligible to receive an Award under
the Plan.
4. ADMINISTRATION
4.1. Members of the Committee shall be appointed by and hold office at the
pleasure of the Board. Committee members may resign at any time by delivering
written notice to the Board. The Board may fill vacancies in the Committee.
4.2. The Plan shall be administered by the Committee, which shall have full
power to interpret and administer the Plan, and full authority to act in
selecting the eligible Employees, Directors and Consultants to whom Awards may
be granted, in determining the times at which such Awards may be granted, in
determining the time and the manner in which Options may be exercised, in
determining the type and amount of Awards that may be granted, in determining
the terms and conditions of Awards that may be granted under the Plan and the
terms of agreements which will be entered into with Participants (which terms
shall not be inconsistent with the terms of the Plan). The Committee also shall
have the power to establish different terms and conditions with respect to (i)
the various types of Awards granted under the Plan, (ii) the granting of the
same type of Award to different Participants (regardless of whether the Awards
are granted at the same time or at different times), and (iii) the establishment
of different Performance Goals for different Participants.
4.3. The Committee shall have the power to accelerate the exercisability or
vesting of any Award. Notwithstanding the foregoing or any other provision of
the Plan, the Committee shall not alter the exercisability or vesting of an
Award granted to a Section 162(m) Participant when such exercisability or
vesting depends on the attainment of one or more Performance Goals, except in
the event of a Change of Control, or the death or Disability of the Participant.
4.4. The Committee's powers shall include, but not be limited to, the power
to determine whether, to what extent and under what circumstances an Option may
be exchanged for cash, Common Stock or some combination thereof; to determine
whether, to what extent and under what circumstances an Award is made and
operates on a tandem basis with other Awards made hereunder;
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to determine whether, to what extent and under what circumstances Common Stock
or cash payable with respect to an Award shall be deferred, and to determine
under Section 14 the effect, if any, of a Change of Control of the Company upon
outstanding Awards; and to grant Awards that are transferable by a Participant.
4.5. The Committee shall have the power to adopt regulations for carrying
out the Plan and to make changes in such regulations as it shall, from time to
time, deem advisable. The Committee shall have the full and final authority in
its sole discretion to interpret the provisions of the Plan and to decide all
questions of fact arising in the application of the Plan's provisions, and to
make all determinations necessary or advisable for the administration of the
Plan. Any interpretation by the Committee of the terms and provisions of the
Plan and the administration thereof, and all action taken by the Committee,
shall be final, binding, and conclusive for all purposes and upon all
Participants.
4.6. The Committee may condition the grant of any Award or the lapse of any
Restriction Period or Performance Period, or any combination thereof, upon the
Participant's or Company's achievement of a Performance Goal that is established
by the Committee before the grant of the Award and/or upon the Participant's
entering into a non-competition and/or non-solicitation agreement. The Committee
shall certify that any applicable Performance Goals have been satisfied before
making any payment or issuing any Common Stock pursuant to an Award.
4.7. Members of the Committee shall receive such compensation for their
services as may be determined by the Board. The Company shall pay all expenses
and liabilities which members of the Committee incur in connection with the
administration of the Plan. The Committee may, with the approval of the Board,
employ attorneys, consultants, accountants and other service providers. The
Committee, the Board, the Company and the Company's officers shall be entitled
to rely upon the advice and opinions of any such person. No member of the
Committee or the Board shall be personally liable for any action, determination
or interpretation made with respect to the Plan and all members of the Committee
and the Board shall be protected by the Company in respect of any such action,
determination or interpretation in the manner provided in the Company's bylaws.
4.8. The Committee shall maintain a written record of its proceedings. A
majority of the Committee shall constitute a quorum, and the acts of a majority
of the members present at any meeting at which a quorum is present, or acts
unanimously approved in writing, shall be the acts of the Committee.
5. SHARES OF STOCK SUBJECT TO THE PLAN
5.1. Subject to adjustment as provided in Section 13, the total number of
shares of Common Stock available for Awards under the Plan shall be 1,500,000
shares; provided, that shares of Common Stock subject to Awards of SARs or
Phantom Shares shall not count toward such limit.
5.2. The maximum number of shares of Common Stock covered by Options and
SARs, with option or base prices greater than or equal to Fair Market Value on
the applicable dates of grant, awarded to any Employee during any calendar year
shall not exceed 500,000 (the "Individual Limit"). No Employee may be granted in
any calendar year other Awards contingent on the attainment of one or more
Performance Goals which are valued at more than $3,000,000 on the applicable
dates of grant.
5.3. Any shares issued hereunder may consist, in whole or in part, of
authorized and unissued shares or treasury shares. Any shares issued by the
Company through the assumption or substitution of outstanding grants from an
acquired company shall not (i) reduce the number of shares of Common Stock
available for Awards under the Plan, or (ii) be counted against the Individual
Limit.
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If any shares subject to any Award granted hereunder are forfeited or such Award
otherwise terminates without the issuance of such shares or the payment of other
consideration in lieu of such shares, the shares subject to such Award, to the
extent of any such forfeiture or termination, shall again be available for
Awards under the Plan; however, such shares shall be counted against the
Individual Limit.
6. OPTIONS
The grant of Options shall be subject to the following terms and
conditions:
6.1. Option Grants: Any Option granted under the Plan shall be evidenced by
a written agreement executed by the Company and the Participant, which agreement
shall conform to the requirements of the Plan and may contain such other
provisions not inconsistent with the terms of the Plan as the Committee shall
deem advisable. An agreement shall state that the Option is an Incentive Stock
Option if that is the intent of the Committee. Absent such a statement, the
Option shall be a Non-Qualified Stock Option.
6.2. Number of Shares: Subject to the Individual Limit, the Committee shall
specify the number of shares of Common Stock subject to each Option.
6.3. Option Price: The price per share at which Common Stock may be
purchased upon exercise of an Option shall be as determined by the Committee.
6.4. Term of Option and Vesting: The Committee shall specify when an Option
may be exercisable and the terms and conditions applicable thereto. The term of
an Option shall in no event be greater than 10 years. Options granted under the
Plan may be subject to a vesting schedule and/or the attainment of Performance
Goals as determined by the Committee and set forth in the applicable stock
option agreement.
6.5. Incentive Stock Options: Each provision of the Plan and each agreement
relating to an Incentive Stock Option shall be construed and interpreted in a
manner consistent with the requirements of Section 422 of the Code, and in no
event shall a Participant be granted an Incentive Stock Option that does not
comply with the requirements of Section 422 of the Code.
6.6. Exercise of Option and Payment of Option Price: An Option may be
exercised only for a whole number of shares of Common Stock. The Committee shall
establish the time and the manner in which an Option may be exercised. The
option price of the shares of Common Stock received upon the exercise of an
Option shall be paid in full in cash at the time of the exercise or, with the
consent of the Committee:
6.6.1. in whole or in part in Common Stock held by the Participant for
at least six months prior to the date of exercise and which is valued at Fair
Market Value on the date of exercise;
6.6.2. by the delivery of a properly executed exercise notice, together
with irrevocable instructions to a Company-designated broker to promptly deliver
to the Company the amount of sale or loan proceeds required to pay the exercise
price; or
6.6.3. any other method deemed acceptable by the Committee.
6.7. Termination Due to Death or Disability: If a Participant's employment
or service with the Company, a Subsidiary or Affiliate terminates due to death
or Disability, any unexercised Option granted to the Participant may thereafter
be exercised (to the extent such Option was exercisable at the time of the
Participant's termination or to a greater extent permitted by the Committee) by
the Participant (or where appropriate, the Participant's transferee, personal
representative, heir or
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legatee), for one year, or such other period determined by the Committee which
may extend to the expiration of the stated term of the Option.
6.8. Termination for Cause: If a Participant's employment or service with
the Company, a Subsidiary or Affiliate terminates for Cause, any Options granted
to the Participant and which are unexercised shall terminate on the date of such
termination or notice of such termination, if earlier, unless otherwise
determined by the Committee.
6.9. Termination Due to Retirement or Other Reasons: If a Participant's
employment or service with the Company, a Subsidiary or Affiliate terminates due
to retirement after the Participant has attained age 65 ("Retirement"), any
unexercised Option granted to the Participant may thereafter be exercised (to
the extent such Option was exercisable at the time of the Participant's
termination or to a greater extent permitted by the Committee) by the
Participant (or where appropriate, the Participant's transferee, personal
representative, heir or legatee), for such period determined by the Committee
which may extend to the expiration of the stated term of the Option. If a
Participant's employment or service with the Company, a Subsidiary or Affiliate
terminates for any reason other than death, Disability, Retirement or for Cause,
any unexercised Option granted to the Participant may thereafter be exercised
(to the extent such Option was exercisable at the time of the Participant's
termination or to a greater extent permitted by the Committee) by the
Participant (or where appropriate, the Participant's transferee, personal
representative, heir or legatee), for 90 days, or such other period determined
by the Committee which may extend to the expiration of the stated term of the
Option.
6.10. Reload Options: The Committee may grant Reload Options, separately or
together with another Option, pursuant to which, subject to the terms and
conditions established by the Committee, the Participant would be granted a new
Option when the payment of the exercise price of a previously granted Option is
made by the delivery of Common Stock owned by the Participant pursuant to
Section 6.6 of the Plan or the relevant provisions of another plan of the
Company, and/or when the Common Stock is tendered or withheld as payment of the
amount to be withheld under applicable income tax laws in connection with the
exercise of an Option. Such a Reload Option would be an Option to purchase a
number of shares of Common Stock not exceeding the sum of (A) the number of
shares so provided as consideration upon the exercise of the previously granted
option to which the Reload Option relates, and (B) the number of shares, if any,
tendered or withheld as payment of the amount to be withheld under applicable
tax laws in connection with the exercise of the option to which such Reload
Option relates. Such Reload Options shall have a per share exercise price equal
to the Fair Market Value of one share of Common Stock as of the date of grant of
the new Option. Any Reload Option shall be subject to availability of sufficient
shares of Common Stock for grant under the Plan.
7. STOCK APPRECIATION RIGHTS
The grant of SARs shall be subject to the following terms and conditions:
7.1. Grant of SARs: Any SAR granted under the Plan shall be evidenced by a
written agreement executed by the Company and the Participant, which agreement
shall specify the number of shares of Common Stock subject to the Award, conform
to the requirements of the Plan and may contain such other provisions not
inconsistent with the terms of the Plan as the Committee shall deem advisable.
The base price of an SAR shall be the Fair Market Value of the Common Stock on
the date of grant.
7.2. Tandem SARs: An SAR granted under the Plan may be granted in tandem
with all or a portion of a related Option. An SAR granted in tandem with an
Option may be granted either at the
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time of the grant of the Option or at a time thereafter during the term of the
Option and shall be exercisable only to the extent that the related Option is
exercisable. The base price of an SAR granted in tandem with an Option shall be
the option price under the related Option.
7.3. Exercise of an SAR: An SAR shall entitle the Participant to surrender
unexercised the SAR (or any portion of such SAR) and to receive a payment equal
to the excess of the Fair Market Value of the shares of Common Stock covered by
the SAR on the date of exercise over the base price of the SAR. Such payment may
be in cash, in shares of Common Stock, in shares of Restricted Stock, or any
combination thereof, as the Committee shall determine. Upon exercise of an SAR
issued in tandem with an Option or lapse thereof, the related Option shall be
canceled automatically to the extent of the number of shares of Common Stock
covered by such exercise, and such shares shall no longer be available for
purchase under the Option. Conversely, if the related Option is exercised, or
lapses, as to some or all of the shares of Common Stock covered by the grant,
the related SAR, if any, shall be canceled automatically to the extent of the
number of shares of Common Stock covered by the Option exercise.
7.4. Other Applicable Provisions: SARs shall be subject to the same terms
and conditions applicable to Options as stated in sections 6.4, 6.7, 6.8 and
6.9.
8. RESTRICTED STOCK
An Award of Restricted Stock is a grant by the Company of a specified
number of shares of Common Stock to the Participant, which shares are subject to
forfeiture upon the happening of specified events or upon the Participant's
and/or Company's failure to achieve Performance Goals established by the
Committee. A grant of Restricted Stock shall be subject to the following terms
and conditions.
8.1. Grant of Restricted Stock Award. Any Restricted Stock granted under
the Plan shall be evidenced by a written agreement executed by the Company and
the Participant, which agreement shall conform to the requirements of the Plan,
and shall specify (i) the number of shares of Common Stock subject to the Award,
(ii) the Restriction Period applicable to each Award, (iii) the events that will
give rise to a forfeiture of the Award, (iv) the Performance Goals, if any, that
must be achieved in order for the restriction to be removed from the Award, (v)
the extent to which the Participant's right to receive Common Stock under the
Award will lapse if the Performance Goals, if any, are not met, and (vi) whether
the Restricted Stock is subject to a vesting schedule. The agreement may contain
such other provisions not inconsistent with the terms of the Plan as the
Committee shall deem advisable.
8.2. Delivery of Restricted Stock. Upon determination of the number of
shares of Restricted Stock to be granted to the Participant, the Committee shall
direct that a certificate or certificates representing the number of shares of
Common Stock be issued to the Participant with the Participant designated as the
registered owner. The certificate(s) representing such shares shall be legended
as to restrictions on the sale, transfer, assignment, or pledge of the
Restricted Stock during the Restriction Period and deposited by the Participant,
together with a stock power endorsed in blank, with the Company.
8.3. Dividend and Voting Rights. During the Restriction Period, unless
otherwise determined by the Committee, the Participant will not have the right
to vote the shares of Restricted Stock or to receive dividends and other
distributions related to such shares.
8.4. Receipt of Common Stock. At the end of the Restriction Period, the
Committee shall determine, in light of the terms and conditions set forth in the
Restricted Stock agreement, the number of shares of Restricted Stock with
respect to which the restrictions imposed hereunder shall
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lapse. The Restricted Stock with respect to which the restrictions shall lapse
shall be converted to unrestricted Common Stock by the removal of the
restrictive legends from the Restricted Stock. Thereafter, Common Stock equal to
the number of shares of the Restricted Stock with respect to which the
restrictions hereunder shall lapse shall be delivered to the Participant (or,
where appropriate, the Participant's legal representative). The Committee may,
in its sole discretion, modify or accelerate the vesting and delivery of shares
of Restricted Stock.
8.5. Termination. Unless otherwise determined by the Committee, if a
Participant's employment or service with the Company, a Subsidiary or Affiliate
terminates, any Restricted Stock with respect to which the Restriction Period
has not expired shall be forfeited.
9. PERFORMANCE AWARDS
9.1. Grant of Performance Award. Any Performance Award granted under the
Plan shall be evidenced by a written agreement executed by the Company and the
Participant, which agreement shall conform to the requirements of the Plan and
shall specify (i) the number of shares of Common Stock subject to the Award,
(ii) the Performance Period applicable to each Award, (iii) the Performance
Goals that must be achieved in order for the Participant to be entitled to the
Award, (iv) the extent to which the Participant's right to receive the Award
will lapse if the Performance Goals are not met, and (v) whether the Performance
Award is subject to a vesting schedule. The agreement may contain such other
provisions not inconsistent with the terms of the Plan as the Committee shall
deem advisable.
9.2. Dividend and Voting Rights. During the Performance Period, the
Participant shall have no right to receive dividends from or to vote the shares
covered by the Performance Award.
9.3. Receipt of Common Stock. As soon as practicable after the Performance
Period, the Committee shall determine the extent to which the Performance Award
has been earned on the basis of the Company's and/or Participant's performance
in relation to the Performance Goals set forth in the Performance Award
agreement. Once the Performance Award to which the Participant is entitled has
been determined, the Performance Award shall be paid to the Participant (or,
where appropriate, the Participant's legal representative). If the Participant
and/or the Company fails to achieve the Performance Goals specified in the
Performance Award agreement, all or a portion of the Performance Award shall be
forfeited.
9.4. Termination. Unless otherwise determined by the Committee, if a
Participant's employment or service with the Company, a Subsidiary or Affiliate
terminates, any Performance Award with respect to which the Performance Period
has not expired shall be forfeited.
10. PHANTOM SHARES
10.1. Grant of Phantom Shares: Any Phantom Shares granted under the Plan
shall be evidenced by a written agreement executed by the Company and the
Participant, which agreement shall specify the number of shares of Common Stock
subject to the Award, conform to the requirements of the Plan and may contain
such other provisions not inconsistent with the terms of the Plan as the
Committee shall deem advisable.
10.2. Exercise of Phantom Shares: A Participant may exercise Phantom
Shares awarded to him (or any portion of such Phantom Shares) at the times
provided for in the applicable Phantom Share agreement or as otherwise permitted
by the Committee. Upon exercise, the Participant shall receive a payment equal
to the Fair Market Value of a share of Common Stock on the date of exercise
multiplied by the number of Phantom Shares exercised. Such payment may be in
cash, in
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shares of Common Stock, in shares of Restricted Stock or any combination
thereof, as the Committee shall determine.
10.3. Other Applicable Provisions: Phantom Shares shall be subject to the
same terms and conditions applicable to Options as stated in Sections 6.4, 6.7,
6.8 and 6.9.
11. OTHER STOCK GRANTS
The Committee, subject to the terms of the Plan and any applicable Award
agreement, may grant to Participants Common Stock without restrictions thereon
as determined by the Committee to be consistent with the purpose of the Plan.
12. DEFERRAL ELECTION
Notwithstanding any provision of the Plan to the contrary, any Participant
may elect, with the concurrence of the Committee and consistent with any rules
and regulations established by the Committee, to defer to a specified date the
receipt of unrestricted Common Stock that the Participant would otherwise be
entitled to receive pursuant to an Award. Notwithstanding such an election, the
Committee may distribute the unrestricted Common Stock deferred by all
Participants pursuant to this Section 12 if the Committee determines, in its
discretion, that the continued deferral of Common Stock hereunder is no longer
in the best interest of the Company.
13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
In the event of a reorganization, recapitalization, stock split, spin-off,
split-off, split-up, stock dividend, issuance of stock rights, combination of
shares, merger, consolidation or any other change in the corporate structure of
the Company affecting Common Stock, or any distribution to shareholders other
than a cash dividend, the Committee shall make appropriate adjustment in the
number and kind of shares authorized for use under the Plan and any adjustments
to outstanding Awards as it determines appropriate. The adjustments to
outstanding Awards shall include, but not be limited to, the respective prices,
limitations, and/or performance criteria applicable to the outstanding Awards.
No fractional shares of Common Stock shall be issued pursuant to such an
adjustment. The Fair Market Value of any fractional shares resulting from
adjustments pursuant to this Section shall, where appropriate, be paid in cash
to the Participant. The determinations and adjustments made by the Committee
pursuant to this Section 13 shall be conclusive.
14. CHANGE OF CONTROL OF THE COMPANY
Upon a Change of Control, the Committee may in its discretion implement the
following steps with respect to outstanding Awards:
(a) Provide that all Options that are unexercised and outstanding (i)
become immediately and fully vested and exercisable, or (ii) be canceled in
exchange for a cash payment in an amount equal to the excess, if any, of the
Fair Market Value of the Common Stock underlying the Option as of the date of
the Change of Control over the exercise price of such Option. In addition,
provide that all Restricted Stock and Performance Awards that are outstanding on
the date of the Change of Control become nonforfeitable and/or immediately
payable in cash;
(b) Provide that the Awards that are outstanding as of the date of a Change
of Control, shall be assumed by the successor corporation, and shall be
substituted with awards involving the common stock of the successor corporation.
Provided, however, that the substitution of Awards described under this
subsection (b) shall occur only if (i) the common stock of the successor
corporation is traded on
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an established stock exchange or exchanges, or will be so traded within 60 days
of the Change of Control and (ii) the terms and conditions of the substituted
awards are no less favorable than the Awards granted by the Company; or
(c) Make no changes to outstanding Awards or take such other actions as the
Committee deems appropriate.
15. EFFECTIVE DATE, TERMINATION AND AMENDMENT
The Plan shall become effective on the date it is approved by the Company's
shareholders. The Plan shall remain in full force and effect until the earlier
of 10 years from its effective date or the date it is terminated by the Board.
The Board shall have the power to amend, suspend or terminate the Plan at any
time, provided that no such amendment shall be made without shareholder approval
to the extent such approval is required under Code sec. 422, Code sec. 162(m),
the rules of a stock exchange or NASDAQ, or any other applicable law.
Termination of the Plan pursuant to this Section 15 shall not affect Awards
outstanding under the Plan at the time of termination.
16. TRANSFERABILITY
Except as provided below, Awards may not be pledged, assigned or
transferred for any reason during the Participant's lifetime, and any attempt to
do so shall be void and the relevant Award shall be forfeited. The Committee may
grant Awards other than Incentive Stock Options that are transferable by the
Participant during his lifetime, but such Awards shall be transferable only to
the extent specifically provided in the agreement entered into with the
Participant. The transferee of the Participant shall, in all cases, be subject
to the provisions of the agreement between the Company and the Participant,
including any requirements as to the Participant's continued service or
employment. The rights of the transferee shall be no greater than the rights
that would be acquired by the Participant's estate if the Participant were to
die prior to the transfer of the Award.
17. GENERAL PROVISIONS
17.1. No Employment Rights. Nothing contained in the Plan, or any Award
granted pursuant to the Plan, shall confer upon any Employee any right with
respect to continuance of employment by the Company, a Subsidiary or Affiliate,
or upon any Director or Consultant any right with respect to continued service
for the Company, a Subsidiary or Affiliate nor interfere in any way with the
right of the Company, a Subsidiary or Affiliate to terminate the employment or
service of any Employee, Director or Consultant at any time.
17.2. Transfer of Employment. For purposes of this Plan, transfer of
employment between the Company and its Subsidiaries and Affiliates shall not be
deemed termination of employment.
17.3. Payment of Taxes. The Company shall have the power to withhold, or
require a Participant to remit to the Company, all taxes required to be paid in
connection with any Award, the exercise thereof and the transfer of shares of
Common Stock pursuant to this Plan. The Company's power to withhold a portion of
the cash or Common Stock received pursuant to an Award, or require that the
Participant remit the applicable taxes shall extend to all applicable Federal,
state, local or foreign withholding taxes. The Company shall have the right to
retain the shares of Common Stock to be issued or cash to be paid pursuant to an
Award until the Company determines that the applicable withholding taxes have
been satisfied. Agreements evidencing such Awards shall contain appropriate
provisions to effect withholding in this manner.
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17.4. Participation of Foreign Nationals. Without amending the Plan,
Awards may be granted to Employees who are foreign nationals or employed outside
the United States or both, on such terms and conditions different from those
specified in the Plan as may, in the judgment of the Committee, be necessary or
desirable to further the purpose of the Plan.
17.5. Restrictions on Shares. The Award Shares shall be subject to
restrictions on transfer pursuant to applicable securities laws and such other
agreements as the Committee shall deem appropriate and shall bear a legend
subjecting the Award Shares to those restrictions on transfer in accordance with
the applicable Award. The certificates shall also bear a legend referring to any
restrictions on transfer arising hereunder or under any other applicable law,
regulation or agreement.
17.6. Requirements of Law. The Plan and each Award under the Plan shall be
subject to the requirement that if at any time the Committee shall determine
that (a) the listing, registration or qualification of the Award Shares upon any
securities exchange or under any state or federal law, (b) the consent or
approval of any government regulatory body or (c) an agreement by the recipient
of an Award with respect to the disposition of the Award Shares is necessary or
desirable as a condition of, or in connection with, the Plan or the granting of
such Award or the issue or purchase of the Award Shares thereunder, the Award
may not be consummated in whole or in part until such listing, registration,
qualification, consent, approval or agreement shall have been effected or
obtained free of any conditions not acceptable to the Committee.
17.7. Amending of Awards. The Committee may amend any outstanding Awards
to the extent it deems appropriate. Such amendment may be made by the Committee
without the consent of the Participant, except in the case of amendments adverse
to the Participant, in which case the Participant's consent is required to any
such amendment.
17.8. No Shareholder Rights. The Participant shall have no rights as a
shareholder with respect to shares of Common Stock subject to an Award unless
and until certificates for the Award Shares are issued.
17.9. Headings. Section headings are included only for ease of reference.
Headings are not intended to constitute substantive provisions of the Plan and
shall not be used to interpret the scope of this Plan or the rights or
obligations of the Company in any way.
17.10. Changes to Existing Laws, Regulations or Rules. Any law, regulation
or rule referenced in the Plan shall be construed to include any successor
thereto or amendment thereof.
17.11. Governing Law. To the extent that Federal laws do not otherwise
control, the Plan and all determinations made and actions taken pursuant hereto
shall be governed by the law of the State of Delaware and construed accordingly.
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To record the adoption of the Plan, ITI Technologies, Inc. has caused its
authorized officers to affix its corporate name this day of , 2000.
Attest: ITI TECHNOLOGIES, INC.
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ITI TECHNOLOGIES, INC.
SPECIAL MEETING OF STOCKHOLDERS
MAY 2, 2000
\/ PLEASE DETACH HERE \/
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ITI TECHNOLOGIES, INC.
2266 SECOND STREET NORTH
NORTH SAINT PAUL, MN 55109 PROXY
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THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR USE AT THE SPECIAL
MEETING ON MAY 2, 2000.
The Board of Directors unanimously recommends a vote FOR proposal #1 and
proposal #2. If any other business is presented at the Special Meeting, this
Proxy shall be voted in accordance with the discretion of the individuals named
below as proxies. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
AND MAY BE REVOKED PRIOR TO ITS USE.
The undersigned stockholder(s) of ITI Technologies, Inc. ("ITI") hereby
appoints Thomas L. Auth and Charles A. Durant, and each of them, the proxy of
the undersigned, with full power of substitution, to vote all shares of ITI
common stock which the undersigned is entitled to vote at the Special Meeting of
Stockholders to be held at The Saint Paul Hotel, 350 Market Street, Saint Paul,
Minnesota 55102 on Tuesday, May 2, 2000 at 9:00 a.m Central time, or any
adjournment.
See reverse for voting instructions.
<PAGE> 239
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THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1 AND 2
<TABLE>
<S> <C>
1. MERGER. To approve and adopt an Agreement and [ ] For [ ] Against [ ] Abstain
Plan of Merger and Reorganization, dated as of
September 28, 1999, as amended March 9, 2000 (the
"Merger Agreement"), between ITI and SLC
Technologies, Inc., a Delaware corporation ("SLC"),
and the merger of SLC into ITI (the "Merger"). Approval
and adoption of the Merger and the Merger Agreement
will constitute approval of an amendment to ITI's Amended
and Restated Certificate of Incorporation to change the
name of ITI to Interlogix, Inc., to increase the number
of authorized shares of ITI common stock to 60,000,000 and
to opt out of Section 203 of the Delaware General Corporation
Law.
2. STOCK INCENTIVE PLAN. To approve ITI's 2000 Stock Incentive [ ] For [ ] Against [ ] Abstain
plan for 1,500,000 shares of common stock.
3. OTHER BUSINESS. To transact such other business as may properly come before the Special Meeting or any adjournment or
postponement thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS GIVEN, WILL BE VOTED FOR EACH PROPOSAL.
Address Change? Mark Box [ ]
Indicate changes below:
Date
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Signature(s) in Box
Please sign exactly as your name(s) appear on Proxy. If held in
joint tenancy, all persons must sign. Trustee, Administrators,
etc., should include title and authority. Corporations should
provide full name of corporation and title of authorized officer
signing the proxy.
</TABLE>
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