<PAGE> 1
UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements give
effect to the merger based on an exchange ratio of 15.17064 shares of common
stock and stock options of ITI Technologies, Inc. ("ITI") for all of the issued
and outstanding common stock and stock options of SLC Technologies, Inc.
("SLC"). In addition, under the terms of the Cash Election, the shareholders of
ITI exchanged approximately 50% of the common stock and stock options
outstanding prior to the transaction for cash of $174,500,000. Upon completion
of the transaction on May 2, 2000, Berwind Group Partners, the stockholder of
SLC, owned approximately 15.2 million shares, or 78% of common stock, of the
combined company. In accordance with generally accepted accounting principles,
the combined company will account for the merger using the purchase method of
accounting as a reverse merger, since Berwind Group Partners obtained a
controlling interest in ITI. Consequently, ITI is treated as being acquired by
SLC for accounting purposes. 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 $293,300,000 for accounting purposes was
computed based on the following:
- The trading price of ITI common stock of $24.1875 on May 2, 2000 (the
closing date of the transaction) for approximately 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 of
$174,500,000 based on a cash price of $36.50 per share, and
- The estimated direct expenses of the transaction.
The unaudited pro forma combined condensed balance sheet assumes the merger took
place on December 31, 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, 1999 with ITI's condensed statements of
income for the same period adjusted to give effect to the transactions as if the
merger occurred on January 1, 1999. 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 of $86,500,000 over 20 years and other
intangibles of $127,700,000 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
<PAGE> 2
- 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 ultimate purchase price allocation are not expected to have a material
impact on the results 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 plan 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
$37,800,000 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 second quarter of 2000 by the combined company. 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 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 annual
results of SLC include $2,835,000 (after-tax amount of $1,814,000) 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 $199,100,000 (including SLC historical goodwill)
and $142,700,000, respectively, are capitalized and amortized over their
useful lives, which are estimated to be 20 years for goodwill and 7 to 20 years
for other intangible assets. 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. The unaudited pro forma
combined condensed financial statements for the year ended December 31, 1999,
includes non-cash expenses for amortization of goodwill and intangible assets,
with diluted earnings per share effects of $.98.
<PAGE> 3
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.
<PAGE> 4
COMBINED COMPANY
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Pro Forma Pro Forma
SLC ITI Adjustments Combined
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(in millions)
ASSETS
CURRENT ASSETS:
Cash ........................................... $ 21.6 $ 9.7 $ -- $ 31.3
Accounts receivable ............................ 78.2 20.0 -- 98.2
Inventories .................................... 40.5 23.9 4.2 (a) 68.6
Prepaid expense and other current assets ....... 9.0 10.4 6.6 (b) 26.0
------------- ------------- ------------- -------------
Total current assets ..................... 149.3 64.0 10.8 224.1
PROPERTY & EQUIPMENT .............................. 33.0 13.1 1.2 (c) 47.3
GOODWILL .......................................... 114.1 26.8 58.2 (d) 199.1
IDENTIFIABLE INTANGIBLE ASSETS:
Acquired technology ............................ 11.6 2.3 77.9 (d) 91.8
Trademarks and other intangible assets ......... 3.4 13.2 34.3 (d) 50.9
NOTES RECEIVABLE .................................. -- 12.7 -- 12.7
OTHER ASSETS ...................................... 6.5 -- 3.0 (e) 9.5
------------- ------------- ------------- -------------
$ 317.9 $ 132.1 $ 185.4 $ 635.4
============= ============= ============= =============
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................... $ 36.4 $ 5.7 $ -- $ 42.1
Accrued liabilities ............................ 42.2 6.3 -- 48.5
Other short term liabilities ................... -- -- -- --
------------- ------------- ------------- -------------
Total current liabilities ................ 78.6 12.0 -- 90.6
LONG-TERM DEBT, net of current portion ............ 71.3 -- 183.5 (g) 254.8
OTHER LONG-TERM LIABILITIES ....................... 1.1 5.7 42.8 (f) 49.6
------------- ------------- ------------- -------------
Total liabilities ........................ 151.0 17.7 226.3 395.0
------------- ------------- ------------- -------------
STOCKHOLDERS' EQUITY
Common stock ................................... -- 0.1 0.1 (h) 0.2
Additional Paid-in Capital ..................... 107.5 80.0 31.1 (j) 218.6
Retained earnings .............................. 67.3 49.7 (87.5) (i) 29.5
Cumulative translation adjustment .............. (7.9) -- -- (7.9)
Treasury stock, at cost ........................ -- (15.4) 15.4 (j) --
------------- ------------- ------------- ------------
Total stockholders' equity ............... 166.9 114.4 (40.9) 240.4
------------- ------------- ------------- ------------
$ 317.9 $ 132.1 $ 185.4 $ 635.4
============= ============= ============= ============
</TABLE>
See accompanying notes to unaudited pro forma
combined condensed financial statements.
<PAGE> 5
COMBINED COMPANY
UNAUDITED PRO FORMA
COMBINED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Pro Forma Pro Forma
SLC ITI Adjustments Combined
------------- ------------- - ---------- --------------
<S> <C> <C> <C> <C>
(in millions, except share data)
SALES.......................................... $ 427.8 $ 121.6 $ -- $ 549.4
COST OF SALES.................................. 240.8 64.4 0.1 (k) 305.3
------------- ------------- ---------- --------------
Gross profit.......................... 187.0 57.2 (0.1) 244.1
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES... 109.8 23.9 (1.3) (1) 132.4
RESEARCH AND DEVELOPMENT EXPENSE............... 17.1 8.8 -- 25.9
AMORTIZATION OF INTANGIBLES.................... 9.2 1.4 11.7 (m) 22.3
PATENT LITIGATION COSTS -- 4.1 -- 4.1
MANAGEMENT FEE................................. 2.8 -- -- 2.8 (p)
------------- ------------- ---------- --------------
Operating income...................... 48.1 19.0 (10.5) 56.6
OTHER:
Other, net.................................. (1.7) -- -- (1.7)
Interest (income) expense................... 4.6 (1.9) 16.3 (n) 19.0
------------- ------------- ---------- --------------
Income before income taxes............ 45.2 20.9 (26.8) 39.3
PROVISION (BENEFIT) FOR INCOME TAXES........... 19.4 7.5 (8.6) (o) 18.3
------------- ------------- ---------- --------------
NET INCOME..................................... $ 25.8 $ 13.4 $ (18.2) $ 21.0
============= ============= ========== ==============
EARNINGS PER SHARE:
Basic....................................... $ 25.74 $ 1.58 $ 1.08
Diluted..................................... $ 25.58 $ 1.52 $ 1.07
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic..................................... 1,000,000 8,453,000 19,397,000
Diluted................................... 1,006,000 8,803,000 19,663,000
</TABLE>
See accompanying notes to unaudited pro forma
combined condensed financial statements.
<PAGE> 6
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.... $ 155.8
Buy-out of 50% of stock options................................ 18.7
Fair value of remaining common shares at $24.1875.............. 103.3
Fair value of remaining options (1)............................ 7.9
-------------
Purchase price................................................. 285.7
Acquisition costs.............................................. 7.6
-------------
Total estimated purchase price.................. $ 293.3
=============
Historical net book value of ITI............................... $ 114.4
Elimination of historical goodwill............................. (26.8)
Inventory write-up............................................. 4.2
In-process research and development............................ 37.8
Estimated write-up of property and equipment................... 1.2
Tax benefit on options cashed-out.............................. 6.6
Deferred income taxes.......................................... (42.8)
Acquired technology............................................ 77.9
Trademarks and marketing assets................................ 34.3
Goodwill....................................................... 86.5
-------------
$ 293.3
=============
</TABLE>
(1) 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 - 6.196%; and expected life - 5 years.
The above total estimated purchase price was computed based on: (1) the trading
price of approximately 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 May 2, 2000 of
$24.1875 has been used), (2) the cost of the exchange of ITI common stock and
options of $174,539,000 ($36.50 per share for each
<PAGE> 7
outstanding share exchanged and $36.50 per option share, net of the exercise
price, for each option), and (3) the direct expenses of the merger.
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.
(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.
- 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.
- 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
<PAGE> 8
"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.
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........................... $ 49,500 18 years
Product specific technology............... 30,700 12 years
Trademarks and Other Intangible Assets
Trade names - trademarks.................. 35,200 20 years
Customer base............................. 4,600 7 years
Work force................................ 7,700 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. 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
<PAGE> 9
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 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 expect 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
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 $49,500,000, $30,700,000 and $37,800,000, 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.
<PAGE> 10
(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, 1999 were
$46,237,000. All of these earnings are considered permanently reinvested.
(g) Reflects borrowings of $183,500,000 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
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.
(h) As of December 31, 1999, ITI had outstanding 8,536,000 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 $37,800,000. This adjustment is excluded from the unaudited pro forma
combined condensed statement of income due to the non-recurring nature of
this expense.
(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........................ $ 111.1
Historical ITI.......................................... (80.0)
---------
$ 31.1
=========
</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) which were previously granted to
<PAGE> 11
SLC's management with an exercise price equal to a 50% discount to
the trading price ($24.1875 per share):
<TABLE>
<CAPTION>
December 31,
1999
(table in
millions
------------
<S> <C>
Depreciation expense............................... $ 0.1
Commission paid to DISC............................ (2.4)
Compensation expense............................... 1.0
-----------
$ (1.3)
===========
</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 8.01% related to the $183,500,000 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 $1,696,000.
(o) The net tax benefit on the pro forma income statement adjustments outlined
in (k) through (n) above after giving effect to the non-deductible goodwill
amortization.
(p) The 1999 unaudited pro forma combined condensed statements of income
include a management fee charged by Berwind Corporation. Upon completion of
the merger, the contract for management services with Berwind Corporation
terminated. 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 December 31, 1999
combined condensed statements of income was $0.09.
