<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-4821
PITTWAY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-5616408
(State of Incorporation) (I.R.S. Employer Identification No.)
200 South Wacker Drive, Chicago, Illinois 60606-5802
(Address of Principal Executive Offices) (Zip Code)
312/831-1070
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date (April 1, 1994).
Common Stock 2,626,024
Class A Stock 11,314,700
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PITTWAY CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 1994
INDEX
PART I. FINANCIAL INFORMATION Page
ITEM 1. Financial Statements
Consolidated Statement of Income -
Three Months Ended March 31, 1994 and 1993 3
Consolidated Balance Sheet -
March 31, 1994 and December 31, 1993 4 - 5
Consolidated Statement of Cash Flows -
Three Months Ended March 31, 1994 and 1993 6
Notes to Consolidated Financial Statements 7 - 10
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10 - 11
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 12 - 13
ITEM 6. Exhibits and Reports on Form 8-K 14
SIGNATURE 14
2
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PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993
(Dollars in Thousands, Except Per Share Data
(UNAUDITED)
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
CONTINUING OPERATIONS:
Net Sales.......................... $176,543 $151,777
Operating Expenses:
Cost of sales.................... 105,292 92,305
Selling, general and
administrative................. 54,573 47,631
Depreciation and amortization.... 4,783 4,116
164,648 144,052
Operating Income................... 11,895 7,725
Other Income (Expense):
Gain on sale of investment....... 17,051
Income from marketable securities
and other interest............. 812 698
Interest expense................. (754) (533)
Income from investments.......... 538 582
Miscellaneous, net............... 434 8
18,081 755
Income From Continuing Operations
Before Income Taxes.............. 29,976 8,480
Provision For Income Taxes......... 12,020 3,311
INCOME FROM CONTINUING OPERATIONS.. 17,956 5,169
Income From Discontinued Operations 9,459
Income Before Cumulative Effect of
Changes in Accounting Principles. 17,956 14,628
Cumulative Effect of Changes In
Accounting For Income Taxes and
Postretirement Benefits.......... 1,535
NET INCOME......................... $ 17,956 $ 16,163
Per Share of Common and Class A Stock:
Income from continuing operations $ 1.29 $ .37
Income from discontinued operations .68
Cumulative effect of changes in
accounting principles.......... .11
Net Income....................... $ 1.29 $ 1.16
Cash Dividends Declared Per Share:
Common.......................... $ .10 $ .15
Class A......................... $ .125 $ .175
Average Number of Shares Outstanding
(in thousands).................. 13,941 13,941
</TABLE>
See accompanying notes.
3
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PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents............. $ 45 $ 1,908
Marketable securities............ 35,222 31,407
Accounts and notes receivable,
less allowance for doubtful
accounts of $6,069 and $5,521.. 141,907 115,947
Inventories...................... 108,976 100,065
Future income tax benefits....... 13,597 15,232
Prepayments, deposits and other.. 9,294 7,974
309,041 272,533
Property, Plant and Equipment, at cost:
Buildings........................ 26,098 25,530
Machinery and equipment.......... 139,789 132,168
165,887 157,698
Less: Accumulated depreciation... (85,196) (81,375)
80,691 76,323
Land............................. 2,403 2,403
83,094 78,726
Investments:
Real estate and other ventures... 46,565 51,153
Leveraged leases................. 22,724 21,954
69,289 73,107
Other Assets:
Goodwill, less accumulated
amortization of $6,451
and $6,159..................... 40,052 40,357
Other intangibles, less
accumulated amortization of
$8,609 and $8,288.............. 6,548 6,658
Notes receivable................ 6,004 5,362
Miscellaneous................... 5,107 5,234
57,711 57,611
$519,135 $481,977
</TABLE>
See accompanying notes.
4
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PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable..................... $ 34,994 $ 30,859
Long-term debt due within one year 5,950 5,649
Dividends payable................. 1,758 1,757
Accounts payable.................. 42,739 44,489
Accrued expenses.................. 35,791 33,744
Income taxes payable.............. 16,027 4,911
Retirement and deferred
compensation plans.............. 634 605
Unearned income................... 5,697 5,320
143,590 127,334
Long-term Debt, less current
maturities........................ 9,005 6,083
Deferred Liabilities:
Income taxes...................... 51,345 51,883
Other............................. 4,882 4,613
56,227 56,496
Stockholders' Equity:
Preferred stock, none issued......
Common capital stock, $1 par value-
Common stock.................... 2,626 2,626
Class A stock................... 11,315 11,315
Capital in excess of par value.... 28,348 28,348
Retained earnings................. 269,907 253,628
Cumulative marketable securities
valuation adjustment............ 1,544
Cumulative foreign currency
translation adjustment.......... (3,427) (3,853)
310,313 292,064
$519,135 $481,977
</TABLE>
See accompanying notes.
5
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PITTWAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993
(Dollars in Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Cash Flows From Continuing Operating
Activities:
Income from continuing operations. $ 17,956 $ 5,169
Adjustments for noncash items
included in income from
continuing operations:
Depreciation and amortization. 4,783 4,116
Gain on sale of investment,
net of taxes................ (10,249)
Deferred income taxes......... 1,796 (615)
Retirement and deferred
compensation plans.......... 346 (620)
Income from investments
adjusted for cash
distributions received...... (424) (517)
Provision for losses on
accounts receivable......... 695 822
Change in assets and liabilities,
excluding effects of acquisitions,
dispositions and foreign currency
adjustments:
Increase in accounts and notes
receivable.............. (5,416) (5,016)
Increase in inventories... (8,549) (6,159)
Decrease in accounts payable
and accrued expenses.... (351) (6,090)
Increase in income taxes
payable................. 2,584 3,399
Other changes, net........ (1,037) 110
Net cash provided by (used in)
continuing operations........... 2,134 (5,401)
Cash Flows From Investing Activities:
Capital expenditures................ (8,474) (6,377)
Proceeds from the sale of
marketable securities............. 8,356 20,592
Purchases of marketable securities.. (8,793) (18,092)
Disposition of property and
equipment......................... 71 31
Additions to investments............ (786) (6)
Collections of notes receivable..... 176 78
Net cash used in investing activities (9,450) (3,774)
Cash Flows From Financing Activities:
Net increase in notes payable....... 3,964 8,309
Proceeds of long-term debt.......... 3,230
Repayments of long-term debt........ (131) (152)
Dividends paid...................... (1,676)
Net cash provided by (used in)
financing activities.............. 5,387 8,157
Effect of Exchange Rate Changes on Cash 66 (74)
Net Cash Used By Discontinued Operations (2,364)
Decrease In Cash And Equivalents...... (1,863) (3,456)
Cash And Equivalents At
Beginning Of Period................. 1,908 3,638
Cash And Equivalents At End Of Period. $ 45 $ 182
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Supplemental cash flow disclosure:
Interest paid....................... $ 654 $ 705
Income taxes paid................... 1,429 1,804
</TABLE>
6
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PITTWAY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Unaudited)
Note 1. Basis of Presentation
The accompanying consolidated financial statements include the
accounts of Pittway and its majority-owned subsidiaries (the
"Company" or "Registrant"). Summarized financial information for
the limited real estate partnership ventures and other affiliates
is omitted because, when considered in the aggregate, they do not
constitute a significant subsidiary. Certain prior year amounts
have been reclassified to conform to the current year
classification.
The accompanying consolidated financial statements are unaudited
but reflect all adjustments of a normal recurring nature which
are, in the opinion of management, necessary for a fair
presentation of the financial statements contained herein.
However, the financial statements and related notes do not
include all disclosures normally provided in the Company's Annual
Report on Form 10-K. Accordingly, these financial statements and
related notes should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 31, 1993.
Note 2. Changes in Accounting Principles
On January 1, 1994 the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities", which requires the Company to record its investments
in certain debt and equity securities available-for-sale at
market value. Changes in market value for these securities are
to be reported, net of tax, in a separate component of
stockholders' equity until realized. Prior to the adoption of
SFAS No. 115, these securities were valued at the lower of
aggregate cost or market. SFAS No. 115 does not apply to
investments accounted for using the equity method or for which
readily determinable market values are not available. As a
result of adopting SFAS No. 115, a $141 unrealized gain, net of
tax, was recorded to stockholders' equity at January 1, 1994.
The adoption of this statement had no impact on net income and
prior year financial statements are not restated.
On January 1, 1993 the Company adopted the provisions of SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other
than Pensions", and No. 109, "Accounting for Income Taxes". The
cumulative effect of the changes in accounting principles on
years prior to 1993 was a $1,965 benefit for income taxes and a
$430 after-tax charge for postretirement benefits.
7
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Note 3. Marketable Securities
Information about the Company's available-for-sale securities at
March 31, 1994 and December 31, 1993 is as follows:
<TABLE>
<CAPTION>
Preferred Common Municipal
Stocks Stock Bonds
<S> <C> <C> <C>
March 31, 1994 -
Aggregate cost $ 22,386 $ 629 $ 9,604
Net unrealized holding
gain 116 2,454 5
Aggregate fair value $ 22,502 $ 3,083 $ 9,609
December 31, 1993 -
Aggregate cost $ 15,118 $ 16,174
Net unrealized holding
gain 163 72
Aggregate fair value $ 15,281 $ 16,246
</TABLE>
The contractual maturities for the municipal bonds (at fair
value) are as follows: within one year ($4,694), after one year
through five years ($2,414), after five years through ten years
($1,500) and after ten years ($1,001).
In March 1994, the Company reduced its 16.67% ownership holdings
in First Alert, Inc. by selling 1,355,000 of its 1,550,000 shares
in connection with an initial public offering of First Alert,
Inc. common stock. The sale of the shares resulted in a pretax
gain of $17,051. The Company sold its remaining 195,000 shares
in April, resulting in a pretax gain of $2,454 which will be
recorded in the second quarter of 1994. The $24,505 proceeds
from the two sales were received in April. $21,422 is included
in accounts receivable and $3,083 in marketable securities in the
consolidated balance sheet at March 31, 1994. Prior to the
initial public offering, the Company's equity investment in First
Alert, Inc. was recorded at a cost of $5 million.
The $2,454 unrealized gain on the 195,000 shares of First Alert,
Inc. common stock held at March 31, 1994 is included, net of tax,
in a separate component of stockholders' equity at March 31, 1994
(see Note 2).
Realized gains and losses are based upon the specific
identification method. Information about the Company's sales
transactions of available-for-sale securities for the three
months ended March 31 is as follows:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Cash proceeds $ 8,356 $ 20,525
Realized gains -
First Alert $ 17,051
Other $ 180 $ 341
Realized losses $ 6 $ 97
</TABLE>
8
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Note 4. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
<S> <C> <C>
Raw materials $ 26,235 $ 23,313
Work in process 11,530 9,311
Finished goods -
Manufactured by the Company 39,802 33,912
Manufactured by others 32,057 34,087
Total 109,624 100,623
Less LIFO reserve (648) (558)
$108,976 $100,065
</TABLE>
Note 5. Earnings per Share
Net income per share of common capital stock is based on the
combined weighted average number of Common and Class A shares
outstanding during each period and does not include Class A
shares issuable upon exercise of stock options because the
dilutive effect is not significant.
Note 6. Discontinued Operations
The Company distributed its investment in the Seaquist packaging
group (now known as AptarGroup, Inc.) to stockholders in a tax-
free spinoff on April 22, 1993.
Net sales of the discontinued operations were $95,210 for the
three months ended March 31, 1993.
Note 7. Legal Proceedings
On May 10, 1989, a judgment was entered against Saddlebrook
Resorts, Inc. ("Saddlebrook"), a former subsidiary of the
Company, in a lawsuit which arose out of the development of
Saddlebrook's resort and a portion of the adjoining residential
properties owned and currently under development by the Company.
The lawsuit alleged damage to plaintiffs' adjoining property
caused by surface water effects from improvements to the
properties. Damages of approximately $8 million were awarded to
the plaintiffs and an injunction was entered requiring, among
other things, that Saddlebrook work with local regulatory
authorities to take corrective actions. In December 1990 the
trial court entered an order vacating the judgment and awarding a
new trial, which was affirmed on appeal in March 1992. On remand
to the trial court, Saddlebrook's motion for summary judgment, on
the ground that plaintiff's claims were fully tried and rejected
in a related administrative proceeding, is pending. If that
motion is not granted, retrial is currently set for October 1994.
The Company and Saddlebrook have entered into an agreement to
split equally the costs of the defense of
9
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the litigation and the costs of certain related litigation and
proceedings, the costs of the ultimate judgment, if any, and the
costs of any mandated remedial work. Subject to certain
conditions, the agreement permits Saddlebrook to obtain
subordinated loans from the Company to enable Saddlebrook to pay
its one-half of the costs of the latter two items. No loans have
been made to date. The Company believes that the ultimate
outcome of the aforementioned lawsuit will not have a material
adverse effect on its financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF CONTINUING OPERATIONS
Sales increased 16% over the first quarter of 1993 due to higher
sales in both the alarm and publishing segments. Gross profit
grew at a faster rate than sales, 20%, reflecting better coverage
of fixed costs through higher volume. Selling, general and
administrative expenses increased 15% due to increased costs
associated with the expanded sales volume.
Alarm product sales increased due to continued market
acceptance of the newer burglar and commercial fire alarm
products. Operating income increased primarily because of
the expanded sales volume partially offset by costs of new
product introductions, particularly low profile smoke detectors.
Publishing sales rose from a year ago due to a modest increase
in advertising pages coupled with a firming of page rates.
Operating income increased due to higher list rentals,
increased advertising pages at higher rates and profits from
a bi-annual directory.
Included in other income is a $17.1 million pretax gain on the
sale of 1,355,000 shares of First Alert, Inc. common stock which
were included in an initial public offering. Excluding the gain
on sale of investment, other income was more favorable in 1994
due to higher miscellaneous income. The increase in investment
income was offset by higher interest expense.
The effective tax rate increased from 39% in 1993 to 40% in 1994
due to an increase in the U.S. Federal income tax rate in August
1993 from 34% to 35%.
One-time accounting changes applicable to 1993 continuing
operations included a $2.0 million benefit from the adoption of
SFAS No. 109, "Accounting for Income Taxes", and an after-tax
charge of $.4 million from the adoption of SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions".
10
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Earnings from discontinued operations amounted to $6.4 million.
A $3.1 million benefit from the adoption of SFAS No. 109 is also
included in income from discontinued operations.
FINANCIAL CONDITION
The Company's financial condition remained strong through the
first quarter of 1994. Management anticipates that operations
and borrowings will continue to be the primary source of funds
needed to meet ongoing programs for capital expenditures, to
finance acquisitions and investments, to pay dividends and to
reduce debt. As a result of selling its investment in First
Alert, Inc. the Company received $24.5 million in April 1994. It
is expected that these proceeds will be used to reduce
outstanding debt, finance the growth in operations, invest in
real estate and other ventures and pay approximately $9.7 million
in income taxes associated with the sale.
In the 1994 first quarter, the primary sources of cash provided
by continuing operations were profits before depreciation,
amortization, deferred income taxes and the net
gain on sale of investment. Such cash generated was largely used
to finance the $14 million increase in accounts receivable and
inventories. The $2 million available cash generated from
operations, along with a $4 million increase in short-term bank
borrowings were used to pay dividends and to pay for $8.5 million
in capital expenditures. Indebtedness of approximately $3
million was recorded in the first quarter of 1994 to record a
sale/leaseback transaction on certain production equipment. For
1993, the cash dividends normally paid in January were paid in
December 1992.
The Company is continually investigating opportunities for growth
in related areas and is presently committed to invest
approximately $17 million in certain ventures through 1996.
The Company has real estate investments in various limited
partnerships with interests in commercial rental properties which
may be sold or turned over to lenders due to the present weak
commercial real estate market. The Company's deferred income tax
liability accounts fully cover the tax payments that would be due
if properties were sold or returned to the lenders and such
events would have no effect on income. However, any such tax
payments would negatively impact the Company's cash position.
The likelihood, extent and timing of such payments is not readily
determinable, but the maximum total amount at March 31, 1994 is
approximately $15 million.
11
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 10, 1989, the Circuit Court of the Sixth Judicial Circuit
in and for Pasco County, Florida, entered a judgment against
Saddlebrook Resorts, Inc. ("Saddlebrook"), a former subsidiary of
the Company, in a lawsuit which arose out of the development of
Saddlebrook's resort and a portion of the adjoining residential
properties owned and currently under development by the Company.
The lawsuit (James H. Porter and Martha Porter, Trustees, et al.
vs. Saddlebrook Resorts, Inc. and The County of Pasco, Florida;
Case No. CA83-1860), alleges damage to plaintiffs' adjoining
property caused by surface water effects from improvements to the
properties. Damages of approximately $8 million were awarded to
the plaintiffs and an injunction was entered requiring, among
other things, that Saddlebrook work with local regulatory
authorities to take corrective actions. Saddlebrook made two
motions for a new trial, based on separate grounds. One such
motion was granted on December 18, 1990. Such grant was appealed
by the plaintiffs. The other such motion was denied on February
28, 1991. Saddlebrook appealed such denial. The appeals were
consolidated, fully briefed and heard in February 1992.
Saddlebrook received a favorable ruling on March 18, 1992,
dismissing the judgment and remanding the case to the Circuit
Court for a new trial. An agreed order has been entered by the
Court preserving the substance of the injunction pending final
disposition of this matter. As part of its plan to comply with
the agreed order, Saddlebrook filed applications with the
regulatory agency to undertake various remediation efforts.
Plaintiffs, however, filed petitions for administrative review of
the applications, which administrative hearing was concluded in
February 1992. On March 31, 1992, the hearing officer issued a
recommended order accepting Saddlebrook's expert's testimony.
The agency's governing board was scheduled to consider this
recommended order on April 28, 1992, however, shortly before the
hearing, the plaintiffs voluntarily dismissed their petitions and
withdrew their challenges to the staff's proposal to issue a
permit. At the April 28, 1992 hearing the governing board closed
its file on the matter and issued the permits. Saddlebrook
appealed the board's refusal to issue a final order. On July 9,
1993 a decision was rendered for Saddlebrook remanding
jurisdiction to the governing board for further proceedings,
including entry of a final order which was issued on October 25,
1993. The plaintiffs have appealed the Appellate Court decision
to the Florida Supreme Court and appealed the issuance of the
final order to the Second District Court of Appeals. The Florida
Supreme Court heard the appeal on May 3, 1994 and the
participants await its decision. The other appeal is being
briefed and awaiting a hearing date. Saddlebrook moved for
summary judgment on December 22, 1993 on the ground that
plaintiffs' claims were fully litigated and decided in
administrative action. The trial court ordered that, in the
event plaintiffs' appeals are resolved by July 1994,
Saddlebrook's motion for summary judgment will be heard in August
1994 and, in the event that such motion is denied, retrial will
begin in October 1994.
12
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Until October 14, 1989, the Company and Saddlebrook disputed
responsibility for ultimate liability and costs (including costs
of corrective action). On that date, the Company and Saddlebrook
entered into an agreement with regard to such matters. The
agreement, as amended and restated on July 16, 1993, provides for
the Company and Saddlebrook to split equally the costs of the
defense of the litigation and the costs of certain related
litigation and proceedings, the costs of the ultimate judgment,
if any, and the costs of any mandated remedial work. Subject to
certain conditions, the agreement permits Saddlebrook to obtain
subordinated loans from the Company to enable Saddlebrook to pay
its one-half of the costs of the latter two items. No loans have
been made to date.
The Company believes that the ultimate outcome of the
aforementioned lawsuit will not have a material adverse effect on
its financial statements.
13
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits are included with this report.
(b) No reports on Form 8-K have been filed during the
quarter for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PITTWAY CORPORATION
(Registrant)
By /s/ Paul R. Gauvreau
Paul R. Gauvreau
Financial Vice President
and Treasurer
(Duly Authorized Officer and
Principal Financial Officer)
Date: May 9, 1994
14
